United Airlines News
UAL Corporation Reports Second Quarter 2008 Results
— Reported basic and diluted loss per share of $1.19 excluding certain largely non-cash accounting charges described below. United's reported GAAP loss per share was $21.47. — Recorded $2.6 billion of previously announced accounting charges, including a $2.3 billion non-cash special charge for goodwill impairment. — Continued its focus on controlling costs, with mainline cost per available seat mile (CASM), excluding fuel and the above mentioned accounting charges, up 2.6 percent versus the same period in 2007. Mainline CASM for the quarter was up 85.5 percent versus the second quarter of 2007, reflecting a 55.4 percent increase in mainline fuel price per gallon and the significant accounting charges. — Strengthened its cash position by raising $90 million through new financings, asset sales and freeing up $130 million in restricted cash. In addition, the company expects to raise $330 million in cash in the third quarter through aircraft financings and the release of restricted cash, resulting in a total cash balance improvement of approximately $550 million. — Announced further capacity cuts and the retirement of the entire B737 fleet as well as six B747s. In total, United will retire 100 aircraft and will reduce fourth-quarter mainline domestic capacity 15.5 percent to 16.5 percent year-over-year. In conjunction with the capacity reductions, the company expects to reduce its workforce by approximately 7,000 by year-end 2009. — Announced an alliance partnership with Continental Airlines — a partnership that will create the most comprehensive domestic system by linking networks as well as creating potential for cost savings and operational efficiencies, while simultaneously benefiting customers.
Quarterly Net Loss Driven By Record High Fuel Prices
The company's financial results in the second quarter of 2008 were impacted by previously disclosed largely non-cash accounting charges that, coupled with a
— A non-cash special charge of $2.3 billion for goodwill impairment. — Non-cash special charges of $194 million relating to the impairment of B737 aircraft that are being retired from the company's operating fleet, aircraft pre-delivery deposits and certain indefinite-lived intangible assets other than goodwill net of a related tax benefit of $29 million. — Severance charges of $82 million related to the staffing reductions that will result from the capacity reductions the company has announced. Cash payments related to severance will be incurred over time as we implement our capacity reduction plans. — Other largely non-cash charges of $54 million related to certain projects that have been terminated or deferred and a non-cash adjustment to increase certain employee benefit obligations. — A $29 million cash gain from a litigation settlement.
These accounting charges added
Excluding the above accounting charges, in the second quarter of 2008 the company generated an operating loss of
Excluding a
Despite continued unit revenue growth, and better cost performance compared to its prior guidance, these gains were insufficient to offset the more than 55 percent increase in average fuel price per gallon.
"Our industry is challenged as never before by the unrelenting price of oil, and United is taking aggressive action to offset unprecedented fuel costs and to strengthen the competitiveness of our business," said
Taking Additional Actions to Address Unprecedented Fuel Costs
While the price of jet fuel has steadily increased over the last few years, the rise in 2008 has been unprecedented, with fuel increasing by more than 37 percent since the beginning of the year. United is executing an aggressive plan to address the skyrocketing cost of fuel by:
— Sizing the business appropriately for the environment, leading the industry in permanently reducing capacity. United is removing 94 narrowbody aircraft and 6 widebody aircraft from its operations, retiring its entire fleet of B737s in the process. — Using its capacity discipline to pass higher commodity costs to customers through fare and fuel surcharge initiatives. — Creating new revenue streams by charging for a la carte service, such as checked bags. — Reducing costs across the business. — Reducing capital expenditures.
United also recently announced a framework agreement to form a unique partnership with Continental Airlines, one that responds to the need for different thinking and solutions in an industry confronted by extraordinary and volatile fuel costs and dramatically changed market conditions. This agreement will result in extensive cooperation, linking networks and services worldwide to the benefit of customers while creating revenue opportunities, cost savings and other operating efficiencies. In addition, Continental plans to join United in the Star Alliance, the largest airline alliance in the world. This week, Continental Airlines, United Airlines and eight other member airlines in the Star Alliance plan to ask the U.S. Department of Transportation (DOT) to allow Continental to join the group of carriers that already hold antitrust immunity. Approval by the DOT would enable Continental, United and the other immunized Star Alliance carriers to work closely together to deliver highly competitive flight schedules, fares and service.
Strengthened Cash Position With
During the quarter, the company raised
In addition, early in the third quarter, the company received funds from a
As a result of all these actions, the company raised approximately
Despite escalating fuel prices, the company generated positive operating and free cash flow during the quarter. The company realized
The company reduced total on and off balance sheet debt by
In addition to its strong cash balance, and subsequent to the financings and asset sales previously discussed, the company continues to have over
"We continue to take the difficult, but necessary action across the company to reduce our costs, including reducing our workforce by more than 7,000 people," said
Capacity Discipline Drives Revenue Growth
The company's focus on capacity discipline and strong revenue management drove continued revenue growth. Total revenues increased by 3.0 percent in the second quarter of 2008 compared to the same period in 2007, as growth in passenger unit revenue and cargo more than offset the year-over-year reduction in capacity. The company's mainline RASM increased by 5.1 percent year-over-year from the second quarter of 2007 due to strong passenger and cargo yield performance partially offset by lower passenger load factors.
The company's cargo business continued its strong performance with a 30.9 percent year-over-year increase in revenue. Higher fuel surcharges, foreign exchange gains and strong yield improvements contributed to the cargo revenue increase.
Total passenger revenues increased by 2.6 percent in the second quarter compared to the prior year as a result of a 7.7 percent gain in consolidated yield, more than offsetting the 3 point decline in system load factor. Mainline domestic PRASM for the quarter increased by 5.9 percent, aided by a 4.8 percent reduction in capacity. International PRASM grew 3.2 percent in the second quarter compared to the same period last year, despite a 3.7 percent increase in international capacity year-over-year. Consolidated PRASM increased 3.9 percent year-over-year.
The company's change to deferred revenue accounting for the Mileage Plus program, from the previous incremental cost method, decreased consolidated passenger revenue by approximately
In the second quarter of 2007 deferred revenue accounting increased consolidated passenger revenue by a net
As the company no longer follows the incremental cost method of accounting, differences between the two accounting methods are calculated using the company's best estimate of the incremental cost method. Excluding Mileage Plus accounting impacts, consolidated PRASM increased 4.9 percent year-over-year.
Regional affiliate PRASM was up 0.3 percent compared to last year, with a 6.6 percent increase in yield and a 1.1 percent capacity decline. Load factor for regional affiliates decreased 4.7 points in the second quarter of 2008 compared to the second quarter of 2007, while stage length for regional affiliates was up 5.3 percent for the same period.
Comparison of 2008 Second Quarter Geographic Passenger Revenue Versus 2007 Second Quarter 2Q 2008 Passenger Passenger Revenues PRASM ASM(1) Revenue % Increase/ % Increase/ % Increase/ Geographic Area (millions) (Decrease) (Decrease) (Decrease) North America $2,414 0.9% 5.9% (4.8)% Pacific $830 1.7% 2.4% (0.7)% Atlantic $723 13.0% 0.8% 12.1% Latin America $132 11.2% 16.0% (4.1)% Total Mainline $4,099 3.3% 4.7% (1.3)% Regional Affiliates $797 (0.9)% 0.3% (1.1)% Total Consolidated $4,896 2.6% 3.9% (1.3)% Adjusted Consolidated(2) $4,938 3.5% 4.9% (1) ASM (available seat miles) (2) Consolidated Passenger Revenue and PRASM adjusted for Mileage Plus effects (See Footnote 5[b]).
Focus On Improving Operating Performance
For the twelve month period ending
"Our focus and our energy are all about generating a step change in our performance," said
Continued Focus on Cost Control
Mainline CASM increased by 85.5 percent year-over-year to
Second Quarter Increase/(Decrease) Mainline Consolidated % % 2008 2007 Chg. 2008 2007 Chg. CASM (cents) 20.39 10.99 85.5% 20.41 11.68 74.7% CASM excluding accounting charges (cents) 13.03 10.99 18.6% 13.81 11.68 18.2% CASM excluding fuel and accounting charges(cents) 7.80 7.60 2.6% 8.23 8.08 1.9%
The company has classified the majority of its various fuel hedging positions as economic hedges for accounting purposes. The company recorded a net gain of
The company also recognized a net gain of
Business Highlights — In June, the company announced a new fee of $15 for first checked bags. The company anticipates that this charge along with the $25 second checked bag fee and several other changes to bag fees will generate $275 million of incremental revenue on an annualized basis. — United became the first U.S. carrier to offer iPod and iPhone connectivity to its in-flight entertainment system, enabling customers to enjoy their individual content on a 15.4-inch personal television, all while the iPod or iPhone charges. United's entire fleet of international, widebody aircraft are being reconfigured over the next two years with lie-flat seats, on-demand entertainment, and iPod and iPhone connectivity in first and business class. — United announced several new codeshare partnerships during the second quarter including new relationships with Hawaiian, Jet Airways and Aer Lingus. These partnerships will significantly expand the number of flights available to United customers in Hawaii, India and Ireland. — On June 12, 2008, the company held its annual meeting of shareholders. At the meeting, the company's shareholders overwhelmingly elected each of its directors to a one-year term and also approved an equity incentive plan that will enable United to attract, retain and reward key leaders.
Fresh Start Reporting
Upon emergence from its Chapter 11 reorganization in
To offer additional information for investors, the company has identified certain items consisting only of major non-cash fresh-start reporting and exit-related credits and charges (Note 7). While it is not practical for the company to present information for all items that are not comparable in the pre- and post-exit periods, the company believes that the items identified in Note 7 are the material non-cash fresh-start reporting and exit-related items and that such information is useful to investors in understanding year-over-year performance. These fresh-start and exit-related items are discussed in the company's 2006 and 2007 Form 10-Ks.
Outlook
In response to higher fuel prices and a weaker domestic economic environment, the company is reducing its capacity for 2008 and 2009 and currently expects the following year-over-year capacity changes:
Capacity Third Quarter Fourth Quarter Full-year Full-year (Available 2008 2008 2008 2009 Seat Miles) (versus 2008) North America -6.5% to -5.5% -16.5% to -15.5% -8.5% to -7.5% -13.5% to -12.5% Inter- national -2.0% to -1.0% -7.5% to -6.5% +0.5% to +1.5% -8.0% to -7.0% Mainline -4.5% to -3.5% -12.5% to -11.5% -5.0% to -4.0% -11.0% to -10.0% Express -0.5% to +0.5% -3.5% to -2.5% -2.0% to -1.0% +6.5% to +7.5% Consoli- dated Domestic -5.5% to -4.5% -14.0% to -13.0% -7.5% to -6.5% -10.0% to -9.0% Consoli- dated -4.0% to -3.0% -11.5% to -10.5% -4.5% to -3.5% -9.0% to -8.0%
Despite the significant reduction in capacity, the company expects 2008 full-year mainline CASM, excluding fuel, special items and the largely non-cash accounting charges discussed earlier, to increase between 1.5 and 2.5 percent, in line with prior guidance, as a result of its newly expanded
As United reduces capacity, it is reducing the number of salaried, management and frontline employees. In addition to the 1,500 or 20 percent reduction in the salaried and management workforce that the company announced last quarter, the company now expects to reduce its frontline workforce by more than 5,500 employees by the end of 2009. United is working to reduce the impact of capacity reductions on employees through voluntary programs.
As previously announced, the company has also set a non-aircraft capital budget of
As of
As of the same date, United had hedged 47 percent of its forecasted mainline fuel consumption for the fourth quarter of 2008, of which 29 percent is through three-way collars with upside protection on average beginning from
As of the same date, United had hedged 14 percent of its forecasted mainline fuel consumption for the full year of 2009, of which 10 percent is through three-way collars with upside protection on average beginning from
The company expects mainline jet fuel price per gallon, including the impact of hedges, to average
Notes 5 and 8 to the attached Statements of Consolidated Operations provides a reconciliation of net income or loss reported under GAAP to net income or loss adjusted for special items and accounting charges for all periods presented as well as a reconciliation of other non-GAAP financial measures.
About United
United Airlines (Nasdaq: UAUA) operates more than 3,200* flights a day on United and United Express to more than 200 U.S. domestic and international destinations from its hubs in
*Based on United's flight schedule between
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain statements included in this press release are forward-looking and thus reflect the company's 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 the operations and business environment of the company that may cause actual results to differ materially from any future results expressed or implied in such forward-looking statements. Factors that could significantly affect net earnings, revenues, expenses, costs, load factor and capacity include, without limitation, the following: the company's ability to comply with the terms of its credit facility; the costs and availability of financing; the company's ability to execute its business plan; the company's ability to realize benefits from its resource optimization efforts and cost reduction initiatives; the company's ability to attract, motivate and/or retain key employees; the company's ability to attract and retain customers; demand for transportation in the markets in which the company operates; general economic conditions (including interest rates, foreign currency exchange rates, crude oil prices and energy refining capacity in relevant markets); the effects of any hostilities or act of war or any terrorist attack; the ability of other air carriers with whom the company has alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; the costs and availability of aircraft insurance; the costs of jet fuel; our ability to cost-effectively hedge against increases in the price of jet fuel; 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 its competitors; U.S. or foreign governmental legislation, regulation and other actions, including the effect of open skies agreements; the company's ability to utilize its net operating losses; the ability of the company to maintain satisfactory labor relations and our ability to avoid any disruptions to operations due to any potential actions by our labor groups; weather conditions; and other risks and uncertainties set forth from time to time in UAL's reports to the United States Securities and Exchange Commission. Consequently, the forward-looking statements should not be regarded as representations or warranties by the company that such matters will be realized. The company disclaims any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.
UAL CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED) (In millions, except per share amounts) Three Months Ended % June 30, Increase/ (In accordance with GAAP) 2008 2007 (Decrease) Operating revenues: Passenger - United Airlines $4,099 $3,968 3.3 Passenger - Regional Affiliates 797 804 (0.9) Cargo 237 181 30.9 Other operating revenues 238 260 (8.5) 5,371 5,213 3.0 Operating expenses: Aircraft fuel 1,848 1,206 53.2 Salaries and related costs (Note 5) 1,179 1,019 15.7 Regional affiliates (a) 847 733 15.6 Purchased services (Note 5) 371 335 10.7 Aircraft maintenance materials and outside repairs 295 284 3.9 Depreciation and amortization 216 229 (5.7) Landing fees and other rent 199 215 (7.4) Distribution expenses 193 197 (2.0) Aircraft rent 100 105 (4.8) Cost of third party sales 65 77 (15.6) Goodwill impairment (Note 5) 2,277 - - Other impairments and special items (Note 5) 223 - - Other operating expenses (Note 5) 252 276 (8.7) 8,065 4,676 72.5 Earnings (loss) from operations (2,694) 537 - Other income (expense): Interest expense (126) (139) (9.4) Interest income 28 62 (54.8) Interest capitalized 5 4 25.0 Miscellaneous, net 28 1 NM (65) (72) (9.7) Earnings (loss) before income taxes and equity in earnings of affiliates (2,759) 465 - Income tax expense (benefit) (Note 5) (29) 192 - Earnings (loss) before equity in earnings of affiliates (2,730) 273 - Equity in earnings of affiliates, net of tax 1 1 - Net income (loss) $(2,729) $274 - Earnings (loss) per share, basic $(21.47) $2.31 Earnings (loss) per share, diluted $(21.47) $1.83 Weighted average shares, basic 127.1 117.4 Weighted average shares, diluted 127.1 153.4 See accompanying notes. (a) Regional affiliates expense includes regional aircraft rent expense. See Note 2 for more information. NM Not meaningful. UAL CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED) (In millions, except per share amounts) Six Months Ended % June 30, Increase/ (In accordance with GAAP) 2008 2007 (Decrease) Operating revenues: Passenger - United Airlines $7,644 $7,232 5.7 Passenger - Regional Affiliates 1,512 1,479 2.2 Cargo 455 349 30.4 Other operating revenues 471 526 (10.5) 10,082 9,586 5.2 Operating expenses: Aircraft fuel 3,423 2,247 52.3 Salaries and related costs (Note 5) 2,225 2,087 6.6 Regional affiliates (a) 1,626 1,425 14.1 Purchased services (Note 5) 720 636 13.2 Aircraft maintenance materials and outside repairs 612 565 8.3 Depreciation and amortization 436 449 (2.9) Landing fees and other rent 429 453 (5.3) Distribution expenses 377 385 (2.1) Aircraft rent 199 205 (2.9) Cost of third party sales 129 170 (24.1) Goodwill impairment (Note 5) 2,277 - - Other impairments and special items (Note 5) 223 (22) - Other operating expenses (Note 5) 541 541 - 13,217 9,141 44.6 Earnings (loss) from operations (3,135) 445 - Other income (expense): Interest expense (261) (345) (24.3) Interest income 76 120 (36.7) Interest capitalized 10 9 11.1 Miscellaneous, net 9 (1) - (166) (217) (23.5) Earnings (loss) before income taxes and equity in earnings of affiliates (3,301) 228 - Income tax expense (benefit) (Note 5) (32) 108 - Earnings (loss) before equity in earnings of affiliates (3,269) 120 - Equity in earnings of affiliates, net of tax 3 2 50.0 Net income (loss) $(3,266) $122 - Earnings (loss) per share, basic $(26.33) $1.00 Earnings (loss) per share, diluted $(26.33) $0.88 Weighted average shares, basic 124.1 117.2 Weighted average shares, diluted 124.1 153.1 See accompanying notes. (a) Regional affiliates expense includes regional aircraft rent expense. See Note 2 for more information. NM Not meaningful. UAL CORPORATION AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (In millions) Three Months Ended % Six Months Ended % June 30, Increase/ June 30, Increase/ (In accordance 2008 2007 (Decrease) 2008 2007 (Decrease) with GAAP) Cash flows provided (used) by operating activities $217 $1,034 (79.0) $137 $1,660 (91.7) Cash flows provided (used) by investing activities: Net (purchases) sales of short-term investments 486 (2,389) - 2,295 (2,270) - Additions to property and equipment (131) (78) 67.9 (232) (146) 58.9 (Increase) decrease in restricted cash (a) 73 (15) - 101 (24) - Proceeds from litigation on advance deposits 41 - - 41 - - Proceeds from the sale of property and equipment 14 5 180.0 14 11 27.3 Other, net (11) (12) (8.3) (22) (26) (15.4) 472 (2,489) - 2,197 (2,455) - Cash flows provided (used) by financing activities: Repayment of Credit Facility - - - (9) (986) (99.1) Repayment of other debt (169) (705) (76.0) (351) (1,023) (65.7) Special distribution - - - (251) - - Principal payments under capital leases (188) (35) 437.1 (200) (48) 316.7 Decrease in capital lease deposits 154 - - 154 - - Increase in deferred financing costs (109) (9) NM (111) (20) 455.0 Proceeds from issuance of secured notes 84 694 (87.9) 84 694 (87.9) Other, net - 1 (100.0) (10) 13 - (228) (54) 322.2 (694) (1,370) (49.3) Increase (decrease) in cash and cash equivalents during the period 461 (1,509) - 1,640 (2,165) - Cash and cash equivalents at beginning of the period 2,438 3,176 (23.2) 1,259 3,832 (67.1) Cash and cash equivalents at end of the period $2,899 $1,667 73.9 $2,899 $1,667 73.9 Reconciliation of cash and cash equivalents to total cash and cash equivalents, short-term investments and restricted cash: As of % June 30, Increase/ 2008 2007 (Decrease) Cash and cash equivalents $2,899 $1,667 73.9 Short-term investments - 2,582 (100.0) Restricted cash (a) 655 871 (24.8) Total cash and cash equivalents, short-term investments and restricted cash (b) $3,554 $5,120 (30.6) (a) The Company's restricted cash primarily relates to reserves with institutions that process its credit card ticket sales, which fluctuate quarterly due to seasonality and the level of advance ticket sales, security deposits for airport leases and security for workers' compensation obligations, which decreased significantly in the second quarter of 2008 due to the posting of letters of credit. (b) See Note 5[i] for the Company's computation of free cash flow. NM Not meaningful. CONSOLIDATED NOTES (UNAUDITED) (1) UAL Corporation ("UAL" or the "Company") is a holding company whose principal subsidiary is United Air Lines, Inc. ("United"). On December 9, 2002, UAL, United and twenty-six direct and indirect wholly-owned subsidiaries filed Chapter 11 petitions for relief in the U.S. Bankruptcy Court for the Northern District of Illinois. On February 1, 2006 (the "Effective Date"), the Company emerged from Chapter 11. In connection with its emergence from Chapter 11 bankruptcy protection, the Company implemented fresh-start reporting in accordance with American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" on the Effective Date. The application of fresh-start reporting resulted in significant changes to the historical financial statements. (2) 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 $103 million and $107 million for the three months ended June 30, 2008 and 2007, respectively, and $207 million and $214 million for the six months ended June 30, 2008 and 2007, respectively, which are included in regional affiliate expense in our Statements of Consolidated Operations. (3) 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. Year-Over-Year Impact of Fuel Expense United Mainline and Regional Affiliate Operations Three Months Ended Six Months Ended (In millions, June 30, % June 30, % except per gallon) 2008 2007 Change 2008 2007 Change Mainline fuel expense $1,848 $1,206 53.2 $3,423 $2,247 52.3 Regional affiliates fuel expense 355 224 58.5 633 418 51.4 United system fuel expense $2,203 $1,430 54.1 $4,056 $2,665 52.2 Mainline fuel consumption (gallons) 571 579 (1.4) 1,127 1,130 (0.3) Mainline average jet fuel price per gallon (in cents) 323.6 208.3 55.4 303.7 198.8 52.8 Regional affiliates fuel consumption (gallons) 94 96 (2.1) 186 188 (1.1) Regional affiliates average jet fuel price per gallon (in cents) 377.7 233.3 61.9 340.3 222.3 53.1 (4) The tables below set forth certain operating statistics by geographic region and the Company's mainline, regional affiliates and consolidated operations: (% change from prior year) Three Months Ended June 30, North Regional 2008 America Pacific Atlantic Latin Mainline Affiliates Consolidated Passenger revenues 0.9 1.7 13.0 11.2 3.3 (0.9) 2.6 ASM (4.8) (0.7) 12.1 (4.1) (1.3) (1.1) (1.3) RPM (7.1) (5.6) 7.6 (3.4) (4.5) (7.0) (4.8) PRASM 5.9 2.4 0.8 16.0 4.7 0.3 3.9 Yield [a] 8.6 7.8 4.2 13.5 8.2 6.6 7.7 Load factor (points) (2.2) (4.1) (3.4) 0.6 (2.7) (4.7) (3.0) Six Months Ended June 30, North Regional 2008 America Pacific Atlantic Latin Mainline Affiliates Consolidated Passenger revenues 2.3 6.5 16.3 13.6 5.7 2.2 5.1 ASM (5.5) 2.4 15.0 (0.1) (0.7) (1.2) (0.7) RPM (7.6) (2.7) 11.0 (1.2) (3.7) (6.4) (4.0) PRASM 8.3 4.0 1.1 13.7 6.4 3.5 6.0 Yield [a] 10.7 9.4 4.4 15.3 9.8 9.1 9.5 Load factor (points) (1.8) (4.1) (2.9) (0.9) (2.6) (4.1) (2.7) [a] Yields for geographic regions exclude charter revenue, industry reduced fares, passenger charges and related revenue passenger miles. CONSOLIDATED NOTES (UNAUDITED) (5) The Company incurred significant charges related to tangible and intangible asset impairments, severance and other charges that significantly impacted its results in the three and six months ended June 30, 2008. Collectively, these charges are identified as "impairments and other charges" in the Regulation G reconciliations below. These items consist of the following: Three Months Six Months Ended Ended June 30, 2008 June 30, 2008 Income Statement Classification Goodwill impairment $2,277 $2,277 Goodwill impairment Intangible asset impairments 80 80 Aircraft and deposit impairments 143 143 Other impairments 223 223 Other impairments and special items Severance 82 82 Salaries and related costs Employee benefit charges 28 (a) 34 (a) Salaries and related costs Litigation-related settlement gain (29) (29) Other operating expenses Purchased services charges 26 (b) 26 (b) Purchased services Pre-tax impairments and other charges 2,607 2,613 Tax benefit on intangible asset impairments (29) (29) Income tax benefit Impairments and other charges, net of tax $2,578 $2,584 (a) Amount relates to additional charges to adjust certain employee benefit obligations. (b) Amount relates to expense for certain projects and transactions that have been terminated or indefinitely postponed by the Company. The Company recorded a special operating expense credit of $22 million in the three months ended March 31, 2007 related to bankruptcy facility lease secured interest litigation, which remains unresolved from the Company's recent reorganization. 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 is useful to investors because they are non-recurring items not indicative of the Company's on-going performance. In addition, the Company adjusts for Mileage Plus impacts for better comparison to several of its peers as many still apply the incremental cost method of accounting to their loyalty plans. 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 margin, net income (loss) and operating expense per available seat mile ("CASM"). Three Months Ended Six Months Ended June 30, % June 30, % 2008 2007 Change 2008 2007 Change [a] Yield (In millions) Mainline Passenger - United Airlines $4,099 $3,968 3.3 $7,644 $7,232 5.7 Less: industry reduced fares and passenger charges (12) (11) 9.1 (22) (21) 4.8 Mainline adjusted passenger revenue $4,087 $3,957 3.3 $7,622 $7,211 5.7 Mainline revenue passenger miles 29,443 30,833 (4.5) 56,370 58,562 (3.7) Adjusted mainline yield (in cents) 13.88 12.83 8.2 13.52 12.31 9.8 Consolidated Consolidated passenger revenue $4,896 $4,772 2.6 $9,156 $8,711 5.1 Less: industry reduced fares and passenger charges (12) (11) 9.1 (22) (21) 4.8 Consolidated adjusted passenger revenue $4,884 $4,761 2.6 $9,134 $8,690 5.1 Consolidated revenue passenger miles 32,581 34,207 (4.8) 62,317 64,913 (4.0) Adjusted consolidated yield (in cents) 14.99 13.92 7.7 14.66 13.39 9.5 [b] PRASM (In millions) Mainline Passenger - United Airlines $4,099 $3,968 3.3 $7,644 $7,232 5.7 Add: Mileage Plus - effect of accounting change 35 37 (5.4) 89 150 (40.7) Less: Mileage Plus - effect of expiration period change - (39)(100.0) - (62)(100.0) Mainline adjusted passenger revenue $4,134 $3,966 4.2 $7,733 $7,320 5.6 Mainline available seat miles 35,394 35,875 (1.3) 69,922 70,410 (0.7) Adjusted mainline PRASM (in cents) 11.68 11.06 5.6 11.06 10.40 6.3 Regional Affiliates Passenger - Regional Affiliates $797 $804 (0.9) $1,512 $1,479 2.2 Add: Mileage Plus - effect of accounting change 7 9 (22.2) 18 31 (41.9) Less: Mileage Plus - effect of expiration period change - (8)(100.0) - (13)(100.0) Regional affiliates passenger revenue $804 $805 (0.1) $1,530 $1,497 2.2 Regional affiliates available seat miles 4,126 4,174 (1.1) 8,007 8,103 (1.2) Regional affiliates PRASM (in cents) 19.49 19.29 1.0 19.11 18.47 3.5 Consolidated Consolidated passenger revenues $4,896 $4,772 2.6 $9,156 $8,711 5.1 Add: Mileage Plus - effect of accounting change 42 46 (8.7) 107 181 (40.9) Less: Mileage Plus - effect of expiration period change - (47)(100.0) - (75)(100.0) Adjusted consolidated passenger revenues $4,938 $4,771 3.5 $9,263 $8,817 5.1 Consolidated available seat miles 39,520 40,049 (1.3) 77,929 78,513 (0.7) Adjusted consolidated PRASM (in cents) 12.49 11.91 4.9 11.89 11.23 5.9 CONSOLIDATED NOTES (UNAUDITED) Three Months Ended Six Months Ended June 30, % June 30, % 2008 2007 Change 2008 2007 Change [c] RASM (In millions) Mainline Consolidated operating revenues $5,371 $5,213 3.0 $10,082 $9,586 5.2 Less: Passenger - Regional Affiliates (797) (804) (0.9) (1,512) (1,479) 2.2 Mainline operating revenues $4,574 $4,409 3.7 $8,570 $8,107 5.7 Mainline available seat miles 35,394 35,875 (1.3) 69,922 70,410 (0.7) Mainline RASM (in cents) 12.92 12.29 5.1 12.26 11.51 6.5 Consolidated Consolidated operating revenues $5,371 $5,213 3.0 $10,082 $9,586 5.2 Add: Mileage Plus - effect of accounting change 42 46 (8.7) 107 181 (40.9) Less: Mileage Plus - effect of expiration period change - (47) (100.0) - (75) (100.0) Adjusted consolidated operating revenues $5,413 $5,212 3.9 $10,189 $9,692 5.1 Consolidated available seat miles 39,520 40,049 (1.3) 77,929 78,513 (0.7) Adjusted consolidated RASM (in cents) 13.70 13.01 5.3 13.07 12.34 5.9 [d] Operating Margin (In millions) Consolidated operating earnings (loss) $(2,694) $537 - $(3,135) $445 - Add (less): impairments and other charges 2,607 - - 2,613 (22) - Adjusted operating earnings (loss) $(87) $537 - $(522) $423 - Consolidated operating revenues $5,371 $5,213 3.0 $10,082 $9,586 5.2 Operating margin (loss) (percent) (50.2) 10.3 (60.5) pt. (31.1) 4.6 (35.7) pt. Adjusted operating margin (loss) (percent) (1.6) 10.3 (11.9) pt. (5.2) 4.4 (9.6) pt. [e] Pre-tax income (loss) (In millions) Earnings (loss) before income taxes and equity in earnings of affiliates $(2,759) $465 - $(3,301) $228 - Add (less): impairments and other charges 2,607 - - 2,613 (22) - Adjusted pre-tax earnings (loss) $(152) $465 - $(688) $206 - Pre-tax earnings (loss) (percent) (51.4) 8.9 (60.3) pt. (32.7) 2.4 (35.1) pt. Adjusted pre-tax earnings (loss) (percent) (2.8) 8.9 (11.7) pt. (6.8) 2.1 (8.9) pt. [f] Net income (loss) (In millions) Net income (loss) $(2,729) $274 - $(3,266) $122 - Add (less): impairments and other charges 2,607 - - 2,613 (22) - Add (less): income tax expense (i) (29) - - (29) 10 - Adjusted net income (loss) $(151) $274 - $(682) $110 - [g] CASM (In millions) Mainline Consolidated operating expenses $8,065 $4,676 72.5 $13,217 $9,141 44.6 Less: Regional affiliates (847) (733) 15.6 (1,626) (1,425) 14.1 Mainline operating expenses $7,218 $3,943 83.1 $11,591 $7,716 50.2 Mainline available seat miles 35,394 35,875 (1.3) 69,922 70,410 (0.7) Mainline CASM (in cents) 20.39 10.99 85.5 16.58 10.96 51.3 Mainline operating expenses $7,218 $3,943 83.1 $11,591 $7,716 50.2 Add (less): impairments and other special items (2,607) - - (2,613) 22 - Adjusted mainline operating expense $4,611 $3,943 16.9 $8,978 $7,738 16.0 Adjusted mainline CASM (in cents) 13.03 10.99 18.6 12.84 10.99 16.8 Adjusted mainline operating expense $4,611 $3,943 16.9 $8,978 $7,738 16.0 Less: mainline fuel expense (1,848) (1,206) 53.2 (3,423) (2,247) 52.3 Less: cost of third party sales - UAFC (ii) (3) (11) (72.7) (3) (34) (91.2) Adjusted mainline operating expense $2,760 $2,726 1.2 $5,552 $5,457 1.7 Adjusted mainline CASM (in cents) 7.80 7.60 2.6 7.94 7.75 2.5 CONSOLIDATED NOTES (UNAUDITED) Three Months Ended Six Months Ended June 30, % June 30, % 2008 2007 Change 2008 2007 Change Consolidated Consolidated operating expenses $8,065 $4,676 72.5 $13,217 $9,141 44.6 Add (less): impairments and other charges (2,607) - - (2,613) 22 - Adjusted consolidated operating expenses $5,458 $4,676 16.7 $10,604 $9,163 15.7 Consolidated available seat miles 39,520 40,049 (1.3) 77,929 78,513 (0.7) Adjusted consolidated CASM (in cents) 13.81 11.68 18.2 13.61 11.67 16.6 Consolidated operating expenses $5,458 $4,676 16.7 $10,604 $9,163 15.7 Less: fuel expense and UAFC(ii) (2,206) (1,441) 53.1 (4,059) (2,699) 50.4 Adjusted consolidated operating expenses $3,252 $3,235 0.5 $6,545 $6,464 1.3 Adjusted consolidated CASM (in cents) 8.23 8.08 1.9 8.40 8.23 2.1 [h] Operating expenses (In millions) Consolidated operating expenses $8,065 $4,676 72.5 $13,217 $9,141 44.6 Add (less): impairments and other charges (2,607) - - (2,613) 22 - Adjusted operating expenses $5,458 $4,676 16.7 $10,604 $9,163 15.7 [i] Operating cash flow (In millions) Operating cash flow $217 $1,034 (79.0) $137 $1,660 (91.7) Less: capital expenditures (131) (78) 67.9 (232) (146) 58.9 Add: proceeds from litigation on advance deposits 41 - - 41 - - Free cash flow $127 $956 (86.7) $(54) $1,514 (103.6) [j] Loss per share (basic and diluted) Loss per share - GAAP $(21.47) $(26.33) Add: impairments and other charges 20.28 20.82 Loss per share - excluding impairment and other charges $(1.19) $(5.51) (i) For the six months ended June 30, 2007, the income tax adjustment for special items is the difference in the income tax provision on actual net income (loss) and the income tax provision on adjusted net income (loss), computed using an effective tax rate of 47%. The Company did not record a tax benefit on the impairments and special items in the 2008 period, except for $29 million of tax benefits related to the intangible asset impairments, which was calculated using a 36% tax rate. (ii) Included in UAL's operating expenses are the expenses of United's wholly-owned subsidiary United Aviation Fuels Corporation ("UAFC"). UAFC's expenses are not derived from mainline jet operations; therefore, UAL has excluded these expenses from the above reported GAAP financial measures. NM - Not meaningful. (6) The table below sets forth the estimated exit-related and fresh-start reporting impacts on the Company's results of operations. 2008 Increase (Decrease) (In millions) YTD 2Q 1Q Revenue impact: Estimate Estimate Estimate Mileage Plus revenue $(107) $(42) $(65) [a] Operating expense impact: Share-based compensation 18 7 11 [b] Mileage Plus marketing expense 7 2 5 [a] Postretirement welfare cost 28 14 14 [c] Depreciation and amortization 20 10 10 [d] Deferred gain 36 18 18 [e] Total operating expense impact 109 51 58 Non-operating expense impact: Non-cash and fresh-start interest expense $8 $4 $4 [f] [a] In connection with its emergence from Chapter 11 protection effective February 1, 2006, the Company adopted fresh-start reporting. Accordingly, the Company elected to change its accounting policy from an incremental cost basis to a deferred revenue model to measure the obligation for the Mileage Plus Frequent Flyer program. Adjustments to the obligation are recorded to operating revenues. Historically, adjustments were based upon incremental costs and were recorded in both operating revenues and advertising expense. The deferred revenue model is more volatile than the incremental cost basis. Because all miles are now accounted for under the deferred revenue model, the amount of revenue recognized is more sensitive to the number of miles earned and redeemed during the period than the incremental cost basis. CONSOLIDATED NOTES (UNAUDITED) [b] In accordance with the plan of reorganization, the Company implemented stock-based compensation plans for certain management employees and non-employee directors. The Company adopted SFAS 123R effective January 1, 2006 and recorded compensation expense for such plans. [c] In accordance with fresh-start reporting, the Company revalued its liabilities effective February 1, 2006 to fair value. As a result, all prior period service credits related to postretirement costs were eli
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