United Reduces Costs, Improves Reliability, Builds Cash in Difficult
Economy
- $579 Million 1Q09 Net Loss ex. Non-Cash Hedge and Other Charges; $382
Million GAAP Loss -
- Consolidated 1Q09 PRASM Down 11.1% vs. 1Q08; at Top End of Guidance -
- Mainline Non-Fuel CASM ex. Charges Down 1.1%; GAAP CASM Down 13.1% -
- Improved Full Year 2009 Outlook for Non-Fuel Costs -
- Raised Nearly $500 Million in Liquidity; Closed Quarter with Solid $2.5
Billion Unrestricted Cash -
- Achieved #1 Rank In On-time Performance Among U.S. Network Carriers -
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CHICAGO, April 21 /PRNewswire-FirstCall/ -- UAL Corporation (Nasdaq:
UAUA), the holding company whose primary subsidiary is United Airlines,
reported results for the first quarter ended March 31, 2009. The company:
-- Reported a first quarter net loss of $579 million or $4.00 per share
excluding non-cash, net mark-to-market hedge gains and certain
accounting charges outlined in note 6 of the attached statement of
consolidated operations. The company reported a GAAP loss of $382
million or $2.64 per share, including these items.
-- Reported an 11.1% decline year-over-year in first quarter consolidated
passenger unit revenue per available seat mile (PRASM), at the top end
of the guidance range we provided in March.
-- Maintained its momentum on cost control, with mainline non-fuel unit
cost per available seat mile (CASM) for the quarter, excluding certain
accounting charges, down 1.1% year-over-year despite a reduction in
mainline capacity of 13.1% year-over-year. Mainline CASM including
fuel and excluding non-cash, net mark-to-market fuel hedge gains and
certain accounting charges was down 11.2% year-over-year. GAAP
mainline unit cost, including these items, was down 13.1%.
-- Reduced its full-year outlook for mainline non-fuel CASM, excluding
profit sharing programs and certain accounting items, to an increase
of only 1.0% to 2.0% year-over-year - a reduction of approximately
$150 million from prior company guidance. The company also reduced
its non-aircraft capital expenditure plan for 2009 by $100 million,
from $450 million to $350 million.
-- Saved $729 million, or 38.7%, in consolidated fuel costs
year-over-year, including the impact of settled hedge losses reported
in fuel expense. On a cash basis, including collateral returns on all
settled hedges, the company saved $982 million in fuel expense.
-- Raised nearly $500 million in new cash in the first quarter through
various transactions, including aircraft and engine financings,
airport facility relocations, equity issuances and asset sales.
-- Closed the quarter with a solid unrestricted cash balance of $2.5
billion, restricted cash of $255 million, and total cash of $2.7
billion. In addition, fuel hedge collateral was $570 million.
-- Achieved a No. 1 ranking in on-time performance among the five major
U.S. network carriers for the quarter, with 80.5% of flights arriving
within 14 minutes of scheduled arrival time. The company paid $265 in
on-time incentive payments to each of more than 40,000 front-line
employees during the quarter under its new on-time incentive program.
The company's first quarter on-time ranking improved from fourth place
last year to first place this year.
-- Increased the performance of our key overall customer satisfaction
measure by more than 10 percentage points, with improvements in
satisfaction scores across the travel experience.
-- Received tentative approval from the DOT to form a trans-Atlantic
joint venture with Continental Airlines, Lufthansa and Air Canada.
Continental Airlines has also received tentative approval to join the
anti-trust immunized alliance of United and eight other Star Alliance
carriers.
"This leadership team is making the right decisions and United's people
are delivering solid results," said Glenn Tilton, United chairman, president
and CEO. "Across our company, from finance to customer service, our employees
are focused on fundamental improvement, from raising liquidity, to improving
our costs, to what matters most to our customers - delivering great service
and on-time performance."
Revenue Significantly Impacted by the Global Economic Recession
For the quarter, consolidated PRASM declined 11.1%, consolidated yield
declined 9.2% and consolidated load factor declined 1.7 points year-over-year,
as the decline in overall traffic, and in particular premium and business
demand, impacted the company's passenger revenues domestically and
internationally. Growth in certain ancillary revenues, including bag fees and
ticket change fees, improved consolidated PRASM by 2 percentage points
year-over-year.
1Q 2009 Passenger
Passenger Revenue % PRASM % ASM(1) %
Revenue Increase/ Increase/ Increase/
Geographic Area (millions) (Decrease) (Decrease) (Decrease)
--------------- ---------- ----------- ----------- -----------
Domestic $1,620 (21.6%) (10.1%) (12.8%)
Pacific 540 (30.1%) (16.3%) (16.5%)
Atlantic 436 (20.6%) (13.4%) (8.3%)
Latin America 105 (33.0%) (19.6%) (16.7%)
---------- ----------- ----------- -----------
International $1,081 (26.9%) (15.4%) (13.6%)
Mainline $2,701 (23.8%) (12.3%) (13.1%)
Regional Affiliates 659 (7.8%) (12.4%) 5.2%
Consolidated $3,360 (21.1%) (11.1%) (11.3%)
(1) ASM: Available Seat Miles
Cargo revenue for the quarter decreased 43.1% year-over-year as a result
of lower demand, softer yields, lower fuel surcharges and reduced
international capacity. Cargo revenues have been affected by United's
exposure to trans-Pacific export markets, where industry cargo demand is down
approximately 50% in Japan and approximately 25% in other Asian markets as a
result of the global recession.
Strong Cost Performance Saves $1.1 Billion, Including Nearly $400 Million
in Non-Fuel Expense
Total consolidated operating expense, including fuel, was down $1.1
billion for the quarter, excluding non-cash net mark-to-market hedge gains and
certain accounting charges, while consolidated operating expense, excluding
fuel and certain accounting charges, was down $387 million or 11.8%, as the
company continued its efforts to reduce costs as capacity declined. Total
GAAP consolidated operating expense including these items was down $1.2
billion for the quarter.
Mainline CASM, excluding fuel and certain accounting charges, decreased
1.1% in the first quarter, despite a 13.1% decline in mainline capacity.
Consolidated CASM, excluding fuel and certain accounting charges, decreased
0.5%, despite an 11.3% decline in consolidated capacity. GAAP mainline and
consolidated CASM, including these items, were down 13.1% and 13.0%
respectively, compared to the year ago quarter, reflecting the impact of lower
fuel prices.
Significant Fuel Cost Savings Partially Offset by Hedging Losses
First quarter consolidated fuel expense, excluding hedge impacts, was down
52%, or $983 million year-over-year. During the quarter, the company incurred
settled hedge losses of $242 million reported in fuel expense, resulting in
net consolidated fuel expense savings of $729 million, excluding net non-cash
mark-to-market hedge gains. The company also incurred settled hedge losses of
$81 million on settled hedge contracts in non-operating expense. On a cash
basis, including collateral returns on settled hedges in operating and
non-operating expense, the company saved $982 million in total fuel expense.
The total impact of settled losses on the company's unrestricted cash balance
was offset by the return of $395 million of cash collateral from fuel hedge
counterparties during the quarter. The table below details hedge impacts for
the quarter:
Three Months Ending March 31, 2009
Fuel Hedge Impacts (in millions)
------------------ ----------------------------------
Included in
Included in Fuel Non-Operating
Expense Expense Total
---------------- ------------- -----
Non-Cash Net Mark-to-Market
Gain $191 $72 $263
Cash Net Loss on Settled Contracts (242) (81) (323)
---------------- ------------- -----
Total Recorded Net Loss ($51) ($9) ($60)
---------------- ------------- -----
Return of Hedge Collateral $395
United Increases Unrestricted Cash Balance by Nearly $500 Million to a
Solid $2.5 Billion
United closed several financing transactions during the first quarter.
The company completed an aircraft sale-leaseback for $94 million and an engine
financing transaction for $134 million. The company received $160 million
from Chicago's O'Hare airport associated with the relocation of its cargo
facility, and $35 million from Los Angeles International Airport as part of an
agreement to vacate certain facilities. The company also raised $62 million
from equity issuances in the quarter. Altogether the company raised nearly
$500 million, ending the quarter with approximately $1.7 billion in
unencumbered assets.
The company ended the quarter with an unrestricted cash balance of $2.5
billion, a restricted cash balance of $255 million and total cash of $2.7
billion. The company also had $570 million in cash deposits held by its fuel
hedge counterparties. During the first quarter, the company generated $426
million of positive operating cash flow and $347 million of positive free cash
flow, defined as operating cash flow less capital expenditures. Both
operating cash flow and free cash flow for the quarter include $395 million in
returns of hedge collateral and $160 million associated with the Chicago
O'Hare cargo facility relocation. The company had scheduled debt and net
capital lease payments of $264 million during the quarter and non-aircraft
capital expenditures of $79 million.
"We have continued to demonstrate success raising cash, with $500 million
in new liquidity in the first quarter - and with $1.7 billion in unencumbered
assets, we have the ability to do more," said Kathryn Mikells, United senior
vice president and chief financial officer. "We are dramatically reducing our
costs, even as we make significant capacity reductions, saving over $1.1
billion in total expense this quarter compared to a year ago."
United Achieves #1 On-Time Performance Ranking - Customer Satisfaction
Improves
The company's efforts to improve reliability and customer satisfaction are
delivering results, with a first place on-time performance ranking among the
five U.S. network carriers in the first quarter, and a more than 10 percentage
point improvement on its key customer satisfaction measure. According to
Department of Transportation statistics, 80.5% of United flights arrived
within 14 minutes of their scheduled arrival time, representing a significant
improvement from last year's fourth place ranking.
Approximately 40,000 United front line employees earned $265 each this
quarter, as United's new Arrival :14 cash incentive program paid cash awards
in all three months. Employees have the opportunity to earn as much as $1,200
per year under the program, which pays $100 each month United ranks first in
on-time Arrival :14, and $65 each month United ranks second, or exceeds its
internal Arrival :14 goal.
Substantial improvements were also achieved across the travel experience,
with double-digit increases year-over-year in customer satisfaction for
aircraft cleanliness and seat and entertainment product workability and a
nearly eight percentage-point improvement in employee courtesy.
Business Highlights
-- United completed conversion of 40% of its international fleet to the
new International Premium Travel Experience. Fully lie-flat first and
business class seating, outstanding in-seat entertainment and an
all-new dining experience are now available to customers flying to
Europe, the Middle East, Latin America, Asia, and Australia.
-- United launched its first-ever nonstop service from Washington, D.C.,
to Moscow on its newly reconfigured B767 with fully lie-flat seats in
first and business class.
-- United launched EasyPurchase, a worldwide service accepting major
credit cards and debit cards for all in-flight purchases. As of April
20, all mainline flights worldwide accept credit cards, and all
mainline domestic flights are cashless.
-- United announced it will offer in-flight internet service on its p.s.
transcontinental service between New York and California starting in
the second half of 2009.
2009 Outlook
Mainline capacity is expected to be down 9.0% to 10.0% year-over-year for
the full year 2009. Despite these large capacity reductions, the company
expects mainline CASM, excluding fuel, profit sharing programs and certain
accounting charges, for the full year 2009 to be up only 1.0% to 2.0%
year-over-year, a reduction of approximately $150 million from prior company
guidance, as United continues its progress on cost control.
As a part of the company's cash conservation efforts, the non-aircraft
capital expenditure plan has been reduced by $100 million, from $450 million
to $350 million for the full year 2009. The company expects scheduled debt
and capital lease payments of $665 million for the remainder of 2009.
Complete details on United's outlook can be found in the Investor Update,
available at united.com/ir.
Question & Answers
Additional information can be found in the Q&A section of this release.
About United
United Airlines (NASDAQ: UAUA) operates over 3,100* flights a day on
United and United Express to more than 200 U.S. domestic and international
destinations from its hubs in Los Angeles, San Francisco, Denver, Chicago and
Washington, D.C. With key global air rights in the Asia-Pacific region,
Europe and Latin America, United is one of the largest international carriers
based in the United States. United also is a founding member of Star
Alliance, which provides connections for our customers to 912 destinations in
159 countries worldwide. United's 48,500 employees reside in every U.S. state
and in many countries around the world. News releases and other information
about United can be found at the company's Web site at united.com.
*Based on United's forward-looking flight schedule for April 1, 2009 to
April 1, 2010
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: Certain statements included in this investor update 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 cost and availability of financing; our ability to maintain
adequate liquidity; our ability to execute our operational plans; our ability
to realize benefits from our resource optimization efforts and cost reduction
initiatives; our ability to utilize our net operating losses; our ability to
attract, motivate and/or retain key employees; our ability to attract and
retain customers; demand for transportation in the markets in which we
operate; 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
aircraft insurance; the costs associated with security measures and practices;
labor costs; 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); our ability to maintain satisfactory labor relations; 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 the 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.
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In millions, except per share amounts)
Three Months Ended %
March 31, Increase/
(In accordance with GAAP) 2009 2008 (Decrease)
---- ---- ----------
As Adjusted
(Note 2)
Operating revenues:
Passenger - United Airlines $2,701 $3,545 (23.8)
Passenger - Regional Affiliates 659 715 (7.8)
Cargo 124 218 (43.1)
Other operating revenues 207 233 (11.2)
--- ---
3,691 4,711 (21.7)
----- -----
Operating expenses:
Salaries and related costs (Note 6) 921 1,046 (12.0)
Aircraft fuel (Notes 4 and 6) 799 1,575 (49.3)
Regional affiliates (a) 671 779 (13.9)
Purchased services 287 349 (17.8)
Depreciation and amortization
(Note 6) 233 220 5.9
Aircraft maintenance materials
and outside repairs 225 317 (29.0)
Landing fees and other rent 221 230 (3.9)
Distribution expenses 118 184 (35.9)
Aircraft rent 88 99 (11.1)
Cost of third party sales 53 64 (17.2)
Asset impairments and special items
(Note 6) 119 - -
Other operating expenses 238 289 (17.6)
--- ---
3,973 5,152 (22.9)
----- -----
Loss from operations (282) (441) (36.1)
Other income (expense):
Interest expense (134) (147) (8.8)
Interest income 7 48 (85.4)
Interest capitalized 3 5 (40.0)
Miscellaneous, net (Note 6) (6) (19) (68.4)
-- ---
(130) (113) 15.0
Loss before income taxes and equity in
earnings of affiliates (412) (554) (25.6)
Income tax benefit (Note 6) (29) (3) NM
--- --
Loss before equity in earnings of
affiliates (383) (551) (30.5)
Equity in earnings of affiliates, net
of tax 1 2 (50.0)
-- --
Net loss $(382) $(549) (30.4)
===== =====
Loss per share, basic and diluted $(2.64) $(4.55)
====== ======
Weighted average shares, basic and
diluted 144.7 121.1
See accompanying notes.
(a) Regional affiliates expense includes regional aircraft rent expense.
See Note 3 for more information.
UAL CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended %
March 31, Increase/
(In accordance with GAAP) 2009 2008 (Decrease)
---- ---- ----------
Cash flows provided (used)
by operating activities (a) $426 $(80) -
Cash flows provided (used) by
investing activities:
Net sales of short-term
investments - 1,809 (100.0)
Additions to property,
equipment and deferred
software (79) (119) (33.6)
Decrease in restricted cash 17 28 (39.3)
Proceeds from asset sale-leaseback 94 - -
Proceeds from the sale of
property and equipment 33 - -
Other, net - 7 (100.0)
-- --
65 1,725 (96.2)
-- -----
Cash flows provided (used) by
financing activities:
Repayment of Credit Facility (9) (9) -
Repayment of other debt (229) (182) 25.8
Special distribution
to common
shareholders - (251) (100.0)
Principal payments under
capital leases (48) (12) 300.0
Decrease in capital
lease deposits 22 - -
Proceeds from issuance of
long-term debt 134 - -
Proceeds from the issuance of
common stock 63 - -
Other, net (6) (12) (50.0)
-- ---
(73) (466) (84.3)
--- ----
Increase (decrease) in cash and
cash equivalents during the period 418 1,179 (64.5)
Cash and cash equivalents at
beginning of the period 2,039 1,259 62.0
----- -----
Cash and cash equivalents at end
of the period $2,457 $2,438 0.8
====== ======
Reconciliation of cash and cash equivalents to total cash and cash
equivalents, short-term investments and restricted cash:
As of March 31, %
Increase/
2009 2008 (Decrease)
---- ---- ----------
Cash and cash equivalents $2,457 $2,438 0.8
Short-term investments - 486 (100.0)
Restricted cash (b) 255 728 (65.0)
--- ---
Total cash and cash
equivalents, short-term
investments and
restricted cash (b) $2,712 $3,652 (25.7)
====== ======
(a) See Note 6[h] for the Company's computation of free cash flow.
(b) Restricted cash decreased significantly since March 31, 2008 due to
the posting of letters of credit for workers' compensation obligations
and an amendment of the Company's largest credit card processing
agreement with respect to credit card ticket sales reserves.
Questions & Answers
Q1: What drove United's consolidated PRASM decline despite the large
capacity actions the company has taken?
A1: As with the rest of the airline industry, the decline in PRASM was
driven by a precipitous decline in worldwide travel demand as a result of the
global recession. Two factors had a distinct impact on United's first quarter
revenue.
First, network composition played a role in overall unit revenue decline.
Conditions in individual markets had a disproportionate impact on United's
revenues, such as China and Australia, where unit revenues dropped 15% and
more than 30% respectively. The Japanese market has held up better than other
Pacific markets, but only accounts for just over 30% of United's Pacific
operation. In the Atlantic, a challenging environment in London and secondary
European cities was mitigated by stronger performance in Germany as capacity
actions we've taken limited PRASM declines to the mid-single digits.
Second, while demand has declined across all market segments, premium and
business demand has declined more significantly than leisure demand. The
decrease in trips taken by business travelers, and the buy-down from premium
class to economy class caused premium cabin traffic to decline 30% in the
first quarter compared to last year. United participates proportionately more
in these segments than others, both internationally and domestically.
These markets and business segments are the right markets for United in
the long term and allow us to continue generating unit revenue premiums to the
industry, but have a greater impact on us during the current downturn.
United's new first and business class seating product reduces premium seat
counts on our international fleet by over 20%, while delivering a superior
customer experience. United has already deployed the new product on 40% of
the fleet. All B767 aircraft will be complete by May 2009, B747 aircraft will
be complete by October 2009, and work on B777 aircraft will begin in September
2009.
Q2: How have United's efforts to generate ancillary revenue performed
year-over-year?
A2: United has been a leader in the industry's move toward unbundling and
the generation of new ancillary revenue streams through our Travel Options by
United program and has launched a number of innovative products that provide
customers with the choice to purchase products and services that offer
comfort, convenience, rewards and peace of mind. Ancillary revenue and fees
have increased to a total of $259 million this quarter. These revenues
consist of Travel Options products such as Economy Plus upsell, Premier Line
and Award Accelerator, as well as ticket change fees and first and second bag
fees. On a per passenger basis, ancillary revenues and fees have increased by
about 60% this quarter to approximately $14 per passenger.
Q3: Which fee and ancillary revenues does United include in passenger
revenue and which are included in other revenue? What impact did fee and
ancillary revenues have in the quarter?
A3: There is not a consistent industry practice among airlines regarding
the recording and classification of ancillary and other revenues. Some
ancillary revenue products, such as premium seat upsell revenues, are
consistently recorded by most airlines as passenger revenue. Certain other
ancillary revenue products, such as first and second bag fees and ticketing
and change fees, are classified by some other carriers in other revenue. For
United, first and second bag fees and ticketing and change fees are recorded
in passenger revenue. Increases in these fees resulted in a two percentage
point improvement in consolidated PRASM year-over-year.
Q4: Given the significant declines in consolidated PRASM in the first
quarter, does the company plan to implement any additional capacity
reductions?
A4: Based upon current projections, the company is satisfied with the
previously announced capacity actions that have been and will continue to be
executed in the coming quarters. We are, however, monitoring the demand
environment closely and have both the willingness and the flexibility to take
additional actions if they are deemed necessary.
Q5: How has the company been able to control its unit cost growth despite
such large capacity reductions?
A5: United is successfully creating a culture of cost control throughout
the company, beginning with improvements in our core planning and project
management processes. Our ability to reduce non-fuel cost in line with
capacity is a direct result of these structural changes.
We are optimizing our maintenance programs and processes to reduce waste
and save costs, including improved planning of maintenance cycles, more
efficient utilization and more cost-effective purchase of spare parts, and
improved inventory management. In addition, by eliminating our entire B737
fleet, we eliminated a significant amount of related overhead, spare parts
inventories, tooling and labor cost.
We are committed to improving corporate staff, supervisory and front line
productivity. As we have previously announced, we are reducing management and
staff positions by 2,500, or almost 30%, by the end of 2009, about 2,000 of
which have already been completed as we continue to streamline and focus the
organization. Operationally, we are improving productivity while at the same
time improving the quality of our product. We have improved our processes at
the airports and in cabin cleaning not only to reduce expense, but also
improve performance, which increases our reliability and improves the product
for our customers. Our increased focus on reliability not only increases
customer satisfaction, but also improves efficiency as we reduce the waste
associated with delays and cancellations.
We are reducing our purchased services expense significantly by
reevaluating all areas of spending, and searching for ways to improve the
productivity of our vendors. We have reduced our information technology
expense significantly by insourcing certain activities and maximizing vendor
relationships on outsourced activities to improve the value of services
provided while reducing costs. We are taking a similar approach with our
catering vendors, aggressively negotiating with our suppliers not only to
reduce costs, but improve the quality of our product offering.
We continue to drive down our distribution expense significantly, as we
manage distribution channels to minimize cost and maximize revenue quality,
with overall distribution costs as a percent of revenue falling by about 20%
year-over-year in the first quarter.
To embed a cost focus into the culture, we introduced a new annual
incentive plan in 2009 that creates a direct link between cost control and
compensation for all layers of management. This has helped to increase the
focus on cost in every aspect of our business.
Q6: Can you provide additional commentary on line items in the income
statement where there were significant year-over-year changes in non-fuel
cost?
A6: Total non-fuel operating expense declined by $387 million
year-over-year in the first quarter, excluding certain accounting charges, or
about 11.8%, as the company continued its efforts to reduce costs as capacity
declined.
Salaries decreased $82 million as a result of capacity reductions combined
with the previously announced reductions in management and staff personnel.
Aircraft maintenance materials and outside repairs decreased $92 million,
about 29%. We continue to be pleased with the progress we're making in
reducing maintenance costs, and the lower volumes driven by our elimination of
the B737 fleet are driving significant savings.
Distribution expenses decreased $66 million, or 36%. While the decrease in
revenue this quarter drove significant savings, we saw a much greater
improvement in distribution costs than the corresponding reduction in revenue
as we continued to successfully target high cost channels, particularly in
commissions.
Purchased Services and Other Operating Expenses decreased by a combined
$113 million, or about 18%, greater than our capacity reduction, reflecting
our continued focus on reducing costs in this challenging environment.
Excluding non-operating fuel hedge impacts, non-operating expense was $121
million for the quarter, $8 million higher than a year ago and about $6
million above our guidance. While relatively flat year-over-year, there were
two major moving parts within the numbers:
First - While interest expense improved by $13 million on lower debt
levels and lower interest rates, interest income declined by $41 million on
lower rates and lower average cash balances.
Second - The strengthening of the dollar during the quarter caused us to
record $7 million in foreign exchange gains compared to a $20 million loss
last year, improving expense by $27 million.
Q7: When does United begin discussions with its U.S. labor unions on
collective bargaining agreements?
A7: United and each of its unions began the process of crafting mutually
beneficial, revised labor agreements in early April 2009, ahead of when they
become amendable in January 2010. The decision to begin discussions in April
2009 was based upon commitments made between the parties in the existing
collective agreements. Updates and information on negotiations can be found
on United's negotiations web site, at www.unitednegotiations.com.
Q8: In prior quarters, United has provided revenue adjustments associated
with the change in accounting for Mileage Plus revenues. Why is this
adjustment no longer provided?
A8: United has suspended its practice of disclosing the impact of fresh
start accounting on earnings, and as a result, is no longer disclosing the
impact of the change in accounting for Mileage Plus revenues. While the
company believes that its accounting for frequent flyer revenues is the most
economically representative method, much of the industry accounts for frequent
flyer revenue differently, generally resulting in lower balance sheet
liabilities and higher revenue recognition for current ticket sales compared
to United. As a result, United revenues will continue to be negatively
impacted when compared to peers; however, the year-over-year change in the
effect of the accounting treatment has significantly diminished as the impact
of the 2007 expiration change from 36 to 18 months has moved out of the
year-over-year comparison period.
Q9: United has adjusted 2008 interest expense. What was the driver behind
this adjustment?
A9: The FASB issued accounting guidance in May 2008 that is effective for
fiscal years beginning after December 15, 2008 (referred to as FSP APB 14-1).
This new guidance primarily relates to convertible debt that includes a cash
settlement option and requires retrospective application to prior period
financial statements to the extent the debt was outstanding in those periods.
The primary effect of FSP APB 14-1 is to require the company to record a debt
discount equal to the difference between the issuance date fair value of the
debt without the conversion option and the proceeds received upon debt
issuance. The debt discount amortization results in incremental non-cash
interest expense in years 2006 through 2011. This change increased first
quarter 2008 interest expense by $12 million, and increased first quarter 2009
interest expense by $13 million. For the full year, the adjustment increases
2008 interest expense by $48 million and 2009 interest expense by $55 million.
All incremental interest expense impacts resulting from FSP APB 14-1 are
non-cash changes, and as a result have no impact on our financial covenant
calculations.
Q10: Does the company expect to record income tax provisions or credits in
2009?
A10: Due to the application of accounting guidance issued by FASB for
fiscal years beginning after Dec. 15, 2008 (referred to as FAS 141R) which
changes the accounting treatment related to tax provisions in purchase
accounting, the company expects to offset, through net income, future tax
provisions or credits with changes to the valuation allowance. As a result of
this treatment, the company expects to record a net zero tax rate, even in
periods of profit, until such time as the valuation allowance is consumed or
reversed. There may, from time to time, be modest impacts to income tax as a
result of special or unusual charges, or as a result of items impacting Other
Comprehensive Income. As a result of the company's significant Net Operating
Loss balance, the company carries a $3.0 billion valuation allowance as of
March 31, 2009.
CONSOLIDATED NOTES (UNAUDITED)
------------------------------
(1) UAL Corporation ("UAL" or the "Company") is a holding company whose
principal subsidiary is United Air Lines, Inc. ("United").
(2) On January 1, 2009, the Company adopted FASB Staff Position APB 14-1:
Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-
1"). FSP APB 14-1 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 resulting
in additional non-cash interest expense. FSP APB 14-1 requires
retrospective application. The Company has two debt instruments with
a combined principal amount of approximately $875 million that are
impacted by FSP 14-1. The following financial statement line items for
the three months ended March 31, 2008 were affected by the adoption of
this new accounting standard:
Effect of
(In millions, except per share) As Reported As Adjusted Change
------------------------------- ------------- ------------- ---------
Interest expense $(135) $(147) $(12)
Nonoperating expense (101) (113) (12)
Loss before income taxes and
equity in earnings of affiliates (542) (554) (12)
Net loss (537) (549) (12)
Loss per share, basic and diluted (4.45) (4.55) (0.10)
In addition, the Company adopted FASB Staff Position No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities ("EITF 03-6-1") effective
January 1, 2009, which also requires retrospective application. EITF
03-6-1 clarifies that instruments granted in share-based payment
transactions that are considered to be 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 previously granted restricted shares 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
months ended March 31, 2009 or 2008, because of losses in these
periods.
(3) United has contractual relationships with various regional carriers to
provide regional jet and turboprop service branded as United Express.
Under these agreements, United pays the regional carriers
contractually agreed fees for crew expenses, maintenance expenses and
other costs of operating these flights. These costs include aircraft
rents of $107 million and $104 million for the three months ended
March 31, 2009 and 2008, respectively, which are included in regional
affiliate expense in our Statements of Consolidated Operations.
(4) UAL's results of operations include aircraft fuel expense for both
United mainline jet operations and regional affiliates. Aircraft fuel
expense incurred as a result of the Company's regional affiliates'
operations is reflected in Regional affiliates operating expense. In
accordance with UAL's agreement with its regional affiliates, these
costs are incurred by the Company. Fuel hedging gains or losses are
not allocated to Regional affiliates fuel expense.
Year-Over-Year Impact of Fuel Expense
United Mainline and Regional Affiliate Operations
-------------------------------------------------
Three Months Ended
March 31, %
2009 2008 Change
Total mainline fuel expense $799 $1,575 (49.3)
Exclude impact of non-cash, net
mark-to-market ("MTM") gains 191 30 NM
---- ---
Mainline fuel expense excluding
MTM gains 990 1,605 (38.3)
Add: Regional affiliates fuel
expense 164 278 (41.0)
--- ---
Consolidated fuel expense
excluding MTM gains 1,154 1,883 (38.7)
Exclude impact of fuel hedge
settlements (242) 12 -
---- --
Consolidated fuel expense
excluding hedge impacts (a) 912 1,895 (51.9)
Less: net adjustment to arrive at
cash fuel expense (b) (8) (9) (11.1)
-- --
Cash fuel expense (a) $904 $1,886 (52.1)
==== ======
Mainline fuel consumption
(gallons) 470 556 (15.5)
Mainline average jet fuel price
per gallon (in cents) 170.0 283.3 (40.0)
Mainline average jet fuel price
per gallon excluding impact of
non-cash MTM gains (in cents) 210.6 288.7 (27.1)
Regional affiliates fuel
consumption (gallons) 92 92 -
Regional affiliates average jet
fuel price per gallon (in cents) 178.3 302.2 (41.0)
(a) See Note 6 for further information related to fuel hedging and non-
GAAP measures.
(b) Net adjustment for cash paid for fuel hedge settlements during the
period and related collateral returned during the period. Collateral
amounts include only the collateral change associated with contract
settlements.
(5) The table below sets forth certain operating statistics by geographic
region and the Company's mainline, regional affiliates and
consolidated operations:
(% change from prior year)
Three Months Ended March 31, 2009
Main- Regional
Domestic Pacific Atlantic Latin line Affiliates Consolidated
Passenger
revenues (21.6) (30.1) (20.6) (33.0) (23.8) (7.8) (21.1)
ASM (12.8) (16.5) (8.3) (16.7) (13.1) 5.2 (11.3)
RPM (12.2) (21.8) (13.7) (21.1) (15.1) 4.5 (13.2)
PRASM (10.1) (16.3) (13.4) (19.6) (12.3) (12.4) (11.1)
Yield [a] (14.3) (4.6) (3.6) (9.0) (10.4) (11.8) (9.2)
Load
Factor
(points) 0.6 (5.0) (4.4) (4.2) (1.7) (0.5) (1.7)
[a] Yields for geographic regions exclude charter revenue, industry
reduced fares, passenger charges and related revenue passenger
miles.
CONSOLIDATED NOTES (UNAUDITED)
------------------------------
(6) The Company incurred special operating charges related to lease
terminations during the three months ended March 31, 2009. In
addition, the Company recorded unusual and/or infrequent items related
to severance, employee benefits and depreciation and amortization, as
noted below. Collectively, these charges are identified as "special
items and other charges" in the Regulation G reconciliations below.
The Company also adjusts certain of its financial statement items and
measures of financial performance to primarily present the impacts of
its fuel hedging on an "economic" basis. Items calculated on an
"economic" basis consist of gains or losses for derivative instruments
that settled in the current accounting period, but were recognized in
a prior period in GAAP results, and changes in market value for
derivatives that will be settled in a future period. These charges are
identified as "non-cash, net mark-to-market gains (losses)" in the
Regulation G reconciliations below. These special items and other
charges and non-cash, net mark-to-market adjustments are as follows:
Three Months
Ended
March 31,
Income Statement
(In millions) 2009 2008 Classification
------------- ---- ----
Lease termination $9 $-
Intangible impairment 110 -
--- --
Asset impairments
and special
Special operating items 119 - items
Salaries and
Severance (5) - related costs
Salaries and
Employee benefit charges (32) 6 related costs
Accelerated depreciation related to Depreciation
aircraft groundings 22 - and amortization
-- --
Total other charges (15) 6
--- --
Total special items and other charges $104 $6
==== ==
Operating non-cash, net mark-to-
market gains (191) (30) Aircraft fuel
---- ---
Total operating impact $(87) $(24)
==== ====
Non-operating non-cash, net mark-to- Miscellaneous,
market gains (72) - net
--- --
Pre-tax impairments and other charges (159) (24)
Income tax benefit on Income tax
impairments and other charges (38) - benefit
--- --
Impairments and other charges,
net of tax $(197) $(24)
===== ====
Total fuel hedge adjustment $(263) $(30)
===== ====
Pursuant to SEC Regulation G, the Company has included the following
reconciliation of reported non-GAAP financial measures to comparable
financial measures reported on a GAAP basis. The Company believes
that excluding fuel costs from certain measures is useful to investors
because it provides an additional measure of management's performance
excluding the effects of a significant cost item over which management
has limited influence. The Company also believes that adjusting for
special items, and other items unusual or infrequent in nature, is
useful to investors because they are non-recurring items not
indicative of the Company's on-going performance. The Company does not
apply cash flow hedge accounting. The Company believes that the net
fuel hedge adjustments provide management and investors with a better
perspective of its performance and comparison to its peers because the
adjustments reflect the economic fuel cost during the periods
presented and many of our peers apply SFAS 133 cash flow hedge
accounting.
The tables below set forth the reconciliation of GAAP and non-GAAP
financial measures for certain operating statistics that are used in
determining key indicators such as adjusted passenger revenue per
revenue passenger mile ("Yield"), operating revenue per available seat
mile ("RASM"), operating expense per available seat mile ("CASM"),
operating margin and net income (loss).
Three Months Ended
March 31, %
2009 2008 Change
---- ---- ------
[a] Yield (In millions)
--------------------
Mainline
Passenger - United Airlines $2,701 $3,545 (23.8)
Less: industry reduced fares and
passenger charges (9) (10) (10.0)
-- ---
Mainline adjusted passenger revenue $2,692 $3,535 (23.8)
====== ======
Mainline revenue passenger miles 22,872 26,927 (15.1)
Adjusted mainline yield (in cents) 11.77 13.13 (10.4)
Consolidated
Consolidated passenger revenue $3,360 $4,260 (21.1)
Less: industry reduced fares and
passenger charges (9) (10) (10.0)
-- ---
Consolidated adjusted passenger revenue $3,351 $4,250 (21.2)
====== ======
Consolidated revenue passenger miles 25,808 29,736 (13.2)
Adjusted consolidated yield (in cents) 12.98 14.29 (9.2)
[b] RASM (In millions)
-------------------
Mainline
Consolidated operating revenues $3,691 $4,711 (21.7)
Less: Passenger - Regional Affiliates (659) (715) (7.8)
---- ----
Mainline operating revenues $3,032 $3,996 (24.1)
====== ======
Mainline available seat miles 29,991 34,528 (13.1)
Mainline RASM (in cents) 10.11 11.57 (12.6)
[c] CASM (In millions)
------------------
Mainline
Consolidated operating expenses $3,973 $5,152 (22.9)
Less: Regional affiliates (671) (779) (13.9)
---- ----
Mainline operating expenses $3,302 $4,373 (24.5)
====== ======
Mainline available seat miles 29,991 34,528 (13.1)
Mainline CASM (in cents) 11.01 12.67 (13.1)
Mainline operating expenses $3,302 $4,373 (24.5)
Add (less): special items and other
charges and non-cash, net mark-to-market
gains 87 24 262.5
-- --
Adjusted mainline operating expense $3,389 $4,397 (22.9)
====== ======
Adjusted mainline CASM (in cents) 11.30 12.73 (11.2)
Adjusted mainline operating expense $3,389 $4,397 (22.9)
Less: mainline fuel expense (excluding
non-cash, net mark-to-market gains) (990) (1,605) (38.3)
---- ------
Adjusted mainline operating expense $2,399 $2,792 (14.1)
====== ======
Adjusted mainline CASM (in cents) 8.00 8.09 (1.1)
Adjusted mainline operating expense $2,399 $2,792 (14.1)
Add (less): profit sharing programs (i) (12) 1 -
--- --
Adjusted mainline operating expense $2,387 $2,793 (14.5)
====== ======
Adjusted mainline CASM (in cents) 7.96 8.09 (1.6)
CONSOLIDATED NOTES (UNAUDITED)
------------------------------
Three Months Ended
March 31, %
2009 2008 Change
---- ---- ------
Consolidated
Consolidated operating expenses $3,973 $5,152 (22.9)
Add (less): special items and
other charges and non-cash,
net mark-to-market gains 87 24 262.5
-- --
Adjusted consolidated
operating expenses $4,060 $5,176 (21.6)
====== ======
Consolidated available seat miles 34,073 38,409 (11.3)
Adjusted consolidated CASM (in cents) 11.92 13.48 (11.6)
Adjusted consolidated
operating expenses $4,060 $5,176 (21.6)
Less: consolidated fuel
expense (excluding non-cash,
net mark-to-market gains) (1,154) (1,883) (38.7)
------ ------
Adjusted consolidated
operating expenses $2,906 $3,293 (11.8)
====== ======
Adjusted consolidated CASM (in cents) 8.53 8.57 (0.5)
Adjusted consolidated
operating expenses $2,906 $3,293 (11.8)
Add (less): profit sharing programs (i) (12) 1 -
--- --
Adjusted consolidated
operating expenses $2,894 $3,294 (12.1)
====== ======
Adjusted consolidated CASM (in cents) 8.49 8.58 (1.0)
[d] Operating Margin (In millions)
------------------------------
Consolidated operating loss $(282) $(441) (36.1)
Less: special items and other charges
and net operating fuel hedge
adjustments (87) (24) 262.5
--- ---
Adjusted operating loss $(369) $(465) (20.6)
===== =====
Consolidated operating revenues $3,691 $4,711 (21.7)
Operating loss (percent) (7.6) (9.4) 1.8 pt.
Adjusted operating loss (percent) (10.0) (9.9) (0.1) pt.
[e] Pre-tax loss (In millions)
--------------------------
Loss before income taxes and
equity in earnings of affiliates $(412) $(554) (25.6)
Less: special items and
other charges and net
operating fuel hedge adjustments (87) (24) 262.5
Less: non-operating fuel hedge
adjustments (72) - -
--- --
Adjusted pre-tax loss $(571) $(578) (1.2)
===== =====
Pre-tax loss (percent) (11.2) (11.8) 0.6 pt.
Adjusted pre-tax loss (percent) (15.5) (12.3) (3.2) pt.
[f] Net loss (In millions)
----------------------
Net loss $(382) $(549) (30.4)
Less: special items and other charges
and net operating fuel hedge
adjustments (87) (24) 262.5
Less: non-operating fuel hedge
adjustments (72) - -
Less: income tax benefit (ii) (38) - -
--- --
Adjusted net loss $(579) $(573) 1.0
===== =====
[g] Loss per share (Basic and diluted)
----------------------------------
Loss per share - GAAP $(2.64) $(4.55) (42.0)
Add: special operating items
and other charges (iii) 0.46 0.06 NM
Less: net fuel hedge adjustments (1.82) (0.25) NM
----- -----
Loss per share excluding
special operating items and
other charges and net fuel
hedge adjustments $(4.00) $(4.74) (15.6)
====== ======
[h] Operating cash flow (In millions)
---------------------------------
Operating cash flow $426 $(80) -
Less: capital expenditures (79) (119) (33.6)
--- ----
Free cash flow $347 $(199) -
==== =====
(i) Does not include expense related to share-based compensation.
(ii) The Company's tax benefit in the three months ended March 31, 2009
primarily related to impairments and special items. These tax
benefits included $38 million in the three months ended March 31,
2009.
(iii) Includes related tax benefits.
UAL CORPORATION AND SUBSIDIARY COMPANIES
----------------------------------------
(Mainline and Regional Affiliates (a))
Three Months Ended
March 31, %
2009 2008 Change
---- ---- ------
Revenue passengers (In thousands)
Mainline 13,146 15,250 (13.8)
Regional affiliates 5,522 5,731 (3.6)
----- -----
Consolidated 18,668 20,981 (11.0)
Revenue passenger miles - RPM (In
millions)
Mainline 22,872 26,927 (15.1)
Regional affiliates 2,936 2,809 4.5
----- -----
Consolidated 25,808 29,736 (13.2)
Available seat miles - ASM (In
millions)
Mainline 29,991 34,528 (13.1)
Regional affiliates 4,082 3,881 5.2
----- -----
Consolidated 34,073 38,409 (11.3)
Passenger load factor (percent)
Mainline 76.3 78.0 (1.7) pt.
Regional affiliates 71.9 72.4 (0.5) pt.
Consolidated 75.7 77.4 (1.7) pt.
Consolidated operating breakeven
passenger load factor (percent) 82.1 85.5 (3.4) pt.
Passenger revenue per passenger
mile - Yield (cents) (See Note 6[a])
Mainline adjusted 11.77 13.13 (10.4)
Regional affiliates 22.45 25.45 (11.8)
Consolidated adjusted 12.98 14.29 (9.2)
Passenger revenue per available
seat mile -PRASM (cents)
Mainline 9.01 10.27 (12.3)
Regional affiliates 16.14 18.42 (12.4)
Consolidated 9.86 11.09 (11.1)
Operating revenue per available
seat mile - RASM (cents) (See
Note 6[b])
Mainline 10.11 11.57 (12.6)
Regional affiliates 16.14 18.42 (12.4)
Consolidated 10.83 12.27 (11.7)
Operating expense per available seat
mile - CASM (cents) (See Note 6[c])
Mainline 11.01 12.67 (13.1)
Mainline excluding special items,
other charges and non-cash, net mark-
to-market gains 11.30 12.73 (11.2)
Mainline excluding special items,
other charges, non-cash, net mark-to-
market gains and fuel 8.00 8.09 (1.1)
Mainline excluding special items,
other charges, non-cash, net mark-to-
market gains, fuel and profit sharing
programs 7.96 8.09 (1.6)
Regional affiliates 16.44 20.07 (18.1)
Consolidated 11.66 13.41 (13.0)
Consolidated excluding special
items, other charges and non-
cash, net mark-to-market gains 11.92 13.48 (11.6)
Consolidated excluding special
items, other charges, non-cash,
net mark-to-market gains and fuel 8.53 8.57 (0.5)
Consolidated excluding special
items, other charges, non-
cash, net mark-to-market
gains, fuel and profit sharing
programs 8.49 8.58 (1.0)
Mainline unit earnings (loss) (in
cents) (b) (0.90) (1.10) (18.2)
Mainline unit earnings excluding
special items, other charges, non-
cash, net mark-to-market gains,
fuel and profit sharing programs
(in cents) (b) 2.15 3.48 (38.2)
Number of aircraft in operating
fleet at end of period
Mainline 396 460 (13.9)
Regional affiliates 286 275 4.0
--- ---
Consolidated 682 735 (7.2)
Other Statistics
Mainline average price per gallon of
jet fuel (cents) 170.0 283.3 (40.0)
Mainline average price per gallon of
jet fuel excluding non-cash, net
mark-to-market (gains) losses (cents) 210.6 288.7 (27.1)
Mainline average full-time equivalent
employees (thousands) 44.8 52.5 (14.7)
Mainline ASMs per equivalent employee -
productivity (thousands) 669 658 1.7
Average stage length (in miles)
Mainline 1,409 1,414 (0.4)
Regional affiliates 471 453 4.0
Mainline fleet utilization (in
hours and minutes) 10:24 10:43 (3.0)
(a) Mainline includes United Air Lines, Inc. scheduled and chartered jet
operations. Regional affiliates include operations from regional
carriers with whom the Company has entered into capacity purchase
agreements to provide jet and turboprop operations branded as United
Express.
(b) Unit earnings are calculated as RASM minus CASM.
SOURCE UAL Corporation
CONTACT: Worldwide Press Office: +1-312-997-8640
