FORM 10-Q/A

Amendment No. 1

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 September 30, 2000

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 33-21220 *

UNITED AIR LINES, INC.

(Exact name of registrant as specified in its charter)

                            Delaware                               36-2675206
                   (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 66100, Chicago, Illinois  60666

(Address of principal executive offices)         (Zip Code)

Registrant's telephone number, including area code  (847) 700-4000

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 requiredto 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                          October 31, 2000
                 Common Stock ($5 par value)                          205

*  Registrant is the wholly-owned subsidiary of UAL Corporation (File 1-6033).  Registrant became subject to filing periodic reports under the Securities Exchange Act of 1934 as a result of a public offering of securities whichbecame effective June 3, 1988 (Registration Nos. 33-21220 and 22-18246).

This Amendment No. 1 is being filed to include the Part I information that was inadvertently omitted in the earlier filing of the Form 10-Q for the third quarter 2000.

 

United Air Lines, Inc. and Subsidiary Companies Report on Form 10-Q

For the Quarter Ended September 30, 2000

Index
 
 
 
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
Page No.
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Condensed Statements of Consolidated Financial Position - as of September 30, 2000 (Unaudited) and December 31, 1999
 
3
 
 
 
 
 
Statements of Consolidated Operations (Unaudited) - for the three months ended September 30, 2000 and 1999
 
5
 
 
 
 
 
Condensed Statements of Consolidated Cash Flows (Unaudited) - for the three months ended September 30, 2000 and 1999
 
7
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
8
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
12
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
 
*Item 6.
Exhibits and Reports on Form 8-K
--
 
 
 
 
Signatures
 
 
19
 
 
 
 
*Exhibit Index
 
 
--
_____________________

* Previously filed

 

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements
United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Financial Position

(In Millions)

 
 
 
 
September 30, 2000
December 31, 1999
Assets
(Unaudited)
 
 
 
 
Current assets:
 
 
   Cash and cash equivalents
$     570 
$     235 
   Short-term investments
520 
292 
   Receivables, net
1,684 
1,275 
   Related party receivables
331 
256 
   Inventories, net
374 
340 
   Income tax receivables
280 
85 
   Deferred income taxes
212 
226 
   Prepaid expenses and other
      374 
      363 
 
   4,345 
   3,072 
 
 
 
 
 
 
Operating property and equipment:
 
 
   Owned
19,370 
17,695 
   Accumulated depreciation and amortization
  (5,621)
  (5,207)
 
  13,749 
  12,488 
 
 
 
   Capital leases
2,977 
3,022 
   Accumulated amortization
     (614)
     (645)
 
    2,363 
    2,377 
 
  16,112 
  14,865 
 
 
 
 
 
 
Other assets:
 
 
   Investments in affiliates
293 
533 
   Intangibles, net
572 
568 
   Related party receivables
474 
465 
   Aircraft lease deposits
560 
594 
   Prepaid rent
624 
626 
   Other, net
      832 
      820 
 
   3,355 
   3,606 
 
 
 
 
$ 23,812 
$ 21,543 
 
====== 
====== 
See accompanying notes to consolidated financial statements.

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Financial Position

(In Millions)

 
 
 
 
September 30, 2000
December 31, 1999
Liabilities and Stockholder's Equity
(Unaudited)
 
 
 
 
Current liabilities:
 
 
   Short-term borrowings
$        - 
$       61 
   Current portions of long-term debt and
 
 
      capital lease obligations
    360 
    282 
   Related party debt maturing within one year
172 
187 
   Advance ticket sales
1,935 
1,412 
   Accounts payable
1,160 
1,030 
   Other
   3,811 
   2,657 
 
   7,438 
   5,629 
 
 
 
Long-term debt
   3,074 
   2,650 
 
 
 
Long-term obligations under capital leases
   2,159 
   2,336 
 
 
 
Other liabilities and deferred credits:
 
 
   Deferred pension liability
- 
70 
   Postretirement benefit liability
1,604 
    1,489 
   Deferred gains
930 
986 
   Other
   2,166 
   1,891 
 
   4,700 
   4,436 
 
 
 
Preferred stock committed to Supplemental ESOP
     737 
     893 
 
 
 
Stockholder's equity:
 
 
   Common stock at par
       - 
       - 
   Additional capital invested
232 
237 
   ESOP capital
3,309 
3,035 
   Retained earnings
2,050 
2,012 
   Unearned ESOP preferred stock
- 
(28)
   Accumulated other comprehensive income
120 
352 
   Other
        (7)
        (9)
 
   5,704 
   5,599 
 
 
 
Commitments and contingent liabilities (See note)
 
 
 
 
 
 
$ 23,812 
$ 21,543 
 
====== 
====== 
See accompanying notes to consolidated financial statements.

 

United Air Lines, Inc. and Subsidiary Companies

Statements of Consolidated Operations (Unaudited)

(In Millions)

 
Three Months
 
Ended September 30
 
2000
1999
Operating revenues:
 
 
   Passenger
$  4,291 
$  4,282 
   Cargo
234 
223 
   Other 
      391 
      329 
 
   4,916 
   4,834 
Operating expenses:
 
 
   Salaries and related costs
1,898 
1,420 
   ESOP compensation expense
- 
175 
   Aircraft fuel
664 
465 
   Commissions
280 
316 
   Purchased services
433 
408 
   Aircraft rent
224 
218 
   Landing fees and other rent
235 
239 
   Depreciation and amortization
253 
214 
   Special charges
12 
- 
   Aircraft maintenance
170 
168 
   Other 
     777 
      600 
 
  4,946 
   4,223 
 
 
 
Earnings (loss) from operations
     (30)
      611 
 
 
 
Other income (expense):
 
 
   Interest expense
(105)
(92)
   Interest capitalized
17 
19 
   Interest income
27 
21 
   Equity in loss of affiliates
(6)
(1)
   Investment impairment
(61)
-  
   Miscellaneous, net
       (8)
        (5)
 
   (136)
      (58)
Earnings (loss) before income taxes
 
 
  and extraordinary item
(166)
553 
Provision (credit) for income taxes
     (61)
     199  
 
 
Earnings (loss) before extraordinary item
(105)
354 
Extraordinary loss on early extinguishment
 
 
  of debt, net of tax
       (6)
        -  
Net earnings (loss)
$   (111)
$    354 
 
===== 
===== 

See accompanying notes to consolidated financial statements.

United Air Lines, Inc. and Subsidiary Companies

Statements of Consolidated Operations (Unaudited)

(In Millions)

 
Nine Months
 
Ended September 30
 
2000
1999
Operating revenues:
 
 
   Passenger
$ 12,826 
$ 11,951 
   Cargo
684 
658 
   Other 
    1,037 
       905 
 
14,547 
  13,514 
Operating expenses:
 
 
   Salaries and related costs
4,910 
4,249 
   ESOP compensation expense
147 
539 
   Aircraft fuel
1,792 
1,280 
   Commissions
781 
890 
   Purchased services
1,266 
1,167 
   Aircraft rent
669 
657 
   Landing fees and other rent
717 
714 
   Depreciation and amortization
731 
637 
   Special charges
76 
- 
   Aircraft maintenance
522 
523 
   Other 
   2,087 
   1,683 
 
13,698 
12,339 
Earnings from operations
     849 
    1,175 
 
 
 
Other income (expense):
 
 
   Interest expense
(304)
(280)
   Interest capitalized
57 
56 
   Interest income
63 
44 
   Equity in earnings (loss) of affiliates
(8)
38 
   Gain on sale of Galileo stock
- 
669 
   Investment impairment
(61)
- 
   Miscellaneous, net
      (33)
         9 
 
    (286)
     536 
Earnings before income taxes, extraordinary
 
 
  item and cumulative effect
  563 
1,711 
Provision for income taxes
     209 
     616 
Earnings before extraordinary item and
 
 
  cumulative effect
354 
1,095 
Extraordinary loss on early extinguishment
 
 
  of debt, net of tax
(6)
       (3)
Cumulative effect of accounting change, net of tax
    (209)
         - 
Net earnings 
$    139 
$ 1,092 
 
===== 
===== 
See accompanying notes to consolidated financial statements.

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Cash Flows (Unaudited)

(In Millions)

 
      Nine Months
 
      Ended September 30
 
          2000
         1999
Cash and cash equivalents at beginning 
 
 
   of period
$   235 
$   326 
 
 
 
Cash flows from operating activities
  2,457 
  2,200 
 
 
 
Cash flows from investing activities:
 
 
   Additions to property and equipment
(1,979)
(1,758)
   Proceeds on disposition of property and
 
 
      equipment
68 
147 
   Proceeds on sale of common shares in Galileo
- 
766 
   Increase in short-term investments
(228)
(103)
   Increase in related party receivables
(8)
(35)
   Other, net
    (141)
     (56)
 
(2,288)
(1,039)
 
 
 
Cash flows from financing activities:
 
 
   Proceeds from issuance of long-term debt
874 
286 
   Repayment of long-term debt
(420)
(492)
   Principal payments under capital
 
 
      lease obligations
(159)
(209)
   Purchase of equipment debt certificates under 
 
 
      Company leases
- 
(47)
   Decrease in equipment debt certificates under
 
 
      Company leases
43 
22 
   Decrease in short-term borrowings
(61)
(184)
   Aircraft lease deposits
5 
(25)
   Dividend to parent company
(100)
- 
   Increase (decrease) in related party debt
(15)
31 
   Other, net
        (1)
        1 
 
     166 
   (617)
 
 
 
Increase in cash and cash equivalents
     335 
    544 
 
 
 
Cash and cash equivalents at end of period
$    570 
$   870 
 
===== 
===== 
Cash paid during the period for:
 
 
   Interest (net of amounts capitalized)
$    217 
$   186 
   Income taxes
$      16 
$   223 
Non-cash transactions:
 
 
   Capital lease obligations incurred
$      76 
$   482 
   Net unrealized gain (loss) on investments
$  (232)
$   359 
 
 
 
United Air Lines, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

The Company

         United Air Lines, Inc. ("United" or the "Company") is a wholly owned subsidiary of UAL Corporation ("UAL").

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 andfootnote 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 United believes that thedisclosures 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 nine-month periods have been made.  These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in United's Annual Report on Form 10-K for the year 1999.

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 toemployees.  Note 2 of the Notes to Consolidated Financial Statements in the 1999 Annual Report on Form 10-K contains additional discussion of the agreements, stock to be issued to employees and the related accounting treatment.  Sharesearned in 1999 were allocated in March 2000 as follows:  434,465 shares of Class 2 ESOP Preferred Stock were contributed to the Non-Leveraged ESOP and an additional 248,572 shares were allocated in "book entry" form under the SupplementalPlan.  Also, 2,390,931 shares of Class 1 ESOP Preferred Stock were allocated under the Leveraged ESOP.  Finally, an additional 857,096 shares of Class 1 and Class 2 ESOP Preferred Stock have been committed to be released by the Companysince January 1, 2000.  The final allocation of ESOP Preferred Stock will take place in March 2001.

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 state income taxes, dividendson ESOP Preferred Stock and certain nondeductible items.

Other Comprehensive Income

          Total comprehensive income (loss) for the three- and nine-month periods ending September 30, 2000 was $(173) million and $(93) million, respectively, compared to $217 million and $1.5billion for the three- and nine-month periods ending September 30, 1999, respectively.  Other comprehensive income consisted of net unrealized gains (losses) on securities of $(62) million and $(232) million for the three- and nine-month periodsending September 30, 2000, respectively and $(137) million and $358 million for the three- and nine-month periods ending September 30, 1999, respectively. 

Investments

          In the third quarter, United recorded an impairment loss of $38 million, net of tax, related to its warrants held in Priceline.com.

          In June 1999, United sold 17,500,000 common shares of Galileo International, Inc. ("Galileo") in a secondary offering for $766 million, resulting in a pre-tax gain of approximately $669million ($428 million, net of tax).  This sale reduced United's holdings in Galileo from 32% to approximately 15%, requiring United to discontinue the equity method of accounting for its investment in Galileo.  United has classifiedits remaining 15,940,000 shares of Galileo common stock as "available-for-sale."

Long-Term Debt

          During the third quarter, the Company issued $921 million in enhanced equipment trust certificates to refinance certain owned aircraft and aircraft under operating leases.  Netproceeds after refinancing the operating leases was $674 million. 

          In addition to scheduled principal payments, in the third quarter, the Company repaid $116 million of debentures prior to maturity.  The debentures were scheduled to mature atvarious times through 2021.  An extraordinary loss of $6 million, net of tax benefits of $4 million was recorded reflecting amounts paid in excess of the debt carrying value.

Segment Information

          United has a global route network designed to transport passengers and cargo between destinations in North America, the Pacific,Latin America and Europe.  These regions constitute United's four reportable segments.

          A reconciliation of the total amounts reported by reportable segments to the applicable amounts in the financial statements follows:

(In Millions)
Three Months Ended September 30, 2000
 
 
 
 
 
Consolidated
 
 
 
 
Latin
and Reportable
 
Domestic
Pacific
Atlantic
America
Segment Total
Revenue
$ 3,195 
$  874
$  647
$ 200 
$ 4,916 
 
 
 
 
 
 
Earnings (loss)*
$  (148)
$    25
$    43
$  (13)
$ (93)
(In Millions)
Three Months Ended September 30, 1999
 
 
 
 
 
Consolidated
 
 
 
 
Latin
and Reportable
 
Domestic
Pacific
Atlantic
America
Segment Total
Revenue
$ 3,340
$  722
$  571
$  201
$ 4,834
 
 
 
 
 
 
Earnings*
$   500      
$    100 
$  106     
$    22   
$    728
*Earnings before ESOP compensation expense, special charges, investment impairment, income taxes, cumulative effect of accounting change and extraordinary loss on debt.

(In Millions)
Nine Months Ended September 30, 2000
 
 
 
 
 
Consolidated
 
 
 
 
Latin
and Reportable
 
Domestic
Pacific
Atlantic
America
Segment Total
Revenue
$ 9,921
$ 2,332
$ 1,690
$ 604
$ 14,547
 
 
 
 
 
 
Earnings*
$    601
$      92
$   130
$   24
$      847
(In Millions)
Nine Months Ended September 30, 1999
 
 
 
 
 
Consolidated
 
 
 
 
Latin
and Reportable
 
Domestic
Pacific
Atlantic
America
Segment Total
Revenue
$ 9,421
$2,006
$1,500
$  587
$ 13,514
 
 
 
 
 
 
Earnings*
$ 1,223   
$   128     
$   190      
$    40 
$   1,581
	*Earnings before ESOP compensation expense, special charges, gain on sale, investment impairment, income taxes, cumulative effect of accountingchange and extraordinary loss on debt.
 
Three Months Ended
Nine Months Ended
 
September 30
September 30
(In Millions)
2000
1999
2000
1999
Total earnings (loss) for reportable segments
$    (93)
$    728 
$   847 
$ 1,581 
  Special charges
(12)
-  
(76)
-  
  Investment impairment
(61)
-  
(61)
-  
  Gain on sale
- 
-  
- 
669 
  ESOP compensation expense
     n/a
   (175)
   (147)
   (539)
Total earnings (loss) before income taxes, 
 
 
 
 
  extraordinary item and cumulative effect 
$  (166)
$    553 
$   563 
$ 1,711 
 
===== 
===== 
===== 
===== 
Accounting Changes

          During the first quarter of 2000, United changed its method of accounting for the sale of mileage to participating partners in its Mileage Plus program, in accordance with StaffAccounting Bulletin No. 101, "Revenue Recognition in Financial Statements."  Under the new accounting method, a portion of  revenue from the sale of mileage (previously recognized in other revenue) is deferred and recognized aspassenger revenue when the transportation is provided.  Accordingly, United has recorded a charge of $209 million, net of tax, for the cumulative effect of a change in accounting principle to reflect the application of the accounting method toprior years.  This change resulted in a reduction to revenues of approximately $17 million and $34 million in the third quarter and nine-month periods, respectively and would have reduced revenue for the third quarter and nine-month periods of1999 by $12 million and $36 million, respectively.  As of September 30, 2000, the deferred revenue balance relating to Mileage Plus was $405 million.

Contingencies and Commitments

          United has certain contingencies resulting from litigation and claims (including environmental issues) incident to the ordinary course of business.  Management believes, afterconsidering a number of factors, including (but not limited to) the views of legal counsel, the nature of contingencies to which United is subject and its prior experience, that the ultimate disposition of these contingencies is not expected to materiallyaffect United's consolidated financial position or results of operations.

          At September 30, 2000, commitments for the purchase of property and equipment, principally aircraft, approximated $4.4 billion, after deducting advance payments.  An estimated $0.7billion will be spent during the remainder of 2000, $2.1 billion in 2001 and $1.6 billion in 2002 and thereafter.  The major commitments are for the purchase of A319, A320, B767 and B777 aircraft, which are scheduled to be delivered through2002.  The above numbers include a recent conversion of 13 option aircraft to firm orders to be delivered in 2002.

 

 

Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION          AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES

          United's total of cash and cash equivalents and short-term investments was $1.1 billion at September 30, 2000, compared to $527 million at December 31, 1999.  Cash flows fromoperating activities amounted to $2.5 billion.  Financing activities included the issuance of $674 million in equipment trust certificates, as well as principal payments under debt and capital lease obligations of $420 million and $159 million,respectively.  Included in the debt payments was the retirement of $116 million of long-term debt prior to maturity.  Additionally, the Company issued, and subsequently retired, $200 million in long-term debt during the period tofinance the acquisition of aircraft.

          Property additions, including aircraft and aircraft spare parts, amounted to $2.0 billion.  Property dispositions resulted in proceeds of $68 million.  In the first ninemonths of 2000, United took delivery of four A319, eight A320, one B747, three B767 and eight B777 aircraft.  Twenty-two of these aircraft were purchased and two were acquired under capital leases.  In addition, United retired fourDC10 aircraft in the first nine months.

          At September 30, 2000, commitments for the purchase of property and equipment, principally aircraft, approximated $4.4 billion, after deducting advance payments.  Of this amount, anestimated $0.7 billion is expected to be spent during the remainder of 2000.  For further details, see "Contingencies and Commitments" in the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

          During the second and third quarters of 2000, the Company experienced significant operational disruptions, as a result of labor-related delays and cancellations, as well as weather andair traffic control limitations, which adversely affected both revenue and expense performance.  The Company attempted to mitigate the impact of these operational difficulties by reducing capacity, particularly in the domestic markets, wheremost of the problems were concentrated. The Company estimates the revenue shortfall arising from these disruptions and associated schedule reductions and cancellations to be somewhere between $450 and $500 million for the third quarter.  Inaddition, the third quarter and nine-month results reflect the impact of the recently approved contract with the Air Line Pilots' Association, International ("ALPA") and the expected impact of open contracts with the International Association ofMachinists and Aerospace Workers ("IAM").  The Company has begun to realize the benefits of the various steps taken to improve its operational performance as cancellations are down 60% and on-time departures have improved by 40% since the heightof the operational disruptions.

Summary of Results

          United's earnings from operations were $849 million in the first nine months of 2000, compared to operating earnings of $1.2 billion in the first nine months of 1999.  United'snet earnings before the cumulative effect of an accounting change and an extraordinary loss on early extinguishment of debt were $354 million, compared to net earnings before an extraordinary loss on early extinguishment of debt of $1.1 billion in thesame period of 1999.

          In the third quarter of 2000, United's loss from operations was $(30) million compared to operating earnings of $611 million in the third quarter of 1999.  United had a net lossbefore the extraordinary loss on debt in the 2000 third quarter of $(105) million, compared to net earnings of $354 million in the same period of 1999.

          The 2000 earnings for the quarter and nine months include a special charge of $8 million, net of tax for the planned early retirement of four leased DC10-30 aircraft and an impairment loss of$38 million, net of tax, related to the Company's warrants held in Priceline.com.  In addition, the 2000 earnings for the nine-month period include a special charge of $15 million, net of tax, for the planned early retirement of seven leasedB747-238 aircraft, a special charge of $23 million, net of tax, for the retirement of the inflight video system on certain B777-222 aircraft, and a special charge of $3 million, net of tax, associated with the asset write-down on non-operating BritishAerospace Advanced Turbo-Prop aircraft previously used in the United Express operation.

          The 1999 earnings for the nine-month period include a gain of $428 million, net of tax, on the sale of a portion of United's investment in Galileo (see "Investments" in the Notes toConsolidated Financial Statements).

          Specific factors affecting United's consolidated operations for the third quarter and first nine months of 2000 are described below.

           Third Quarter 2000 Compared with Third Quarter 1999  

          Operating revenues increased $82 million (2%) and United's revenue per available seat mile (unit revenue) increased 4% to 10.91 cents.  Passenger revenues increased only $9 million(0.2%) on a 3% increase in yield to 12.68 cents.  United's revenue passenger miles decreased 3%, while available seat miles across the system were down 2% over the third quarter of 1999, resulting in a passenger load factor decrease of 0.5points to 74.6%.  The decrease in available seat miles reflects the Company's response to the operational difficulties as well as the impact of Economy Plus (the removal of seats to provide additional legroom in a premium seating zone on eachaircraft).  The following analysis by market is based on information reported to the U.S. Department of Transportation:

 
Increase (Decrease)
 
Available Seat
Revenue Passenger Miles
Revenue Per Revenue
 
Miles (Capacity)
(Traffic)
Passenger Mile (Yield)
Domestic
  (8%)
(10%)
5%
Pacific
18%
  16%
4%
Atlantic
  7%
  6%
6%
Latin America
  (9%)
  (3%)
2%
  System
  (2%)
  (3%)
3%
          Cargo revenues increased $11 million (5%), while other operating revenues increased $62 million (19%) primarily due to increased fuel sales to third parties.

          Operating expenses increased $723 million (17%) and United's cost per available seat mile (unit cost) increased 20%, from 9.18 cents to 10.98 cents.  Salaries and related costsincreased $478 million (34%) due to a new salary program implemented for non-contract employees, the impact of the new ALPA contract, and the estimated costs of IAM contracts currently under negotiation.  Aircraft fuel increased $199 million(43%) due to a 42% increase in the cost of fuel from 58.0 cents to 82.4 cents a gallon.  Commissions decreased $36 million (11%) due to a change in the commission structure implemented in the fourth quarter of 1999.  Depreciation andamortization increased $39 million (18%) due to an increase in the number of owned aircraft.  Other operating expenses increased $177 million (30%) primarily due to costs associated with fuel sales to third parties. 

          Other non-operating expense amounted to $136 million in the third quarter of 2000 compared to $58 million in the third quarter of 1999.  Included in other non-operating expense inthe 2000 third quarter was an investment impairment of $61 million related to the Company's warrants held in Priceline.com.

   

          Nine Months 2000 Compared with Nine Months 1999
          Operating revenues increased $1.0 billion (8%) and United's revenue per available seat mile (unit revenue) increased 9% to 11.05 cents.  Passenger revenues increased $875million (7%) due to a 6% increase in yield to 13.28 cents.  United's revenue passenger miles increased 1%, while available seat miles across the system decreased 1%, resulting in a passenger load factor increase of 1.4 points to 72.9%.  The following analysis by market is based on information reported to the U.S. Department of Transportation:  

 
Increase (Decrease)
 
Available Seat
Revenue Passenger Miles
Revenue Per Revenue
 
Miles (Capacity)
(Traffic)
Passenger Mile (Yield)
Domestic
  (4%)
   (2%)
7%
Pacific
  8%
   9%
8%
Atlantic
  5%
  5%
8%
Latin America
(11%)
  -
3%
  System
  (1%)
  1%
6%
          Cargo revenues increased $26 million (4%), despite a 1% decrease in cargo yield.  Other operating revenues increased $132 million (15%) due to increased fuel sales to third parties,partially offset by the decrease in frequent-flyer program partner-related revenues as a result of a change in accounting principle (see "Accounting Changes" in the Notes to Consolidated Financial Statements).

          Operating expenses increased $1.4 billion (11%) and United's cost per available seat mile (unit cost) increased 12%, from 9.29 cents to 10.41 cents.  Salaries and related costsincreased $661 million (16%) due to a new salary program implemented for non-contract employees, the impact of the new ALPA contract, and the estimated costs of IAM contracts currently under negotiation.  ESOP compensation expense decreased $392million (73%) as the Company discontinued recording ESOP compensation expense once the final ESOP shares were committed to be released in April 2000.  Aircraft fuel increased $512 million (40%) due to a 38% increase in the cost of fuel from 55.7cents to 76.9 cents a gallon.  Commissions decreased $109 million (12%) due to a change in the commission structure implemented in the fourth quarter of 1999.  Purchased services increased $99 million (8%) primarily due to increases incomputer reservations fees and credit card discounts.  Depreciation and amortization increased $94 million (15%) due to an increase in the number of owned aircraft.  Other operating expenses increased $404 million (24%) primarily dueto costs associated with fuel sales to third parties. 

          Other non-operating expense amounted to $225 million in 2000 (excluding the investment impairment - see "Investments" in the Notes to Consolidated Financial Statements) compared to$133 million in 1999 (excluding the gain on the Galileo transaction - see "Investments" in the Notes to Consolidated Financial Statements).  Equity in earnings of affiliates decreased $46 million as a result of the Company discontinuing the equity method of accounting for its investment in Galileo.  Miscellaneous, netincludes $11 million in losses on foreign currency options and $3 million in other foreign exchange losses in the first nine months of 2000, compared to $8 million in gains on written yen call options for the same period in 1999.

LABOR AGREEMENTS

          On April 12, 2000, the Company's contract with ALPA became amendable.  On October 26, 2000, the Company and ALPA signed a newcontract.  The agreement, which will remain in effect through 2004, includes provisions for an immediate increase in wages of 21.5% to 28.7%, retroactive to April 12, as well as additional annual increases of 4.5% to 5.62% for the duration ofthe contract.  Additionally, the contract allows United Express carriers to increase the number of small jets beyond the current 65-jet limit up to an additional 150 immediately as replacements for existing turboprops, with additional increasesin small jets as United's fleet grows.  United may also share in profits and losses of revenues with foreign carriers with whom United has antitrust immunity, provided United gets its fair share of the flying.

          On July 12, 2000, the Company's contracts with the IAM became amendable.  The Company has been in negotiations with the IAM since January for new contracts.  SinceSeptember 1, the negotiations have been conducted with the assistance of the National Mediation Board ("NMB").  On November 8, at the request of the NMB, negotiations between United and the IAM were recessed.  The NMB announced that itintends to resume discussions with both parties within the next two weeks.  Under the terms of the Railway Labor Act, United's current agreements with the IAM will remain in effect while negotiations continue.

          The Company's contract with the Association of Flight Attendants ("AFA"), which becomes amendable in 2006, provides for a mid-term wage conferencein the first quarter of 2001.  While the Company is under no obligation to re-open the contract, on September 26, 2000, United announced that it would accelerate these discussions as well as addressing integration issues related to United'sacquisition of US Airways Group, Inc.  On November 6, the AFA rejected a proposal from United on the tentative format for agreeing both on the pay adjustment and the pending acquisition.  The Company does not anticipate any AFA actionthat would inconvenience its customers or disrupt schedules and will take appropriate steps should such action occur.

US AIRWAYS ACQUISITION

          On May 24, 2000, UAL announced that it had entered into a definitive merger agreement with US Airways Group, Inc. ("US Airways") pursuant to which US Airways will be acquired by UAL in anall-cash transaction valued at $4.3 billion.   Additionally, UAL will assume approximately $1.5 billion in US Airways debt and $5.8 billion in aircraft operating leases.  On October 12, 2000, the stockholders of US Airways approved themerger.  The transaction, which the Company anticipates closing in the first quarter of 2001, is still subject to regulatory clearance and other customary closing conditions.  Definitive financing arrangements have not yet beendetermined although UAL expects to incur additional indebtedness to finance the acquisition.

          Subject to regulatory approval of the transaction and the successful outcome of negotiations with local authorities, the Company has announced its plans to expand US Airways' maintenancefacility in Pittsburgh at a total cost of $160 million.  Additionally, the Company recognizes that it will incur significant costs associated with the integration of US Airways in order to achieve the anticipated benefits to both the Company andthe millions of passengers and hundreds of communities served by United throughout the United States and that it may encounter difficulties in achieving these benefits.  The Company expects that the new network will make traveling moreconvenient for passengers, connecting US Airways' eastern U.S. markets with United's east-west and international markets.  As part of the agreement with US Airways, UAL generally has agreed to pay US Airways a $50 million termination fee in theevent the merger does not take place.

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" ("SFASNo. 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 thederivative'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 theincome statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

          The effective date of SFAS No. 133 has been delayed one year, to fiscal years beginning after June 15, 2000.  The Company plans on adopting SFAS No. 133 in the first quarter of2001.  United is in the process of reviewing its various contracts to determine which contracts meet the requirements of SFAS No. 133 and would need to be reflected as derivatives under the standard and accounted for at fair value.  Inaccordance with the provisions of SFAS No. 133, United will recognize a charge for the cumulative effect of a change in accounting principle in the first quarter of 2001, to reflect application of the accounting method to prior years.  Based oncurrent assumptions, the Company estimates this charge to be insignificant.  However, the adoption of SFAS No. 133 could increase volatility in earnings and other comprehensive income in future periods.

SUBSEQUENT EVENTS

          GetThere.com is a leading provider of internet-based travel planning products tailored to individual, corporate, travel supplier and travel agency customers.  During 1998 and1999, United invested approximately $51 million in GetThere.com resulting in a 28% minority interest in GetThere.com consisting of common stock, warrants and options.  United accounts for its investment in GetThere.com using the equity method ofaccounting.  

          On August 28, 2000, Sabre Holdings Corporation announced its intentions to

acquire GetThere.com in an all cash tender offer for any or all outstanding shares of GetThere.com common stock at $17.75 per share.  The tender offer commenced September 11 and expired on October 6, 2000.  Accordingly, afterconverting its options and warrants, United tendered all of its shares in GetThere.com for net proceeds of $147 million, resulting in a pre-tax gain of approximately $109 million ($69 million, net of tax).  This transaction will be recorded inthe fourth quarter.

E-COMMERCE AND MILEAGE PLUS

          In October 2000, UAL announced the formation of United NewVentures, Inc., a wholly owned subsidiary which will create businesses to provide innovative solutions for its customers,strengthen United's airline business and create incremental value for UAL's shareholders.  The subsidiary will employ about 100 people, primarily from United's former e-commerce division and will consist of two divisions, United NetWorks andUnited NetVentures.

          United NetWorks will focus on United-branded e-commerce and wireless activities, including the recently redesigned united.com web site, as well as taking responsibility for the marketing sideof Mileage Plus sale of miles to third parties.  Revenue from third-party mileage sales reached $340 million during the first nine months of 2000, compared to $289 million in 1999, as adjusted for the change in accounting principle.  Gross air bookings on united.com in the first nine months of 2000 grew 59% from the same period last year.  Total passenger revenue from sales over the Internet reached $173 million in the third quarter compared to $109 million in the sameperiod of 1999. 

          United NetVentures will manage United's investments in other Internet ventures, including two new airline-backed web sites, Orbitz and Hotwire, and identify new business opportunities ine-commerce. 

OUTLOOK FOURTH QUARTER

          The Company expects that reduced capacity levels, effected to address the operational difficulties, will continue to impact revenue performancein the fourth quarter.  Additionally, many of the factors which negatively affected performance in the third quarter could continue.  Unit costs are expected to increase 17%, based on an average fuel price of 92 cents per gallon.  Excluding fuel, unit costs are expected to rise 11%.  The increase reflects lower-than-planned capacity levels as a result of the schedule adjustments, as well as wage increases associated with the new pilot contract and the expectedimpact of the other labor agreements currently in negotiation.  Combined, these factors point to a likely loss in the fourth quarter.

          Information included in the above "Outlook for Fourth Quarter" and "US Airways Acquisition" paragraphs is forward-looking and involves risks and uncertainties that could result inactual results differing materially from expected results.  Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to the Company as of the date of this filing.  Some factors that could significantly impact revenues, expenses, unit costs, and the results and benefits of the pending merger between United and US Airways include, without limitation, the airline pricing environment; industry capacity decisions;competitors' route decisions; obtaining regulatory approvals for the United and US Airways merger; successfully integrating the businesses of United and US Airways; costs related to the United and US Airways merger; achieving cost-cutting synergiesresulting from the United and US Airways merger; labor integration issues; the success of the Company's cost-control efforts; the cost of crude oil and jet fuel; the success of fuel hedging strategies; the results of union contract negotiations and theirimpact on labor costs; operational disruptions as a result of bad weather, air traffic control-related difficulties and labor issues; the growth of e-commerce and off-tariff distribution channels; the success of customer win-back strategies; the effectivedeployment of customer service tools and resources; actions of the U.S., foreign and local governments; willingness of customers to travel; foreign currency exchange rate fluctuations; the stability of the U.S. economy; inflation; the economic environmentof the airline industry and the economic environment in general .  

          Investors should not place undue reliance on the forward-looking information contained herein, which speaks only as of the date of this filing.  United disclaims any intent orobligation to update or alter any of the forward-looking statements whether in response to new information, unforeseen events, changed circumstances or otherwise.

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 United's Annual Report on Form10-K for the year 1999.  Significant changes which have occurred since year-end are as follows:

Foreign Currency Risk - 

(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
 
 
 
(Pay)/Receive*
Forward exchange contracts
 
 
 
Japanese Yen - Purchased forwards
$    131
106.83
$    (1)
                             - Sold forwards
$     64
108.34
$       -
      Hong Kong Dollar - Sold forwards
$     19
    7.81
$       -
      French Franc - Purchased forwards
$     50 
    5.05           
  $     (5)   
      Euro - Purchased forwards
$   140
    1.30       
  $   (12)   
 
 
 
 
Currency options
 
 
 
Japanese Yen - Purchased put options
$    140
102.28
$     7
Australian Dollar - Purchased put options
$      34
     0.62
$     4
British Pound - Purchased put options
$      16
     1.55
  $     1
Euro - Purchased put options
$      26
     0.99 
$     3
Correlation Basket Option - Sold
$   216
    N/A
$     -

Price Risk (Aircraft fuel) - 

(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
 
 
 
(Pay)/Receive*
Purchased call contracts - Crude oil
$   343
$  22.14/bbl
$  108

*Estimated fair values represent the amount United would pay/receive on September 30, 2000 to terminate the contracts.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNITED AIR LINES, INC.

 

 
By:  /s/ Douglas A. Hacker
 
     Douglas A. Hacker
 
     Executive Vice President -
 
     Finance and Planning and
 
     Chief Financial Officer
 
     (principal financial officer)
 
 
 
 
 
By:  /s/ M. Lynn Hughitt
 
     M. Lynn Hughitt
 
     Vice President and Controller
 
     (principal accounting officer)

 

 

 

Dated:  November 13, 2000