Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
|
|
OR
|
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ______ to
______
|
Commission
File Number
|
Exact Name of Registrant as Specified in its Charter, Principal Office Address and Telephone Number |
State
of Incorporation
|
I.R.S.
Employer Identification No
|
|||
001-06033
|
UAL Corporation |
Delaware
|
36-2675207
|
|||
001-11355
|
United Air Lines, Inc. |
Delaware
|
36-2675206
|
|||
77 W. Wacker Drive | ||||||
Chicago, Illinois 60601 | ||||||
(312) 997-8000 |
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.
UAL
Corporation
|
Yes
R No
£
|
United
Air Lines, Inc.
|
Yes
R No
£
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
UAL
Corporation
|
Large
accelerated filer R
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
(Do
not check if a smaller reporting company)
|
||||
United
Air Lines, Inc.
|
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer R
|
Smaller
reporting company £
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
UAL
Corporation
|
Yes
£ No
R
|
United
Air Lines, Inc.
|
Yes
£ No
R
|
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
UAL
Corporation
|
Yes
R No
£
|
United
Air Lines, Inc.
|
Yes
R No
£
|
OMISSION
OF CERTAIN INFORMATION
United
Air Lines, Inc. meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format allowed under that General Instruction.
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of October 16, 2009.
UAL
Corporation
United
Air Lines, Inc.
|
167,040,862
shares of common stock ($0.01 par value)
205
(100% owned by UAL Corporation)
|
There
is no market for United Air Lines, Inc. common
stock.
|
UAL Corporation and Subsidiary Companies
and
United
Air Lines, Inc. and Subsidiary Companies
Report
on Form 10-Q
For
the Quarter Ended September 30, 2009
Page
|
||
PART
I. FINANCIAL INFORMATION
|
||
UAL
Corporation:
|
||
3
|
||
5
|
||
7
|
||
United
Air Lines, Inc.:
|
||
8
|
||
10
|
||
12
|
||
13
|
||
(UAL
Corporation and United Air Lines, Inc.)
|
||
32
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49
|
||
50
|
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PART
II. OTHER INFORMATION
|
||
50
|
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51
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51
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51
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52
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53
|
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UAL
Corporation and Subsidiary Companies
Condensed Statements of Consolidated Operations
(Unaudited)
(In
millions, except per share amounts)
Three
Months Ended September
30,
|
||||||||
|
2009
|
2008
|
||||||
(Adjusted)
|
||||||||
Operating
revenues:
|
||||||||
Passenger
— United Airlines
|
$ | 3,267 | $ | 4,280 | ||||
Passenger
— Regional Affiliates
|
844 | 834 | ||||||
Cargo
|
125 | 219 | ||||||
Other
operating revenues
|
197 | 232 | ||||||
4,433 | 5,565 | |||||||
Operating
expenses:
|
||||||||
Aircraft
fuel
|
1,064 | 2,461 | ||||||
Salaries
and related costs
|
954 | 1,037 | ||||||
Regional
Affiliates
|
775 | 882 | ||||||
Purchased
services
|
279 | 327 | ||||||
Aircraft
maintenance materials and outside repairs
|
253 | 256 | ||||||
Landing
fees and other rent
|
226 | 222 | ||||||
Depreciation
and amortization
|
220 | 234 | ||||||
Distribution
expenses
|
145 | 181 | ||||||
Aircraft
rent
|
88 | 115 | ||||||
Cost
of third party sales
|
59 | 75 | ||||||
Other
impairments and special items (Note 14)
|
43 | (9 | ) | |||||
Other
operating expenses
|
239 | 275 | ||||||
4,345 | 6,056 | |||||||
Earnings
(loss) from operations
|
88 | (491 | ) | |||||
Other
income (expense):
|
||||||||
Interest
expense
|
(146 | ) | (144 | ) | ||||
Interest
income
|
3 | 24 | ||||||
Interest
capitalized
|
3 | 6 | ||||||
Miscellaneous,
net
|
(10 | ) | (186 | ) | ||||
(150 | ) | (300 | ) | |||||
Loss
before income taxes and equity in earnings of affiliates
|
(62 | ) | (791 | ) | ||||
Income
tax expense (benefit)
|
(4 | ) | 2 | |||||
Loss
before equity in earnings of affiliates
|
(58 | ) | (793 | ) | ||||
Equity
in earnings of affiliates, net of tax
|
1 | 1 | ||||||
Net
loss
|
$ | (57 | ) | $ | (792 | ) | ||
Loss
per share, basic and diluted
|
$ | (0.39 | ) | $ | (6.22 | ) |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed
Statements of Consolidated Operations (Unaudited)
(In
millions, except per share amounts)
Nine
Months Ended September
30,
|
||||||||
|
2009
|
2008
|
||||||
(Adjusted)
|
||||||||
Operating
revenues:
|
||||||||
Passenger
— United Airlines
|
$ | 8,909 | $ | 11,924 | ||||
Passenger
— Regional Affiliates
|
2,252 | 2,346 | ||||||
Cargo
|
370 | 674 | ||||||
Other
operating revenues
|
611 | 703 | ||||||
12,142 | 15,647 | |||||||
Operating
expenses:
|
||||||||
Salaries
and related costs
|
2,838 | 3,262 | ||||||
Aircraft
fuel
|
2,528 | 5,884 | ||||||
Regional
Affiliates
|
2,154 | 2,508 | ||||||
Purchased
services
|
852 | 1,047 | ||||||
Aircraft
maintenance materials and outside repairs
|
718 | 868 | ||||||
Landing
fees and other rent
|
676 | 651 | ||||||
Depreciation
and amortization
|
675 | 670 | ||||||
Distribution
expenses
|
402 | 558 | ||||||
Aircraft
rent
|
265 | 314 | ||||||
Cost
of third party sales
|
172 | 204 | ||||||
Goodwill
impairment (Note 14)
|
- | 2,277 | ||||||
Other
impairments and special items (Note 14)
|
250 | 214 | ||||||
Other
operating expenses
|
699 | 816 | ||||||
12,229 | 19,273 | |||||||
Loss
from operations
|
(87 | ) | (3,626 | ) | ||||
Other
income (expense):
|
||||||||
Interest
expense
|
(415 | ) | (428 | ) | ||||
Interest
income
|
15 | 100 | ||||||
Interest
capitalized
|
8 | 16 | ||||||
Miscellaneous,
net
|
19 | (177 | ) | |||||
(373 | ) | (489 | ) | |||||
Loss
before income taxes and equity in earnings of affiliates
|
(460 | ) | (4,115 | ) | ||||
Income
tax benefit
|
(46 | ) | (30 | ) | ||||
Loss
before equity in earnings of affiliates
|
(414 | ) | (4,085 | ) | ||||
Equity
in earnings of affiliates, net of tax
|
3 | 4 | ||||||
Net
loss
|
$ | (411 | ) | $ | (4,081 | ) | ||
Loss
per share, basic and diluted
|
$ | (2.83 | ) | $ | (32.62 | ) |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(Unaudited)
(In
millions, except shares)
September
30, 2009
|
December
31, 2008
|
|||||||
(Adjusted)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,525 | $ | 2,039 | ||||
Restricted
cash
|
99 | 54 | ||||||
Receivables,
less allowance for doubtful accounts (2009—$14; 2008—$24)
|
843 | 714 | ||||||
Prepaid
fuel
|
285 | 219 | ||||||
Aircraft
fuel, spare parts and supplies, less obsolescence allowance (2009—$70;
2008—$48)
|
216 | 237 | ||||||
Deferred
income taxes
|
92 | 268 | ||||||
Fuel
hedge collateral deposits
|
62 | 953 | ||||||
Prepaid
expenses and other
|
404 | 382 | ||||||
4,526 | 4,866 | |||||||
Operating
property and equipment:
|
||||||||
Owned—
|
||||||||
Flight
equipment
|
8,414 | 8,766 | ||||||
Other
property and equipment
|
1,722 | 1,751 | ||||||
10,136 | 10,517 | |||||||
Less—accumulated
depreciation and amortization
|
(1,932 | ) | (1,598 | ) | ||||
8,204 | 8,919 | |||||||
Capital
leases:
|
||||||||
Flight
equipment
|
1,795 | 1,578 | ||||||
Other
property and equipment
|
43 | 39 | ||||||
1,838 | 1,617 | |||||||
Less—accumulated
amortization
|
(310 | ) | (224 | ) | ||||
1,528 | 1,393 | |||||||
9,732 | 10,312 | |||||||
Other
assets:
|
||||||||
Intangibles,
less accumulated amortization (2009—$391; 2008—$339)
|
2,472 | 2,693 | ||||||
Aircraft
lease deposits
|
307 | 297 | ||||||
Restricted
cash
|
210 | 218 | ||||||
Investments
|
90 | 81 | ||||||
Other,
net
|
1,010 | 998 | ||||||
4,089 | 4,287 | |||||||
$ | 18,347 | $ | 19,465 |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed
Statements of Consolidated Financial Position (Unaudited)
(In
millions, except shares)
September
30, 2009
|
December
31, 2008
|
|||||||
(Adjusted)
|
||||||||
Liabilities
and Stockholders’ Deficit
|
||||||||
Current
liabilities:
|
||||||||
Advance
ticket sales
|
$ | 1,675 | $ | 1,530 | ||||
Mileage
Plus deferred revenue
|
1,428 | 1,414 | ||||||
Accounts
payable
|
807 | 833 | ||||||
Accrued
salaries, wages and benefits
|
731 | 756 | ||||||
Long-term
debt maturing within one year
|
651 | 782 | ||||||
Fuel
purchase commitments
|
285 | 219 | ||||||
Current
obligations under capital leases
|
177 | 168 | ||||||
Accrued
interest
|
120 | 112 | ||||||
Derivative
instruments
|
76 | 718 | ||||||
Other
|
687 | 749 | ||||||
6,637 | 7,281 | |||||||
Long-term
debt
|
5,767 | 5,862 | ||||||
Long-term
obligations under capital leases
|
1,212 | 1,192 | ||||||
Other
liabilities and deferred credits:
|
||||||||
Mileage
Plus deferred revenue
|
2,823 | 2,768 | ||||||
Postretirement
benefit liability
|
1,808 | 1,812 | ||||||
Advanced
purchase of miles
|
1,087 | 1,087 | ||||||
Deferred
income taxes
|
576 | 804 | ||||||
Other
|
1,082 | 980 | ||||||
7,376 | 7,451 | |||||||
Commitments
and contingent liabilities (Note 12)
|
||||||||
Stockholders’
deficit:
|
||||||||
Preferred
stock
|
— | — | ||||||
Common
stock at par, $0.01 par value; authorized 1,000,000,000 shares;
outstanding 148,032,041 and 140,037,928 shares at September 30, 2009 and
December 31, 2008, respectively
|
2 | 1 | ||||||
Additional
capital invested
|
3,001 | 2,919 | ||||||
Retained
deficit
|
(5,719 | ) | (5,308 | ) | ||||
Stock
held in treasury, at cost
|
(28 | ) | (26 | ) | ||||
Accumulated
other comprehensive income
|
99 | 93 | ||||||
(2,645 | ) | (2,321 | ) | |||||
$ | 18,347 | $ | 19,465 |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows
(Unaudited)
(In
millions)
|
Nine
Months Ended September
30,
|
|||||||
|
2009
|
2008
|
||||||
(Adjusted)
|
||||||||
Cash
flows provided (used) by operating activities:
|
||||||||
Net
loss
|
$ | (411 | ) | $ | (4,081 | ) | ||
Adjustments
to reconcile to net cash provided (used) by operating
activities—
|
||||||||
Goodwill
impairment
|
- | 2,277 | ||||||
Other
impairments and special items
|
250 | 214 | ||||||
Depreciation
and amortization
|
675 | 670 | ||||||
Proceeds
from lease amendment
|
160 | — | ||||||
Increase
in Mileage Plus deferred revenue and advanced purchase of
miles
|
140 | 584 | ||||||
Increase
in advance ticket sales
|
145 | 333 | ||||||
Net
change in fuel derivative instruments and related pending
settlements
|
(870 | ) | 272 | |||||
(Increase)
decrease in fuel hedge collateral
|
903 | (378 | ) | |||||
Increase
in receivables
|
(44 | ) | (166 | ) | ||||
Other,
net
|
(70 | ) | 25 | |||||
878 | (250 | ) | ||||||
Cash
flows provided (used) by investing activities:
|
||||||||
Net
sales of short-term investments
|
- | 2,295 | ||||||
(Increase)
decrease in restricted cash
|
(37 | ) | 508 | |||||
Proceeds
from asset sale-leasebacks
|
135 | 59 | ||||||
Proceeds
from litigation on advance deposits
|
- | 41 | ||||||
Additions
to property, equipment and deferred software
|
(230 | ) | (384 | ) | ||||
Proceeds
from asset dispositions
|
77 | 43 | ||||||
Other,
net
|
3 | 14 | ||||||
(52 | ) | 2,576 | ||||||
Cash
flows provided (used) by financing activities:
|
||||||||
Proceeds
from issuance of long-term debt
|
321 | 337 | ||||||
Proceeds
from issuance of common stock
|
90 | — | ||||||
Decrease
in lease deposits
|
22 | 154 | ||||||
Repayment
of Credit Facility
|
(18 | ) | (18 | ) | ||||
Repayment
of other debt
|
(615 | ) | (538 | ) | ||||
Special
distribution to common shareholders
|
- | (253 | ) | |||||
Principal
payments under capital leases
|
(129 | ) | (209 | ) | ||||
Increase
in deferred financing costs
|
(9 | ) | (118 | ) | ||||
Other,
net
|
(2 | ) | (9 | ) | ||||
(340 | ) | (654 | ) | |||||
Increase
in cash and cash equivalents during the period
|
486 | 1,672 | ||||||
Cash
and cash equivalents at beginning of the period
|
2,039 | 1,259 | ||||||
Cash
and cash equivalents at end of the period
|
$ | 2,525 | $ | 2,931 |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Operations
(Unaudited)
(In
millions)
|
Three
Months Ended September
30,
|
|||||||
|
2009
|
2008
|
||||||
(Adjusted)
|
||||||||
Operating
revenues:
|
||||||||
Passenger
— United Airlines
|
$ | 3,267 | $ | 4,280 | ||||
Passenger
— Regional Affiliates
|
844 | 834 | ||||||
Cargo
|
125 | 219 | ||||||
Other
operating revenues
|
199 | 273 | ||||||
4,435 | 5,606 | |||||||
Operating
expenses:
|
||||||||
Aircraft
fuel
|
1,064 | 2,461 | ||||||
Salaries
and related costs
|
954 | 1,036 | ||||||
Regional
Affiliates
|
775 | 882 | ||||||
Purchased
services
|
279 | 327 | ||||||
Aircraft
maintenance materials and outside repairs
|
253 | 256 | ||||||
Landing
fees and other rent
|
226 | 222 | ||||||
Depreciation
and amortization
|
220 | 234 | ||||||
Distribution
expenses
|
145 | 181 | ||||||
Aircraft
rent
|
88 | 116 | ||||||
Cost
of third party sales
|
58 | 75 | ||||||
Other
impairments and special items (Note 14)
|
43 | (9 | ) | |||||
Other
operating expenses
|
240 | 276 | ||||||
4,345 | 6,057 | |||||||
Earnings
(loss) from operations
|
90 | (451 | ) | |||||
Other
income (expense):
|
||||||||
Interest
expense
|
(145 | ) | (144 | ) | ||||
Interest
income
|
3 | 24 | ||||||
Interest
capitalized
|
3 | 6 | ||||||
Miscellaneous,
net
|
(11 | ) | (185 | ) | ||||
(150 | ) | (299 | ) | |||||
Loss
before income taxes and equity in earnings of affiliates
|
(60 | ) | (750 | ) | ||||
Income
tax expense (benefit)
|
(4 | ) | 3 | |||||
Loss
before equity in earnings of affiliates
|
(56 | ) | (753 | ) | ||||
Equity
in earnings of affiliates, net of tax
|
1 | 1 | ||||||
Net
loss
|
$ | (55 | ) | $ | (752 | ) |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed
Statements of Consolidated Operations (Unaudited)
(In
millions)
Nine
Months Ended September
30,
|
||||||||
|
2009
|
2008
|
||||||
(Adjusted)
|
||||||||
Operating
revenues:
|
||||||||
Passenger
— United Airlines
|
$ | 8,909 | $ | 11,924 | ||||
Passenger
— Regional Affiliates
|
2,252 | 2,346 | ||||||
Cargo
|
370 | 674 | ||||||
Other
operating revenues
|
618 | 744 | ||||||
12,149 | 15,688 | |||||||
Operating
expenses:
|
||||||||
Salaries
and related costs
|
2,838 | 3,262 | ||||||
Aircraft
fuel
|
2,528 | 5,884 | ||||||
Regional
Affiliates
|
2,154 | 2,508 | ||||||
Purchased
services
|
852 | 1,047 | ||||||
Aircraft
maintenance materials and outside repairs
|
718 | 868 | ||||||
Landing
fees and other rent
|
676 | 651 | ||||||
Depreciation
and amortization
|
675 | 670 | ||||||
Distribution
expenses
|
402 | 558 | ||||||
Aircraft
rent
|
267 | 316 | ||||||
Cost
of third party sales
|
171 | 203 | ||||||
Goodwill
impairment (Note 14)
|
- | 2,277 | ||||||
Other
impairments and special items (Note 14)
|
250 | 214 | ||||||
Other
operating expenses
|
699 | 844 | ||||||
12,230 | 19,302 | |||||||
Loss
from operations
|
(81 | ) | (3,614 | ) | ||||
Other
income (expense):
|
||||||||
Interest
expense
|
(414 | ) | (427 | ) | ||||
Interest
income
|
15 | 100 | ||||||
Interest
capitalized
|
8 | 16 | ||||||
Miscellaneous,
net
|
18 | (177 | ) | |||||
(373 | ) | (488 | ) | |||||
Loss
before income taxes and equity in earnings of affiliates
|
(454 | ) | (4,102 | ) | ||||
Income
tax benefit
|
(46 | ) | (30 | ) | ||||
Loss
before equity in earnings of affiliates
|
(408 | ) | (4,072 | ) | ||||
Equity
in earnings of affiliates, net of tax
|
3 | 4 | ||||||
Net
loss
|
$ | (405 | ) | $ | (4,068 | ) |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(Unaudited)
(In
millions, except shares)
|
September
30, 2009
|
December
31, 2008
|
||||||
(Adjusted)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,519 | $ | 2,033 | ||||
Restricted
cash
|
99 | 50 | ||||||
Receivables,
less allowance for doubtful accounts (2009 — $14; 2008 —
$24)
|
843 | 704 | ||||||
Prepaid
fuel
|
285 | 219 | ||||||
Aircraft
fuel, spare parts and supplies, less obsolescence allowance (2009 — $70;
2008 — $48)
|
216 | 237 | ||||||
Deferred
income taxes
|
87 | 265 | ||||||
Fuel
hedge collateral deposits
|
62 | 953 | ||||||
Receivables
from related parties
|
56 | 214 | ||||||
Prepaid
expenses and other
|
382 | 376 | ||||||
4,549 | 5,051 | |||||||
Operating
property and equipment:
|
||||||||
Owned
—
|
||||||||
Flight
equipment
|
8,414 | 8,766 | ||||||
Other
property and equipment
|
1,722 | 1,751 | ||||||
10,136 | 10,517 | |||||||
Less
— accumulated depreciation and amortization
|
(1,932 | ) | (1,598 | ) | ||||
8,204 | 8,919 | |||||||
Capital
leases:
|
||||||||
Flight
equipment
|
1,795 | 1,578 | ||||||
Other
property and equipment
|
43 | 39 | ||||||
1,838 | 1,617 | |||||||
Less
— accumulated amortization
|
(310 | ) | (224 | ) | ||||
1,528 | 1,393 | |||||||
9,732 | 10,312 | |||||||
Other
assets:
|
||||||||
Intangibles,
less accumulated amortization (2009 — $391; 2008 — $339)
|
2,472 | 2,693 | ||||||
Aircraft
lease deposits
|
307 | 297 | ||||||
Restricted
cash
|
210 | 217 | ||||||
Investments
|
90 | 81 | ||||||
Other,
net
|
997 | 984 | ||||||
4,076 | 4,272 | |||||||
$ | 18,357 | $ | 19,635 |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed
Statements of Consolidated Financial Position (Unaudited)
(In
millions, except shares)
September
30, 2009
|
December
31, 2008
|
|||||||
(Adjusted)
|
||||||||
Liabilities
and Stockholder’s Deficit
|
||||||||
Current
liabilities:
|
||||||||
Advance
ticket sales
|
$ | 1,675 | $ | 1,530 | ||||
Mileage
Plus deferred revenue
|
1,428 | 1,414 | ||||||
Accounts
payable
|
807 | 833 | ||||||
Accrued
salaries, wages and benefits
|
731 | 756 | ||||||
Long-term
debt maturing within one year
|
650 | 780 | ||||||
Fuel
purchase commitments
|
285 | 219 | ||||||
Current
obligations under capital leases
|
177 | 168 | ||||||
Accrued
interest
|
120 | 112 | ||||||
Derivative
instruments
|
76 | 718 | ||||||
Other
|
770 | 1,016 | ||||||
6,719 | 7,546 | |||||||
Long-term
debt
|
5,768 | 5,861 | ||||||
Long-term
obligations under capital leases
|
1,212 | 1,192 | ||||||
Other
liabilities and deferred credits:
|
||||||||
Mileage
Plus deferred revenue
|
2,823 | 2,768 | ||||||
Postretirement
benefit liability
|
1,808 | 1,812 | ||||||
Advanced
purchase of miles
|
1,087 | 1,087 | ||||||
Deferred
income taxes
|
494 | 724 | ||||||
Other
|
1,082 | 981 | ||||||
7,294 | 7,372 | |||||||
Commitments
and contingent liabilities (Note 12)
|
||||||||
Stockholder’s
deficit:
|
||||||||
Common
stock at par, $5 par value; authorized 1,000 shares; outstanding 205 at
both September 30, 2009 and December 31, 2008
|
— | — | ||||||
Additional
capital invested
|
2,929 | 2,831 | ||||||
Retained
deficit
|
(5,664 | ) | (5,260 | ) | ||||
Accumulated
other comprehensive income
|
99 | 93 | ||||||
(2,636 | ) | (2,336 | ) | |||||
$ | 18,357 | $ | 19,635 |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows
(Unaudited)
(In
millions)
|
Nine
Months Ended September
30,
|
|||||||
|
2009
|
2008
|
||||||
(Adjusted)
|
||||||||
Cash
flows provided (used) by operating activities:
|
||||||||
Net
loss
|
$ | (405 | ) | $ | (4,068 | ) | ||
Adjustments
to reconcile to net cash provided (used) by operating
activities—
|
||||||||
Goodwill
impairment
|
- | 2,277 | ||||||
Other
impairments and special items
|
250 | 214 | ||||||
Depreciation
and amortization
|
675 | 670 | ||||||
Proceeds
from lease amendment
|
160 | — | ||||||
Increase
in Mileage Plus deferred revenue and advanced purchase of
miles
|
140 | 584 | ||||||
Increase
in advance ticket sales
|
145 | 333 | ||||||
Net
change in fuel derivative instruments and related pending
settlements
|
(870 | ) | 272 | |||||
(Increase)
decrease in fuel hedge collateral
|
903 | (378 | ) | |||||
Increase
in receivables
|
(38 | ) | (168 | ) | ||||
Other,
net
|
(80 | ) | 71 | |||||
880 | (193 | ) | ||||||
Cash
flows provided (used) by investing activities:
|
||||||||
Net
sales of short-term investments
|
- | 2,259 | ||||||
Proceeds
from asset sale-leasebacks
|
135 | 59 | ||||||
(Increase)
decrease in restricted cash
|
(42 | ) | 479 | |||||
Additions
to property, equipment and deferred software
|
(230 | ) | (384 | ) | ||||
Proceeds
from asset dispositions
|
77 | 42 | ||||||
Other,
net
|
4 | 15 | ||||||
(56 | ) | 2,470 | ||||||
Cash
flows provided (used) by financing activities:
|
||||||||
Proceeds
from issuance of long-term debt
|
321 | 337 | ||||||
Capital
contribution from parent
|
89 | — | ||||||
Decrease
in lease deposits
|
22 | 154 | ||||||
Dividend
to parent
|
- | (258 | ) | |||||
Repayment
of Credit Facility
|
(18 | ) | (18 | ) | ||||
Repayment
of other debt
|
(614 | ) | (537 | ) | ||||
Principal
payments under capital leases
|
(129 | ) | (209 | ) | ||||
Increase
in deferred financing costs
|
(9 | ) | (118 | ) | ||||
Other,
net
|
- | 1 | ||||||
(338 | ) | (648 | ) | |||||
Increase
in cash and cash equivalents during the period
|
486 | 1,629 | ||||||
Cash
and cash equivalents at beginning of the period
|
2,033 | 1,239 | ||||||
Cash
and cash equivalents at end of the period
|
$ | 2,519 | $ | 2,868 |
See
accompanying Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
UAL
Corporation and Subsidiary Companies and
United
Air Lines, Inc. and Subsidiary Companies
Combined Notes to Condensed Consolidated Financial
Statements (Unaudited)
(1)
Basis of Presentation
UAL
Corporation (together with its consolidated subsidiaries, “UAL”), is a holding
company and its principal, wholly-owned subsidiary is United Air Lines, Inc.
(together with its consolidated subsidiaries, “United”). We sometimes use the
words “we,” “our,” “us,” and the “Company” in this Form 10-Q for disclosures
that relate to both UAL and United.
This
Quarterly Report on Form 10-Q is a combined report of UAL and United. Therefore,
these Combined Notes to
Condensed Consolidated Financial Statements (Unaudited) (the
“Footnotes”), apply to both UAL and
United, unless otherwise noted. As UAL consolidates United for financial
statement purposes, disclosures that relate to activities of United also apply
to UAL.
Interim Financial
Statements. The UAL and United unaudited condensed consolidated financial
statements (the “Financial Statements”) shown here have been prepared as
required by the U.S. Securities and Exchange Commission (the “SEC”). Some
information and footnote disclosures normally included in financial statements
that meet accounting principles generally accepted in the United States (“GAAP”)
have been condensed or omitted as permitted by the SEC. The Company believes
that the disclosures presented here are not misleading. The Financial Statements
include all adjustments, including asset impairments, severance and normal
recurring adjustments, which are considered necessary for a fair presentation of
the Company’s financial position and results of operations. Certain historical
amounts have been reclassified to conform to the current year’s presentation,
including reclassification of December 31, 2008 derivative counterparty
settlement payables of $140 million from Fuel derivative instruments to Other
current liabilities in the Company’s Financial Statements. These Financial Statements
should be read together with the information included in the combined UAL and
United Annual Report on Form 10-K for the year ended December 31, 2008 as
updated by the Current Report on Form 8-K dated May 1, 2009 (the “2008 Annual
Report”).
Restricted
Cash. For the 2009 and 2008 periods, restricted cash primarily includes
cash collateral to secure workers’ compensation obligations and reserves for
institutions that process credit card ticket sales. Industry practice includes
classification of restricted cash flows as operating cash flows by some airlines
and investing cash flows by others. The Company classifies changes in restricted
cash balances associated with workers’ compensation obligations and credit card
reserves as an investing activity in its Financial Statements because it
considers restricted cash arising from these activities similar to an
investment. If UAL had classified these changes in its restricted cash balances
as operating activities in the nine months ended September 30, 2009 and 2008,
its cash provided (used) by operating activities of $878 million and $(250)
million, respectively, would have been reported as $841 million and $258
million, respectively. Additionally, cash provided (used) by investing
activities for the nine months ended September 30, 2009 and 2008 of $(52)
million and $2,576 million, respectively, would have been reported as $(15)
million and $2,068 million, respectively.
(2)
New Accounting Pronouncements
In the
third quarter of 2009, the Company adopted the Financial Accounting Standards
Board (“FASB”) Accounting
Standards Codification (“ASC”). The ASC is the single official source of
authoritative, nongovernmental GAAP, other than guidance issued by the SEC. The
adoption of the ASC did not have any impact on the financial statements included
herein.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging Issues Task Force.” This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a deliverable. The selling
price used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific
or third-party evidence is available. The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is permitted. The
Company has not determined the impact that this update may have on its financial
statements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASC Update
2009-05”), an update to ASC 820, Fair Value Measurements and
Disclosures. This update provides amendments to reduce potential
ambiguity in financial reporting when measuring the fair value of liabilities.
Among other provisions, this update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the valuation techniques described in ASC Update 2009-05. ASC Update
2009-05 will become effective for the Company’s annual financial statements for
the year ended December 31, 2009. The Company has not determined the impact that
this update may have on its financial statements.
In June
2009, the FASB issued guidance related to accounting for transfers of financial
assets. This guidance improves the information that a reporting entity provides
in its financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
continuing interest in transferred financial assets. In addition, this guidance
amends various ASC concepts with respect to accounting for transfers and
servicing of financial assets and extinguishments of liabilities, including removing the
concept of qualified special purpose entities. This guidance must be
applied to transfers occurring on or after the effective date. The Company will
adopt this guidance in its first annual and interim reporting periods beginning
after November 15, 2009. The Company has not determined the impact that
this guidance may have on its financial statements.
In June
2009, the FASB issued guidance which amends certain ASC concepts related to
consolidation of variable interest entities. Among other accounting and
disclosure requirements, this guidance replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. The Company will adopt this guidance in its first
annual and interim reporting periods beginning after November 15, 2009. The
Company has not determined the impact that this guidance may have on its
financial statements.
Adoption of ASC
470 Update. The Company adopted new accounting guidance related to
accounting for convertible debt instruments that may be settled in cash upon
conversion (“ASC
470 Update”), effective January 1, 2009, which required retrospective
application. This standard requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. The Company has two currently outstanding
convertible debt instruments that are impacted by the ASC 470 Update. Upon the
original issuance of these two debt instruments in 2006, the Company recorded
the net debt obligation as long-term debt in accordance with applicable
accounting standards at that time. To adopt this standard effective January 1,
2009, the Company estimated the fair value, as of the date of issuance, of its
two applicable convertible debt instruments as if the instruments were issued
without the conversion options. The difference between the fair value and the
principal amounts of the instruments was $254 million. This amount was
retrospectively applied to the Company’s Financial Statements from the issuance
date of the debt instruments in 2006, and was retrospectively recorded as a debt
discount and as a component of equity. The discount is being amortized over the
expected five-year life of the notes resulting in non-cash increases to interest
expense in historical and future periods. The full year 2008 interest expense
impact is $48 million.
The
following tables reflect UAL and United’s previously reported amounts, along
with the adjusted amounts after adoption.
(In millions, except per
share)
|
UAL
|
United
|
|||||||||||||||||||||||
As
Reported
|
As
Adjusted
|
Effect
of Change
|
As
Reported
|
As
Adjusted
|
Effect
of
Change
|
Statement of Consolidated Operations
(Unaudited)
Three Months Ended
September 30, 2008
Interest
expense
|
$ | (131 | ) | $ | (144 | ) | $ | (13 | ) | $ | (132 | ) | $ | (144 | ) | $ | (12 | ) | |||||||
Nonoperating
expense
|
(287 | ) | (300 | ) | (13 | ) | (287 | ) | (299 | ) | (12 | ) | |||||||||||||
Loss
before income taxes and equity earnings in affiliates
|
(778 | ) | (791 | ) | (13 | ) | (738 | ) | (750 | ) | (12 | ) | |||||||||||||
Net
loss
|
(779 | ) | (792 | ) | (13 | ) | (740 | ) | (752 | ) | (12 | ) | |||||||||||||
Loss
per share, basic and diluted
|
(6.13 | ) | (6.22 | ) | (0.09 | ) |
NA
|
NA
|
NA
|
||||||||||||||||
Total
comprehensive loss
|
(791 | ) | (804 | ) | (13 | ) | (752 | ) | (764 | ) | (12 | ) |
Nine
months Ended September 30, 2008
Interest
expense
|
$ | (392 | ) | $ | (428 | ) | $ | (36 | ) | $ | (392 | ) | $ | (427 | ) | $ | (35 | ) | ||||||
Nonoperating
expense
|
(453 | ) | (489 | ) | (36 | ) | (453 | ) | (488 | ) | (35 | ) | ||||||||||||
Loss
before income taxes and equity earnings in affiliates
|
(4,079 | ) | (4,115 | ) | (36 | ) | (4,067 | ) | (4,102 | ) | (35 | ) | ||||||||||||
Net
loss
|
(4,045 | ) | (4,081 | ) | (36 | ) | (4,033 | ) | (4,068 | ) | (35 | ) | ||||||||||||
Loss
per share, basic and diluted
|
(32.34 | ) | (32.62 | ) | (0.28 | ) |
NA
|
NA
|
NA
|
|||||||||||||||
Total
comprehensive loss
|
(4,084 | ) | (4,120 | ) | (36 | ) | (4,072 | ) | (4,107 | ) | (35 | ) |
Statement of Consolidated Financial
Position (Unaudited) (a)
As
of December 31, 2008
Long-term
debt
|
$ | 6,007 | $ | 5,862 | $ | (145 | ) | $ | 6,007 | $ | 5,861 | $ | (146 | ) | ||||||||||
Additional
capital invested
|
2,666 | 2,919 | 253 | 2,578 | 2,831 | 253 | ||||||||||||||||||
Retained
deficit
|
(5,199 | ) | (5,308 | ) | (109 | ) | (5,151 | ) | (5,260 | ) | (109 | ) |
____________
|
(a)
|
The
adoption of the ASC 470 Update also had minor impacts on Other assets and
Deferred income taxes as reported in the Company’s Financial Statements.
The adoption required an increase to the Company’s deferred tax liability
and a decrease to its additional paid in capital. However, these impacts
were substantially offset by a corresponding decrease in the valuation
allowance for deferred tax assets and increase to additional paid in
capital.
|
The
following table provides additional information about UAL’s convertible debt
instruments that may be settled for cash.
|
September 30, 2009
|
December 31, 2008
|
||||||||||||||
($ and shares in millions, except conversion
prices)
|
$726
million notes
|
$150
million notes
|
$726
million notes
|
$150
million notes
|
||||||||||||
Carrying
amount of the equity component
|
$ | 216 | $ | 38 | $ | 216 | $ | 38 | ||||||||
Principal
amount of the liability component
|
726 | 150 | 726 | 150 | ||||||||||||
Unamortized
discount of liability component
|
92 | 13 | 126 | 20 | ||||||||||||
Net
carrying amount of liability component
|
634 | 137 | 600 | 130 | ||||||||||||
Remaining
amortization period of discount
|
21
months
|
16
months
|
(a)
|
(a)
|
||||||||||||
Conversion
price
|
$ | 32.64 | $ | 43.90 |
(a)
|
(a)
|
||||||||||
Number
of shares to be issued upon conversion
|
22.2 | 3.4 |
(a)
|
(a)
|
||||||||||||
Effective
interest rate on liability component
|
12.8 | % | 12.1 | % |
(a)
|
(a)
|
____________
(a)
|
Not
required to be disclosed.
|
The
following table presents the associated interest cost related to UAL’s
convertible debt instruments that may be settled for cash, which consists of
both the contractual interest coupon and amortization of the discount on the
liability component.
$726 million notes
|
$150 million notes
|
|||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
(In millions)
|
September 30,
|
September 30,
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
Non-cash
interest cost recognized (a)
|
$ | 12 | $ | 11 | $ | 34 | $ | 30 | $ | 2 | $ | 2 | $ | 6 | $ | 6 | ||||||||||||||||
Cash
interest cost recognized
|
8 | 8 | 24 | 24 | 2 | 2 | 6 | 6 |
____________
(a)
|
Amounts
represent the adoption impact of the ASC 470 Update on interest expense
for the three and nine months ended September 30, 2009 and 2008. The
related negative adoption impact on loss per share for the three and nine
months ended September 30, 2009 is $0.10 and $0.28,
respectively.
|
Adoption of ASC
260 Update. The Company adopted new accounting guidance related to
determining whether instruments granted in share-based payment transactions are
participating securities (“ASC 260 Update”), effective January 1, 2009,
requiring retrospective application. The ASC 260 Update clarifies that
instruments granted in share-based payment transactions that are considered
participating securities prior to vesting should be included in the earnings
allocation under the two-class method of calculating earnings per share. The
Company determined that its restricted shares granted under UAL’s share-based
compensation plans are participating securities because the restricted shares
participate in dividends. However, the impact of these shares was not included
in the common shareholder basic loss per share computation for the three and
nine months ended September 30, 2009 and 2008, because of losses in these
periods. There were 0.8 million and 1.5 million nonvested restricted shares at
September 30, 2009 and 2008, respectively, that would have been included in the
common shareholder basic earnings per share computation had there been income in
these periods.
Other Standards
Adopted. Effective January 1, 2009, the Company prospectively adopted ASC
guidance related to disclosures about derivative instruments and hedging
activities and new ASC guidance related to fair value measurements required for
the Company’s nonfinancial assets and nonfinancial liabilities. See Note 11,
“Fair Value Measurements and Derivative Instruments,” for disclosures related to
the adoption of these ASC updates and the Company’s adoption of ASC updates
related to interim disclosures about fair value of financial instruments and recognition and
presentation of other-than-temporary impairments, effective April 1,
2009.
(3)
Company Operational Plans
Since the
second quarter of 2008, the Company has been implementing a plan to address
volatility in crude oil prices, industry over-capacity and the severe global
recession. The Company is reducing capacity and permanently removing 100
aircraft from its Mainline fleet by the end of 2009, including its entire B737
fleet and six B747 aircraft. In connection with the capacity reductions, the
Company is further streamlining its operations and corporate functions in order
to cumulatively reduce the size of its workforce by approximately 9,000
positions by the end of 2009. The Company’s workforce reductions have occurred
through furloughs and furlough-mitigation programs, such as voluntary early-out
options. Future workforce reductions may occur through similar programs. The
tables below summarize the accrual activity and expense related to the Company’s
implementation of its operational plans.
(In millions)
|
||||||||
Reserve Activity
|
Severance
|
Leased Aircraft
|
||||||
Balance
at December 31, 2008
|
$ | 81 | $ | 16 | ||||
Payments
|
(44 | ) | (14 | ) | ||||
Accruals
|
23 | 41 | ||||||
Balance
at September 30, 2009
|
$ | 60 | $ | 43 |
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
|||||||||||||||
Expense Recognized
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Severance
|
$ | 22 | $ | 6 | $ | 23 | $ | 88 | ||||||||
Leased
aircraft
|
24 | - | 48 | - |
All of
these charges are within the Mainline segment where the fleet reductions are
occurring. Severance expense and leased aircraft expense are classified within
Salaries and related costs and Other impairments and special items,
respectively, in the Company’s Financial Statements.
The
charges related to leased aircraft consist of the present value of future lease
payments for aircraft that have been removed from service in advance of their
lease termination dates as of September 30, 2009, estimated payments for lease
return maintenance conditions related to B737 aircraft and write-off of
associated lease fair value valuation balances, which were initially established
as part of fresh-start reporting when the Company emerged from bankruptcy.
Periodic lease payments will be made over the lease terms of these aircraft
unless early return agreements are reached with the lessors; and, lease return
maintenance condition payments, if any, will be made upon return of the aircraft
to the lessors. The total expected future payments for leased aircraft that were
removed from service at September 30, 2009 and that are expected to be removed
from service during the fourth quarter of 2009 are $96 million, payable through
2013. Actual lease payments may be less if the Company is able to negotiate
early termination of any of its leases.
The
following table provides information regarding the Company’s operating fleet.
Amounts reported are applicable to UAL and United, except where noted
otherwise.
|
B737s (Mainline)
|
All Other Mainline
|
Total
|
Regional
|
|||||||||||||
|
Owned
|
Leased
|
Total
|
Owned
|
Leased
|
Total
|
Mainline
|
Affiliates
|
Total
|
||||||||
Aircraft
at December 31, 2008
|
18 | 28 | 46 | 191 | 172 | 363 | 409 | 280 | 689 | ||||||||
Added
to (removed from) operating fleet
|
(18 | ) | (17 | ) | (35 | ) | (2 | ) | (1 | ) | (3 | ) | (38 | ) | 12 | (26) | |
Transferred
from owned to leased
|
— | — | — | (14 | ) | 14 | — | — | — | — | |||||||
Transferred
from leased to owned
|
— | — | — | 1 | (1 | ) | — | — | — | — | |||||||
Aircraft
at September 30, 2009
|
— | 11 | 11 | 176 | 184 | 360 | 371 | 292 | 663 | ||||||||
Nonoperating
at December 31, 2008 (a)
|
24 | 12 | 36 | 3 | — | 3 | 39 | — | 39 | ||||||||
Removed
from operating fleet
|
18 | 17 | 35 | 2 | 1 | 3 | 38 | — | 38 | ||||||||
Returned
to lessors
|
— | (9 | ) | (9 | ) | — | — | — | (9 | ) | — | (9) | |||||
Nonoperating
at September 30, 2009 (a)
|
42 | 20 | 62 | 5 | 1 | 6 | 68 | — | 68 |
____________
(a)
|
At
December 31, 2008 and September 30, 2009, United had one less owned and
one more leased nonoperating B737 aircraft as compared to the UAL amounts
shown in this table.
|
Other Costs.
As the Company continues to complete its operational plans discussed
above, it may incur additional costs related to its conversion of the Company’s
fleet of Ted aircraft (including seat reconfiguration to include United First
and Economy Plus seating), costs to exit additional facilities such as airports
no longer served, lease termination costs, additional severance costs and asset
impairment charges, among others. Such future costs and charges may be
material.
(4)
|
Common Stockholders’
Deficit
|
During
the nine months ended September 30, 2009, UAL received net proceeds of $89
million from the issuance of 8.5 million shares of common stock, of which 7.1
million shares were sold during the first nine months of 2009 and 1.4 million
shares were sold in 2008. UAL contributed the $89 million of common stock sale
proceeds to United.
For the
nine months ended September 30, 2009, UAL acquired 202,384 common shares for
treasury. These shares were acquired from participants for tax withholding
obligations under UAL’s share-based compensation plans. In addition, UAL
distributed approximately 1.1 million shares according to the bankruptcy plan of
reorganization in the nine months ended September 30, 2009. Approximately
967,000 shares remain to be issued under the reorganization plan.
(5)
Per Share Amounts (UAL Only)
UAL basic
per share amounts were computed by dividing loss available to common
shareholders by the weighted-average number of shares of common stock
outstanding. UAL’s $563 million of 6% senior notes are callable at any time at
100% of par value, and can be redeemed with either cash or UAL common stock at
UAL’s option. These notes are not deemed potentially dilutive shares, as UAL has
the ability and intent to redeem these notes with cash. The table below
represents the computation of UAL basic and diluted per share amounts and the
number of securities that have been excluded from the computation of diluted per
share amounts. Nonvested, participating restricted shares did not impact basic
or diluted loss per share in the 2009 and 2008 periods that had losses. See Note
2, “New Accounting Pronouncements,” for additional information related to the
adoption of the ASC 260 Update.
|
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
||||||||||||||
(In millions, except per
share)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(Adjusted)
|
(Adjusted)
|
|||||||||||||||
Basic
loss per share:
|
||||||||||||||||
Net
loss
|
$ | (57 | ) | $ | (792 | ) | $ | (411 | ) | $ | (4,081 | ) | ||||
Preferred
stock dividend requirements
|
- | - | - | (2 | ) | |||||||||||
Loss
available to common stockholders (a)
|
$ | (57 | ) | $ | (792 | ) | $ | (411 | ) | $ | (4,083 | ) | ||||
Basic
weighted average shares outstanding
|
145.6 | 127.3 | 145.1 | 125.2 | ||||||||||||
Loss
per basic share
|
$ | (0.39 | ) | $ | (6.22 | ) | $ | (2.83 | ) | $ | (32.62 | ) | ||||
Diluted
loss per share:
|
||||||||||||||||
Loss
available to common stockholders
|
$ | (57 | ) | $ | (792 | ) | $ | (411 | ) | $ | (4,083 | ) | ||||
Diluted
weighted average shares outstanding
|
145.6 | 127.3 | 145.1 | 125.2 | ||||||||||||
Loss
per share, diluted
|
$ | (0.39 | ) | $ | (6.22 | ) | $ | (2.83 | ) | $ | (32.62 | ) | ||||
Potentially
dilutive shares excluded from diluted per share amounts:
|
||||||||||||||||
Stock
options
|
6.6 | 4.4 | 6.6 | 4.4 | ||||||||||||
Restricted
shares (a)
|
0.8 | 1.5 | 0.8 | 1.5 | ||||||||||||
2%
preferred securities
|
- | 2.1 | - | 4.1 | ||||||||||||
4.5%
senior limited-subordination convertible notes
|
22.2 | 22.2 | 22.2 | 22.2 | ||||||||||||
5%
convertible notes
|
3.4 | 3.4 | 3.4 | 3.4 | ||||||||||||
33.0 | 33.6 | 33.0 | 35.6 |
____________
(a)
|
Losses
are not allocated to participating securities in the computation of loss
per common share.
|
(6)
Share-Based Compensation Plans
Effective
April 1, 2009, the Company made a general grant of 1,773,600 restricted stock
units (“RSUs”) and 2,431,800 stock options to certain of its management
employees. These grants were made pursuant to the UAL 2008 Incentive
Compensation Plan which was approved by UAL’s Board of Directors and
shareholders in 2008 and replaced the 2006 Management Equity Incentive Plan,
effective June 12, 2008. These awards vest pro-rata over three years on the
anniversary of the grant date. The terms of the awards do not provide for the
acceleration of vesting upon retirement. The RSUs may be settled in cash or
stock at the discretion of the Human Resources Subcommittee of the UAL Board of
Directors. The Company’s intent is to settle the RSUs in cash; therefore, the
obligations related to these RSUs are classified as liabilities on the Company’s
Financial Statements and will be remeasured
each reporting period throughout the requisite service period. The remeasurement
is based upon the market share price on the last day of the reporting period. A
cumulative adjustment is recorded during each reporting period to adjust
compensation expense based on the current value of the awards.
Compensation
expense associated with the UAL share-based compensation plans has been pushed
down to United. The Company recognized share-based compensation expense of $8
million and $13 million during the three and nine months ended September 30,
2009, respectively. The Company recognized share-based compensation expense of
$5 million and $23 million during the three and nine months ended September 30,
2008, respectively. The Company’s unrecognized share-based compensation expense
was $26 million and $18 million as of September 30, 2009 and December 31, 2008,
respectively. At September 30, 2009 and December 31, 2008, 3.1 million and 8.1
million awards were available for future issuance under the Company’s
share-based compensation plans for employees, respectively. The weighted average
grant date fair value and exercise price of options awarded in the nine months
ended September 30, 2009 was $3.70 and $4.91, respectively. The table below
summarizes stock option activity for the nine months ended September 30,
2009.
|
Options
|
Outstanding
at beginning of period
|
4,353,672
|
Granted
|
2,517,000
|
Exercised
|
(10,000)
|
Canceled
|
(276,472)
|
Outstanding
at end of period
|
6,584,200
|
Exercisable
(vested) at end of period
|
2,863,555
|
The fair
value of RSUs was $16 million at September 30, 2009, which was based upon the
closing share price on September 30, 2009. The table below summarizes UAL’s RSU
and restricted stock activity for the nine months ended September 30,
2009.
Restricted Stock Units
|
Restricted Stock
|
|||||||
Nonvested
at beginning of period
|
- | 1,430,675 | ||||||
Granted
|
1,815,600 | 42,400 | ||||||
Vested
|
- | (608,306 | ) | |||||
Terminated
|
(47,800 | ) | (36,727 | ) | ||||
Nonvested
at end of period
|
1,767,800 | 828,042 |
(7)
Income Taxes
For the
three and nine months ended September 30, 2009, UAL and United each recorded $4
million and $46 million, respectively, of tax benefits primarily due to
impairment of indefinite-lived intangibles. For the nine months ended September
30, 2009, UAL and United each had an effective tax rate of approximately 10%. In
the 2008 periods, the Company had an insignificant effective tax rate, as
compared to the U.S. federal statutory rate of 35%, principally because of
goodwill impairment charges in the second quarter that are not deductible for
income tax purposes and the tax benefits of the Company’s remaining net
operating losses for the periods were almost completely offset by a valuation
allowance. The Company’s tax benefit in the 2008 nine month period was primarily
due to an indefinite-lived intangible asset impairment.
The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income, including the reversals of deferred tax liabilities
during the periods in which those temporary differences will become deductible.
The Company’s management assesses the realizability of its deferred tax assets,
and records a valuation allowance for the deferred tax assets when it is more
likely than not that a portion, or all of the deferred tax assets will not be
realized. As a result, the Company has a valuation allowance against its
deferred tax assets as of September 30, 2009 and December 31, 2008, to reflect
management’s assessment regarding the realizability of those assets. The Company
expects to continue to maintain a valuation allowance on deferred tax assets
until there is sufficient positive evidence of future realization.
If
reversed, the current valuation allowance of $2,988 million and $2,911 million
for UAL and United, respectively, will be allocated to reduce income tax
expense. As of December 31, 2008, UAL and United had a valuation allowance of
$2,886 million (as adjusted) and $2,812 million (as adjusted), respectively. The
valuation allowance as of December 31, 2008, as previously reported, was
retrospectively adjusted for the adoption of APB 14-1 which is discussed in Note
2, “New Accounting Pronouncements.” UAL’s valuation allowance increased by $102
million in the first nine months of 2009 primarily due to an increase in its net
operating loss carryforward.
As of
September 30, 2009, UAL and United had a federal net operating loss (“NOL”)
carry forward of approximately $7.4 billion, and a combined federal and state
income tax NOL carry forward tax benefit of approximately $2.8 billion, which
may be used to reduce taxes in future years. If not used, federal tax benefits
of $1.0 billion expire in 2022, $0.4 billion expire in 2023, $0.5 billion expire
in 2024, $0.4 billion expire in 2025, $20 million expire in 2026, $0.1 billion
in 2028 and $0.2 billion in 2029. In addition, the state tax benefit of $179
million, if not used, expires over a five to twenty year period.
The
Company’s ability to utilize these benefits may be impaired if the Company were
to have a change of ownership within the meaning of Section 382 of the Internal
Revenue Code. To reduce the possibility of a potential adverse effect on the
Company’s ability to utilize its NOL carry forward benefits, the Company’s
certificate of incorporation contains a “5% Ownership Limitation,” applicable to
all stockholders except the Pension Benefit Guaranty Corporation (“PBGC”). The
5% Ownership Limitation remains effective until February 1, 2011. Generally, the
5% limitation prohibits (i) the acquisition by a single stockholder of shares
representing 5% or more of the common stock of UAL and (ii) any acquisition or
disposition of common stock by a stockholder that already owns 5% or more of
UAL’s common stock, unless prior written approval is granted by the UAL Board of
Directors. At this time, the Company does not believe the limitations imposed by
the Internal Revenue Code on the usage of the NOL carry forward and other tax
attributes following an ownership change will have an effect on the Company.
Therefore, the Company does not believe its exit from bankruptcy has had any
material impact on the use of its remaining NOL carry forward and other tax
attributes.
In
addition to the deferred tax assets listed above, the Company had an $809
million unrecorded tax benefit at September 30, 2009 attributable to the
difference between the amount of the financial statement expense and the
allowable tax deduction for UAL common stock issued to certain unsecured
creditors and employees pursuant to the bankruptcy plan of reorganization. The
Company is accounting for this unrecorded tax benefit by analogy to ASC guidance
with respect to accounting for share-based payment arrangements which requires
recognition of the tax benefit to be deferred until it is realized as a
reduction of taxes payable. If not realized, the unrecognized tax benefits of
$161 million will expire in 2025, $489 million in 2026 and $159 million over a
period from 2027 through 2050. UAL’s income tax returns for tax years after 2003
remain subject to examination by the Internal Revenue Service and state taxing
jurisdictions. United is included in UAL’s consolidated income tax
returns.
(8)
Retirement and Postretirement Plans
UAL and
United contribute to defined contribution plans on behalf of most of their
employees, particularly within the U.S. Internationally, the Company maintains a
number of small pension plans covering much of its local, non-U.S. workforce.
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 certain retirees, which are reflected as “Other Benefits” in the tables
below. The Company has reserved the right, subject to collective bargaining and
other agreements, to modify or terminate the health care and life insurance
benefits for both current and future retirees. The curtailment gain in the nine
months ended September 30, 2009 is attributed to a reduction in future service
for certain of the Company’s postretirement plans due to reductions in
workforce.
The
Company’s net periodic benefit cost included the following
components.
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||||||||||
(In millions)
|
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
Service
cost
|
$ | 2 | $ | 2 | $ | 5 | $ | 5 | $ | 7 | $ | 8 | $ | 21 | $ | 24 | ||||||||||||||||
Interest
cost
|
2 | 2 | 6 | 7 | 29 | 31 | 86 | 91 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(2 | ) | (2 | ) | (5 | ) | (8 | ) | (2 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||||||||||
Gain
due to curtailment
|
— | — | — | — | — | — | (7 | ) | — | |||||||||||||||||||||||
Amortization
of unrecognized gain and prior service cost
|
— | (1 | ) | — | (2 | ) | (5 | ) | (4 | ) | (15 | ) | (12 | ) | ||||||||||||||||||
Net
periodic benefit costs
|
$ | 2 | $ | 1 | $ | 6 | $ | 2 | $ | 29 | $ | 34 | $ | 82 | $ | 100 |
(9)
Segment Information
The
Company manages its business by two reportable segments: Mainline and Regional
Affiliates (United Express operations). The table below includes segment
information for UAL and United for the three and nine month periods ended
September 30, 2009 and 2008.
Three
Months Ended
|
Nine Months
Ended
|
|||||||||||||||
(In millions)
|
September 30,
|
September 30,
|
||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
UAL
segment information
|
|
(Adjusted)
|
|
(Adjusted)
|
||||||||||||
Revenue:
|
||||||||||||||||
Mainline
|
$ | 3,589 | $ | 4,731 | $ | 9,890 | $ | 13,301 | ||||||||
Regional
Affiliates
|
844 | 834 | 2,252 | 2,346 | ||||||||||||
Total
|
$ | 4,433 | $ | 5,565 | $ | 12,142 | $ | 15,647 | ||||||||
Segment
earnings (loss):
|
||||||||||||||||
Mainline
|
$ | (87 | ) | $ | (751 | ) | $ | (305 | ) | $ | (1,458 | ) | ||||
Regional
Affiliates
|
69 | (48 | ) | 98 | (162 | ) | ||||||||||
Goodwill
impairment
|
- | - | - | (2,277 | ) | |||||||||||
Other
impairments and special items (a)
|
(43 | ) | 9 | (250 | ) | (214 | ) | |||||||||
Less:
equity earnings (b)
|
(1 | ) | (1 | ) | (3 | ) | (4 | ) | ||||||||
Consolidated
loss before income taxes and equity in earnings of
affiliates
|
$ | (62 | ) | $ | (791 | ) | $ | (460 | ) | $ | (4,115 | ) |
United segment
information
|
||||||||||||||||
Revenue:
|
||||||||||||||||
Mainline
|
$ | 3,591 | $ | 4,772 | $ | 9,897 | $ | 13,342 | ||||||||
Regional
Affiliates
|
844 | 834 | 2,252 | 2,346 | ||||||||||||
Total
|
$ | 4,435 | $ | 5,606 | $ | 12,149 | $ | 15,688 | ||||||||
Segment
earnings (loss):
|
||||||||||||||||
Mainline
|
$ | (85 | ) | $ | (710 | ) | $ | (299 | ) | $ | (1,445 | ) | ||||
Regional
Affiliates
|
69 | (48 | ) | 98 | (162 | ) | ||||||||||
Goodwill
impairment
|
- | - | - | (2,277 | ) | |||||||||||
Asset
impairment and special items (a)
|
(43 | ) | 9 | (250 | ) | (214 | ) | |||||||||
Less:
equity earnings (b)
|
(1 | ) | (1 | ) | (3 | ) | (4 | ) | ||||||||
Consolidated
loss before income taxes and equity in earnings of
affiliates
|
$ | (60 | ) | $ | (750 | ) | $ | (454 | ) | $ | (4,102 | ) |
____________
(a)
|
Asset
impairment and special items are only applicable to the Mainline
segment.
|
(b)
|
Equity
earnings are part of the Mainline
segment.
|
(10)
Comprehensive Loss
For the
three and nine month periods ended September 30, 2009, UAL’s total comprehensive
loss was $47 million and $405 million, respectively. For the three and nine
month periods ended September 30, 2008, UAL’s total comprehensive loss was $804
million (as adjusted) and $4,120 million (as adjusted), respectively. For the
three and nine month periods ended September 30, 2009, United’s total
comprehensive loss was $45 million and $399 million, respectively. For the three
and nine month periods ended September 30, 2008, United’s total comprehensive
loss was $764 million (as adjusted) and $4,107 million (as adjusted),
respectively. Comprehensive loss in the 2009 and 2008 periods primarily includes
the amortization of deferred net periodic pension and other postretirement
benefit gains that were recorded as a component of accumulated other
comprehensive income and changes in the fair value of the Company’s
available-for-sale Enhanced Equipment Trust Certificate (“EETC”) investments.
See Note 2, “New Accounting Pronouncements,” for a discussion of the adjustments
made to the 2008 amounts.
(11)
Fair Value Measurements and Derivative Instruments
Fair Value
Information. A fair value hierarchy that prioritizes the inputs used to
measure fair value has been established by GAAP. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs
(Level 3 measurement). This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs. The three levels
of inputs used to measure fair value are as follows:
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities.
|
|
Level
2
|
Observable
inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
The table
below presents disclosures about fair value measurements of financial assets and
financial liabilities recognized in the Company’s Financial
Statements.
|
Fair Value Measurements at Reporting Date
Using
|
|||||||||||||||||||
(In millions)
|
September 30, 2009
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
Gains/(Losses)
(Level 3)
|
|||||||||||||||
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis:
|
||||||||||||||||||||
Financial
assets:
|
||||||||||||||||||||
Noncurrent
EETC available-for-sale securities
|
$ | 55 | $ | — | $ | — | $ | 55 | $ | 12 | ||||||||||
Current
fuel derivative instruments
|
105 | — | 105 | — | — | |||||||||||||||
Fuel
derivative instrument receivables (a)
|
7 | — | 7 | — | — | |||||||||||||||
Total
financial assets
|
$ | 167 | $ | — | $ | 112 | $ | 55 | $ | 12 | ||||||||||
Financial
liabilities:
|
||||||||||||||||||||
Current
fuel derivative instruments
|
$ | 73 | $ | — | $ | 73 | ||||||||||||||
Current
foreign currency derivative instruments
|
3 | — | 3 | |||||||||||||||||
Noncurrent
fuel derivative instruments
|
1 | — | 1 | |||||||||||||||||
Fuel
derivative instrument payables (a)
|
35 | — | 35 | |||||||||||||||||
Total
financial liabilities
|
$ | 112 | $ | — | $ | 112 |
____________
(a)
|
Fuel
derivative instrument receivables and payables represent pending
settlements of contract premiums and expired
contracts.
|
The
Company records derivative instruments as a derivative asset or liability (on a
gross basis) in its Financial Statements, and accordingly records any
related collateral on a gross basis. The table below presents the fair value
amounts of derivative assets and liabilities as of September 30, 2009. The
Company applied new ASC disclosure requirements prospectively; therefore,
the December 31, 2008 amounts are not presented.
|
Asset Derivatives
|
Liability Derivatives
|
|||||||||
(In millions)
|
Balance
Sheet Location
|
September 30,
2009
|
Balance
Sheet Location
|
September 30,
2009
|
|||||||
Derivatives
not receiving hedge accounting treatment:
|
|||||||||||
Fuel
contracts due within one year
|
Receivables
|
$ | 105 |
Derivative
instruments
|
$ | 73 | |||||
Foreign
currency contracts due within one year
|
— |
Derivative
instruments
|
3 | ||||||||
Fuel
contracts due after one year
|
— |
Other
Liabilities
|
1 | ||||||||
Total
derivatives
|
$ | 105 | $ | 77 |
Level
3 Financial Assets and Liabilities
Available-for-Sale
Securities
|
||||||||
(In millions)
|
Three
Months Ended
September 30, 2009
|
Nine
Months Ended
September 30, 2009
|
||||||
Balance
at beginning of period
|
$ | 44 | $ | 46 | ||||
Unrealized
gains relating to instruments held at reporting date
|
12 | 12 | ||||||
Return
of principal
|
(1 | ) | (3 | ) | ||||
Balance
at end of period
|
$ | 55 | $ | 55 |
As of
September 30, 2009, the Company’s EETC securities have an amortized cost basis
of $83 million and unrealized losses of $28 million and represent a portion of
the Company’s previously issued and outstanding EETC securities which were
repurchased in open market transactions in 2007. As of September 30, 2009, these
investments have been in an unrealized loss position for a period of over twelve
months. However, United has not recognized an impairment loss in earnings
related to these securities because United does not intend or expect to be
required to sell the securities prior to recovery. United expects to collect the
full principal balance and all related interest payments. All changes in the
fair value of these investments have been classified within Accumulated other
comprehensive income in the Financial Statements.
Derivative
instruments and investments presented in the table above have the same fair
value as their carrying value. The table below presents the carrying values and
estimated fair values of the Company’s financial instruments not presented in
the table above.
|
September 30, 2009
|
|||||||
(In millions)
|
Carrying
Amount
|
Fair
Value
|
||||||
Long-tem
debt (including current portion)
|
$ | 6,418 | $ | 5,400 | ||||
Lease
deposits
|
335 | 359 |
Fair
value of the above financial instruments was determined as follows.
Description
|
Fair
Value Methodology
|
|
Cash,
Cash Equivalents, Restricted Cash, Accounts Receivable, Fuel Hedge
Collateral Deposits, Accounts Payable and Other Accrued
Liabilities
|
The
carrying amounts approximate fair value because of the short-term maturity
of these investments.
|
|
Enhanced Equipment
Trust
Certificates
|
The
EETCs are not actively traded on an exchange. Fair value is based on the
trading prices of United’s EETCs or similar EETC instruments
issued by other airlines. The Company uses internal models and observable
and unobservable inputs to corroborate third party quotes. Because certain
inputs are unobservable, the Company categorized inputs to the EETC fair
value valuation as Level 3. Significant inputs to the valuation models
include contractual terms, risk-free interest rates and credit
spreads.
|
|
Fuel
Derivative Instruments
|
Derivative
contracts are privately negotiated contracts and are not exchange traded.
Fair value measurements are estimated with option pricing models that
employ observable and unobservable inputs. Inputs to the valuation models
include contractual terms, market prices, yield curves, fuel price curves
and measures of volatility, among others.
|
|
Foreign
Currency Derivative Instruments
|
Fair
value is determined with a formula utilizing observable inputs.
Significant inputs to the valuation models include contractual terms,
risk-free interest rates and forward exchange rates.
|
|
Long-Term
Debt
|
The
fair value is based on the quoted market prices for the same or similar
issues, discounted cash flow models using appropriate market rates and the
Black-Scholes model to value conversion rights in UAL’s convertible debt
instruments. The Company’s credit risk was considered in estimating fair
value.
|
Derivative
Credit Risk and Fair Value
The
Company is exposed to credit losses in the event of nonperformance by
counterparties to its derivative instruments. The Company enters into master
netting agreements with its derivative counterparties. While the Company records
derivative instruments on a gross basis, the Company monitors its net derivative
position with each counterparty to monitor credit risk. As of September 30,
2009, the Company had a net derivative asset of $78 million with certain of its
fuel derivative counterparties; therefore, this amount represents the potential
credit-risk loss if these counterparties fail to perform. The Company had a net
derivative payable of $47 million with its remaining fuel counterparties at
September 30, 2009.
Based on
the fair value of the Company’s fuel derivative instruments, our counterparties
may require the Company to post collateral when the price of the
underlying commodity decreases and we may require our counterparties to provide
us with collateral when the price of the underlying commodity increases. The
Company was required to post $62 million of cash collateral with certain of its
fuel derivative counterparties at September 30, 2009. The Company routinely
reviews the credit risk associated with its counterparties and believes its
collateral is fully recoverable from its counterparties as of September 30,
2009. The collateral is classified as Fuel hedge collateral deposits in the
accompanying Financial Statements.
The
Company reviews the credit risk associated with its derivative counterparties
and may require collateral from its counterparties in the event the Company has
a significant net derivative asset with the counterparties. As of September 30,
2009, the Company did not receive cash collateral from any of its fuel
derivative counterparties because the net derivative asset did not exceed the
respective threshold amount.
The
Company considered counterparty credit risk in determining the fair value of its
financial instruments. The Company considered credit risk to have a minimal
impact on fair value because varying amounts of collateral are either provided
by or received from United’s hedging counterparties based on current market
exposure and the credit-worthiness of the counterparties.
Derivative
Instruments
The
following section includes additional information regarding derivative
instruments not already disclosed above.
Aircraft Fuel
Hedges. The Company has a risk management strategy to hedge a portion of
its price risk related to projected jet fuel requirements. Jet fuel is one of
the Company’s most significant operating expenses. Jet fuel is a commodity with
significant price volatility. Prices fluctuate based on market expectations of
supply and demand, among other factors. Increases in fuel prices may adversely
impact the Company’s financial performance, operating cash flows and financial
position as greater amounts of cash may be required to obtain jet fuel for
operations. The Company periodically enters into derivative contracts to
mitigate the adverse financial impact of potential increases in the price of jet
fuel. The Company does not enter into derivative instruments for non-risk
management purposes. The Company’s fuel hedges are not accounted for as fair
value or cash flow hedges.
The
following table presents the fuel hedge gains (losses) recognized during the
periods presented and their classification in the Financial
Statements.
|
Mainline Fuel
|
Nonoperating
Income (Expense)
|
Total
|
|||||||||||||||||||||
|
Three
Months Ended
September 30,
|
Three
Months Ended
September 30,
|
Three
Months Ended
September 30,
|
|||||||||||||||||||||
(In millions)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||
Fuel
hedges (a):
|
||||||||||||||||||||||||
Cash
net gains (losses) on settled contracts
|
$ | (92 | ) | $ | 39 | $ | (39 | ) | $ | (22 | ) | $ | (131 | ) | $ | 17 | ||||||||
Non-cash
net mark-to-market gains (losses)
|
25 | (336 | ) | 34 | (183 | ) | 59 | (519 | ) | |||||||||||||||
Total
fuel hedge gains (losses)
|
$ | (67 | ) | $ | (297 | ) | $ | (5 | ) | $ | (205 | ) | $ | (72 | ) | $ | (502 | ) |
|
Mainline Fuel
|
Nonoperating
Income (Expense)
|
Total
|
|||||||||||||||||||||
Nine
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
||||||||||||||||||||||
(In millions)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||
Fuel
hedges (a):
|
||||||||||||||||||||||||
Cash
net gains (losses) on settled contracts
|
$ | (491 | ) | $ | 102 | $ | (215 | ) | $ | (21 | ) | $ | (706 | ) | $ | 81 | ||||||||
Non-cash
net mark-to-market gains (losses)
|
521 | (119 | ) | 241 | (162 | ) | 762 | (281 | ) | |||||||||||||||
Total
fuel hedge gains (losses)
|
$ | 30 | $ | (17 | ) | $ | 26 | $ | (183 | ) | $ | 56 | $ | (200 | ) |
____________
|
(a)
|
Fuel
hedge gains (losses) are not allocated to Regional Affiliates
expense.
|
As
presented in the table below, the Company utilizes various types of hedging
instruments including calls, puts, swaps, collars, 3-way collars and 4-way
collars. The swaps utilized by the Company generally provide that the
counterparty will pay to (receive from) United when the price of the underlying
commodity is above (below) the price specified in the swap agreement. A collar
involves the purchase of fuel call options with the simultaneous sale of fuel
put options with identical expiration dates. Generally, the Company’s hedge
instruments are based on crude oil, heating oil or jet fuel. As of September 30,
2009, the Company’s hedge positions were primarily based on either heating oil
or jet fuel. Certain of these instruments remain outstanding as of September 30,
2009, as summarized in the table below.
Barrels hedged (in 000s)
|
Weighted-average crude equivalent price per barrel
(a)
|
|||||||||||||||||||||||||||||||||||
Percentage
of Projected Fuel Requirements
|
Purchased
|
Sold
|
Swaps/
Purchased
|
Sold
|
Payment
Obligation
|
Payment
Obligation
|
Hedge
Protection
|
Hedge
Protection
|
||||||||||||||||||||||||||||
Hedged
|
Puts
|
Puts
|
Calls
|
Calls
|
Ends
|
Begins
|
Begins
|
Ends
|
||||||||||||||||||||||||||||
Fourth
Quarter 2009:
|
% | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Calls
|
31 | - | - | 4,150 | - |
NA
|
NA
|
66 |
NA
|
|||||||||||||||||||||||||||
Swaps
|
13 | - | - | 1,800 | - |
NA
|
62 | 62 |
NA
|
|||||||||||||||||||||||||||
Collars
|
1 | - | 300 | 150 | - |
NA
|
112 | 138 |
NA
|
|||||||||||||||||||||||||||
3-way
collars
|
8 | - | 1,425 | 1,050 | 1,050 |
NA
|
100 | 120 | 160 | |||||||||||||||||||||||||||
4-way
collars
|
2 | 225 | 225 | 225 | 225 | 63 | 78 | 95 | 135 | |||||||||||||||||||||||||||
Total
|
55 | 225 | 1,950 | 7,375 | 1,275 | |||||||||||||||||||||||||||||||
Purchased
puts
|
14 | 1,800 | - | - | - |
NA
|
NA
|
52 |
NA
|
|||||||||||||||||||||||||||
Full
Year 2010:
|
||||||||||||||||||||||||||||||||||||
Calls
|
9 | - | - | 4,900 | - |
NA
|
NA
|
73 |
NA
|
|||||||||||||||||||||||||||
Swaps
|
6 | - | - | 3,075 | - |
NA
|
74 | 74 |
NA
|
|||||||||||||||||||||||||||
Collars
|
- | - | 300 | 300 | - |
NA
|
93 | 98 |
NA
|
|||||||||||||||||||||||||||
Total
(b)
|
15 | - | 300 | 8,275 | - |
____________
(a)
|
Instruments
in heating oil and jet fuel are converted to crude oil price
equivalents.
|
(b)
|
The
Company has hedged approximately 40% of its first quarter 2010
consolidated consumption.
|
In
addition to the hedges described in the table above, the Company has entered
into hedges against adverse increases in the spread between the price of crude
oil and the price of refined petroleum products (referred to as a crack spread).
As the Company consumes refined products, adverse increases in this spread can
negatively impact the Company’s results of operations. As described above, an
increase above the contract price would result in payment to United, while a
decrease below the contract price would require payments by United to its
counterparties.
Foreign Exchange.
The Company generates revenues and incurs expenses in numerous foreign
currencies. Such expenses include fuel, aircraft leases, commissions, catering,
personnel expense, advertising and distribution costs, customer service expense
and aircraft maintenance. Changes in foreign currency exchange rates impact the
Company’s results of operations and cash flows through changes in the dollar
value of foreign currency-denominated operating revenues and expenses. When
management believes risk reduction can be effectively achieved, the Company may
use foreign currency forward contracts to hedge a portion of its exposure to
changes in foreign currency exchange rates. The Company does not enter into
foreign currency derivative contracts for purposes other than risk management.
As of September 30, 2009, the notional amount of foreign currencies hedged with
the forward contracts in U.S. dollar terms was approximately $36 million. Hedge
gains (losses) were not significant in any of the periods presented in these
Financial Statements. Foreign currency derivative gains and losses are
classified in nonoperating expense in the Company’s Financial Statements. None of the Company’s
foreign exchange contracts were designated as hedging instruments under
applicable GAAP.
Fair
Value of Nonfinancial Assets
The table
below presents disclosures about fair value measurements of nonfinancial assets
as of September 30, 2009.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
(In millions)
|
September 30, 2009
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
Gains/(Losses)
(Level 3)
|
|||||||||||||||
Nonfinancial
Assets Measured at Fair Value on a Nonrecurring
Basis:
|
||||||||||||||||||||
Five
B747 aircraft - nonoperating
|
$ | 184 | $ | — | $ | — | $ | 184 | $ | (19 | ) |
As
discussed in Note 14, “Asset Impairments, Special Items and Intangible Assets,”
the Company evaluated the fair value of these nonoperating aircraft as market
conditions indicated that their then-current carrying value may not have been
recoverable. The Company utilized a market approach to estimate the fair value
of the nonoperating B747 aircraft. The market approach used by the Company
included prices and other relevant information generated by market transactions
involving comparable assets, as well as pricing guides and other sources. The
Company considered the current market for the aircraft, the condition of the
aircraft and the expected proceeds from the sale of the assets, among other
factors. The Company considers the fair value of these aircraft to be a Level 3
measurement because significant unobservable inputs, such as aircraft
conditions, were considered in the fair value measurement.
As of
June 30, 2009, the Company estimated the fair value of its tradenames using a
discounted cash flow model. The key inputs to the discounted cash flow model
were the Company’s historical and estimated future revenues, an assumed royalty
rate and discount rate among others. While certain of these inputs are
observable, significant judgment was required to select certain inputs from
observable and unobservable market data. This fair value measurement was
considered a Level 3 measurement. The decrease in fair value of the tradename
was due to lower estimated revenues resulting from the weak economic environment
and the Company’s capacity reductions, among other factors. Certain of the
Company’s tradenames with a carrying amount of $570 million were written down to
their fair value of $420 million as of June 30, 2009, resulting in an impairment
charge of $150 million, which was included in earnings for the nine months ended
September 30, 2009. See Note 14, “Asset Impairments, Special Items and
Intangible Assets,” for additional information related to this asset
impairment.
(12)
|
Commitments, Contingent
Liabilities and
Uncertainties
|
General
Guarantees and Indemnifications. In the normal course of business, the
Company enters into numerous real estate leasing and aircraft financing
arrangements that have various guarantees included in the contracts. These
guarantees are primarily in the form of indemnities. In both leasing and
financing transactions, the Company typically indemnifies the lessors, and any
financing parties, against tort liabilities that arise out of the use,
occupancy, operation or maintenance of the leased premises or financed aircraft.
Currently, management believes that any future payments required under these
guarantees or indemnities would be immaterial, as most tort liabilities and
related indemnities are covered by insurance (subject to deductibles).
Additionally, certain leased premises such as fueling stations or storage
facilities include indemnities of such parties for any environmental liability
that may arise out of or relate to the use of the leased premises.
Labor
Negotiations. All of United’s domestic labor contracts become amendable
on or about January 1, 2010. Consistent with its contractual commitments, United
served “Section 6” notices to all six of its labor unions during April 2009 to
commence the collective bargaining process. Negotiations with each union began
during the second quarter of 2009. During the first week of August 2009, United
filed for mediation assistance in conjunction with three of its six unions,
including the Air Line Pilots Association, the Association of Flight
Attendants—Communication Workers of America and the International Association of
Machinists and Aerospace Workers. These filings were consistent with
commitments contained in current labor contracts which provided that the parties
would jointly invoke the mediation services of the National Mediation Board in
the event agreements had not been reached by August 1, 2009. While the labor
contracts with the International Brotherhood of Teamsters and the Professional
Airline Flight Control Association also contemplate filing for mediation, the
parties have agreed to continue in direct negotiations. The current contract
with the International Federation of Professional and Technical Engineers does
not contemplate filing for mediation. The outcome of these negotiations may
materially impact the Company’s future financial results. However, it is too
early in the process to assess the timing or magnitude of the impact, if
any.
Bankruptcy
Contingencies. The Company emerged from bankruptcy protection in 2006
pursuant to a plan of reorganization confirmed by the United States Bankruptcy
Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy
Court”). The following discussion provides a summary of significant
bankruptcy-related contingencies and related reserves.
There is
pending litigation before the Bankruptcy Court of the U.S. District Court for
the Northern District of Illinois (the “District Court”) regarding the extent to
which the Los Angeles International Airport (“LAX”) municipal bond debt is
entitled to secured status under Section 506(a) of the Bankruptcy Code. In 2007,
the Bankruptcy Court issued its written opinion holding that the value of the
security interest was approximately $33 million, which was affirmed by the
District Court. On May 5, 2009, the United States Court of Appeals for the
Seventh Circuit reversed the lower courts and held that LAX bondholders were
entitled to a full recovery of the principal amount due on the bonds,
approximately $60 million. United filed a petition for rehearing, which was
subsequently denied. United accrued $60 million and $33 million (plus some
accrued interest) as its estimated obligation to LAX bondholders at September
30, 2009 and December 31, 2008, respectively. In October 2009, the Company
entered into a settlement agreement with the LAX bondholders and the City of Los
Angeles to settle the obligation for an amount that represents the principal
amount of the bonds plus some accrued interest. The settlement agreement is
subject to Bankruptcy Court approval, among other contingencies.
The table
below includes the Company’s estimated obligations related to the administrative
and priority claims and other bankruptcy-related claim reserves including
reserves related to LAX litigation and other legal, professional and tax
matters, among others, for the nine months ended September 30, 2009. These
reserves are primarily classified in other current liabilities in the Financial
Statements.
(In millions)
|
|
|||
Balance
at December 31, 2008
|
$ | 96 | ||
Payments
|
(34 | ) | ||
Accruals
|
30 | |||
Balance
at September 30, 2009
|
$ | 92 |
Legal and
Environmental. The Company has certain contingencies resulting from
litigation and claims incident to the ordinary course of business. Management
believes, after considering a number of factors, including (but not limited to)
the information currently available, the views of legal counsel, the nature of
contingencies to which the Company is subject and prior experience, that the
ultimate disposition of the litigation and claims will not materially affect the
Company’s consolidated financial position or results of operations. When
appropriate, the Company accrues for these matters based on its assessments of
the likely outcomes of their eventual disposition. The amounts of these
liabilities could increase or decrease in the near term, based on revisions to
estimates relating to the various claims.
Given the
Air Transportation Safety and System Stabilization Act of 2001, the resolution
of the majority of the wrongful death and personal injury cases by settlement
and the withdrawal of all related proofs of claim from the Company’s Chapter 11
reorganization, and that claimants’ recoveries are limited to insurance
proceeds, the Company believes that it will have no financial exposure for
claims arising out of the events of September 11, 2001.
The
Company continues to analyze whether any potential liability may result from air
cargo/passenger surcharge cartel investigations following the receipt of a
Statement of Objections that the European Commission (the “Commission”) issued
to 26 companies on December 18, 2007. The Statement of Objections sets out
evidence related to the utilization of fuel and security surcharges and exchange
of pricing information that the Commission views as supporting the conclusion
that an illegal price-fixing cartel had been in operation in the air cargo
transportation industry. United received a copy of the Statement of Objections
and has provided written and oral responses vigorously disputing the
Commission’s allegations against the Company. Nevertheless, United will continue
to cooperate with the Commission’s ongoing investigation. Based on its
evaluation of all information currently available, the Company has determined
that no reserve for potential liability is required and will continue to defend
itself against all allegations that it was aware of or participated in cartel
activities. However, penalties for violation of European competition laws can be
substantial and a finding that the Company engaged in improper activity could
have a material adverse impact on our consolidated financial position and
results of operations.
Many
aspects of United’s operations are subject to increasingly stringent federal,
state and local laws protecting the environment. Future environmental regulatory
developments, such as those relating to climate change, in the U.S. and abroad
could adversely affect operations and increase operating costs in the airline
industry. Some climate change laws and regulations that have gone into effect
apply to United, including environmental taxes for certain international
flights, limited greenhouse gas reporting requirements and land-based planning
laws which could apply to airports and could affect airlines in certain
circumstances. In addition, a 2009 European Union (“EU”) Directive requires EU
member countries to enact legislation that would include aviation within the
EU’s existing carbon emission trading scheme, effective in 2012. The legality of
applying such a scheme to non-EU airlines has been widely questioned, and non-EU
countries are considering filing a formal challenge to the EU’s inclusion of
non-EU carriers. It is not clear whether the trading scheme would withstand any
such challenge. If the scheme is found to be valid, however, it could
significantly increase the costs of carriers operating in the EU, although the
precise cost to United is difficult to calculate with any certainty due to a
number of variables, and will depend, among other things, on United’s carbon
emissions from flights to and from the EU and the price of carbon credits.
Actions also may be taken in the future by the U.S. government, state
governments within the U.S., foreign governments, the International Civil
Aviation Organization, or by signatory countries through a new global climate
change treaty to regulate the emission of greenhouse gases by the aviation
industry. The precise nature of any such requirements and their applicability to
United are difficult to predict, but the impact to the Company and the aviation
industry would likely be adverse and could be significant, including the
potential for increased fuel costs, carbon taxes or fees, or a requirement to
purchase carbon credits.
Contingent Senior
Unsecured Notes. UAL is obligated to issue up to $500 million of 8%
senior unsecured notes to the PBGC in up to eight equal tranches of $62.5
million upon the occurrence of certain financial triggering events. Beginning
with the Company’s fiscal year ending December 31, 2009 and concluding with its
fiscal year ending December 31, 2017, a triggering event may occur when, among
other things, the Company’s EBITDAR exceeds $3.5 billion over a prior twelve
month period. In certain circumstances, UAL common stock may be issued in lieu
of issuance of the notes.
Commitments.
At September 30, 2009, future commitments for the purchase of property
and equipment, principally aircraft, include approximately $0.4 billion of
binding commitments and $2.3 billion of nonbinding commitments. The nonbinding
commitments of $2.3 billion are related to 42 A319 and A320 aircraft. These
orders may be cancelled which would result in the forfeiture of $91 million of
advance payments provided to the manufacturer. The Company reached an agreement
with the engine manufacturer eliminating all provisions pertaining to firm
commitments and support for future Airbus aircraft. While this permits future
negotiations on engine pricing with any engine manufacturer, restructured
aircraft manufacturer commitments have assumed that aircraft will be delivered
with installed engines at list price. During the second quarter of 2008, the
Company recorded an impairment charge to decrease the carrying value of the
advance deposits and associated capitalized interest to zero in the Company’s
Financial Statements based on the Company’s
belief that it is highly unlikely that it will take future delivery of these
aircraft. These aircraft purchase orders are still included in the Company’s
total nonbinding commitment amount, as the Company has not formally terminated
the orders. In addition, the Company has capital commitments related to its
international premium travel experience product enhancement program. As of
September 30, 2009, the Company’s commitments would require the payment of
approximately $0.2 billion in the last three months of 2009, $0.3 billion for
the combined years of 2010 and 2011, $1.3 billion for the combined years of 2012
and 2013 and $0.9 billion thereafter. Additionally, the Company has committed to
purchase approximately $210 million of equipment or services from a technology
vendor over a seven-year period, which is not reflected in the commitments
described above.
Municipal Bond Guarantee. The
Company has guaranteed interest and principal payments on $270 million of the
Denver International Airport bonds, which were originally issued in 1992, but
were subsequently redeemed and reissued in 2007 and are due in 2032 unless the
Company elects not to extend its lease in which case the bonds are due in 2023.
The outstanding bonds and related guarantee are not recorded in the Company’s
Financial Statements at September 30, 2009
or December 31, 2008. The related lease agreement is recorded on a straight-line
basis resulting in ratable accrual of the final $270 million lease obligation
over the lease term.
(13)
Debt Obligations and Other Financing Transactions
As of
September 30, 2009 and December 31, 2008, assets with a net carrying value of
$8.5 billion and $7.9 billion, respectively, principally aircraft and engines,
aircraft spare parts, route authorities and Mileage Plus intangible assets were
pledged under various financing and other agreements. At September 30, 2009, the
Company had 21 operating, unencumbered aircraft and an additional 41
unencumbered aircraft, which were either nonoperating or part of the Company’s
permanent fleet reduction plan. As described under Credit Card Processing
Agreements below, in October 2009, the Company terminated a credit card
processor collateral substitution agreement which will unencumber significant
assets.
Amended
Credit Facility and Letters of Credit
The
Company has a $255 million revolving loan commitment available under Tranche A
of its credit facility. The Company used $249 million and $254 million of the
Tranche A commitment capacity for letters of credit at September 30, 2009 and
December 31, 2008, respectively. In addition, under a separate agreement, the
Company had $27 million of letters of credit issued as of September 30, 2009 and
December 31, 2008.
Financing
Arrangements
In
January 2009, the Company completed a $94 million sale-leaseback agreement for
nine aircraft. The leaseback agreement, which has a one-year term, a single
one-year renewal option, and a bargain purchase option, was accounted for as a
capital lease. This transaction resulted in an approximately $94 million
non-cash increase to the Company’s capital lease assets and capital lease
obligations. Additionally, capital lease assets increased by approximately $84
million for the deferred loss on the sale.
In
January 2009, the Company amended its lease of the Chicago O’Hare International
Airport cargo facility. This amendment resulted in proceeds to the Company of
approximately $160 million in return for the Company’s agreement to vacate its
currently leased cargo facility earlier than the lease expiration date in order
for the airport authority to continue with its long-term airport modernization
plan. The Company currently has not determined its future cargo plans, as the
Company is not required to vacate its current facility until approximately
mid-2011. The Company expects to account for this relocation payment as a lease
incentive and has recorded a noncurrent deferred credit of $160 million as of
September 30, 2009. Future accounting treatment of this deferred credit will be
impacted by the Company’s future cargo plans. As of December 31, 2008, the
Company had leasehold improvements in its current cargo facility of
approximately $38 million. The Company will ratably accelerate the amortization
of these assets so that they are fully amortized by the Company’s required
relocation date in mid-2011.
In March
2009, the Company entered into a $134 million term loan agreement. This
agreement requires quarterly interest and principal payments with the remaining
principal balance due at the end of the five year term. The applicable interest
rate is variable. The loan is callable 42 months after its issuance and is
secured by certain of the Company’s spare engines. The agreement also
cross-collateralizes the Company’s other obligations with this
lender.
On July
2, 2009, United issued $175 million aggregate principal amount of 12.75% Senior
Secured Notes due 2012 (the “Notes”). The Notes were issued at a discount of $17
million from their principal amount at maturity. Interest on the principal of
the Notes is payable quarterly. The Notes are secured by a lien on certain
aircraft spare parts owned by United and are guaranteed by UAL. United is
required to maintain certain collateral ratios including a ratio of the
outstanding principal to each of the following: total
collateral, Section 1110 collateral and rotables/repairables
collateral. If any of these ratios fall below the required minimum, United would
be required to provide additional collateral or redeem some or all of the Notes
to comply with the minimum ratio. In addition, the Notes have a mandatory
pro-rata redemption requirement if certain of United’s in-service fleet falls
below certain specified amounts. The Company has the right to redeem the Notes
at any time. If United elects to redeem the Notes, it must pay par value, plus
accrued interest, plus a potential make-whole amount. In addition, the holders
can require immediate repayment of the Notes, at par value plus accrued
interest, in the event of default on United’s part.
In August
2009, the Company completed a $30 million aircraft mortgage financing secured by
one B777 aircraft. The financing agreement requires monthly principal and
interest payments and a balloon payment upon final maturity in March 2016.
Interest is based on a variable interest rate plus a margin. The Company has the
right of prepayment with no penalty in certain circumstances.
In August
2009, the Company completed a $40 million sale-leaseback for five aircraft. The
aircraft are being leased back over an average period of 6.5 years. These leases
are considered to be capital leases resulting in an approximate $40 million
increase to capital lease assets and capital lease obligations. Additionally,
capital lease assets increased by approximately $13 million for the deferred
loss on sale, which will be recognized over the lease term.
See Note
16, “Subsequent Events,” for information related to United’s financing
transactions completed during October 2009.
Amended
Credit Facility Covenants
The
Company’s Amended Credit Facility requires compliance with certain covenants.
Beginning with the quarter ended June 30, 2009, the Company was required to
comply with a fixed charge coverage ratio, which requirement had been previously
suspended in 2008. For the six month period ended September 30, 2009, the
required ratio was 1.1 to 1.0. The Company was in compliance with this ratio and
all of its Amended Credit Facility covenants as of September 30,
2009.
Failure
to comply with any applicable covenants in effect for any reporting period could
result in a default under the Amended Credit Facility unless the Company obtains
a waiver of, or otherwise mitigates or cures, any such default. Additionally,
the Amended Credit Facility contains a cross default provision with respect to
other credit arrangements that exceed $50 million. Although the Company was in
compliance with all required financial covenants as of September 30, 2009,
continued compliance depends on many factors, some of which are beyond the
Company’s control, including the overall industry revenue environment and the
level of fuel costs. There are no assurances that the Company will continue to
comply with its debt covenants. Failure to comply with applicable covenants in
any reporting period would result in a default under the Amended Credit
Facility, which could have a material adverse impact on the Company depending on
the Company’s ability to obtain a waiver of, or otherwise mitigate, the impact
of the default.
Additional
details on the Company’s Amended Credit Facility covenants are available in the
combined UAL and United Annual Report on Form 10-K for the year ended December
31, 2008 as updated by the Current Report on Form 8-K dated May 1, 2009 (the
“2008 Annual Report”).
Credit
Card Processing Agreements
The
Company has agreements with financial institutions that process customer credit
card transactions for the sale of air travel and other services. Under certain
of the Company’s card processing agreements, the financial institutions have the
right to require that United maintain a reserve (“reserve”) equal to a portion
of advance ticket sales that have been processed by that financial institution,
but for which the Company has not yet provided the air transportation (referred
to as “relevant advance ticket sales”).
As
further described in the 2008 Annual Report, the Company’s agreements with
Paymentech and JPMorgan Chase Bank (collectively “Chase”) and with American
Express require the Company to provide cash reserves approximately three weeks
following the end of each month if the Company’s unrestricted cash, cash
equivalents and short-term investments at month-end were below certain levels.
In November 2008, the Company amended its agreement with Chase to provide
non-cash collateral in lieu of cash reserves, effective through January 19,
2010, unless terminated earlier by the Company. In October 2009, the Company
notified Chase of its intention to terminate the collateral substitution
agreement which unencumbers collateral with a book value of approximately $0.7
billion which may be utilized for other liquidity initiatives. Based on the
Company’s September 30, 2009 unrestricted cash balance, the Company would not be
required to provide cash collateral above the current $25 million reserve
balance.
Under the
American Express agreement, in addition to certain other risk protections
provided to American Express, the Company will be required to provide reserves
if its unrestricted cash balance (as defined in the agreement) falls below $2.4
billion. Additionally, the Company also has the ability to provide non-cash
collateral in lieu of cash collateral if its unrestricted cash balance is above
$1.35 billion.
(14)
Asset Impairments, Special Items and Intangible Assets
Impairment
Testing. As of September 30, 2009, the Company reviewed the carrying
values of its nonoperating B737 and B747 aircraft to assess whether the carrying
values were recoverable due to the weak market for such aircraft. As a result of
this testing, the B737 aircraft carrying values were determined to be
recoverable; however, the carrying value of the five nonoperating B747 aircraft
were reduced to a lower estimated fair value resulting in a charge of $19
million.
As of
June 30, 2009, the Company performed interim impairment testing of its
tradenames due to a significant decline in its unit revenues and forecasted
future revenues. In addition, as of February 28, 2009, the Company performed an
interim impairment test of all indefinite-lived intangible assets and certain of
its definite-lived intangible assets due to events and changes in circumstances
during the first quarter of 2009 that indicated an impairment might have
occurred. Similarly, the Company tested its aircraft for impairment during the
first quarter of 2009. The primary factor deemed by management to have
constituted a potential impairment triggering event was a significant decline in
unit revenues experienced in the first quarter of 2009.
Indefinite-lived
intangible assets tested for impairment included tradenames, international route
authorities, London-Heathrow slots and codesharing agreements. The Company
utilized appropriate valuation techniques to separately estimate the fair values
of all of its indefinite-lived intangible assets as of February 28, 2009, and
compared those estimates to related carrying values. The methods used to test
these assets were primarily income methodologies, which were based on estimated
future cash flows, except for the valuation of the London-Heathrow slots, for
which fair value was estimated using the market approach. The only impairment of
indefinite-lived intangible assets was related to the carrying value of United’s
tradenames. During the nine months ended September 30, 2009, the Company
recorded an impairment charge of $150 million to decrease the carrying value of
the tradenames to estimated fair value.
For
purposes of testing impairment of certain definite-lived intangible assets at
February 28, 2009, the Company determined whether the carrying amounts of its
long-lived assets were recoverable by comparing their carrying amount to the sum
of the undiscounted cash flows attributable to their use. The Company determined
that the carrying value of its definite-lived intangible assets was fully
recoverable based on this testing.
Similarly
during 2008, the Company performed an interim impairment test of its goodwill,
all intangible assets and certain of its long-lived assets (principally aircraft
and related spare engines and spare parts) as of May 31, 2008 due to events and
changes in circumstances during the first and second quarters of 2008 that
indicated an impairment might have occurred. Factors deemed by management to
have collectively constituted an impairment triggering event included record
high fuel prices, significant losses in the first and second quarters of 2008, a
softening U.S. economy, analyst downgrade of UAL common stock, rating agency
changes in outlook for the Company’s debt instruments from stable to negative,
the announcement of the planned removal from UAL’s fleet of 100 aircraft in 2008
and a significant decrease in the fair value of the Company’s outstanding equity
and debt securities during the nine months ended September 30, 2008, including a
decline in UAL’s market capitalization to significantly below book
value.
For
purposes of testing impairment of aircraft in 2009 and 2008, the Company
compared the carrying amount of each aircraft fleet type to its estimated future
undiscounted cash flows attributable to the fleet type. In 2009, for all but two
fleet types, the Company determined that the fleet types were not impaired as
estimated cash flows exceeded carrying value. For the two fleet types which had
estimated undiscounted cash flows less than carrying value, the Company
estimated the fair value of these fleet types and determined that the aircraft
were not impaired as the estimated fair value exceeded the carrying value. The
fair value of these two fleet types was estimated using a market
approach.
Due to
extreme fuel price volatility, tight credit markets, the depressed value of
UAL’s market capitalization and its debt securities, the uncertain economic
environment, as well as other uncertainties, the Company can provide no
assurance that a material impairment charge will not occur in a future period.
The Company will continue to monitor circumstances and events in future periods
to determine whether additional asset impairment testing is
warranted.
As a
result of this impairment testing, the Company recorded impairment charges
during the three and nine months ended September 30, 2009 and 2008, as presented
in the table below. All of these impairment charges are within the Mainline
segment. All of the impairments other than the goodwill impairment, which is
separately identified, are classified within Other impairments and special items
in the Company’s Financial Statements.
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(In
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Goodwill
impairment
|
$ | - | $ | - | $ | - | $ | 2,277 | ||||||||
Indefinite-lived
intangible assets:
|
||||||||||||||||
Codeshare
agreements
|
- | (16 | ) | - | 44 | |||||||||||
Tradenames
|
- | - | 150 | 20 | ||||||||||||
Intangible
asset impairments
|
- | (16 | ) | 150 | 64 | |||||||||||
Tangible
assets:
|
||||||||||||||||
Pre-delivery
advance deposits including related capitalized interest
|
- | - | - | 105 | ||||||||||||
B737
and B747 aircraft, B737 spare parts and other
|
19 | - | 19 | 38 | ||||||||||||
Aircraft
and related deposit impairments
|
19 | - | 19 | 143 | ||||||||||||
Total
impairments
|
$ | 19 | $ | (16 | ) | $ | 169 | $ | 2,484 |
Special items.
Special items included charges of $24 million and $54 million during the
three and nine months ended September 30, 2009, respectively, primarily related
to the Company’s operational plans as discussed in Note 3, “Company Operational
Plans.” In addition, the nine months ended September 30, 2009 included special
charges of $27 million related to a pending legal matter which has been
unresolved since the Company’s emergence from bankruptcy in 2006. See Note 12,
“Commitments, Contingent Liabilities and Uncertainties,” for additional
information regarding this matter.
Special
charges of $7 million in both the three and nine months ended September 30, 2008
were primarily related to lease termination expense.
Intangible
Assets. During the three and nine months ended September 30, 2009, the
carrying value of the Company’s indefinite-lived intangible assets decreased by
$18 million due to the sale of certain airport slots.
(15)
Related Party Transactions
During
the nine months ended September 30, 2009, UAL contributed cash of $89 million to
United from the net proceeds that UAL generated from the issuance of UAL common
stock, as discussed in Note 4, “Common Stockholders’ Deficit.”
(16)
Subsequent Events
The
Company’s management has evaluated its subsequent events for disclosure in this
quarterly filing on Form 10-Q through October 21, 2009, the date on which the
Financial Statements were issued, and has identified the following
events.
In
October 2009, United issued approximately $659 million aggregate principal
amount of Pass-Through Certificates, Series 2009-1A (the “Certificates”).
The transaction refinances 29 aircraft covered under an existing EETC facility
and finances two previously unencumbered aircraft. United intends to use the net
proceeds from the issuance of the Certificates to redeem at par all of the $568
million aggregate principal amount related to its outstanding pass-through
certificates from the 2001-1 EETC issuance. This transaction will generate net
proceeds to the Company, some of which was received in October 2009 and the
remainder of which will be received in January 2010 when the existing EETC
facility is redeemed and the Certificates are issued. The payment obligations of
United under this transaction are fully and unconditionally guaranteed by UAL.
The Certificates have a stated interest rate of 10.4%, payable on May 1 and
November 1 of each year beginning May 1, 2010 and ending November 1, 2016. This
transaction is expected to reduce principal payment obligations under the 2001-1
EETC by $218 million and $101 million in 2010 and 2011,
respectively.
In
October 2009, UAL issued $345 million aggregate principal amount of 6.0%
Convertible Senior Notes due 2029 (the “Convertible Notes”). The Convertible
Notes are unsecured and will pay interest semi-annually at an annual rate of 6%
on April 15 and October 15 of each year, beginning on April 15, 2010 and ending
October 15, 2029. The Convertible Notes may be converted by holders into shares
of UAL’s common stock at an initial conversion rate of 115.1013 shares per
$1,000 of principal, equivalent to an initial conversion price of approximately
$8.69 per share. In October 2009, UAL also sold 19.0 million shares of UAL
common stock in an underwritten, public offering for a price of $7.24 per share.
The Company received approximately $468 million in net proceeds from
the issuance of the Convertible Notes and the 19.0 million shares of
UAL common stock.
In
October 2009, the Company completed total financings of $129 million with one of
its regional flying partners. These financings consist of an $80 million secured
note financing from its regional flying partner and an amendment to the
Company’s capacity agreement with the regional flying partner that allows a $49
million deferral of future obligations under that agreement. Interest
obligations due under the secured note are at a fixed interest rate; principal
and interest payments are due monthly over the ten-year secured note term but
may be repaid at any time partially or in full without penalty. The
Company’s obligations under the note are secured by certain of the Company’s
ground equipment and slots. If a specified collateral ratio is not
maintained, the Company must either provide additional collateral or prepay the
note to increase the collateral coverage ratio to the required
minimum. Interest due on the deferral of future obligations are at a
fixed rate and the principal amount must be repaid within ten
years. The Company also has the ability to repay the deferred
obligations at any time partially or in full without penalty. Also, the regional
carrier can require the Company to repay the deferred obligations if the
Company’s unrestricted liquid assets drop below a specified dollar
amount. In addition, the capacity agreement amendment extends the
lease terms on 40 aircraft presently leased from the regional flying partner and
adds 13 new operating aircraft to the amended agreement.
As
further discussed in Note 13, “Debt Obligations and Other Financing
Transactions,” in October 2009, the Company notified Chase of its intention to
terminate its collateral substitution agreement with respect to its credit card
processing agreement with Chase.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS.
Overview
UAL
Corporation (together with its consolidated subsidiaries, “UAL”), is a holding
company and its principal, wholly-owned subsidiary is United Air Lines, Inc.
(together with its consolidated subsidiaries, “United”). We sometimes use the
words “we,” “our,” “us” and the “Company” in this Form 10-Q for disclosures that
relate to both UAL and United. United’s operations consist primarily of the
transportation of persons, property, and mail throughout the U.S. and abroad.
United provides these services through full-sized jet aircraft (which we refer
to as its “Mainline” operations), as well as smaller aircraft in its regional
operations conducted under contract by “United Express®” carriers.
United is
one of the largest passenger airlines in the world. The Company offers
approximately 3,300 flights a day to more than 200 destinations through its
Mainline and United Express services, based on its flight schedule from October
2009 to October 2010. United offers approximately 1,200 average daily Mainline
departures to approximately 115 destinations in 27 countries and two U.S.
territories. United provides regional service, connecting primarily via United’s
domestic hubs, through marketing relationships with United Express carriers,
which provide approximately 2,100 average daily departures to approximately 175
destinations. United serves virtually every major market around the world,
either directly or through its participation in the Star Alliance®, the world’s
largest airline network.
This
Quarterly Report on Form 10-Q is a combined report of UAL and United including
their respective unaudited condensed consolidated financial statements (the
“Financial Statements”). As UAL consolidates United for financial statement
purposes, disclosures that relate to activities of United also apply to UAL as
included within the Combined
Notes to Condensed Consolidated Financial Statements (Unaudited) (the
“Footnotes”), unless otherwise noted. United’s operating revenues and operating
expenses comprise nearly 100% of UAL’s revenues and operating expenses. In
addition, United comprises approximately the entire balance of UAL’s assets,
liabilities and operating cash flows. Therefore, the following qualitative
discussion is applicable to both UAL and United, unless otherwise noted. Any
significant differences between UAL and United results are separately disclosed
and explained. United meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format allowed under that General Instruction.
Company
Operational Plans. Since the second quarter of 2008, the Company has
implemented certain operational plans to address significant unfavorable fuel
price volatility, industry over-capacity and a weak economic environment. As
previously discussed, the Company is reducing capacity and permanently removing
100 aircraft from its Mainline fleet by the end of 2009, including its entire
B737 fleet and six B747 aircraft. As of September 30, 2009, the Company has
removed 88 of these aircraft from its fleet. In addition, the Company has
converted 28 of its 56 Ted aircraft into its Mainline fleet configuration as of
September 30, 2009 and remaining conversions are expected to be completed by the
end of 2009. See Note 3, “Company Operational Plans,” in the Footnotes for
additional information. In connection with the capacity reductions discussed
above, the Company is further streamlining its operations and corporate
functions in order to match the size of its workforce to the reduced size of its
operations. The Company’s planned total workforce reduction of
approximately 9,000 positions is substantially complete. The workforce reduction
occurred in 2008 and 2009 through a combination of furloughs and
furlough-mitigation programs, such as early-out options.
Recent
Developments.
|
●
|
In
October 2009, the Company significantly enhanced its liquidity from
several financing transactions including the issuance of 19.0 million
shares of UAL common stock, generating gross proceeds of $138
million, and $345 million aggregate principal amount of UAL 6.0%
Convertible Senior Notes due 2029. The Company’s October 2009 financings
also include agreements with one of the Company’s regional flying partners
that enhanced the Company’s liquidity by $129 million. In addition, the
Company completed a secured aircraft financing which refinanced existing
debt obligations and financed two previously unencumbered aircraft
providing net proceeds to the Company in October 2009 with additional
proceeds to be received in January 2010. See Liquidity and Capital
Resources, below, and Note 16, “Subsequent Events,” in the
Footnotes for additional information on these and other financing
transactions completed in 2009.
|
|
●
|
Following
an extensive review of multiple sites in the Chicago area, the Company
selected the Willis Tower (formerly the Sears Tower) as the new location
of United’s Operations Center, offering much improved workspaces,
technology and other resources. United expects to occupy approximately
460,000 square feet within the Willis Tower and expects to obtain
approximately $36 million of incentives and grants from the City of
Chicago as well as incentives from the landlord which will primarily
be applied toward leasehold improvements. The Company’s rental obligations
and possession of the building will commence in late 2010. The lease,
which became effective in October 2009, has an initial 15-year term with
renewal options.
|
|
●
|
During
the second quarter of 2009, the Company initiated a fleet modernization
review with a request for proposal that has the potential to result in a
large order of next-generation wide body and narrow body aircraft to
replace its older fleet types. This process could present a unique
opportunity for the Company to improve its cost structure and fleet
strategy.
|
|
●
|
The
Company has completed the upgrade of all B767 and B747 aircraft, which are
used for international flights, with new first and business class premium
seats, entertainment systems and other product enhancements. This new
premium travel product features, among other improvements, 180-degree, lie
flat beds in business class. In addition, the reconfiguration of its
international B777 fleet will commence in early
2010.
|
|
●
|
The
Company is taking appropriate actions to respond to the current economic
environment as indicated by its significant capacity reductions. However,
consolidated passenger revenue per available seat mile was down 15% and
14% in the three and nine months ended September 30, 2009, respectively,
as compared to the comparable year-ago periods as a result of the severe
global recession.
|
|
●
|
In
July 2009, the Company announced plans to reduce its international
capacity by an additional 7% during the last four months of 2009. The
Company continues to monitor its capacity levels and will make additional
adjustments, as appropriate.
|
|
●
|
The
Company continues to focus on cost control through various cost savings
initiatives. As shown in the table below, Mainline fuel and non-fuel unit
costs decreased in the third quarter of 2009 as compared to the year-ago
period. Fuel costs are mostly uncontrollable by the Company. See Results of Operations,
below, for further discussion of year-over-year expense fluctuations for
both the three and nine month periods ended September 30,
2009.
|
Three
Months Ended
|
2009 expense per ASM | 2008 expense per ASM | % change | |||||||||||||||||
September 30,
|
(in cents)
|
(in cents)
|
per ASM
|
|||||||||||||||||
(In millions, except unit
costs)
|
2009
|
2008
|
||||||||||||||||||
Mainline
ASMs
|
32,193 | 35,082 | (8.2 | ) | ||||||||||||||||
Mainline
fuel expense
|
$ | 1,064 | $ | 2,461 | 3.31 | 7.01 | (52.9 | ) | ||||||||||||
Other
impairments and special items
|
43 | (9 | ) | 0.13 | (0.03 | ) | - | |||||||||||||
Other
operating expenses (a)
|
2,463 | 2,722 | 7.65 | 7.76 | (1.4 | ) | ||||||||||||||
Total
mainline operating expense
|
3,570 | 5,174 | 11.09 | 14.75 | (24.8 | ) | ||||||||||||||
Regional
affiliate expense
|
775 | 882 | ||||||||||||||||||
Consolidated
operating expense
|
$ | 4,345 | $ | 6,056 |
____________
(a)
|
Included
in Other operating expenses for the 2009 and 2008 periods are total
charges of $17 million and $14 million, respectively, which relate to the
Company’s operational plans, asset sales, and other items. An itemization
of these charges is included in the table
below.
|
Continental
Alliance. In 2008, United and Continental announced their plan to form a
new alliance partnership that will link the airlines’ networks and services
worldwide to the benefit of customers, employees and shareholders, creating new
revenue opportunities, cost savings and other efficiencies. In
addition on October 27, 2009, Continental plans to join United and its 23 other
partners in the Star Alliance, the most comprehensive airline alliance in the
world. On July 10, 2009, the U. S. Department of Transportation
approved an application by United, Continental and eight other airlines to allow
Continental to join United, Air Canada, Lufthansa and six other carriers in
their already established anti-trust immunized alliance. The immunity
will enable United, Air Canada, Continental and Lufthansa to implement a joint
venture covering transatlantic routings that would deliver highly competitive
flight schedules, fares and service. The European Commission and
Canadian Competition Bureau are conducting separate reviews of the anticipated
competitive impact of the joint venture operations within those
jurisdictions. In the U.S. market, where antitrust immunity would not
apply, customers will benefit as United and Continental plan to begin broad
codesharing, which eases travel for customers flying on itineraries using both
carriers, and cooperation on frequent flyer programs and airport lounges,
subject to regulatory notice and Continental exiting certain of its current
alliance relationships. In addition, United and Continental are also
exploring opportunities to capture important cost savings in the areas of
information technology, frequent flyer programs, airport operations, lounges,
procurement and sales and marketing.
Continental’s
and United’s route networks are highly complementary, with little overlap, so
they add value to each other and to customers who are planning domestic and
international travel. Under codesharing, customers will benefit from
a coordinated process for reservations/ticketing, check-in, flight connections
and baggage transfer. Frequent flyer reciprocity will allow members
of Continental’s OnePass program and United’s Mileage Plus program to earn miles
in their accounts when flying on either partner airline and redeem awards on
both carriers. Continental’s plans to join the Star Alliance and
other planned cooperation are subject to certain regulatory and other approvals
and the termination of certain contractual relationships, including the
termination in October 2009 of Continental’s existing agreements with SkyTeam
members that restrict its participation in another global alliance.
Summary of
Financial Results. The air travel business is subject to seasonal
fluctuations and, historically, the Company’s results of operations are better
in the second and third quarters as compared to the first and fourth quarters of
each year, since our first and fourth quarter results normally reflect weaker
travel demand. The Company’s results of operations can be impacted by fuel price
volatility, an outbreak of a disease impacting travel behavior, adverse weather,
air traffic control delays, economic conditions and other factors in any
period.
The table
below highlights significant changes in the Company’s results in the three and
nine months ended September 30, 2009 as compared to the year-ago period.
Capacity reductions and the severe global recession significantly reduced
operating revenues in 2009 as compared to 2008. Revenues were particularly
impacted by a drop in business travel and premium service demand as well as by
the structure of our network and international performance. This negative impact
was offset by lower fuel cost, which was due to a decrease in market prices for
fuel and lower consumption resulting from capacity reductions, and lower
non-fuel expenses due to cost savings programs and capacity reductions.
Impairment charges also had a significant impact in both the current and
year-ago periods. The table below highlights that the Company, through its past
and on-going cost reduction initiatives, was able to effectively manage costs in
non-fuel and other areas.
Three Months Ended September
30,
|
Nine Months Ended September
30,
|
||||||||||||||||||||||||||||
Favorable(unfavorable)
|
Favorable(unfavorable)
|
||||||||||||||||||||||||||||
(In millions)
|
2009
|
2008
|
$ Change
|
% Change
|
2009
|
2008
|
$ Change
|
% Change
|
|||||||||||||||||||||
(Adjusted
(a))
|
(Adjusted
(a))
|
||||||||||||||||||||||||||||
UAL Information
|
|||||||||||||||||||||||||||||
Total
revenues
|
$ | 4,433 | $ | 5,565 | $ | (1,132 | ) | (20.3) | $ | 12,142 | $ | 15,647 | $ | (3,505 | ) | (22.4) | |||||||||||||
Mainline
fuel purchase cost
|
997 | 2,164 | 1,167 | 53.9 | 2,558 | 5,867 | 3,309 | 56.4 | |||||||||||||||||||||
Operating
non-cash fuel hedge (gains) losses
|
(25 | ) | 336 | 361 | - | (521 | ) | 119 | 640 | - | |||||||||||||||||||
Operating
cash fuel hedge (gains) losses
|
92 | (39 | ) | (131 | ) | - | 491 | (102 | ) | (593 | ) | - | |||||||||||||||||
Regional
Affiliate fuel expense (b)
|
222 | 377 | 155 | 41.1 | 564 | 1,010 | 446 | 44.2 | |||||||||||||||||||||
Asset
impairments and special items (see below)
|
43 | (9 | ) | (52 | ) | - | 250 | 2,491 | 2,241 | 90.0 | |||||||||||||||||||
Other
operating expenses
|
3,016 | 3,227 | 211 | 6.5 | 8,887 | 9,888 | 1,001 | 10.1 | |||||||||||||||||||||
Nonoperating
non-cash fuel hedge (gains) losses
|
(34 | ) | 183 | 217 | - | (241 | ) | 162 | 403 | - | |||||||||||||||||||
Nonoperating
cash fuel hedge (gains) losses
|
39 | 22 | (17 | ) | (77.3) | 215 | 21 | (194 | ) |
NM
|
|||||||||||||||||||
Other
nonoperating expense (c)
|
144 | 94 | (50 | ) | (53.2) | 396 | 302 | (94 | ) | (31.1) | |||||||||||||||||||
Income
tax expense (benefit)
|
(4 | ) | 2 | 6 | - | (46 | ) | (30 | ) | 16 | 53.3 | ||||||||||||||||||
Net
loss
|
$ | (57 | ) | $ | (792 | ) | $ | 735 | 92.8 | $ | (411 | ) | $ | (4,081 | ) | $ | 3,670 | 89.9 | |||||||||||
United
Net loss
|
$ | (55 | ) | $ | (752 | ) | $ | 697 | 92.7 | $ | (405 | ) | $ | (4,068 | ) | $ | 3,663 | 90.0 |
____________
(a)
|
As
discussed in Note 2, “New Accounting Pronouncements,” in the
Footnotes,
certain amounts have been adjusted from the Company’s historical results
due to the retrospective adoption of new accounting guidance related to
accounting for certain of the Company’s convertible debt
instruments.
|
(b)
|
Regional
Affiliates’ fuel expense is classified as part of Regional Affiliates
expense in the Company’s Financial Statements.
|
(c)
|
Includes
equity in earnings of affiliates.
|
Details
of significant items impacting the Company’s results include:
Three
Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
||||||||||||||||
(In millions)
|
2009
|
2008
|
2009
|
2008
|
Income statement
classification
|
||||||||||||
Goodwill
impairment
|
$ | - | $ | - | $ | - | $ | 2,277 |
Goodwill
impairment
|
||||||||
Intangible
asset impairments
|
- | (16 | ) | 150 | 64 | ||||||||||||
Aircraft
and related deposit impairments
|
19 | - | 19 | 143 | |||||||||||||
LAX
municipal bond secured interest
|
- | - | 27 | - | |||||||||||||
Lease
termination and other special items
|
24 | 7 | 54 | 7 | |||||||||||||
Other
impairments and special items
|
43 | (9 | ) | 250 | 214 |
Other
impairments and special items
|
|||||||||||
Total
asset impairments and special items
|
43 | (9 | ) | 250 | 2,491 | ||||||||||||
Severance
|
22 | 6 | 23 | 88 |
Salaries
and related costs
|
||||||||||||
Employee
benefit obligation adjustment
|
- | (6 | ) | (33 | ) | 28 |
Salaries
and related costs
|
||||||||||
(Gain)
loss on asset sales
|
(11 | ) | 8 | (11 | ) | 8 |
Other
operating expenses
|
||||||||||
Litigation-related
settlement gain
|
- | - | - | (29 | ) |
Other
operating expenses
|
|||||||||||
Charges
related to terminated/deferred projects
|
- | - | - | 26 |
Purchased
services
|
||||||||||||
Accelerated
depreciation related to aircraft groundings
|
6 | 6 | 38 | 8 |
Depreciation
and amortization
|
||||||||||||
Severance
and other charges
|
17 | 14 | 17 | 129 | |||||||||||||
Total
asset impairments, special items and other charges
|
60 | 5 | 267 | 2,620 | |||||||||||||
Net
operating non-cash fuel hedge (gains) losses
|
(25 | ) | 336 | (521 | ) | 119 |
Aircraft
fuel
|
||||||||||
Net
nonoperating non-cash fuel hedge (gains) losses
|
(34 | ) | 183 | (241 | ) | 162 |
Miscellaneous,
net
|
||||||||||
Total
non-cash fuel hedge (gains) losses
|
(59 | ) | 519 | (762 | ) | 281 | |||||||||||
Income
tax expense (benefit) on impairments and other charges
|
(7 | ) | 3 | (59 | ) | (26 | ) |
Income
tax benefit
|
|||||||||
Impairments
and other charges (net of tax) and non-cash fuel hedge
gains/losses
|
$ | (6 | ) | $ | 527 | $ | (554 | ) | $ | 2,875 |
Liquidity.
The following table provides a summary of UAL’s cash position at
September 30, 2009 and December 31, 2008 and net cash provided (used) by
operating, financing and investing activities for the nine months ended
September 30, 2009 and 2008.
(In millions)
|
As
of September 30, 2009
|
As
of December 31, 2008
|
||||||
Cash
and cash equivalents
|
$ | 2,525 | $ | 2,039 | ||||
Restricted
cash
|
309 | 272 | ||||||
Total
cash
|
$ | 2,834 | $ | 2,311 |
|
Nine
Months Ended September
30,
|
|||||||
|
2009
|
2008
|
||||||
Net
cash provided (used) by operating activities
|
$ | 878 | $ | (250 | ) | |||
Net
cash provided (used) by investing activities
|
(52 | ) | 2,576 | |||||
Net
cash used by financing activities
|
(340 | ) | (654 | ) |
UAL’s
variation in cash flows from operations in the 2009 period as compared to the
prior year was relatively consistent with its results of operations, as further
described below under Results
of Operations. Lower cash expenditures for fuel purchases were offset by
lower cash receipts from the sale of air and cargo transportation in 2009 as
compared to the 2008 period. In 2009, the Company received $160 million related
to the future relocation of its Chicago O’Hare International Airport (“O’Hare”)
cargo operations. This cash receipt was classified as an operating cash inflow.
The Company also received $35 million from Los Angeles International Airport
(“LAX”) as part of an agreement to vacate certain facilities. Decreases in the
Company’s fuel hedge collateral requirements also provided operating cash of
approximately $903 million in the nine months ended September 30, 2009. This
benefit was substantially offset by approximately $706 million of net cash paid
to counterparties for fuel derivative contract settlements and premiums in the
nine months ended September 30, 2009. Cash provided by investing activities was
significantly greater in the year-ago period due to the replacement of
short-term investments at December 31, 2007 with cash and cash equivalents in
2008. See Item 3. Quantitative
and Qualitative
Disclosures about Market Risk for additional information regarding
collateral requirements.
The
Company expects its cash flows from operations and its available capital to be
sufficient to meet its operating expenses, lease obligations and debt service
requirements for the near term; however, the Company’s future liquidity could be
impacted by increases or decreases in fuel prices, inability to adequately
increase revenues to offset high fuel prices, declines in revenue, failure to
meet future debt covenants and other factors. See Liquidity and Capital Resources and Item 3. Quantitative and Qualitative
Disclosures about Market Risk, below, for a discussion
of these factors and the Company’s significant operating, investing and
financing cash flows.
Capital
Commitments. At September 30, 2009, future commitments for the purchase
of property and equipment, principally aircraft, include approximately $0.4
billion of binding commitments and $2.3 billion of nonbinding commitments. The
nonbinding commitments of $2.3 billion are related to 42 A319 and A320 aircraft.
These orders may be cancelled which would result in the forfeiture of $91
million of advance payments provided to the manufacturer. United believes it is
highly unlikely that it will take delivery of these aircraft in the future, and
therefore believes it will be required to forfeit its $91 million of advance
delivery deposits. Based on this determination, the Company recorded an
impairment charge in the second quarter of 2008 to decrease the value of the
deposits and related capitalized interest of $14 million to zero in the
Company’s Financial Statements. In addition, the Company’s capital commitments
include commitments related to its international premium travel experience
product enhancement program. For further details, see Note 12, “Commitments,
Contingent Liabilities and Uncertainties,” in the Footnotes.
Contingencies.
The following discussion provides an overview of the status of
contingencies identified by the Company. For further details on these matters,
see Note 12, “Commitments, Contingent Liabilities and Uncertainties,” in the
Footnotes.
Labor Negotiations. All of
United’s domestic labor contracts become amendable on or about January 1, 2010.
Consistent with its contractual commitments, United served “Section 6” notices
to all six of its labor unions during April 2009 to commence the collective
bargaining process. Negotiations with each union began during the second quarter
of 2009. During the first week of August 2009, United filed for mediation
assistance in conjunction with three of its six unions, including the Air Line
Pilots Association, the Association of Flight Attendants—Communication Workers
of America and the International Association of Machinists and Aerospace
Workers. These filings were consistent with commitments contained in
current labor contracts which provided that the parties would jointly invoke the
mediation services of the National Mediation Board in the event agreements had
not been reached by August 1, 2009. While the labor contracts with the
International Brotherhood of Teamsters and the Professional Airline Flight
Control Association also contemplate filing for mediation, the parties have
agreed to continue in direct negotiations. The current contract with the
International Federation of Professional and Technical Engineers does not
contemplate filing for mediation. The outcome of these negotiations may
materially impact the Company’s future financial results. However, it is too
early in the process to assess the timing or magnitude of the impact, if
any.
Bankruptcy
Contingencies. During
the course of the Company’s Chapter 11 proceedings, we successfully reached
settlements with most of our creditors and resolved most pending claims against
the Company. The most significant unresolved bankruptcy matter is whether the
LAX municipal bond debt is entitled to secured status under Section 506(a) of
the Bankruptcy Code. The United States Court of Appeals of the Seventh Circuit
has ruled that bondholders are entitled to a full recovery of the principal
amount due on the bonds, approximately $60 million, which amount (plus some
accrued interest) has been accrued by United at September 30, 2009. In October
2009, the Company entered into a settlement agreement with the LAX bondholders
and the City of Los Angeles to settle the obligation for an amount that
represents the principal amount of the bonds plus some accrued interest. The
settlement agreement is subject to approval by the United States Bankruptcy
Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy
Court”), among other contingencies.
Municipal Bond Obligations &
Off-Balance Sheet Financing. United has guaranteed $270 million of the
City and County of Denver, Colorado Special Facilities Airport Revenue Bonds
(United Air Lines Project) Series 2007A. These bonds are callable by United. The
outstanding bonds and related guarantee are not recorded in the Company’s
Financial Statements. However, the related lease agreement is accounted for on a
straight-line basis resulting in a ratable accrual of the final $270 million
payment over the lease term.
Legal and Environmental. The
Company has certain contingencies resulting from litigation and claims incident
to the ordinary course of business. Management believes, after considering a
number of factors, including (but not limited to) the information currently
available, the views of legal counsel, the nature of contingencies to which the
Company is subject and prior experience, that the ultimate disposition of the
litigation and claims will not materially affect the Company’s consolidated
financial position or results of operations. When appropriate, the Company
accrues for these matters based on its assessments of the likely outcomes of
their eventual disposition. The amounts of these liabilities could increase or
decrease in the near term, based on revisions to estimates relating to the
various claims.
Given the
Air Transportation Safety and System Stabilization Act of 2001, the resolution
of the majority of the wrongful death and personal injury cases by settlement
and the withdrawal of all related proofs of claim from the Company’s Chapter 11
reorganization, and that claimants’ recoveries are limited to insurance
proceeds, the Company believes that it will have no financial exposure for
claims arising out of the events of September 11, 2001.
The
Company continues to analyze whether any potential liability may result from air
cargo/passenger surcharge cartel investigations following the receipt of a
Statement of Objections that the European Commission (the “Commission”) issued
to 26 companies on December 18, 2007. The Statement of Objections sets out
evidence related to the utilization of fuel and security surcharges and exchange
of pricing information that the Commission views as supporting the conclusion
that an illegal price-fixing cartel had been in operation in the air cargo
transportation industry. United received a copy of the Statement of Objections
and has provided written and oral responses vigorously disputing the
Commission’s allegations against the Company. Nevertheless, United will continue
to cooperate with the Commission’s ongoing investigation. Based on its
evaluation of all information currently available, the Company has determined
that no reserve for potential liability is required and will continue to defend
itself against all allegations that it was aware of or participated in cartel
activities. However, penalties for violation of European competition laws can be
substantial and a finding that the Company engaged in improper activity could
have a material adverse impact on our consolidated financial position and
results of operations.
Many
aspects of United’s operations are subject to increasingly stringent federal,
state and local laws protecting the environment. Future environmental regulatory
developments, such as those relating to climate change, in the U.S. and abroad
could adversely affect operations and increase operating costs in the airline
industry. Some climate change laws and regulations that have gone into effect
apply to United, including environmental taxes for certain international
flights, limited greenhouse gas reporting requirements and land-based planning
laws which could apply to airports and could affect airlines in certain
circumstances. In addition, a 2009 European Union (“EU”) Directive requires EU
member countries to enact legislation that would include aviation within the
EU’s existing carbon emission trading scheme, effective in 2012. The legality of
applying such a scheme to non-EU airlines has been widely questioned, and non-EU
countries are considering filing a formal challenge to the EU’s inclusion of
non-EU carriers. It is not clear whether the trading scheme would withstand any
such challenge. If the scheme is found to be valid, however, it could
significantly increase the costs of carriers operating in the EU, although the
precise cost to United is difficult to calculate with any certainty due to a
number of variables, and will depend, among other things, on United’s carbon
emissions from flights to and from the EU and the price of carbon credits.
Actions also may be taken in the future by the U.S. government, state
governments within the U.S., foreign governments, the International Civil
Aviation Organization, or by signatory countries through a new global climate
change treaty to regulate the emission of greenhouse gases by the aviation
industry. The precise nature of any such requirements and their applicability to
United are difficult to predict, but the impact to the Company and the aviation
industry would likely be adverse and could be significant, including the
potential for increased fuel costs, carbon taxes or fees, or a requirement to
purchase carbon credits.
Results
of Operations
United’s
operating revenues and operating expenses comprise nearly 100% of UAL’s revenues
and operating expenses. Therefore, the following discussion is applicable to
both UAL and United, unless otherwise noted. There were no significant
differences between UAL and United results in the 2009 or 2008 periods presented
herein, except for a litigation gain recognized at UAL, but not
United, in the nine month period ended September 30, 2008 as
discussed below.
Third
Quarter 2009 Compared to Third Quarter 2008
As
highlighted in the summary of financial results table in Overview above, UAL’s net
loss of $57 million for the three months ended September 30, 2009 was a
significant improvement as compared to a net loss $792 million in the year-ago
period. The most significant changes were lower fuel expense, including related
fuel hedge impacts and lower revenues due to capacity reductions and the severe
global recession.
Operating Revenues. The table
below illustrates the year-over-year percentage change in UAL and United
operating revenues.
|
Three
Months Ended
September 30,
|
$ | % | ||||||||||||
(In millions)
|
2009
|
2008
|
Change
|
Change
|
|||||||||||
Passenger—United
Airlines
|
$ | 3,267 | $ | 4,280 | $ | (1,013 | ) | (23.7) | |||||||
Passenger—Regional
Affiliates
|
844 | 834 | 10 | 1.2 | |||||||||||
Cargo
|
125 | 219 | (94 | ) | (42.9) | ||||||||||
Other
operating revenues
|
197 | 232 | (35 | ) | (15.1) | ||||||||||
UAL
total
|
$ | 4,433 | $ | 5,565 | $ | (1,132 | ) | (20.3) | |||||||
United
total
|
$ | 4,435 | $ | 5,606 | $ | (1,171 | ) | (20.9) |
The table
below presents selected UAL and United passenger revenues and operating data
from our Mainline segment, broken out by geographic region and from our Regional
Affiliates segment (United Express operations), expressed as third quarter
period-to-period changes.
Domestic
|
Pacific
|
Atlantic
|
Latin
|
Mainline
|
Regional
Affiliates
|
Consolidated
|
||||||||||||||||||||||
Increase
(decrease) from 2008:
|
||||||||||||||||||||||||||||
Passenger
revenues (in millions)
|
$ | (579 | ) | $ | (260 | ) | $ | (124 | ) | $ | (50 | ) | $ | (1,013 | ) | $ | 10 | $ | (1,003 | ) | ||||||||
Passenger
revenues
|
(22.9 | )% | (30.0 | )% | (16.3 | )% | (40.2 | )% | (23.7 | )% | 1.2 | % | (19.6 | )% | ||||||||||||||
Available
seat miles (“ASMs”) (a)
|
(10.2 | )% | (7.9 | )% | (0.3 | )% | (18.4 | )% | (8.2 | )% | 15.3 | % | (5.7 | )% | ||||||||||||||
Revenue
passenger miles (“RPMs”) (b)
|
(8.0 | )% | (2.0 | )% | 1.3 | % | (14.8 | )% | (5.4 | )% | 19.0 | % | (2.9 | )% | ||||||||||||||
Passenger
revenues per ASM (“PRASM”)
|
(14.2 | )% | (23.9 | )% | (16.1 | )% | (26.7 | )% | (16.8 | )% | (12.3 | )% | (14.7 | )% | ||||||||||||||
Yield
(c)
|
(18.5 | )% | (24.8 | )% | (13.7 | )% | (26.8 | )% | (19.4 | )% | (15.0 | )% | (17.1 | )% | ||||||||||||||
Passenger
load factor (points) (d)
|
2.0
pts.
|
5.0
pts.
|
1.4
pts.
|
3.4
pts.
|
2.6
pts.
|
2.5
pts.
|
2.5
pts.
|
____________
a)
|
ASMs
are the number of seats available for passengers multiplied by the number
of scheduled miles those seats are flown.
|
b)
|
RPMs
are the number of scheduled miles flown by revenue
passengers.
|
c)
|
Yield
is a measure of average price paid per passenger mile, which is calculated
by dividing passenger revenues by RPMs. Yields for geographic regions
exclude charter revenue and RPMs.
|
d)
|
Passenger
load factor is derived by dividing RPMs by
ASMs.
|
As with
the rest of the airline industry, the Company’s decline in PRASM was driven by a
precipitous decline in worldwide travel demand as a result of the severe global
recession. Two factors continued to have a distinct impact on United’s revenue
in the third quarter of 2009.
First,
network composition played a role in overall unit revenue decline. International
markets, in particular the Pacific, have experienced more significant unit
revenue declines as compared to the Domestic market. Given United’s strong
international network and its historic relative contribution to revenues, the
Company’s results have been disproportionately impacted.
Second,
while demand has declined across all geographic regions, premium and business
demand has declined more significantly than leisure demand. United’s business
model is strongly aligned to serve premium and business travelers, both
internationally and domestically. The decrease in trips taken by business
travelers, and the buy-down from premium class to economy class has caused a
significant negative impact on our results of operations.
In light
of the continuing poor economic environment, these two factors — network
composition and decline of premium and business demand — have had and may
continue to have a continuing negative impact on our results of
operations.
In the
third quarter of 2009, revenues for both Mainline and Regional Affiliates were
negatively impacted by yield decreases of 19% and 15%, respectively, as compared
to the third quarter of 2008. The yield decreases were a result of the severe
global recession in 2009 and the economic factors discussed above. Mainline
revenues were also negatively impacted by lower RPMs, which were largely driven
by the Company’s capacity reduction as well as poor economic conditions. The
decrease in Mainline RPMs was less than United’s capacity reductions, resulting
in significant load factor improvement as compared to the year-ago period.
Partially offsetting Regional Affiliates’ decrease in yield was a 19% increase
in RPMs, driven by a 15% increase in capacity. Regional Affiliate capacity
increased as we adjusted capacity on routes to market demand.
Mainline
and Regional Affiliate revenues were favorably impacted in the third quarter of
2009 by an adjustment of approximately $36 million related to certain tax
accruals that were previously recorded as a reduction in revenues. This
adjustment was recorded as a result of new information received by the Company
related to these tax matters.
Cargo
revenues declined by $94 million, or 43%, in the third quarter of 2009 as
compared to 2008, due to four key factors. First, United took significant
industry leading steps to rationalize its capacity, with reduced international
flying affecting a number of key cargo markets including Los Angeles-Hong Kong,
Los Angeles-Frankfurt, San Francisco-Taipei, San Francisco-Nagoya, Chicago-Tokyo
and Chicago-London. Second, as noted by recent industry statistical releases,
virtually all carriers in the industry, including United, have been sharply
impacted by reduced air freight and mail volumes driven by recessionary demand,
with the resulting oversupply of cargo capacity putting pressure on industry
pricing in nearly all markets. Additionally, some of the largest industry demand
reductions occurred in the Pacific cargo market, where United has a greater
exposure as compared to the Atlantic, Latin or Domestic air cargo markets.
Finally, cargo revenues have been reduced as a result of lower fuel
surcharges.
Operating Expenses. As
discussed in Operating
Revenues above, the Company (decreased) increased Mainline and Regional
Affiliates capacity by (8%) and 15%, respectively, in the third quarter of 2009
as compared to the year-ago period. The Mainline capacity reductions had a
significantly favorable impact on certain of the Company’s Mainline operating
expenses, as further described below. Other significant fluctuations in the
Company’s operating expenses are also discussed below. The table below includes
data related to UAL and United operating expenses.
|
Three
Months Ended
September 30,
|
$ | % | ||||||||||||
(In millions)
|
2009
|
2008
|
Change
|
Change
|
|||||||||||
Aircraft
fuel
|
$ | 1,064 | $ | 2,461 | $ | (1,397 | ) | (56.8) | |||||||
Salaries
and related costs
|
954 | 1,037 | (83 | ) | (8.0) | ||||||||||
Regional
Affiliates
|
775 | 882 | (107 | ) | (12.1) | ||||||||||
Purchased
services
|
279 | 327 | (48 | ) | (14.7) | ||||||||||
Aircraft
maintenance materials and outside repairs
|
253 | 256 | (3 | ) | (1.2) | ||||||||||
Landing
fees and other rent
|
226 | 222 | 4 | 1.8 | |||||||||||
Depreciation
and amortization
|
220 | 234 | (14 | ) | (6.0) | ||||||||||
Distribution
expenses
|
145 | 181 | (36 | ) | (19.9) | ||||||||||
Aircraft
rent
|
88 | 115 | (27 | ) | (23.5) | ||||||||||
Cost
of third party sales
|
59 | 75 | (16 | ) | (21.3) | ||||||||||
Other
impairments and special items
|
43 | (9 | ) | 52 | - | ||||||||||
Other
operating expenses
|
239 | 275 | (36 | ) | (13.1) | ||||||||||
UAL
total
|
$ | 4,345 | $ | 6,056 | $ | (1,711 | ) | (28.3) | |||||||
United
total
|
$ | 4,345 | $ | 6,057 | $ | (1,712 | ) | (28.3) |
The
decrease in Mainline aircraft fuel expense and Regional Affiliates expense was
primarily attributable to decreased market prices for jet fuel as highlighted in
the table below, which presents the significant changes in Mainline and Regional
Affiliate aircraft fuel cost per gallon in the three months ended September 30,
2009 as compared to the year-ago period. Lower Mainline fuel consumption due to
the capacity reductions also benefited Mainline fuel expense in the third
quarter of 2009 as compared to the year-ago period. See Note 11, “Fair Value
Measurements and Derivative Instruments,” in the Footnotes for additional
details regarding gains/losses from settled and open positions and unrealized
gains and losses at the end of the period. Derivative gains/losses are not
allocated to Regional Affiliate fuel expense.
|
Three Months Ended September
30,
|
|||||||||||||||||||||
Average price per gallon (in
cents)
|
||||||||||||||||||||||
(In millions, except per
gallon)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||
Mainline
fuel purchase cost
|
$ | 997 | $ | 2,164 | (53.9) | 195.1 | 383.7 | (49.2) | ||||||||||||||
Non-cash
fuel hedge (gains) losses in Mainline fuel (a)
|
(25 | ) | 336 | - | (4.9 | ) | 59.6 | - | ||||||||||||||
Cash
fuel hedge (gains) losses in Mainline fuel (a)
|
92 | (39 | ) | - | 18.0 | (7.0 | ) | - | ||||||||||||||
Total
Mainline fuel expense
|
1,064 | 2,461 | (56.8) | 208.2 | 436.3 | (52.3) | ||||||||||||||||
Regional
Affiliates fuel expense (b)
|
222 | 377 | (41.1) | 211.4 | 405.4 | (47.9) | ||||||||||||||||
UAL
system operating fuel expense
|
$ | 1,286 | $ | 2,838 | (54.7) | 208.8 | 432.0 | (51.7) | ||||||||||||||
Mainline
fuel consumption (gallons)
|
511 | 564 | (9.4) | |||||||||||||||||||
Regional
Affiliates fuel consumption (gallons)
|
105 | 93 | 12.9 | |||||||||||||||||||
Total
fuel consumption (gallons)
|
616 | 657 | (6.2) |
____________
(a)
|
The
Company incurred additional fuel hedge gains/losses which are classified
in nonoperating expense as described
below.
|
(b)
|
Regional
Affiliate fuel costs are classified as part of Regional Affiliate expense
in the Company's Financial
Statements.
|
Salaries
and related costs decreased $83 million, or 8%, in the third quarter of 2009 as
compared to the year-ago period. The decrease was primarily due to the Company’s
reduced workforce in 2009 compared to 2008. The Company had approximately 44,000
average full-time equivalent employees for the three months ended September 30,
2009 as compared to 49,000 average full-time equivalent employees in the
year-ago period. The Company recorded $22 million of severance expense during
the third quarter of 2009 related to the Company’s workforce reduction plans,
while only $6 million of severance was recorded in the comparable year-ago
period. In addition, the Company recorded $13 million of expense during the
third quarter of 2008 related to the Company’s Success Sharing Program, none of
which was recorded in the comparable 2009 period. Partially offsetting these
benefits were the unfavorable impacts of average wage and benefit cost increases
and a $6 million increase in expense in 2009 due to on-time performance bonuses
paid to operations employee groups.
Regional
Affiliates expense decreased $107 million, or 12%, during the third quarter of
2009 as compared to the same period last year, primarily due to a $155 million
decrease in Regional Affiliates fuel cost, which was due to a lower average
price per gallon of Regional Affiliates jet fuel in 2009 as presented in the
fuel table above. The Regional Affiliates operating income was $69 million in
the 2009 period, as compared to a loss of $48 million in the 2008 period.
Regional Affiliates operating results improved significantly on a year-over-year
basis as the benefits of increased traffic and lower fuel cost offset the yield
decrease.
Purchased
services decreased $48 million, or 15%, in the third quarter of 2009 as compared
to the year-ago period primarily due to the Company’s operating cost savings
programs and lower variable costs associated with lower Mainline
capacity.
Depreciation
and amortization decreased $14 million, or 6%, in the third quarter of 2009
primarily due to aircraft removed from the Company’s fleet throughout 2008 and
2009.
Distribution
expenses decreased $36 million, or 20%, in the third quarter of 2009 primarily
due to lower passenger revenues on lower capacity and yield driving reductions
in commissions, credit card fees and global distribution services (“GDS”) fees
over those in the prior year.
Cost of
third party sales decreased by $16 million, or 21%, primarily due to reduced
sales of engine maintenance activities.
Aircraft
rent expense decreased by $27 million, or 24%, primarily as a result of the
Company’s operational plans to retire its entire fleet of B737 aircraft, some of
which were financed through operating leases.
In the
third quarter of 2009, the Company recorded special charges of $24 million
related to aircraft lease terminations and $19 million to reduce the carrying
value of the Company’s five nonoperating B747 aircraft to their estimated net
realizable value. In the three months ended September 30, 2008, the Company
recorded intangible asset impairment adjustments of $16 million. The special
charges and impairments relate to the Mainline segment and are classified within
Other impairments and special items in the Company’s Financial Statements. See Note 11, “Fair Value
Measurements and Derivative Instruments” and Note 14, “Asset Impairments,
Special Items and Intangible Assets,” in the Footnotes for additional
information.
In the
third quarter of 2009, other operating expenses decreased by $36 million, or
13%, as compared to the 2008 period due to the Company’s cost savings
initiatives and lower variable expenses due to reduced capacity in the 2009
period as compared to year-ago period.
Other income (expense). The
following table illustrates the year-over-year dollar and percentage changes in
UAL and United other income (expense).
|
Three
Months Ended
September 30,
|
Favorable/(Unfavorable)
Change
|
|||||||||||||
(In millions)
|
2009
|
2008
|
$ | % | |||||||||||
(Adjusted)
|
|||||||||||||||
Interest
expense
|
$ | (146 | ) | $ | (144 | ) | $ | (2 | ) | (1.4) | |||||
Interest
income
|
3 | 24 | (21 | ) | (87.5) | ||||||||||
Interest
capitalized
|
3 | 6 | (3 | ) | (50.0) | ||||||||||
Miscellaneous,
net:
|
|||||||||||||||
Non-cash
fuel hedge gains (losses)
|
34 | (183 | ) | 217 | - | ||||||||||
Cash
fuel hedge losses
|
(39 | ) | (22 | ) | (17 | ) | (77.3) | ||||||||
Other
miscellaneous, net
|
(5 | ) | 19 | (24 | ) | - | |||||||||
UAL
total
|
$ | (150 | ) | $ | (300 | ) | $ | 150 | 50.0 | ||||||
United
total
|
$ | (150 | ) | $ | (299 | ) | $ | 149 | 49.8 |
The $21
million decrease in interest income was primarily related to reduced investment
yields resulting from lower market rates, as well as lower cash and short-term
investment balances.
In the
third quarter of 2008, the Company recorded significant mark-to-market losses
due to the impact of fuel price decreases on those fuel hedge derivatives that
are classified in Miscellaneous, net. The Company subsequently entered into new
derivative positions to reduce its exposure to future price declines. In
addition, as of September 30, 2009 the Company has a relatively small position
of fuel derivatives that are classified within Miscellaneous, net. See Note 11,
“Fair Value Measurements and Derivative Instruments,” in the Footnotes for
information related to the Company’s fuel hedge gains (losses) which are
classified as nonoperating income (expense).
First
Nine Months of 2009 Compared to First Nine Months of
2008
As
highlighted in the summary of financial results table in Overview above, UAL’s net
loss for the nine months ended September 30, 2009 was $411 million as compared
to a net loss of $4.1 billion in the year-ago period. The most significant
changes were lower fuel expense, including related fuel hedge impacts, lower
revenues due to capacity reductions and lower yields from the severe global
recession, and lower impairment charges in 2009 as compared to the $2.5 billion
of asset impairment charges recorded during 2008.
Operating Revenues. The table
below illustrates the year-over-year percentage change in UAL and United
operating revenues.
|
Nine
Months Ended
September 30,
|
$ | % | ||||||||||||
(In
millions)
|
2009
|
2008
|
Change
|
Change
|
|||||||||||
Passenger—United
Airlines
|
$ | 8,909 | $ | 11,924 | $ | (3,015 | ) | (25.3) | |||||||
Passenger—Regional
Affiliates
|
2,252 | 2,346 | (94 | ) | (4.0) | ||||||||||
Cargo
|
370 | 674 | (304 | ) | (45.1) | ||||||||||
Other
operating revenues
|
611 | 703 | (92 | ) | (13.1) | ||||||||||
UAL
total
|
$ | 12,142 | $ | 15,647 | $ | (3,505 | ) | (22.4) | |||||||
United
total
|
$ | 12,149 | $ | 15,688 | $ | (3,539 | ) | (22.6) |
The table
below presents selected UAL and United passenger revenues and operating data
from our Mainline segment, broken out by geographic region and from our Regional
Affiliates segment, expressed as first nine month period-to-period
changes.
|
Domestic
|
Pacific
|
Atlantic
|
Latin
|
Mainline
|
Regional
Affiliates
|
Consolidated
|
|||||||||||||||||||||
Increase
(decrease) from 2008:
|
||||||||||||||||||||||||||||
Passenger
revenues (in millions)
|
$ | (1,652 | ) | $ | (805 | ) | $ | (396 | ) | $ | (162 | ) | $ | (3,015 | ) | $ | (94 | ) | $ | (3,109 | ) | |||||||
Passenger
revenues
|
(23.6 | )% | (32.6 | )% | (19.5 | )% | (39.1 | )% | (25.3 | )% | (4.0 | )% | (21.8 | )% | ||||||||||||||
Available
seat miles (“ASMs”)
|
(12.0 | )% | (12.3 | )% | (2.5 | )% | (17.3 | )% | (10.7 | )% | 9.3 | % | (8.6 | )% | ||||||||||||||
Revenue
passenger miles (“RPMs”)
|
(10.8 | )% | (13.5 | )% | (3.9 | )% | (20.6 | )% | (10.6 | )% | 11.7 | % | (8.4 | )% | ||||||||||||||
Passenger
revenues per ASM (“PRASM”)
|
(13.1 | )% | (23.1 | )% | (17.5 | )% | (26.4 | )% | (16.4 | )% | (12.2 | )% | (14.4 | )% | ||||||||||||||
Yield
|
(17.2 | )% | (17.4 | )% | (12.3 | )% | (18.1 | )% | (16.5 | )% | (14.0 | )% | (14.6 | )% | ||||||||||||||
Passenger
load factor (points)
|
1.3
pts.
|
(1.1)
pts.
|
(1.2)
pts.
|
(3.1)
pts.
|
0.1
pts.
|
1.6
pts.
|
0.2
pts.
|
As with
the rest of the airline industry, the Company’s decline in PRASM was driven by a
precipitous decline in worldwide travel demand as a result of the global
recession. As further discussed in Third Quarter 2009 Compared to Third
Quarter 2008, above, in light of the current poor economic environment,
two factors — network composition and the decline of premium and business demand
have had, and may continue to have, a negative impact on the Company’s results
of operations.
In the
first nine months of 2009, revenues for both Mainline and Regional Affiliates
were negatively impacted by yield decreases of 17% and 14%, respectively, as
compared to the first nine months of 2008. The yield decreases were a result of
the weak economic environment in 2009 and the economic factors discussed above.
Mainline revenues were also negatively impacted by lower RPMs, which were
largely driven by the Company’s capacity reductions and by the severe global
recession. Partially offsetting Regional Affiliates’ decrease in yield was a 12%
increase in RPMs, driven by a 9% increase in capacity. Regional Affiliates
capacity increased as we adjusted capacity on routes to market
demand.
As
discussed in Third Quarter
2009 Compared to Third Quarter 2008, above, Mainline and Regional
Affiliate revenues were favorably impacted by a tax-related adjustment during
2009.
Cargo
revenues declined by $304 million, or 45%, in the nine months ended September
30, 2009 as compared to 2008, due to various factors as discussed above under
Third Quarter 2009 Compared to
Third Quarter 2008.
Operating Expenses. As
discussed in Operating
Revenues, above, the Company (decreased) increased Mainline and Regional
Affiliate capacity by (11%) and 9%, respectively, in the first nine months of
2009 as compared to the year-ago period. The Mainline capacity reductions had a
significant favorable impact on certain of the Company’s Mainline operating
expenses, as further described below. Other significant fluctuations in the
Company’s operating expenses are also discussed below. The table below includes
data related to UAL and United operating expenses.
|
Nine
Months Ended
September 30,
|
$ | % | ||||||||||||
(In millions)
|
2009
|
2008
|
Change
|
Change
|
|||||||||||
Salaries
and related costs
|
$ | 2,838 | $ | 3,262 | $ | (424 | ) | (13.0) | |||||||
Aircraft
fuel
|
2,528 | 5,884 | (3,356 | ) | (57.0) | ||||||||||
Regional
Affiliates
|
2,154 | 2,508 | (354 | ) | (14.1) | ||||||||||
Purchased
services
|
852 | 1,047 | (195 | ) | (18.6) | ||||||||||
Aircraft
maintenance materials and outside repairs
|
718 | 868 | (150 | ) | (17.3) | ||||||||||
Landing
fees and other rent
|
676 | 651 | 25 | 3.8 | |||||||||||
Depreciation
and amortization
|
675 | 670 | 5 | 0.7 | |||||||||||
Distribution
expenses
|
402 | 558 | (156 | ) | (28.0) | ||||||||||
Aircraft
rent
|
265 | 314 | (49 | ) | (15.6) | ||||||||||
Cost
of third party sales
|
172 | 204 | (32 | ) | (15.7) | ||||||||||
Goodwill
impairment
|
- | 2,277 | (2,277 | ) | (100.0) | ||||||||||
Other
impairments and special items
|
250 | 214 | 36 | 16.8 | |||||||||||
Other
operating expenses
|
699 | 816 | (117 | ) | (14.3) | ||||||||||
UAL
total (a)
|
$ | 12,229 | $ | 19,273 | $ | (7,044 | ) | (36.5) | |||||||
United
total (a)
|
$ | 12,230 | $ | 19,302 | $ | (7,072 | ) | (36.6) |
____________
|
(a)
|
The
difference between UAL and United operating expenses in the 2008 period is
primarily due to a $29 million gain recorded at UAL for a litigation
settlement resulting in reduced Other operating
expenses.
|
Salaries
and related costs decreased $424 million, or 13%, for the nine months ended
September 30, 2009 as compared to the year-ago period. The decrease was
primarily due to the Company’s reduced workforce in 2009 compared to 2008, as
discussed in Third Quarter
2009 Compared to Third Quarter 2008, above. A $65 million decrease in
severance expense related to the Company’s operational plans and a $61 million
year-over-year benefit due to changes in employee benefits accruals also
contributed to the year-over-year decrease in Salaries and related costs.
Salaries and related costs also decreased by $26 million due to the Company’s
Success Sharing Program. The Company has not recorded any expense for this plan
in 2009. Partially offsetting these benefits were the unfavorable impacts of
average wage and benefit cost increases and a $23 million increase in expense in
2009 due to on-time performance bonuses paid to operations employee
groups.
The
decrease in aircraft fuel expense and Regional Affiliates expense was primarily
attributable to decreased market prices for jet fuel as highlighted in the table
below, which presents the significant changes in Mainline and Regional Affiliate
aircraft fuel cost per gallon in the nine months ended September 30, 2009 as
compared to the year-ago period. Lower Mainline fuel consumption due to the
capacity reductions also benefited Mainline fuel expense in the nine months
ended September 30, 2009 as compared to the year-ago period. See Note 11, “Fair
Value Measurements and Derivative Instruments,” in the Footnotes for additional
details regarding gains/losses from settled and open positions and unrealized
gains and losses at the end of the period. Derivative gains/losses are not
allocated to Regional Affiliate fuel expense.
|
Nine Months Ended September
30,
|
|||||||||||||||||||||
Average price per gallon (in
cents)
|
||||||||||||||||||||||
(In millions, except per
gallon)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||
Mainline
fuel purchase cost
|
$ | 2,558 | $ | 5,867 | (56.4) | 172.8 | 347.0 | (50.2) | ||||||||||||||
Non-cash
fuel hedge (gains) losses in Mainline fuel (a)
|
(521 | ) | 119 | - | (35.2 | ) | 7.0 | - | ||||||||||||||
Cash
fuel hedge (gains) losses in Mainline fuel (a)
|
491 | (102 | ) | - | 33.2 | (6.0 | ) | - | ||||||||||||||
Total
Mainline fuel expense
|
2,528 | 5,884 | (57.0) | 170.8 | 348.0 | (50.9) | ||||||||||||||||
Regional
Affiliates fuel expense (b)
|
564 | 1,010 | (44.2) | 191.8 | 362.0 | (47.0) | ||||||||||||||||
UAL
system operating fuel expense
|
$ | 3,092 | $ | 6,894 | (55.1) | 174.3 | 349.9 | (50.2) | ||||||||||||||
Mainline
fuel consumption (gallons)
|
1,480 | 1,691 | (12.5) | |||||||||||||||||||
Regional
Affiliates fuel consumption (gallons)
|
294 | 279 | 5.4 | |||||||||||||||||||
Total
fuel consumption (gallons)
|
1,774 | 1,970 | (9.9) |
____________
(a)
|
The
Company incurred fuel hedge gains/losses which are classified in
nonoperating expense as described
below.
|
(b)
|
Regional
Affiliate fuel costs are classified as part of Regional Affiliate expense
in the Company's Financial
Statements.
|
Regional
Affiliates expense decreased $354 million, or 14%, during the nine months ended
September 30, 2009 as compared to the same period last year, primarily due to a
$446 million decrease in Regional Affiliates fuel cost, which was due to a
higher average price per gallon of Regional Affiliates jet fuel in 2008 as
presented in the fuel table above. Partially offsetting the fuel price benefit
was increased fuel consumption as a result of the increase in Regional Affiliate
capacity. Increased rent payments to Regional Affiliates as a result of
increased capacity partially offset the net fuel benefit. The Regional
Affiliates operating income was $98 million in the 2009 period, as compared to a
loss of $162 million in the 2008 period. Regional Affiliates operating results
improved significantly on a year-over-year basis as the benefits of increased
traffic and lower fuel cost offset the yield decrease.
Purchased
services decreased $195 million, or 19%, in the first nine months of 2009 as
compared to the year-ago period primarily due to the Company’s operating cost
savings programs and lower variable costs associated with lower Mainline
capacity.
During
the nine months ended September 30, 2009, aircraft maintenance materials and
outside repairs decreased by $150 million, or 17%, as compared to the prior year
primarily due to a lower volume of engine and airframe maintenance expense as a
result of the Company’s planned early retirement of 100 aircraft from its
operating fleet and the timing of maintenance on other fleet types.
Landing
fees and other rent increased $25 million, or 4%, in the nine months ended
September 30, 2009 as compared to the year-ago period primarily due to higher
rates and unfavorable differences in the timing and amount of the annual airport
credits.
Distribution
expenses decreased $156 million, or 28%, in the nine months ended September 30,
2009 primarily due to lower passenger revenues on lower capacity and yields
driving reductions in commissions, credit card fees and GDS fees over those in
the prior year. The Company has also implemented several operating cost savings
programs for both commissions and GDS fees which are producing realized savings
in the current year.
Aircraft
rent expense decreased by $49 million, or 16%, primarily as a result of the
Company’s operational plans to retire its entire fleet of B737 aircraft, some of
which were financed through operating leases.
In the
nine months ended September 30, 2009, the Company recorded special charges of
$27 million related to a litigation settlement, $54 million primarily related to
aircraft lease terminations and $19 million related to a nonoperating B747
aircraft impairment. In addition, the Company recorded a $150 million intangible
asset impairment to decrease the value of United tradenames. A significant
factor in the lower fair value of the tradenames was a decrease in estimated
future revenues due to the weak economic environment and the Company’s capacity
reductions, among other factors. In the nine months ended September 30, 2008,
the Company incurred asset impairment charges of $2.5 billion, as shown in the
table below. All special charges and impairments relate to the Mainline segment
and the non-goodwill impairment charges are classified within Other impairments
and special items in the Company’s Financial Statements. See Note 11, “Fair
Value Measurements and Derivative Instruments” and Note 14, “Asset Impairments,
Special Items and Intangible Assets,” in the Footnotes for additional
information.
Nine
Months Ended
|
||||||||
September 30,
|
||||||||
(In
millions)
|
2009
|
2008
|
||||||
Goodwill
impairment
|
$ | - | $ | 2,277 | ||||
Indefinite-lived
intangible assets:
|
||||||||
Codeshare
agreements
|
- | 44 | ||||||
Tradenames
|
150 | 20 | ||||||
Intangible
asset impairments
|
150 | 64 | ||||||
Tangible
assets:
|
||||||||
Pre-delivery
advance deposits including related capitalized interest
|
- | 105 | ||||||
B737
and B747 aircraft, B737 spare parts and other
|
19 | 38 | ||||||
Aircraft
and related deposit impairments
|
19 | 143 | ||||||
Total
impairments
|
$ | 169 | $ | 2,484 |
In the
first nine months of 2009, other operating expenses decreased by $117 million,
or 14%, as compared to the 2008 period due to the Company’s cost savings
initiatives and lower variable expenses due to reduced capacity in the 2009
period as compared to year-ago period. UAL recorded a gain of $29 million for a
litigation settlement resulting in a reduction of other operating expenses
during the nine months ended September 30, 2008.
Other income (expense). The
following table illustrates the year-over-year dollar and percentage changes in
UAL and United other income (expense).
Nine
Months Ended
September
30,
|
Favorable/(Unfavorable)
Change
|
|||||||||||||||
(In
millions)
|
2009
|
2008
|
$ | % | ||||||||||||
(Adjusted)
|
||||||||||||||||
Interest
expense
|
$ | (415 | ) | (428 | ) | $ | 13 | 3.0 | ||||||||
Interest
income
|
15 | 100 | (85 | ) | (85.0 | ) | ||||||||||
Interest
capitalized
|
8 | 16 | (8 | ) | (50.0 | ) | ||||||||||
Miscellaneous,
net:
|
||||||||||||||||
Non-cash
fuel hedge gains (losses)
|
241 | (162 | ) | 403 | - | |||||||||||
Cash
fuel hedge losses
|
(215 | (21 | ) | (194 | ) |
NM
|
||||||||||
Other
miscellaneous, net
|
(7 | ) | 6 | (13 | ) | - | ||||||||||
UAL
total
|
$ | (373 | ) | (489 | ) | $ | 116 | 23.7 | ||||||||
United
total
|
$ | (373 | ) | (488 | $ | 115 | 23.6 |
UAL
interest expense decreased $13 million, or 3%, in the nine months ended
September 30, 2009 as compared to the year-ago period primarily due to lower
interest rates on the Company’s variable-rate borrowings. The decrease in
interest expense was more than offset by an $85 million decrease in interest
income due to reduced investment yields resulting from lower market rates, as
well as lower cash and short-term investment balances.
Total
hedge losses included in Miscellaneous, net in the 2008 period were
significantly greater than the net gain in the 2009 period due to the adverse
impact of 2008 market price declines on the Company’s fuel hedge portfolio. In
addition, as of September 30, 2009 the Company has a relatively small position
of fuel derivatives that are classified within Miscellaneous, net. See Note 11,
“Fair Value Measurements and Derivative Instruments,” in the Footnotes for
further information related to fuel hedges.
Income Taxes. In the nine
months ended September 30, 2009, the Company recorded a tax benefit of $46
million which was mostly related to its intangible asset impairment discussed
above. In 2008, the Company recorded a tax benefit of $30 million primarily due
to the reversal of certain deferred tax liabilities related to indefinite-lived
intangible assets established as part of fresh-start reporting when the Company
emerged from bankruptcy. This reversal was recorded as a result of
indefinite-lived intangible asset impairments. See Note 7, “Income Taxes,” in
the Footnotes for
additional information.
Liquidity
and Capital Resources
As of the
date of this Form 10-Q, the Company believes it has sufficient liquidity to fund
its operations for the near-term, including funding for scheduled repayments of
debt and capital lease obligations, capital expenditures, cash deposits required
under fuel hedge contracts and other contractual obligations. We expect to meet
our near-term liquidity needs from cash flows from operations, cash and cash
equivalents on hand, proceeds from new financing arrangements using unencumbered
assets and proceeds from aircraft sales and sales of other assets, among other
sources. While the Company expects to meet its near-term cash requirements, our
ability to do so could be impacted by many factors including, but not limited
to, the following:
●
|
Higher
jet fuel prices and the cost and effectiveness of hedging jet fuel prices
may require the use of significant liquidity in future periods. The
Company may hedge against future price increases using calls,
collar-strategies, fixed price swaps or other derivative instruments and
structures. The Company has been, and may in the future be, required to
make significant payments at the settlement dates of the hedge contracts
if the settlement price is below the floor price of the collars or the
fixed swap price. Furthermore, the Company has been, and may in the future
be, further required to provide counterparties with additional cash
collateral prior to such settlement dates. While the Company’s results of
operations benefit from lower fuel prices on its unhedged fuel
consumption, the Company may not realize the full benefit of lower fuel
prices due to unfavorable fuel hedge cash settlements. See Note 11, “Fair
Value Measurements and Derivative Instruments,” in the Footnotes, as well
as Item 3. Quantitative
and Qualitative Disclosures Above Market Risk, for further
information regarding the Company’s fuel derivative
instruments.
|
●
|
Poor
general economic conditions have had, and may in the future continue to
have, a significant adverse impact on travel demand, which has resulted in
decreased revenues and may adversely affect revenues in future periods. In
addition, the Company’s current operational plans to address the severe
weakness of the global economy may not be successful in improving its
results of operations and
liquidity.
|
●
|
A
significant increase in future cash reserve requirements by the Company’s
credit card processors could materially reduce the Company’s liquidity. As
of September 30, 2009, the Company had cash reserves under credit card
processing agreements of $74 million, which are classified as current
restricted cash in the accompanying Financial
Statements.
|
●
|
Our
high level of indebtedness, our non-investment grade credit rating, the
current poor credit market conditions and the nature of the Company’s
remaining assets available as collateral for financings are factors that,
in the aggregate, may limit the Company’s ability to raise capital to meet
liquidity needs and/or may increase its cost of
borrowing.
|
●
|
Due
to the factors above, and other factors, we may be unable to comply with
our Amended Credit Facility covenant that currently requires the Company
to maintain an unrestricted cash balance of $1.0 billion and also requires
the Company to maintain a minimum ratio of EBITDAR to fixed charges. If
the Company does not comply with these covenants, the lenders may
accelerate repayment of these debt obligations, which would have a
material adverse impact on the Company’s financial position and
liquidity.
|
●
|
If
a default occurs under our Amended Credit Facility or other debt
obligations, the cost to cure any such default may materially and
adversely impact our financial position and liquidity, and no assurance
can be provided that such a default will be mitigated or
cured.
|
UAL’s
cash and restricted cash balance was $2.8 billion at September 30, 2009. In
addition, the Company has recently taken actions to improve its liquidity, and
believes it will continue to access additional capital or improve its liquidity,
as described below.
●
|
The
Company received proceeds of approximately $0.8 billion in the nine months
ended September 30, 2009 from financing agreements, UAL common stock
sales, asset sales and other transactions. In October 2009, the Company
completed additional financing transactions to enhance its
liquidity, as described below. One of these transactions reduced the
Company’s scheduled 2010 and 2011 debt payments by $218 million and
$101 million, respectively.
|
●
|
As
of September 30, 2009, the Company has approximately $0.9 billion of
unencumbered aircraft and other assets that may be sold or otherwise used
as collateral to obtain additional financing. As described under Credit Card Processing
Agreements below, in October 2009 the Company gave notice to cancel
its collateral substitution agreement with one of its credit
card processors. As a result of this cancellation, aircraft with a book
value of approximately $0.7 billion will be available to the Company for
liquidity initiatives. This increase in available collateral was
partially offset by additional collateral provided in the October
2009 financing transactions described
herein.
|
●
|
The
Company is taking aggressive actions to right-size its business including
significant capacity reductions, disposition of underperforming assets and
a large workforce reduction, among other actions to improve financial
performance.
|
The
Company’s prior success in raising capital to meet its liquidity needs does not
guarantee that the Company will continue to be successful in such efforts going
forward.
Cash Position.
As of September 30, 2009, the Company’s cash and cash equivalents is
invested in money market funds of which 28% is in funds that invest in U.S.
treasury securities and 72% is in funds that are AAA-rated or have AAA-rated
fund characteristics but have yet to be rated. The following table provides a
summary of UAL’s net cash provided (used) by operating, financing and investing
activities for the nine months ended September 30, 2009 and 2008 and total cash
position at September 30, 2009 and December 31, 2008.
|
Nine
Months Ended
September 30,
|
|||||||
(In millions)
|
2009
|
2008
|
||||||
Net
cash provided (used) by operating activities
|
$ | 878 | $ | (250 | ) | |||
Net
cash provided (used) by investing activities
|
(52 | ) | 2,576 | |||||
Net
cash used by financing activities
|
(340 | ) | (654 | ) |
As
of September 30,
2009
|
As
of December 31,
2008
|
|||||||
Cash
and cash equivalents
|
$ | 2,525 | $ | 2,039 | ||||
Restricted
cash
|
309 | 272 | ||||||
Total
cash
|
$ | 2,834 | $ | 2,311 |
2009
and 2008 Sources and Uses of Cash
Operating Activities. UAL’s
cash from operations increased by approximately $1.1 billion in the nine months
ended September 30, 2009, as compared to the year-ago period. This improvement
was primarily due to decreased cash required for aircraft fuel purchases as
Mainline and Regional Affiliate fuel purchase costs decreased $3.8 billion in
the 2009 period as compared to the 2008 period. Decreases in the Company’s fuel
hedge collateral requirements also provided operating cash of approximately $903
million in the nine months ended September 30, 2009. In addition, in the first
nine months of 2009, the Company received $160 million related to the future
relocation of its O’Hare cargo facility as further discussed in Note 13, “Debt
Obligations and Other Financing Transactions,” in the Footnotes.
These
operating cash flow benefits were partially offset by a decrease in
operating cash flow due to lower sales, as discussed in Results of Operations, above,
and approximately $706 million of payments to counterparties for fuel derivative
contract settlements and premiums. The decrease in cash from advance ticket
sales of $188 million in the first nine months of 2009, as compared to the same
period in the prior year, was primarily due to lower sales of future air
transportation in 2009 due to the weak economic environment and the Company’s
capacity reductions.
Investing Activities. Net
sales of short-term investments provided cash of $2.3 billion to UAL in the 2008
period. In 2009 and 2008, the Company invested most of its excess cash in money
market funds as compared to significant available cash invested in short-term
investments at December 31, 2007. The sale of these short-term investments
throughout 2008 generated significant investing cash flows in the 2008 period.
UAL’s capital expenditures were $230 million and $384 million in 2009 and 2008,
respectively. Capital expenditures decreased significantly in the 2009 period as
compared to the year-ago period because the Company acquired nine aircraft
during the 2008 period and the Company has limited its spending in 2009 by
focusing its capital resources only on its highest-value projects due to current
economic conditions. The 2008 aircraft acquisitions were completed pursuant to
existing lease terms and were acquired through pre-funded lease deposits, as
described below.
In
2009, the Company received investing cash flows of $135 million from two
sale-leaseback agreements. These transactions were accounted for as capital
leases, resulting in non-cash increases to capital lease assets and capital
lease obligations during 2009. Other asset sales, including airport slot sales,
generated proceeds of $77 million and $43 million during the nine months ended
September 30, 2009 and 2008, respectively. The 2008 period included proceeds of
$59 million from a sale-leaseback transaction.
Financing Activities. The
following are significant financing activities by the Company in 2009 and
2008:
2009
During
the first nine months of 2009, the Company generated gross proceeds of
approximately $400 million from financing transactions as follows:
|
●
|
$158
million from the issuance of senior secured notes secured by certain
aircraft spare parts;
|
|
●
|
$134
million mortgage financing which is secured by certain of the Company’s
spare engines;
|
|
●
|
$90
million from the issuance of UAL common stock;
and
|
|
●
|
$30
million of financing secured by one
aircraft.
|
The
proceeds from these transactions were more than offset by $762 million used for
scheduled long-term debt and capital lease payments during the same
period.
2008
In July
2008, United completed a $241 million credit agreement secured by 26 of the
Company’s owned and mortgaged A319 and A320 aircraft. This agreement did not
change the number of the Company’s unencumbered aircraft as the Company used
available equity in these previously owned and mortgaged aircraft as collateral
for this financing. In addition, United entered into an $84 million loan
agreement in June 2008 secured by three aircraft, including two Airbus A320 and
one Boeing B777. Borrowings under both agreements were at a variable interest
rate based on LIBOR plus a margin.
These
proceeds were more than offset by the following uses of cash:
|
●
|
$253
million was used by the Company for UAL’s special distribution to its
common stockholders in January
2008;
|
|
●
|
In
May 2008, United used cash of $109 million in connection with an amendment
to its Amended Credit Facility, as further discussed
below;
|
|
●
|
Capital
expenditures were $335 million in the first nine months of 2008, during
which time the Company acquired nine aircraft that were being operated
under existing capital leases. These aircraft were acquired pursuant to
existing lease terms. Aircraft lease deposits of $154 million provided
financing cash that was utilized by the Company to make the final payments
due under these lease obligations. These aircraft were
previously recorded as capital lease assets and are now owned assets;
and
|
|
●
|
The
Company used cash of $765 million during the nine months ended September
30, 2008 for scheduled long-term debt and capital lease
payments.
|
See Note
13, “Debt Obligations and Other Financing Transactions” in the Footnotes for
additional information.
October 2009 Financing
Transactions. The following significant financing transactions were
completed in October 2009. See Note 16, “Subsequent Events,” in the
Footnotes for additional information related to these transactions.
|
●
|
United issued
approximately $659 million aggregate principal amount of Pass Through
Certificates, Series 2009-1A to finance 31 aircraft owned by United. The
proceeds from this transaction will be used to refinance 29 aircraft
financed by an existing EETC facility. This aircraft financing is expected
to be completed in January 2010 when the notes under the existing EETC
facility are redeemed. The transaction also financed two previously
unencumbered aircraft and will significantly reduce 2010 and 2011 debt
maturities, as described above;
|
|
●
|
UAL
issued $345 million principal amount of 6% Convertible Senior
Notes;
|
|
●
|
UAL
sold 19.0 million shares of UAL common stock in
an underwritten, public offering for a price of $7.24 per share,
generating net proceeds of approximately $132 million;
and
|
|
●
|
The
Company entered into a $129 million financing with one of its
regional flying partners.
|
Other Liquidity
and Capital Resources. At September 30, 2009, the Company had 21
operating, unencumbered aircraft and an additional 41 unencumbered aircraft,
which were either nonoperating or part of the Company’s permanent fleet
reduction plan. As of September 30, 2009 and December 31, 2008, assets with net
book values of $8.5 billion and $7.9 billion, respectively, principally
aircraft, spare engines, aircraft spare parts, route authorities and Mileage
Plus intangible assets were pledged under various loan and other agreements.
After giving effect to the October 2009 financings described above and the
termination of the collateral substitution agreement with one of the Company's
credit card processors, the book value of the Company’s encumbered assets
will decrease to approximately $7.9 billion.
The
Company has a $255 million revolving loan commitment available under Tranche A
of its Amended Credit Facility. As of September 30, 2009 and December 31, 2008,
the Company had used $249 million and $254 million, respectively, of the Tranche
A commitment capacity for letters of credit. In addition, under a separate
agreement, the Company had $27 million of letters of credit issued as
of September 30, 2009 and December 31, 2008.
The
Company may, from time to time, make open market purchases of certain of its
debt securities or other financing instruments depending on, among other
factors, favorable market conditions and the Company’s liquidity
position.
In
October 2009, the Company completed the $200 million ongoing equity offering
program which the Company began in December 2008 and which resulted in aggregate
net proceeds under the program of approximately $196 million after deducting
related expenses.
Credit Ratings. As of
September 30, 2009 and
December 31, 2008, the Company had a corporate credit rating of B- (outlook
negative) from Standard and Poor’s (“S&P”) and a corporate family rating of
“Caa1” from Moody’s Investor Services. During the second quarter of 2009, Fitch
had lowered UAL’s issuer default rating to “CCC” from “B-.” In
addition, early in the third quarter of 2009, S&P placed the Company on
CreditWatch Negative due to revenue and liquidity concerns. In October 2009,
S&P removed the Company from the CreditWatch Negative listing due to an
improvement in the Company’s liquidity position since the end of the second
quarter. These credit ratings are below investment grade levels.
Amended Credit Facility
Covenants. The
Company’s Amended Credit Facility requires compliance with certain covenants.
Beginning with the quarter ended June 30, 2009, the Company was again required
to comply with a fixed charge coverage ratio, which requirement had been
previously suspended in 2008. For the six month period ended September 30, 2009,
the required ratio was 1.1 to 1.0. The Company was in compliance with this ratio
and all of its Amended Credit Facility covenants as of September 30,
2009.
Failure
to comply with any applicable covenants in effect for any reporting period could
result in a default under the Amended Credit Facility unless the Company obtains
a waiver of, or otherwise mitigates or cures, any such default. Additionally,
the Amended Credit Facility contains a cross default provision with respect to
other credit arrangements that exceed $50 million. Although the Company was in
compliance with all required financial covenants as of September 30, 2009,
continued compliance depends on many factors, some of which are beyond the
Company’s control, including the overall industry revenue environment and the
level of fuel costs. There are no assurances that the Company will continue to
comply with its debt covenants. Failure to comply with applicable covenants in
any reporting period would result in a default under the Amended Credit
Facility, which could have a material adverse impact on the Company depending on
the Company’s ability to obtain a waiver of, or otherwise mitigate, the impact
of the default.
Additional
details on the Company’s Amended Credit Facility covenants are available in the
combined UAL and United Annual Report on Form 10-K for the year ended December
31, 2008 as updated by the Current Report on Form 8-K dated May 1, 2009 (the
“2008 Annual Report”).
Credit Card Processing
Agreements. The
Company has agreements with financial institutions that process customer credit
card transactions for the sale of air travel and other services. Under certain
of the Company’s card processing agreements, the financial institutions have the
right to require that United maintain a reserve (“reserve”) equal to a portion
of advance ticket sales that have been processed by that financial institution,
but for which the Company has not yet provided the air transportation (referred
to as “relevant advance ticket sales”).
As
further described in the 2008 Annual Report, the Company’s agreements with
Paymentech and JPMorgan Chase Bank (collectively “Chase”) and with American
Express require the Company to provide cash reserves approximately three weeks
following the end of each month if the Company’s unrestricted cash, cash
equivalents and short-term investments at month-end were below certain levels.
In November 2008, the Company amended its agreement with Chase to provide
non-cash collateral in lieu of cash reserves, effective through January 19,
2010, unless terminated earlier by the Company. In October 2009, the Company
notified Chase of its intention to terminate the collateral substitution
agreement which unencumbers collateral with a book value
of approximately $0.7 billion which may be utilized for other
liquidity initiatives. Based on the Company’s September 30, 2009 unrestricted
cash balance, the Company would not be required to provide cash collateral above
the current $25 million reserve balance.
Under the
American Express agreement, in addition to certain other risk protections
provided to American Express, the Company will be required to provide reserves
if its unrestricted cash balance (as defined in the agreement) falls below $2.4
billion. Additionally, under certain circumstances, the Company also has the
ability to provide non-cash collateral in lieu of cash collateral if its
unrestricted cash balance is above $1.35 billion.
Critical
Accounting Policies
See
“Critical Accounting Policies” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations
in the 2008 Annual Report for a detailed discussion of the Company’s critical
accounting policies.
Forward-Looking
Information
Certain
statements throughout Management’s Discussion and Analysis
of Financial Condition
and Results of Operations and elsewhere in this report are
forward-looking and thus reflect our current expectations and beliefs with
respect to certain current and future events and financial performance. Such
forward-looking statements are and will be subject to many risks and
uncertainties relating to our operations and business environment that may cause
actual results to differ materially from any future results expressed or implied
in such forward-looking statements. Words such as “expects,” “will,” “plans,”
“anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook” and
similar expressions are intended to identify forward-looking
statements.
Additionally,
forward-looking statements include statements that do not relate solely to
historical facts, such as statements which identify uncertainties or trends,
discuss the possible future effects of current known trends or uncertainties, or
which indicate that the future effects of known trends or uncertainties cannot
be predicted, guaranteed or assured. All forward-looking statements in this
report are based upon information available to us on the date of this report. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events, changed
circumstances or otherwise.
Our
actual results could differ materially from these forward-looking statements due
to numerous factors including, without limitation, the following: our ability to
comply with the terms of our Amended Credit Facility and other financing
arrangements; the costs and availability of financing; our ability to maintain
adequate liquidity; our ability to execute our operational plans; our ability to
control our costs, including recognizing benefits from our resource optimization
efforts and cost reduction initiatives; our ability to utilize our net operating
losses; our ability to attract and retain customers; demand for transportation
in the markets in which we operate; an outbreak of a disease that affects travel
demand or travel behavior; the demand for travel and the impact the economic
recession has on customer travel patterns; the increasing reliance on enhanced
video-conferencing and other technology as a means of conducting virtual
meetings; general economic conditions (including interest rates, foreign
currency exchange rates, investment or credit market conditions, crude oil
prices, costs of aviation fuel and refining capacity in relevant markets); our
ability to cost-effectively hedge against increases in the price of aviation
fuel; any potential realized or unrealized gains or losses related to fuel or
currency hedging programs; the effects of any hostilities, act of war or
terrorist attack; the ability of other air carriers with whom we have alliances
or partnerships to provide the services contemplated by the respective
arrangements with such carriers; the costs and availability of aviation and
other insurance; the costs associated with security measures and practices;
industry consolidation; competitive pressures on pricing and on demand; capacity
decisions of United and/or our competitors; U.S. or foreign governmental
legislation, regulation and other actions (including open skies agreements);
labor costs; our ability to maintain satisfactory labor relations and the
results of the collective bargaining agreement process with our union groups;
any disruptions to operations due to any potential actions by our labor groups;
weather conditions; and other risks and uncertainties set forth under the
caption “Risk Factors” in Item 1A. of the 2008 Annual Report, as well as other
risks and uncertainties set forth from time to time in the reports we file with
U.S. Securities and Exchange Commission (“SEC”). Consequently, forward-looking
statements should not be regarded as representations or warranties by UAL or
United that such matters will be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The
discussion below describes changes in our market risks since December 31, 2008.
For additional information regarding our exposure to certain market risks, see
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk in the 2008 Annual Report. See
Note 11, “Fair Value Measurements and Derivative Instruments,” in the Footnotes
for further information related to the Company’s fuel and foreign currency hedge
positions.
Commodity Price Risk (Jet
Fuel)—Our results of operations and liquidity may be materially impacted
by changes in the price of aircraft fuel and other oil-related commodities and
related derivative instruments. When market conditions indicate risk reduction
is achievable, United may use commodity option contracts or other derivative
instruments to reduce its price risk exposure to jet fuel. The Company’s
derivative positions are typically comprised of crude oil, heating oil and jet
fuel derivatives. The derivative instruments are designed to provide protection
against increases in the price of aircraft fuel. Some derivative instruments may
result in hedging losses if the underlying commodity prices drop below specified
floors; however, the negative impact of these losses may be offset by the
benefit of lower jet fuel acquisition cost. United may adjust its hedging
program based on changes in market conditions. At September 30, 2009, the fair
value of United’s fuel derivative instruments was a net receivable of $31
million, as compared to a net payable of $727 million at December 31,
2008.
As of
September 30, 2009, the Company hedged its forecasted consolidated fuel
consumption as shown in the table below.
Barrels hedged (in 000s)
|
Weighted-average crude equivalent price per barrel
(a)
|
|||||||||||||||||||||||||||||||||||
Percentage
of Projected Fuel Requirements
Hedged
|
Purchased
Puts
|
Sold
Puts
|
Swaps/
Purchased
Calls
|
Sold
Calls
|
Payment
Obligation
Ends
|
Payment
Obligation
Begins
|
Hedge
Protection
Begins
|
Hedge
Protection
Ends
|
||||||||||||||||||||||||||||
Fourth
Quarter 2009:
|
% | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Calls
|
31 | - | - | 4,150 | - |
NA
|
NA
|
66 |
NA
|
|||||||||||||||||||||||||||
Swaps
|
13 | - | - | 1,800 | - |
NA
|
62 | 62 |
NA
|
|||||||||||||||||||||||||||
Collars
|
1 | - | 300 | 150 | - |
NA
|
112 | 138 |
NA
|
|||||||||||||||||||||||||||
3-way
collars
|
8 | - | 1,425 | 1,050 | 1,050 |
NA
|
100 | 120 | 160 | |||||||||||||||||||||||||||
4-way
collars
|
2 | 225 | 225 | 225 | 225 | 63 | 78 | 95 | 135 | |||||||||||||||||||||||||||
Total
|
55 | 225 | 1,950 | 7,375 | 1,275 | |||||||||||||||||||||||||||||||
Purchased
puts
|
14 | 1,800 | - | - | - |
NA
|
NA
|
52 |
NA
|
|||||||||||||||||||||||||||
Full
Year 2010:
|
||||||||||||||||||||||||||||||||||||
Calls
|
9 | - | - | 4,900 | - |
NA
|
NA
|
73 |
NA
|
|||||||||||||||||||||||||||
Swaps
|
6 | - | - | 3,075 | - |
NA
|
74 | 74 |
NA
|
|||||||||||||||||||||||||||
Collars
|
- | - | 300 | 300 | - |
NA
|
93 | 98 |
NA
|
|||||||||||||||||||||||||||
Total
(b)
|
15 | - | 300 | 8,275 | - |
_________
(a)
|
Instruments
in heating oil and jet fuel are converted to crude oil price
equivalents.
|
(b)
|
The
Company has hedged approximately 40% of its first quarter 2010
consolidated consumption.
|
In
addition to the hedges described in the table above, the Company has entered
into hedges against adverse increases in the spread between the price of crude
oil and the price of refined petroleum products (referred to as a crack spread).
As the Company consumes refined products, adverse increases in this spread can
negatively impact the Company’s results of operations.
The above
derivative positions are subject to potential counterparty collateral
requirements. The Company’s cash collateral held by counterparties was $62
million as of September 30, 2009. Actual collateral requirements, fuel purchase
costs and cash requirements for hedge losses will vary depending on changes in
forward fuel prices, modifications to the Company’s fuel hedge portfolio and
other factors.
ITEM 4. CONTROLS AND PROCEDURES.
UAL and
United each maintain controls and procedures that are designed to ensure that
information required to be disclosed in the reports UAL and United each file
with the SEC is recorded, processed, summarized, and reported, within the time
periods specified by the SEC’s rules and forms, and is accumulated and
communicated to management including the Chief Executive Officer and Chief
Financial Officer as appropriate to allow timely decisions regarding required
disclosure. The management of UAL and United, including each company’s Chief
Executive Officer and Chief Financial Officer, performed an evaluation to
conclude with reasonable assurance that its disclosure controls and procedures
were designed and operating effectively to report the information each company
is required to disclose in the reports they file with the SEC on a timely basis.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer of both UAL and United have concluded that as of September 30, 2009, the
disclosure controls and procedures of both UAL and United were
effective.
There
were no changes in UAL’s or United’s internal control over financial reporting
during their most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, their internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In
addition to the legal proceedings described below, UAL and United are parties to
other legal proceedings as described in the 2008 Annual Report.
In re: UAL
Corporation, et. al.
On
December 9, 2002, the Debtors filed voluntary petitions to reorganize their
businesses under Chapter 11 of the Bankruptcy Code. After extensive
restructuring activities, the Bankruptcy Court confirmed the Company’s Plan of
Reorganization on January 20, 2006. The Plan of Reorganization became effective
and the Debtors emerged from bankruptcy protection on February 1, 2006. Numerous
pre-petition claims were still pending at that time, and the process of
determining whether liability exists and liquidating the amounts due to those
creditors continued through the nine months ended September 30,
2009.
While
certain other significant matters remain to be resolved in the Bankruptcy Court,
the Company believes that the remaining claims can be addressed by the end of
2009. For details see Note 12, “Commitments, Contingent Liabilities and
Uncertainties,” in the Footnotes. On July 15, 2009, the Company filed a motion
for final closure of the bankruptcy cases, which was heard on July 29, 2009. The
motion is currently scheduled for ruling by the Bankruptcy Court on November 10,
2009.
ITEM 1A. RISK
FACTORS.
See Part
I, Item 1A., “Risk Factors,” of the 2008 Annual Report for a detailed discussion
of the risk factors affecting UAL and United.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
The
following table presents repurchases of UAL common stock made in the third
quarter of fiscal year 2009.
Period
|
Total
number of shares purchased(a)
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans or programs
|
Maximum
number of shares (or approximate dollar value) of shares that may yet be
purchased under the plans or
programs
|
||||||
07/01/09
– 07/31/09
|
1,796 | $ | 3.41 | — |
(b)
|
|||||
08/01/09
– 08/31/09
|
1,021 | 4.74 | — |
(b)
|
||||||
09/01/09
– 09/30/09
|
481 | 5.67 | — |
(b)
|
||||||
Total
|
3,298 | 4.15 | — |
(b)
|
____________
(a)
|
Shares
withheld from employees to satisfy certain tax obligations due upon the
vesting of restricted stock.
|
(b)
|
The
UAL Corporation 2008 Incentive Compensation Plan provides for the
withholding of shares to satisfy tax obligations due upon the vesting of
restricted stock or restricted stock units. However, this plan does not
specify a maximum number of shares that may be
repurchased.
|
ITEM 6. EXHIBITS.
A list of
exhibits included as part of this Form 10-Q is set forth in an Exhibit Index
that immediately precedes the exhibits.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, each registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. The signature for each undersigned company shall be deemed to
relate only to matters having reference to such company or its
subsidiaries.
UAL
CORPORATION
|
|||
(Registrant)
|
|||
Date:
October 21, 2009
|
By:
|
/s/ Kathryn A.
Mikells
|
|
Kathryn
A. Mikells
|
|||
Executive Vice President and Chief Financial Officer | |||
(principal financial and accounting officer) | |||
UNITED
AIR LINES, INC.
|
|||
(Registrant)
|
|||
Date:
October 21, 2009
|
By:
|
/s/ Kathryn A.
Mikells
|
|
Kathryn A. Mikells | |||
Executive Vice President and Chief Financial Officer | |||
(principal
financial officer)
|
|||
Date:
October 21, 2009
|
By:
|
/s/ David M.
Wing
|
|
David
M. Wing
|
|||
Vice President and Controller | |||
(principal accounting officer) |
EXHIBIT INDEX
The
documents listed below are being filed on behalf of UAL and United as
indicated.
*4.1
|
Indenture,
dated as of October 7, 2009, between UAL Corporation, as Issuer, and The
Bank of New York Mellon Trust Company, N.A., as Trustee, providing for
issuance of 6% Convertible Senior Notes due 2029 (filed as exhibit 4.1 to
UAL’s Form 8-K dated October 7, 2009, Commission file number 1-6033, and
incorporated herein by reference)
|
|
*4.2
|
Form
of Note representing all 6.0% Convertible Senior Notes due 2029 (filed as
exhibit 4.2 to UAL’s Form 8-K dated October 7, 2009, Commission file
number 1-6033, and incorporated herein by reference)
|
|
Amendment
No. 2 to the UAL Corporation 2006 Director Equity Incentive
Plan
|
||
Form
of Share Unit Award Notice pursuant to the UAL Corporation 2006 Director
Equity Incentive Plan
|
||
UAL
Corporation Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Stock Dividend
Requirements
|
||
United
Air Lines, Inc. Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Fixed Charges and Preferred Stock Dividend
Requirements
|
||
Certification
of the Principal Executive Officer of UAL Pursuant to 15 U.S.C. 78m(a) or
78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)
|
||
Certification
of the Principal Financial Officer of UAL Pursuant to 15 U.S.C. 78m(a) or
78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)
|
||
Certification
of the Principal Executive Officer of United Pursuant to 15 U.S.C. 78m(a)
or 78o(d) (Section 302 of the Sarbanes-Oxley Act of
2002)
|
||
Certification
of the Principal Financial Officer of United Pursuant to 15 U.S.C. 78m(a)
or 78o(d) (Section 302 of the Sarbanes-Oxley Act of
2002)
|
||
Certification
of the Chief Executive Officer and Chief Financial Officer of UAL Pursuant
to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002)
|
||
Certification
of the Chief Executive Officer and Chief Financial Officer of United
Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002)
|
||
* Previously
filed
† Indicates
management contract or compensatory plan or arrangement
53