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United Continental Holdings, Inc. 10-Q 2007
body.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
FORM 10-Q
(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, 2007
 
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                    to         
 
        
Commission
File Number
Exact Name of Registrant as Specified in
its Charter, Principal Office Address and
Telephone Number
State of
Incorporation
I.R.S. Employer
Identification No
        001-06033
UAL Corporation
Delaware
36-2675207
001-11355
United Air Lines, Inc.
77 W. Wacker Drive
Chicago, Illinois 60601
(312) 997-8000
Delaware
36-2675206
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
UAL Corporation                                                          Yes x No o
United Air Lines, Inc.                                                   Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
UAL Corporation                                                Large accelerated filer x        Accelerated filer o         Non-accelerated filer o
United Air Lines, Inc.                                         Large accelerated filer ¨         Accelerated filer o         Non-accelerated filer x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
UAL Corporation                                                          Yes ¨ No x
United Air Lines, Inc.                                                   Yes ¨ No x
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
UAL Corporation                                                          Yes x No o
United Air Lines, Inc.                                                   Yes x No o
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 27, 2007.
 
UAL Corporation
115,739,989 shares of common stock ($0.01 par value)
United Air Lines, Inc.
205 (100% owned by UAL Corporation)
 
There is no market for United Air Lines, Inc. common stock.
 


      
        
    

UAL Corporation and Subsidiary Companies and
United Air Lines, Inc. and Subsidiary Companies

         
PART I. FINANCIAL INFORMATION
 
Financial Statements
     
           
   
UAL Corporation:
     
   
  Condensed Statements of Consolidated Operations (Unaudited)
   
3
   
  Condensed Statements of Consolidated Financial Position (Unaudited)
   
5
   
  Condensed Statements of Consolidated Cash Flows (Unaudited)
   
7
           
   
United Air Lines, Inc.:
     
   
  Condensed Statements of Consolidated Operations (Unaudited)
   
8
   
  Condensed Statements of Consolidated Financial Position (Unaudited)
   
10
   
  Condensed Statements of Consolidated Cash Flows (Unaudited)
   
12
           
   
Combined Notes to Condensed Consolidated Financial Statements (Unaudited) (UAL Corporation and United Air Lines, Inc.)
   
13
           
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
29
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
   
45
Item 4.
 
Controls and Procedures
   
46
           
PART II. OTHER INFORMATION
Item 1.
 
Legal Proceedings
          47          
Item1A.
 
Risk Factors
          48
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
        49
Item 4.
 
Submission of Matters to a Vote of Security Holders
          49
Item 6.
 
Exhibits
          49
 
Signatures
          50
 
Exhibit Index
          51

 

2

      
        
 
    

 
 
ITEM 1. FINANCIAL STATEMENTS
 
UAL Corporation and Subsidiary Companies
 
Condensed Statements of Consolidated Operations (Unaudited)
 
(In millions, except per share amounts)
 
             
   
Three Months Ended June 30,
 
   
2007
   
2006
 
Operating revenues:
           
Passenger - United Airlines
  $
3,968
    $
3,806
 
Passenger - Regional Affiliates
   
804
     
761
 
Cargo
   
181
     
194
 
Other operating revenues
   
260
     
352
 
     
5,213
     
5,113
 
Operating expenses:
               
Aircraft fuel
   
1,206
     
1,250
 
Salaries and related costs
   
1,019
     
1,071
 
Regional affiliates
   
733
     
715
 
Purchased services
   
335
     
321
 
Aircraft maintenance materials and outside repairs
   
284
     
257
 
Depreciation and amortization
   
229
     
218
 
Landing fees and other rent
   
215
     
225
 
Distribution expenses (Note 1)
   
197
     
208
 
Aircraft rent
   
105
     
109
 
Cost of third party sales
   
77
     
190
 
Other operating expenses
   
276
     
289
 
     
4,676
     
4,853
 
                 
Earnings from operations
   
537
     
260
 
                 
Other income (expense):
               
Interest expense (Note 11)
    (139 )     (211 )
Interest income
   
62
     
67
 
Interest capitalized
   
4
     
4
 
Miscellaneous, net
   
1
      (4 )
      (72 )     (144 )
                 
Earnings before income taxes and equity in earnings
               
of affiliates
   
465
     
116
 
Income tax expense
   
192
     
-
 
                 
Earnings before equity in earnings of affiliates
   
273
     
116
 
Equity in earnings of affiliates, net of tax
   
1
     
3
 
Net income
  $
274
    $
119
 
                 
Earnings per share, basic
  $
2.31
    $
1.01
 
Earnings per share, diluted
  $
1.83
    $
0.93
 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

3

      
        
 
    


UAL Corporation and Subsidiary Companies
       
Condensed Statements of Consolidated Operations (Unaudited)
       
(In millions, except per share amounts)
       
   
Successor
   
Successor
   
Predecessor
 
   
Six Months
   
Period from
   
Period from
 
   
Ended
   
February 1
   
January 1
 
   
June 30,
   
to June 30,
   
to January 31,
 
   
2007
   
2006
   
2006
 
Operating revenues:
                 
 Passenger - United Airlines
  $
7,232
    $
5,988
    $
1,074
 
 Passenger - Regional Affiliates
   
1,479
     
1,226
     
204
 
 Cargo
   
349
     
318
     
56
 
 Other operating revenues
   
526
     
588
     
124
 
     
9,586
     
8,120
     
1,458
 
 Operating expenses:
                       
 Aircraft fuel
   
2,247
     
1,955
     
362
 
 Salaries and related costs
   
2,087
     
1,797
     
358
 
 Regional affiliates
   
1,425
     
1,183
     
228
 
 Purchased services
   
636
     
527
     
98
 
 Aircraft maintenance materials and outside repairs
   
565
     
436
     
80
 
 Landing fees and other rent
   
453
     
370
     
75
 
 Depreciation and amortization
   
449
     
366
     
68
 
 Distribution expenses (Note 1)
   
385
     
349
     
60
 
 Aircraft rent
   
205
     
184
     
30
 
 Cost of third party sales
   
170
     
318
     
65
 
 Special operating items (Note 2)
    (22 )    
-
     
-
 
 Other operating expenses
   
541
     
494
     
86
 
     
9,141
     
7,979
     
1,510
 
                         
Earnings (loss) from operations
   
445
     
141
      (52 )
                         
Other income (expense):
                       
Interest expense (Note 11)
    (345 )     (352 )     (42 )
Interest income
   
120
     
95
     
6
 
Interest capitalized
   
9
     
7
     
-
 
Miscellaneous, net
    (1 )    
2
     
-
 
      (217 )     (248 )     (36 )
                         
Earnings (loss) before reorganization items, income
                       
taxes and equity in earnings of affiliates
   
228
      (107 )     (88 )
Reorganization items, net
   
-
     
-
     
22,934
 
                         
Earnings (loss) before income taxes and equity in
                       
earnings of affiliates
   
228
      (107 )    
22,846
 
Income tax expense
   
108
     
-
     
-
 
                         
Earnings (loss) before equity in earnings of affiliates
   
120
      (107 )    
22,846
 
Equity in earnings of affiliates, net of tax
   
2
     
3
     
5
 
Net income (loss)
  $
122
    $ (104 )   $
22,851
 
                         
Earnings (loss) per share, basic
  $
1.00
    $ (0.94 )   $
196.61
 
Earnings (loss) per share, diluted
  $
0.88
    $ (0.94 )   $
196.61
 
                         

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

4

      
        
 
    

 
   
June 30,
   
December 31,
 
   
2007
   
2006
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $
1,667
    $
3,832
 
Short-term investments
   
2,582
     
312
 
Restricted cash
   
439
     
341
 
Receivables, less allowance for doubtful accounts (2007—$30; 2006—$27)
   
1,138
     
820
 
Prepaid fuel
   
414
     
283
 
Aircraft fuel, spare parts and supplies, less
               
obsolescence allowance (2007—$11; 2006—$6)
   
210
     
218
 
Deferred income taxes
   
66
     
122
 
Prepaid expenses and other
   
400
     
345
 
     
6,916
     
6,273
 
Operating property and equipment:
               
Owned—
               
Flight equipment
   
9,009
     
8,958
 
Advances on flight equipment
   
103
     
103
 
Other property and equipment
   
1,488
     
1,441
 
     
10,600
     
10,502
 
Less—accumulated depreciation and amortization
    (776 )     (503 )
     
9,824
     
9,999
 
Capital leases:
               
Flight equipment
   
1,511
     
1,511
 
Other property and equipment
   
34
     
34
 
     
1,545
     
1,545
 
Less—accumulated amortization
    (127 )     (81 )
     
1,418
     
1,464
 
     
11,242
     
11,463
 
Other assets:
               
Intangibles, less accumulated amortization (2007—$247; 2006—$169)
   
2,950
     
3,028
 
Goodwill
   
2,697
     
2,703
 
Aircraft lease deposits
   
557
     
539
 
Restricted cash
   
432
     
506
 
Investments
   
116
     
113
 
Other, net
   
755
     
744
 
     
7,507
     
7,633
 
    $
25,665
    $
25,369
 

 
 

5

      
        
 
    

Condensed Statements of Consolidated Financial Position (Unaudited)
 
   
June 30,
 
December 31,
   
2007
 
2006
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Advance ticket sales
  $
2,657
    $
1,669
 
Mileage Plus deferred revenue
   
1,269
     
1,111
 
Accounts payable
   
861
     
667
 
Accrued salaries, wages and benefits
   
818
     
795
 
Advanced purchase of miles
   
703
     
681
 
Long-term debt maturing within one year (Note 11)
   
601
     
1,687
 
Fuel purchase commitments
   
414
     
283
 
Accrued interest
   
259
     
241
 
Current obligations under capital leases
   
101
     
110
 
Other
   
578
     
701
 
     
8,261
     
7,945
 
                 
Long-term debt (Note 11)
   
7,210
     
7,453
 
Long-term obligations under capital leases
   
1,330
     
1,350
 
 
Other liabilities and deferred credits:
               
Mileage Plus deferred revenue
   
2,586
     
2,569
 
Postretirement benefit liability
   
1,959
     
1,955
 
Deferred income taxes
   
756
     
688
 
Deferred pension liability
   
133
     
130
 
Other
   
753
     
770
 
     
6,187
     
6,112
 
Mandatorily convertible preferred securities
   
366
     
361
 
Commitments and contingent liabilities (Note 13)
               
 
Stockholders’ equity:
               
Preferred stock
   
     
 
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 115,595,952 and 112,280,629 shares at June 30, 2007 and December 31, 2006, respectively
   
1
     
1
 
Additional capital invested
   
2,106
     
2,053
 
Retained earnings
   
132
     
16
 
Stock held in treasury, at cost (Note 4)
   
(15
)
   
(4
)
Accumulated other comprehensive income
   
87
     
82
 
     
2,311
     
2,148
 
    $
25,665
    $
25,369
 

 
See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

6

      
        
 
    

 
   
Successor
   
Predecessor
   
Six Months
Ended
June 30,
 
Period from
February 1 to
June 30,
   
Period from
January 1 to
January 31,
   
2007
 
2006
   
2006
Cash flows provided (used) by operating activities:
                         
Net income (loss) before reorganization items
  $
122
    $
(104
)
    $
(83
)
Adjustments to reconcile to net cash provided (used) by operating activities—
                         
Increase in advance ticket sales
   
988
     
697
       
109
 
Increase in receivables
   
(316
)
   
(128
)
     
(88
)
Depreciation and amortization
   
449
     
366
       
68
 
Mileage Plus deferred revenue and advanced purchase of miles
   
197
     
119
       
14
 
Other, net
   
220
     
27
       
141
 
     
1,660
     
977
       
161
 
Cash flows provided (used) by reorganization activities:
                         
Reorganization items, net
   
     
       
22,934
 
Increase in other liabilities
   
     
       
37
 
Increase in non-aircraft claims accrual
   
     
       
429
 
Discharge of claims and liabilities
   
     
       
(24,628
)
Revaluation of Mileage Plus frequent flyer deferred revenue
   
     
       
2,399
 
Revaluation of other assets and liabilities
   
     
       
(2,106
)
Pension curtailment, settlement and employee claims
   
     
       
912
 
     
     
       
(23
)
Cash flows provided (used) by investing activities:
                         
(Increase) decrease in short-term investments
   
(2,270
)
   
16
       
2
 
Additions to property and equipment
   
(146
)
   
(129
)
     
(30
)
(Increase) decrease in restricted cash
   
(24
)
   
254
       
(203
)
Decrease in segregated funds
   
     
200
       
 
Other, net
   
(15
)
   
54
       
(7
)
     
(2,455
)
   
395
       
(238
)
Cash flows provided (used) by financing activities:
                         
Proceeds from secured notes
   
694
     
       
 
Proceeds from Credit Facility
   
     
2,961
       
 
Repayment of Credit Facility
   
(986
)
   
(161
)
     
 
Repayment of DIP Financing
   
     
(1,157
)
     
 
Repayment of other long-term debt
   
(1,023
)
   
(456
)
     
(24
)
Principal payments under capital leases
   
(48
)
   
(35
)
     
(5
)
Other, net
   
(7
)
   
(61
)
     
(1
)
     
(1,370
)
   
1,091
       
(30
)
Increase (decrease) in cash and cash equivalents during the period
   
(2,165
)
   
2,463
       
(130
)
Cash and cash equivalents at beginning of the period
   
3,832
     
1,631
       
1,761
 
Cash and cash equivalents at end of the period
  $
1,667
    $
4,094
      $
1,631
 

 
 

7

      
        
 
    


United Air Lines, Inc. and Subsidiary Companies
 
Condensed Statements of Consolidated Operations (Unaudited)
 
(In millions)
 
             
   
Three Months Ended
 
   
June 30,
 
   
2007
   
2006
 
Operating revenues:
           
Passenger - United Airlines
  $
3,968
    $
3,806
 
Passenger - Regional Affiliates
   
804
     
761
 
Cargo
   
181
     
194
 
Other operating revenues
   
263
     
350
 
     
5,216
     
5,111
 
Operating expenses:
               
Aircraft fuel
   
1,206
     
1,250
 
Salaries and related costs
   
1,018
     
1,070
 
Regional affiliates
   
733
     
715
 
Purchased services
   
335
     
321
 
Aircraft maintenance materials and outside repairs
   
284
     
257
 
Depreciation and amortization
   
229
     
218
 
Landing fees and other rent
   
215
     
226
 
Distribution expenses (Note 1)
   
197
     
208
 
Aircraft rent
   
105
     
110
 
Cost of third party sales
   
76
     
188
 
Other operating expenses
   
276
     
285
 
     
4,674
     
4,848
 
                 
Earnings from operations
   
542
     
263
 
                 
Other income (expense):
               
Interest expense (Note 11)
    (139 )     (222 )
Interest income
   
64
     
65
 
Interest capitalized
   
4
     
4
 
Miscellaneous, net
   
-
      (2 )
      (71 )     (155 )
                 
Earnings before income taxes and equity in earnings
               
of affiliates
   
471
     
108
 
Income tax expense
   
194
     
-
 
                 
Earnings before equity in earnings of affiliates
   
277
     
108
 
Equity in earnings of affiliates, net of tax
   
1
     
3
 
Net income
  $
278
    $
111
 
                 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

8

      
        
 
    

United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Operations (Unaudited)
(In millions)

   
Successor
   
Successor
   
Predecessor
 
   
Six Months
   
Period from
   
Period from
 
   
Ended
   
February 1
   
January 1
 
   
June 30,
   
to June 30,
   
to January 31,
 
   
2007
   
2006
   
2006
 
Operating revenues:
                 
Passenger - United Airlines
  $
7,232
    $
5,988
    $
1,074
 
Passenger - Regional Affiliates
   
1,479
     
1,226
     
204
 
Cargo
   
349
     
318
     
56
 
Other operating revenues
   
533
     
585
     
120
 
     
9,593
     
8,117
     
1,454
 
Operating expenses:
                       
Aircraft fuel
   
2,247
     
1,955
     
362
 
Salaries and related costs
   
2,086
     
1,795
     
358
 
Regional affiliates
   
1,425
     
1,183
     
228
 
Purchased services
   
636
     
527
     
97
 
Aircraft maintenance materials and outside repairs
   
565
     
436
     
80
 
Landing fees and other rent
   
453
     
370
     
75
 
Depreciation and amortization
   
449
     
366
     
68
 
Distribution expenses (Note 1)
   
385
     
349
     
60
 
Aircraft rent
   
206
     
185
     
30
 
Cost of third party sales
   
168
     
314
     
63
 
Special items (Note 2)
    (22 )    
-
     
-
 
Other operating expenses
   
540
     
490
     
85
 
     
9,138
     
7,970
     
1,506
 
                         
Earnings (loss) from operations
   
455
     
147
      (52 )
                         
Other income (expense):
                       
Interest expense (Note 11)
    (345 )     (353 )     (42 )
Interest income
   
124
     
93
     
6
 
Interest capitalized
   
9
     
7
     
-
 
Miscellaneous, net
    (1 )     (1 )    
-
 
      (213 )     (254 )     (36 )
                         
Earnings (loss) before reorganization items, income
                       
taxes and equity in earnings of affiliates
   
242
      (107 )     (88 )
Reorganization items, net
   
-
     
-
     
22,709
 
                         
Earnings (loss) before income taxes and equity in
                       
earnings of affiliates
   
242
      (107 )    
22,621
 
Income tax expense
   
114
     
-
     
-
 
                         
Earnings (loss) before equity in earnings of affiliates
   
128
      (107 )    
22,621
 
Equity in earnings of affiliates, net of tax
   
2
     
3
     
5
 
Net income (loss)
  $
130
    $ (104 )   $
22,626
 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).


9

      
        
 
    

United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position (Unaudited)
(In millions, except shares)
           
   
June 30,
 
December 31,
 
   
2007
 
2006
 
Assets
         
Current assets:
         
Cash and cash equivalents
  $
1,645
  $
3,779
 
Short-term investments
   
2,547
   
308
 
Restricted cash
   
406
   
303
 
Receivables, less allowance for doubtful
             
accounts (2007 - $30; 2006 - $27)
   
1,127
   
814
 
Prepaid fuel
   
414
   
283
 
Aircraft fuel, spare parts and supplies, less
             
obsolescence allowance (2007 - $11; 2006 - $6)
   
210
   
218
 
Deferred income taxes
   
59
   
114
 
Receivables from related parties
   
158
   
154
 
Prepaid expenses and other
   
403
   
348
 
     
6,969
   
6,321
 
Operating property and equipment: