FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 1-6033
UAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-2675207
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P.O. Box 66919, Chicago, Illinois 60666
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1998
----- --------------
Common Stock ($0.01 par value) 58,364,081
UAL Corporation and Subsidiary Companies Report on Form 10-Q
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For the Quarter Ended June 30, 1998
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Index
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PART I. FINANCIAL INFORMATION Page No.
- ------ --------------------- -------
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of June 30, 1998
(Unaudited) and December 31, 1997
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
six months ended June 30, 1998 and 1997
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the six
months ended June 30, 1998 and 1997
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 17
About Market Risk
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of 17
Security Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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Exhibit Index 21
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30,
1998 December 31,
Assets (Unaudited) 1997
- ------ ----------- ------------
Current assets:
Cash and cash equivalents $ 588 $ 295
Short-term investments 439 550
Receivables, net 1,331 1,051
Inventories, net 425 355
Deferred income taxes 239 244
Prepaid expenses and other 326 453
------ ------
3,348 2,948
------ ------
Operating property and equipment:
Owned 15,270 14,196
Accumulated depreciation and
amortization (5,160) (5,116)
------ ------
10,110 9,080
------ ------
Capital leases 2,620 2,319
Accumulated amortization (621) (625)
------ ------
1,999 1,694
------ ------
12,109 10,774
------ ------
Other assets:
Investments in affiliates 282 223
Intangibles, net 695 703
Aircraft lease deposits 449 318
Prepaid rent 655 60
Other 731 777
------ ------
2,812 2,081
------ ------
$ 18,269 $ 15,803
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30,
1998 December 31,
Liabilities and Stockholders' Equity (Unaudited) 1997
- ------------------------------------ ----------- ------------
Current liabilities:
Short-term borrowings $ 10 $ -
Current portions of long-term
debt and capital lease obligations 475 406
Advance ticket sales 1,691 1,267
Accounts payable 1,119 1,030
Other 2,562 2,545
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5,857 5,248
------ ------
Long-term debt 2,736 2,092
------ ------
Long-term obligations under
capital leases 1,899 1,679
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Other liabilities and deferred credits:
Postretirement benefit liability 1,449 1,361
Deferred gains 1,177 1,210
Other 1,378 1,261
------ ------
4,004 3,832
------ ------
Company-obligated mandatorily
redeemable preferred securities of
a subsidiary trust 101 101
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Preferred stock committed to
Supplemental ESOP 681 514
------ ------
Stockholders' equity:
Preferred stock - -
Common stock at par 1 1
Additional capital invested 3,224 2,876
Retained earnings 601 309
Unearned ESOP preferred stock (155) (177)
Other (680) (672)
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2,991 2,337
------ ------
Commitments and contingent
liabilities (See note) ------ ------
$ 18,269 $ 15,803
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Three Months
Ended June 30
1998 1997
---- ----
Operating revenues:
Passenger $ 3,948 $ 3,854
Cargo 224 215
Other 270 313
------ ------
4,442 4,382
------ ------
Operating expenses:
Salaries and related costs 1,300 1,228
ESOP compensation expense 232 226
Aircraft fuel 435 495
Commissions 328 386
Purchased services 376 310
Aircraft rent 219 235
Landing fees and other rent 228 224
Depreciation and amortization 192 174
Aircraft maintenance 141 157
Other 521 535
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3,972 3,970
------ ------
Earnings from operations 470 412
------ ------
Other income (expense):
Interest expense (93) (71)
Interest capitalized 30 26
Interest income 14 11
Equity in earnings of affiliates 21 22
Miscellaneous, net (13) (12)
------ ------
(41) (24)
------ ------
Earnings before income taxes and
distributions on preferred securities 429 388
Provision for income taxes 146 145
------ ------
Earnings before distributions on
preferred securities 283 243
Distributions on preferred
securities, net of tax (1) (1)
------ ------
Net earnings $ 282 $ 242
====== ======
Per share, basic: $ 4.43 $ 3.77
====== ======
Per share, diluted: $ 2.44 $ 2.31
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Six Months
Ended June 30
1998 1997
---- ----
Operating revenues:
Passenger $ 7,514 $ 7,481
Cargo 439 410
Other 544 612
------ ------
8,497 8,503
------ ------
Operating expenses:
Salaries and related costs 2,609 2,468
ESOP compensation expense 490 410
Aircraft fuel 876 1,049
Commissions 645 750
Purchased services 713 617
Aircraft rent 452 472
Landing fees and other rent 431 442
Depreciation and amortization 383 350
Aircraft maintenance 297 295
Other 1,008 1,044
------ ------
7,904 7,897
------ ------
Earnings from operations 593 606
------ ------
Other income (expense):
Interest expense (173) (140)
Interest capitalized 56 50
Interest income 30 23
Equity in earnings of affiliates 43 48
Miscellaneous, net (24) (28)
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(68) (47)
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Earnings before income taxes and
distributions on preferred securities 525 559
Provision for income taxes 179 209
------ ------
Earnings before distributions on
preferred securities 346 350
Distributions on preferred securities (3) (3)
------ ------
Net earnings $ 343 $ 347
====== ======
Per share, basic: $ 5.05 $ 5.23
====== ======
Per share, diluted: $ 2.80 $ 3.26
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
Six Months
Ended June 30
1998 1997
---- ----
Cash and cash equivalents at
beginning of period $ 295 $ 229
------ ------
Cash flows from operating activities 1,787 1,479
------ ------
Cash flows from investing activities:
Additions to property and equipment (1,580) (1,491)
Proceeds on disposition of
property and equipment 351 27
Decrease (increase) in short-term
investments 111 (54)
Other, net (40) (5)
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(1,158) (1,523)
------ ------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt 823 -
Repayment of long-term debt (103) (38)
Principal payments under capital
lease obligations (209) (80)
Purchase of equipment certificates
under Company operating leases (693) -
Increase in short-term borrowings 10 60
Aircraft lease deposits (149) (56)
Other, net (15) 6
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(336) (108)
------ ------
Increase (decrease) in cash and
cash equivalents 293 (152)
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Cash and cash equivalents
at end of period $ 588 $ 77
====== ======
Cash paid during the period for:
Interest (net of amounts
capitalized) $ 111 $ 81
Income taxes $ 67 $ 117
Non-cash transactions:
Capital lease obligations incurred $ 465 $ 239
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
------------------------------------------------------
The Company
- -----------
UAL Corporation ("UAL") is a holding company whose
principal subsidiary is United Air Lines, Inc. ("United").
Interim Financial Statements
- ----------------------------
The consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to or as
permitted by such rules and regulations, although UAL believes
that the disclosures are adequate to make the information
presented not misleading. In management's opinion, all
adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results of operations
for the three and six month periods have been made. These
financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included
in UAL's Annual Report on Form 10-K for the year 1997.
Employee Stock Ownership Plans
- ------------------------------
Pursuant to amended labor agreements which provide for
wage and benefit reductions and work-rule changes which
commenced July 1994, UAL has agreed to issue convertible
preferred stock to employees. Note 2 of the Notes to
Consolidated Financial Statements in the 1997 Annual Report on
Form 10-K contains additional discussion of the agreements,
stock to be issued to employees and the related accounting
treatment. Shares earned in 1997 were allocated in March 1998
as follows: 97,406 shares of Class 2 ESOP Preferred Stock were
contributed to the Non-Leveraged ESOP and an additional 889,031
shares were allocated in "book entry" form under the
Supplemental Plan. Additionally, 2,087,531 shares of Class 1
ESOP Preferred Stock were allocated under the Leveraged ESOP.
Finally, an additional 1,536,986 shares of Class 1 and Class 2
ESOP Preferred Stock have been committed to be released by the
Company since January 1, 1998.
Income Taxes
- ------------
The provisions for income taxes are based on the
estimated annual effective tax rate, which differs from the
federal statutory rate of 35% principally due to dividends on
ESOP Preferred Stock and other tax credits, partially offset by
state income taxes and certain nondeductible expenses.
Deferred tax assets are recognized based upon UAL's history of
operating earnings and expectations for future taxable income.
Per Share Amounts
- -----------------
Basic earnings per share were computed by dividing net
income available to common stockholders by the weighted average
number of shares of common stock outstanding during the year. In
addition, diluted earnings per share amounts include potential
common shares including ESOP shares committed to be released.
Earnings Attributable to Common Three Months Six Months
Stockholders (Millions) Ended Ended
- ------------------------------- June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Net Income $ 282 $ 242 $ 343 $ 347
Preferred stock dividends and other (25) (19) (52) (38)
---- ---- ---- ----
Earnings attributable to common
stockholders (Basic and Diluted) $ 257 $ 223 $ 291 $ 309
==== ==== ==== ====
Shares (Millions)
- -----------------
Weighted average shares
outstanding (Basic) 57.9 59.3 57.6 59.0
Convertible ESOP preferred stock 45.7 34.4 44.4 33.0
Other 1.7 2.9 1.8 2.8
----- ---- ----- ----
Weighted average number of
shares (Diluted) 105.3 96.6 103.8 94.8
===== ==== ===== ====
Earnings Per Share
- ------------------
Basic $4.43 $3.77 $5.05 $5.23
Diluted $2.44 $2.31 $2.80 $3.26
Long-Term Debt and Lease Obligations
- ------------------------------------
In March 1998, the Company, through a special-purpose
financing entity which is consolidated, issued $604 million of
commercial paper to refinance certain lease commitments.
Although the issued commercial paper has short maturities, the
Company expects to continually rollover this obligation
throughout the 5-year life of its supporting liquidity facility
or bank standby facility. As such, the commercial paper is
classified as a long-term obligation in the Company's statement
of financial position.
The proceeds from the commercial paper, as well as $65
million from internally generated funds, were used to refinance
$669 million face-value of equipment certificates supporting
leveraged lease transactions between United and various lessors.
During the second quarter, the Company purchased an additional
$24 million face-value of equipment certificates using internally
generated funds. While the terms of the original leases between
United and these lessors remain unchanged, these actions
effectively satisfy future minimum payments under these leases of
$1,038 million, which are scheduled for payment as follows:
(In millions)
After
1998 1999 2000 2001 2002 2002 Total
---- ---- ---- ---- ---- ----- -----
$ 44 $ 63 $ 64 $ 64 $ 59 $744 $1,038
Additionally, in connection with the acquisition of one
B747, four A319 aircraft, and several aircraft simulators, the
Company issued $219 million of secured notes during the period.
Other Comprehensive Income
- --------------------------
On January 1,1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes standards for displaying
comprehensive income and its components in a full set of general
purpose financial statements. The reconciliation of net income
to comprehensive net income is as follows:
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Net earnings, as reported $ 282 $ 242 $ 343 $ 347
Other comprehensive income (1) 1 (1) (2)
---- ---- ---- ----
Total comprehensive income $ 281 $ 243 $ 342 $ 345
==== ==== ==== ====
Accumulated other comprehensive income included in other
stockholders' equity was $(3) million and $(2) million at June
30, 1998 and December 31, 1997, respectively.
Contingencies and Commitments
- -----------------------------
UAL has certain contingencies resulting from litigation
and claims (including environmental issues) incident to the
ordinary course of business. Management believes, after
considering a number of factors, including (but not limited to)
the views of legal counsel, the nature of contingencies to which
UAL is subject and its prior experience, that the ultimate
disposition of these contingencies is not expected to materially
affect UAL's consolidated financial position or results of
operations.
At June 30, 1998, commitments for the purchase of property
and equipment, principally aircraft, approximated $8.1 billion,
after deducting advance payments. An estimated $1.5 billion
will be spent during the remainder of 1998, $2.2 billion in
1999, $2.0 billion in 2000 and $2.4 billion in 2001 and
thereafter. The major commitments are for the purchase of B777,
B747, B767, B757, A320 and A319 aircraft, which are scheduled to
be delivered through 2002. The above amounts include a recent
order with Airbus Industrie for an additional 10 A319 and 12
A320 aircraft to be delivered through 2001. These commitments,
combined with aircraft retirements, are part of the Company's
plan to eventually increase the fleet to an expected 645
aircraft at the end of 2001.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
UAL's total of cash and cash equivalents and short-term
investments was $1.027 billion at June 30, 1998, compared to
$845 million at December 31, 1997. Cash flows from operating
activities for the six-month period amounted to $1.8 billion.
Financing activities included principal payments under debt and
capital lease obligations of $103 million and $209 million,
respectively and deposits of an equivalent $149 million in
Japanese yen, French francs and German marks with certain banks
in connection with the financing of capital lease transactions.
Additionally, the Company issued $823 million in debt during the
period and used part of the proceeds to purchase $693 million in
equipment certificates under Company operating leases. See
"Long-Term Debt and Lease Obligations" in the Notes to
Consolidated Financial Statements for further details.
Property additions, including aircraft and aircraft spare
parts, amounted to $1.6 billion, while property dispositions
resulted in proceeds of $351 million. In the first six months
of 1998, United took delivery of five A320, six A319, four B777,
two B757, one B767 and one B747 aircraft. Seventeen of the
aircraft were purchased and two were acquired under capital
leases. Eight of the aircraft purchased during the period were
later sold and then leased back. In addition, United acquired
two B727 and two DC10-10 aircraft off lease during the first six
months and retired nineteen B737 and three B747 aircraft.
At June 30, 1998, commitments for the purchase of property
and equipment, principally aircraft, approximated $8.1 billion,
after deducting advance payments. Of this amount, an estimated
$1.5 billion is expected to be spent during the remainder of
1998. For further details, see "Contingencies and Commitments"
in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Summary of Results
------------------
UAL's earnings from operations were $593 million in the
first six months of 1998, compared to operating earnings of $606
million in the first six months of 1997. UAL's net earnings
were $343 million ($5.05 per share, basic; $2.80 per share,
diluted), compared to net earnings of $347 million during the
same period of 1997 ($5.23 per share, basic; $3.26 per share,
diluted).
In the second quarter of 1998, UAL's earnings from
operations were $470 million compared to operating earnings of
$412 million in the second quarter of 1997. UAL had net
earnings in the 1998 second quarter of $282 million ($4.43 per
share, basic; $2.44 per share, diluted), compared to net
earnings of $242 million in the same period of 1997 ($3.77 per
share, basic; $2.31 per share, diluted).
Management believes that a more complete understanding of
UAL's results can be gained by viewing them on a pro forma,
"Fully Distributed" basis. This approach considers all ESOP
shares which will ultimately be distributed to employees
throughout the ESOP (rather than just the shares committed to be
released) to be immediately outstanding and thus Fully
Distributed. Consistent with this method, the ESOP compensation
expense is excluded from Fully Distributed net earnings and ESOP
convertible preferred stock dividends are not deducted from
earnings attributable to common stockholders. No adjustments
are made to Fully Distributed earnings to take into account
future salary increases. A comparison of results reported on a
Fully Distributed basis to results reported under generally
accepted accounting principles (GAAP) is as follows (in
millions, except per share):
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
GAAP Fully GAAP Fully GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed (diluted) Distributed (diluted) Distributed
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net Income $ 282 $ 418 $ 242 $ 376 $ 343 $ 637 $ 347 $ 591
Per share $2.44 $3.24 $2.31 $2.82 $2.80 $4.91 $3.26 $4.44
Specific factors affecting UAL's consolidated operations
for the second quarter and first six months of 1998 are
described below.
Second Quarter 1998 Compared with Second Quarter 1997
-----------------------------------------------------
Operating revenues increased $60 million (1%) and United's
revenue per available seat mile (unit revenue) decreased 1% to
10.29 cents. Passenger revenues increased $94 million (2%)
despite a slight decrease in yield from 12.59 to 12.58 cents due
to a 3% increase in United's revenue passenger miles. Available
seat miles across the system were up 2% over the second quarter
of 1997, resulting in a passenger load factor increase of 0.1
point to 72.6%. The following analysis by market is based on
information reported to the U.S. Department of Transportation:
Increase (Decrease)
-------------------
Capacity Revenue Revenue per Revenue
(ASMs) Passenger Miles Passenger Mile (Yield)
-------- --------------- ----------------------
Domestic 4% 5% 4%
Pacific (11%) (11%) (13%)
Atlantic 17% 14% (5%)
Latin America 18% 10% (9%)
Pacific yields continue to be negatively impacted by the
weakness of the Japanese yen to the dollar, and the effects of
the Asian economic turmoil on demand for travel. Yields in
other international markets have been impacted by a negative
pricing environment, as well as the strength of the U.S. dollar.
Cargo revenues increased $9 million (4%) on increased
freight ton miles of 5%. A 1% higher freight yield was offset
by a 1% lower mail yield, resulting in no change to cargo yield
for the period. Other operating revenues decreased $43 million
(14%) due primarily to the sale of the Apollo Travel Services
Partnership ("ATS") in July 1997, partially offset by increases
in frequent flyer program partner-related revenues and contract
sales to third parties.
Operating expenses increased $2 million (0.1%) and
United's cost per available seat mile decreased 2%, from 9.46
cents to 9.25 cents, including ESOP compensation expense.
Without the ESOP compensation expense, United's cost per
available seat mile would have been 8.71 cents, a decrease of 2%
from the 1997 second quarter. ESOP compensation expense
increased $6 million (3%), reflecting a slight increase in the
estimated average fair value of ESOP stock committed to be
released to employees as a result of UAL's higher common stock
price. Purchased services increased $66 million (21%) due to
increases in computer reservations fees, as a result of the sale
of ATS, credit card discounts and communications expense.
Depreciation and amortization increased $18 million (10%) due to
an increase in the number of owned aircraft and aircraft under
capital lease. Salaries and related costs increased $72 million
(6%) due to ESOP mid-term wage adjustments which took place in
July 1997 and to increased staffing in certain customer-contact
positions. Commissions decreased $58 million (15%) due to a
change in the commission structure implemented in the third
quarter of 1997 as well as a slight decrease in commissionable
revenues. Aircraft fuel decreased $60 million (12%) due to a
14% decrease in the cost of fuel from 67.4 cents to 58.0 cents a
gallon. Aircraft maintenance decreased $16 million (10%) due to
a decrease in unscheduled engine overhauls. Aircraft rent
decreased $16 million (7%) due to a decrease in the number of
aircraft under operating lease. Other expenses decreased $14
million (3%) as a result of the sale of ATS.
Other expense amounted to $41 million in the second
quarter of 1998 compared to $24 million in the second quarter of
1997. Interest expense increased $22 million (31%) due to the
issuance of long-term debt in 1997 and 1998. Interest income
increased $3 million (27%) due to higher average interest rates,
as well as higher investment balances.
Six Months 1998 Compared with Six Months 1997
- ---------------------------------------------
Operating revenues decreased $6 million (0.1%) and
United's revenue per available seat mile (unit revenue)
decreased 2% to 10.07 cents. Passenger revenues increased $33
million (0.4%) despite a slight decrease in yield from 12.69 to
12.67 cents due to a 1% increase in United's revenue passenger
miles. Available seat miles across the system were up 2%;
however passenger load factor decreased 1.3 points to 69.9%.
The following analysis by market is based on information
reported to the U.S. Department of Transportation:
Increase (Decrease)
-------------------
Capacity Revenue Revenue Per Revenue
(ASMs) Passenger Miles Passenger Mile (Yield)
-------- --------------- ----------------------
Domestic 3% 2% 3%
Pacific (8%) (12%) (9%)
Atlantic 17% 14% (4%)
Latin America 18% 9% (7%)
Pacific yields continue to be negatively impacted by the
weakness of the Japanese yen to the dollar, and the effects of
the Asian economic turmoil on demand for travel. Yields in
other international markets have also been impacted by a
negative pricing environment, as well as the strength of the
U.S. dollar.
Cargo revenues increased $29 million (7%) on increased
freight ton miles of 11%. A 1% lower freight yield was only
partially offset by a slightly higher mail yield, resulting in a
1% decrease in cargo yield for the period. Other operating
revenues decreased $68 million (11%) due primarily to the sale
of the Apollo Travel Services Partnership ("ATS") in July 1997,
partially offset by increases in frequent flyer program partner-
related revenues and contract sales to third parties.
Operating expenses increased $7 million (0.1%) and
United's cost per available seat mile decreased 2%, from 9.59
cents to 9.38 cents, including ESOP compensation expense.
Without the ESOP compensation expense, United's cost per
available seat mile would have been 8.80 cents, a decrease of 3%
from the 1997 six-month period. ESOP compensation expense
increased $80 million (20%), reflecting the increase in the
estimated average fair value of ESOP stock committed to be
released to employees as a result of UAL's higher common stock
price. Purchased services increased $96 million (16%) due to
increases in computer reservations fees, as a result of the sale
of ATS, credit card discounts and communications expense.
Depreciation and amortization increased $33 million (9%) due to
an increase in the number of owned aircraft and aircraft under
capital lease. Salaries and related costs increased $141
million (6%) due to ESOP mid-term wage adjustments which took
place in July 1997 and to increased staffing in certain customer-
contact positions. Commissions decreased $105 million (14%) due
to a change in the commission structure implemented in the third
quarter of 1997 as well as a slight decrease in commissionable
revenues. Aircraft fuel decreased $173 million (17%) due to an
18% decrease in the cost of fuel from 72.8 cents to 59.8 cents a
gallon. Aircraft rent decreased $20 million (4%) due to a
decrease in the number of aircraft under operating lease. Other
expenses decreased $36 million (3%) as a result of the sale of
ATS.
Other expense amounted to $68 million in the first six
months of 1998 compared to $47 million in the first six months
of 1997. Interest expense increased $33 million (24%) due to
the issuance of long-term debt in 1997 and 1998. Interest
income increased $7 million (30%) due to higher average interest
rates as well as higher investment balances.
LABOR AGREEMENTS & WAGE ADJUSTMENTS
- -----------------------------------
On April 2, 1998, the International Association of
Machinists and Aerospace Workers ("IAM") filed an application
with the National Mediation Board ("NMB") seeking recognition as
the collective-bargaining representative for United's
approximately 19,000 public contact employees (primarily customer
service and reservations sales and service representatives). On
July 17, 1998, the NMB announced that the IAM had received
sufficient votes to represent United's public contact employees.
As a result, the IAM becomes the bargaining representative for
these employees and will begin negotiations regarding a contract
for the affected employees, a process which is expected to last
for several months.
Also in July, United announced its intentions to improve
compensation and benefits for the Company's nearly 2,000
administrative employees hired on or after February 1, 1994
("post-ESOP employees"). Currently the Company's administrative
employees are being paid under a two-tier wage structure which
went into effect at the time of the 1994 recapitalization.
Effective April 13, 2000, the two-tier wage structure will be
eliminated and post-ESOP employees will be paid on the same basis
as those employees hired prior to February 1, 1994. In addition,
on January 1, 1999, the benefits for post-ESOP employees will
match those of employees hired prior to February 1, 1994,
including company-paid medical, dental and pension. The Company
expects the increase in Salaries and related costs resulting from
this change to be immaterial.
DEPARTMENT OF TRANSPORTATION POLICY STATEMENT
- ---------------------------------------------
On April 10, 1998, the Department of Transportation ("DOT")
issued a proposed Statement of the Department of Transportation's
Enforcement Policy Regarding Unfair Exclusionary Conduct in the
Air Transportation Industry. The proposed policy sets forth
tentative findings and guidelines for use by the DOT in
evaluating whether major carriers' competitive responses to new
entry warrant enforcement action. On July 24, 1998, United filed
comments on the proposed policy, opposing the policy as being
anti-competitive, anti-consumer and outside of the DOT's
administrative authority. Rebuttals to these comments are due
September 8, 1998.
In a related matter, Congress is considering a proposal that
calls for significant additional studies concerning the various
factors which may impact competition in the airline industry. If
passed, this legislation would suspend implementation of the
above stated DOT policy until the required studies are complete.
UNITED-DELTA ALLIANCE
- ---------------------
On April 30, 1998, United announced a tentative, seven-year
bilateral alliance with Delta Air Lines, Inc. ("Delta"). The
alliance would allow code-sharing between the carriers, if
approved by both carriers' pilot unions, as well as reciprocal
participation in frequent flyer programs.
United and Delta initially expect to implement code-sharing
on U.S. domestic flights and would eventually expand to include
international flights in Latin America and the Pacific, pending
agreement of both companies' foreign alliance partners and the
appropriate governments. Europe is excluded from the tentative
agreement because of the uncertainty and complexity of the
European regulatory environment.
Effective September 1, 1998, United and Delta will
participate in each other's frequent flyer programs. Frequent
flyer members can earn miles on United and Delta flights within
the United States, Puerto Rico and the U.S. Virgin Islands and
choose to credit the miles to their frequent flyer account with
either carrier. In addition, members will ultimately be able to
redeem miles on either carrier's domestic route network.
However, a start date for this benefit has yet to be determined.
YEAR 2000 COMPLIANCE
- --------------------
UAL's 1997 Annual Report on Form 10-K outlined the
Company's efforts to identify and fix critical date-sensitive
systems. Remediation and testing of all internally used
software is currently underway. The Company still expects to
complete remediation efforts by December 31, 1998 and system
integration testing by April 30, 1999. UAL also continues to
remain on schedule with its efforts to identify and fix Year
2000 issues related to other operational systems and
relationships with key business partners. The Company has
completed the inventory of all date-sensitive systems and
equipment, and the technical assessment of impacts and
development of remediation approach are underway. The Company
still expects to complete the assessment and development stages
of its plan by the end of September 1998, at which time it will
make an estimate of the overall costs to achieve Year 2000
compliance. However, based on its efforts to date, the Company
has identified $50 million in costs, $15 million of which has
already been spent, $20 million which is to be spent over the
remainder of 1998 and $15 million which is to be spent in 1999,
relating to Year 2000 compliance efforts. Of this amount, $15
million is expected to be capitalized and $35 million will be
recognized as expense. All amounts expected to be recognized as
expense in 1998 have been taken into consideration in the
earnings guidance discussed in "Outlook for 1998". Because the
Company has not yet completed its assessment, it is still
possible that the Company's final estimate of costs to achieve
Year 2000 compliance could differ significantly from the amounts
discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), which establishes accounting and reporting
standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the
income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company has not yet quantified the impacts
of adopting SFAS No. 133 on the financial statements. However,
it could increase volatility in earnings and other comprehensive
income.
OUTLOOK FOR 1998
- ----------------
In 1998, available seat miles are expected to increase
approximately 2.7%, with total system revenue per available seat
mile being a little less than 1% below 1997's level. Costs per
available seat mile excluding ESOP charges are expected to be
just under 1% better than the prior year. This unit cost
forecast assumes the average cost of jet fuel per gallon is lower
in 1998 than in 1997. Industry capacity increases in
international markets and the economic situation in Asia are
forecast to adversely affect international revenue performance.
For the third quarter, United expects available seat miles
to increase between 2.5% and 3% versus the same period last year,
and expects total system revenue per available seat mile to
increase by about 0.5% compared to the same period of 1997.
Costs per available seat mile excluding ESOP charges are expected
to be approximately 0.5% higher than the third quarter of last
year.
Based on the favorable domestic environment, continued
industry capacity increases in the international arenas, economic
weakness in Asia, fuel prices assumed to be lower than the prior
year and first half results, the Company anticipates its "fully
distributed" earnings per share in 1998 will slightly exceed
those for 1997 (see "Results of Operations, Summary of Results"
for further explanation of this pro forma methodology).
The information included in the previous paragraphs and in
the paragraph "Year 2000 Compliance" is forward-looking and
involves risks and uncertainties that could result in actual
results differing materially from expected results. It is not
reasonably possible to itemize all of the many factors and
specific events that could affect the outlook of an airline
operating in the global economy. Some factors that could
significantly impact expected capacity, international revenues,
unit revenues, unit costs, fuel prices and fully distributed
earnings per share include: industry capacity decisions, the
airline pricing environment, fuel prices, the terms and timing of
a collective bargaining agreement for passenger service
employees, the success of the Company's cost-control efforts,
actions of the U.S., foreign and local governments, the Asian
economic environment and travel patterns, foreign currency
exchange rate fluctuations, the economic environment of the
airline industry and the general economic environment. Some
factors that could significantly impact the Company's expected
Year 2000 compliance and the estimated cost thereof include: the
results of the technical assessment of date-sensitive systems and
equipment and the ability of key business partners, including the
Federal Aviation Administration, to achieve Year 2000 compliance.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
- ---------------------------------------------------------------
For information regarding the Company's exposure to certain
market risks, see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk in UAL's Annual Report on Form 10-K
for the year 1997. Significant changes which have occurred since
year-end are as follows:
(In millions, except Notional Average Estimated
average contract rates) Amount Contract Rate Fair Value
- ----------------------- -------- ------------- -----------
Purchased call contracts - Crude oil $ 511 $19.03/bbl $ 7
- Heating oil $ 37 $ 0.53/gal $ -
Sold put contracts - Crude oil $ 513 $18.26/bbl $ (83)
- Heating oil $ 36 $ 0.51/gal $ (8)
PART II. OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ---------------------------------------------------
At the annual meeting of the stockholders of UAL Corporation
on May 7, 1998, the following matters were voted upon:
Description Votes
----------- -----
1. Election of Board of Directors
Public Directors:
John A. Edwardson 50,752,011 For
891,873 Withheld
Gerald Greenwald 50,703,913 For
939,971 Withheld
John F. McGillicuddy 48,008,209 For
3,635,675 Withheld
James J. O'Connor 50,773,800 For
870,084 Withheld
Paul E. Tierney, Jr. 50,695,044 For
948,840 Withheld
Independent Directors:
John W. Creighton, Jr. 4 For
0 Withheld
Duane D. Fitzgerald 4 For
0 Withheld
Richard D. McCormick 4 For
0 Withheld
John K. Van de Kamp 4 For
0 Withheld
ALPA Director:
Michael H. Glawe 1 For
0 Withheld
IAM Director:
John F. Peterpaul 1 For
0 Withheld
Salaried/Management Employee Director:
Deval L. Patrick 3 For
0 Withheld
2. Ratification of the Appointment 115,859,797 For
of Independent Public Accountants 3,568,234 Against
Accountants 2,609,006 Abstain
0 Broker Non-Votes
Item 5. Other Information.
- ------ -----------------
The following is notice pursuant to Rule 14a-5(e)(2) and Rule 14a-
4(c)(1) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding UAL's use of its discretionary proxy
voting authority with respect to a non-Rule 14a-8 shareholder
proposal:
If a proponent of a stockholder proposal fails to notify the
Company on or before January 26, 1999 (or by an earlier or later
date, if such date is adopted as an amendment to the Company's
Bylaws), then management proxies will be allowed to use their
discretionary voting authority if the proposal is raised at the
1999 annual meeting of stockholders.
This notice provision applies only to proposals submitted outside
the process of Rule 14a-8 of the Exchange Act and not to
proposals submitted pursuant to Rule 14a-8 for inclusion in the
Company's proxy statement for its 1999 annual meeting of
stockholders.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
A list of exhibits included as part of this Form 10-Q is
set forth in an Exhibit Index which immediately precedes
such exhibits.
(b) Form 8-K and Form 8-K/A, both dated April 30, 1998, to
announce tentative agreement with Delta Air Lines, Inc.
to expand global access, and to report a cautionary
statement for purposes of the "Safe Harbor for Forward-
Looking Statements" provision of the Private Securities
Litigation Reform Act of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UAL CORPORATION
By: /s/ Douglas A. Hacker
---------------------
Douglas A. Hacker
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
Dated: August 6, 1998
Exhibit Index
-------------
Exhibit No. Description
- ---------- -----------
10.1 UAL Corporation 1998 Restricted Stock Plan, adopted May 7, 1998.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividend Requirements.
27 Financial Data Schedule.
Exhibit 10.1
May 7, 1998
UAL CORPORATION
1998 RESTRICTED STOCK PLAN
1. Purpose.
-------
The purposes of the Plan are to attract and retain key
employees of the Company and its Subsidiaries, to compensate them
for their contributions to the growth and profits of the Company
and its Subsidiaries and to encourage ownership by them of shares
of Common Stock of the Company.
2. Definitions.
-----------
(a) "Company" shall mean UAL Corporation.
(b) "Subsidiary" or "Subsidiaries" shall mean a
corporation or corporations of which the Company owns, directly or
indirectly, shares having a majority of the ordinary voting power
for the election of directors.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Committee" shall mean, as applicable, the
Compensation Administration Committee of the Board of Directors of
the Company for all grants to any "officer" as such term is defined
in Rule 16a-1(f) under the Securities Exchange Act of 1934, as
amended, and the Compensation Committee of the Board of Directors
of the Company for all other grants.
(e) "Plan" shall mean the UAL Corporation 1998
Restricted Stock Plan.
(f) "Restricted Share" shall mean a share of Common
Stock of the Company, par value $.01 per share ("Common Stock")
allocated to a Recipient pursuant to the Plan.
(g) "Recipient" shall mean an employee of the Company or
a Subsidiary to whom Restricted Shares are allocated pursuant to
the Plan and shall be deemed to include such Recipient's estate and
the beneficiaries of such estate as the context may require.
3. Restricted Shares Available Under the Plan.
------------------------------------------
(a) Subject to the provisions of Section 3(b), the
maximum number of shares of Common Stock that may be delivered to
Recipients and their beneficiaries shall be equal to 309,120, plus
any shares that are represented by awards granted under the 1988
Restricted Stock Plan ("Prior Plan") that are forfeited, canceled,
or are not delivered because the award is settled in cash or used
to satisfy the applicable tax withholding obligation (1). To the
extent shares of Common Stock are not delivered to a Recipient or
beneficiary with respect to an award of Restricted Shares because
the award is forfeited or canceled, or are not delivered because
the award is settled in cash or used to satisfy the applicable tax
withholding obligation, such shares shall not be deemed to have
been delivered for purposes of determining the maximum number of
shares of Common Stock available for delivery under the Plan. All
shares granted under the Plan shall be treasury shares.
(b) In the event of any merger, consolidation,
reorganization, recapitalization, or other change in corporate
structure of the Company, appropriate adjustment shall be made in
the aggregate number and type of Restricted Shares which may be
allocated under the Plan and to the number and type of Restricted
Shares allocated to any individual. Such adjustment shall be made
by the Committee, whose determination as to what adjustment shall
be made, and the extent thereof, shall be final. No fractional
shares of stock shall be allocated or authorized by any such
adjustment. In the event of a stock dividend or stock split, the
aggregate number of shares which may be allocated to any individual
shall be proportionately adjusted.
4. Eligibility and Making of Allocations.
-------------------------------------
(a) Any officer or key employee of the Company or any
Subsidiary shall be eligible to receive one or more allocations of
Restricted Shares pursuant to the Plan.
(b) The Committee shall from time to time select those
employees who will receive allocations and determine the number of
Restricted Shares subject to each such allocation.
5. Form of Allocations.
-------------------
Each allocation shall specify the number of Restricted
Shares subject thereto. At the time of making any allocation, the
Committee or its designee shall advise the Recipient thereof by
delivery of written notice in the form prescribed by the Committee.
6. Action Required.
---------------
The Recipient shall deliver to the Company an agreement
in writing, by such Recipient, in form and substance as prescribed
by the Committee, together with a stock power, duly endorsed in
blank, relating to such Restricted Shares.
7. Restrictions.
------------
(a) During the Restricted Period (as hereinafter
defined), Recipient shall not sell, assign, exchange, transfer,
pledge, hypothecate or otherwise dispose of or encumber any of the
Restricted Shares. Upon allocation, however, Recipient shall
thereupon be a stockholder with respect to all shares allocated and
shall have all the rights of a stockholder with respect to such
shares, including the right to vote such shares and to receive all
dividends and other distributions.
(b) The term "Restricted Period" with respect to
Restricted Shares shall mean any period as set by the Committee,
not to exceed ten years, said period to end sooner, upon the
occurrence of any of the following:
(i) the dissolution of the Company, or any merger
or consolidation of the Company where the Company is not the
surviving corporation and the surviving corporation does not
agree to exchange the Restricted Shares outstanding hereunder
for shares of stock or securities of which it is the issuer
having an aggregate value equal to the aggregate value of such
Restricted Shares;
(ii) a determination by the Committee at any time to
accelerate or terminate such Restricted Period, but only to
the extent of such determination.
(c) Unless and to the extent the Committee determines to
end the Restricted Period with respect to any such Restricted
Shares pursuant to Section 7(b)(ii ), if a Recipient ceases to be
an employee of the Company or any Subsidiary for any reason, all of
such Recipient's Restricted Shares which at such time remain
subject to the restrictions imposed hereunder shall be forfeited
and returned to the Company, and the Restricted Share reserve shall
be increased by the number of shares returned and such Restricted
Shares may again be subject to allocations under the Plan.
(d) The restrictions set forth in Section 7(c) shall
lapse with respect to Restricted Shares when the Restricted Period
applicable to such shares expires, as described in Section 7(b).
_______________________________
(1) The 309,120 number represents the number of shares reserved for
grant under Prior Plan which have not been granted as of May 7,
1998. The total number of restricted shares outstanding under
grants made under Prior Plan is 157,680.
8. Administration.
--------------
The Committee shall administer the Plan and construe its
provisions. The Committee is authorized, in its discretion and
subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of
the Plan, to determine such other terms and conditions of
Restricted Shares, and to make such other determinations and
interpretations and to take such action in connection with the Plan
as it deems necessary or advisable. All determinations by the
Committee in carrying out, administering or construing this Plan
shall be final, binding and conclusive for all purposes and upon
all persons interested herein.
9. Limitations.
-----------
(a) Except as provided herein, no person shall at any
time have any right to receive an allocation of Restricted Shares
hereunder, and no person shall have authority to enter into an
agreement for the making of an allocation hereunder or to make any
representation or warranty with respect thereto without the
approval of the Committee and the Board.
(b) Recipients of allocations shall have no rights in
respect thereof except as set forth in the Plan. No Recipient
shall have any rights as a stockholder with respect to any shares
reserved for allocation hereunder nor shall any such shares be
earmarked for any Recipient prior to the date of delivery of such
shares.
(c) Neither the action of the Company in establishing
the Plan, nor any action taken by it or by the Board or the
Committee under the Plan, nor any provision of the Plan, shall be
construed as giving to any person the right to be retained in
employment with the Company or any Subsidiary.
10. Amendment, Suspension, Extension or Termination of the Plan in
--------------------------------------------------------------
Whole or in Part.
----------------
The Board may amend, suspend, extend or terminate the
Plan in whole or in part at any time, provided that such amendment,
suspension, extension or termination shall not, without a
Recipient's consent, affect adversely such Recipient's rights with
respect to allocations of Restricted Shares theretofore made.
11. Withholding.
-----------
The Company shall be entitled to withhold the amount of
taxes which the Company deems necessary to satisfy any applicable
federal, state and local tax withholding obligations arising from
allocations of or the lapse of restrictions on Restricted Shares
under the Plan, or to make other appropriate arrangements with
Recipients to satisfy such obligations. At the discretion of the
Committee, the Company may deduct or withhold from any transfer or
payment to a Recipient, or may receive payment from a Recipient, in
the form of cash or other property, including shares of Common
Stock of the Company. If such withholding is satisfied with
Restricted Shares for which the applicable Restricted Period has
lapsed, the Restricted Shares reserve shall be increased by the
amount of the shares so withheld and may again be subject to
allocations under the Plan.
12. Effective Date and Term of Plan.
-------------------------------
(a) The Plan was adopted by the Board on May 7, 1998.
(b) The Plan shall terminate ten (10) years after the
date of its adoption by the Board, unless terminated sooner or
extended later by the Board. No Restricted Shares may be allocated
under the Plan after its termination date, but the Plan shall
continue in effect with respect to all Restricted Shares which, as
of such termination date, have been allocated under the Plan.
Exhibit 12.1
UAL Corporation and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
Six Months Ended
June 30
1998 1997
---- ----
(In Millions)
Earnings:
Earnings before income taxes $ 525 $ 559
Fixed charges, from below 475 482
Undistributed earnings of affiliates (37) (40)
Interest capitalized (56) (50)
---- ----
Earnings $ 907 $ 951
==== ====
Fixed charges:
Interest expense $ 173 $ 140
Portion of rental expense representative
of the interest factor 302 342
---- ----
Fixed charges $ 475 $ 482
==== ====
Ratio of earnings to fixed charges 1.91 1.97
==== ====
Exhibit 12.2
UAL Corporation and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
Six Months Ended
June 30
1998 1997
---- ----
(In Millions)
Earnings:
Earnings before income taxes $ 525 $ 559
Fixed charges, from below 560 546
Undistributed earnings of affiliates (37) (40)
Interest capitalized (56) (50)
---- -----
Earnings $ 992 $1,015
==== =====
Fixed charges:
Interest expense $ 173 $ 140
Preferred stock dividend requirements 85 64
Portion of rental expense representative
of the interest factor 302 342
---- ----
Fixed charges $ 560 $ 546
==== ====
Ratio of earnings to fixed charges 1.77 1.86
==== ====
5
