LIQUDITY RATIOS

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					                                     Introduction

United Airlines History

        In 1926, Varney Airlines, America’s first commercial air transportation

company, got its start flying mail from Pasco, Washington to Elko, Nevada. In 1934,

Bill Boeing brought together a consortium of independent airlines including Varney,

National, Pacific, Boeing, and Pratt & Whitney. The companies merged to form

United Airlines Transportation Company. The company name was shortened to

United Airlines in 1943 (Simley p. 128).

        Most of the companies Boeing brought together were in the airmail business

with two exceptions—Boeing and Pratt & Whitney. Boeing manufactured aircraft in

Seatle, and Pratt & Whitney manufactured aircraft engines. By joining forces the

group formed a vertical monopoly that planned to eliminate the competition.

However, 1934 was the same year Congress passed legislation outlawing vertical

monopolies. United was forced to divorce itself from Boeing and Pratt & Whitney.

Innovations

        United is responsible for a large number of innovations in the airline industry.

It is credited with introducing air-to-ground radio, which greatly improved

communication and safety in the industry. A United exectutive also came up with the

idea of stewardesses. His reasoning was that no man could admit he was afraid of

flying if women were working on planes. The original eight stewardesses were all

registered nurses (Simley p. 128). In 1954, United became the first airline to use

flight simulators to train its pilots. It now operates the world’s largest, state of the art

training center valued at nearly $200 million (Student Resource Guide p. 9).



                                             1
Expansion
      In 1961, United acquired Capital Airlines. The purchase helped United

strengthen its presence in the eastern United States. In 1967, United became the first

airline to surpass $1 billion in annual revenues (Simley p. 129).

          In 1978, the Airline Deregulation Act was passed. After the act became law,

the airlines were no longer required to get government approval before entering new

passenger markets. United was one of the first airlines to support deregulation;

however, after the act was passed, it was forced to scale down operations to remain

competitive (Standard & Poor p. 8).

          Deregulation brought about the rapid growth of hub-and-spoke systems.

United Airlines now has four major hubs located in Washington Dulles, Chicago,

Denver, and San Francisco. The four hubs are perfectly positioned geographically to

cover the United States from east to west and north to south (Student Resource

Guide p. 5).

          United purchased Pan Am’s Asian traffic rights for $715.5 million in 1985.

The agreement also included 18 jets, 2700 Pan Am employees, and all of Pan Am’s

facilities in Asia. It also added 30 destinations and 65,000 miles to United’s network

(Simley, p. 129).

          During the late 1980s, some of the more financially distressed airlines started

selling routes to raise money. Instead of reacting the way TWA and Pan Am did,

United saw this as an opportunity to expand and become more global. When the

economy began to weaken in the 1990s, the entire airline industry was hurt by

reduced passenger traffic. The Persian Gulf Crisis also caused an increase in fuel

prices.



                                             2
        These factors lowered the income of all the major airlines, and United

suffered a net loss of $331.9 million in 1991. Of course, United also made some big

purchases in 1991. In the spring, United purchased 6 Pan Am routes to London for

$400 million, and later that same year, it acquired part of Pan Am’s Latin American

division for $135 million. Today, United continues to expand into Latin America and

Europe (Simley p. 130).

Size

        United’s vast network includes 5 continents, 30 countries, and 2 United States

territories with service to 97 domestic and 38 international airports worldwide.

United Airlines employs close to 92,000 people including 9,281 pilots, 21,283 flight

attendants, 26,430 mechanics, and 34,785 management and salaried personnel.

Everyday United employees are responsible for 2,245 flights carrying approximately

230,580 passengers (Student Resource Guide p. 10).

Fleet

        As of January 1, 1998, United Airline’s fleet consisted of 576 aircraft, and the

company has already placed orders for 75 additional aircraft. The airline’s passenger

fleet includes 727’s, 737’s, 747’s, 757’s, 767’s, 777’s, McDonnell Douglas DC-10s,

and Airbus 320s. The average age of United’s aircraft is 10.8 years. During 1998,

United took delivery of 41 new planes including 4 Boeing 777-200s, 4 Boeing 747-

400s, 10 Airbus 320-200s, 16 Airbus 319s, and 3 Boeing 757-200s (Student Resource

Guide p.4).




                                           3
Revenue

       In 1997, United Airlines was the largest domestic airline with carrier revenues

of $17.4 billion, which was equal to 19.3% of industry revenues. United’s closest

competitor was American Airlines with $16.9 billion. The United States airline

industry is estimated to have had $90 billion in 1997 revenues. Eighty-one billion

dollars of that total came from ticket sales, and the other $9 billion came from in-

flight sales and carrying mail and other cargo (Standard and Poor p. 8).

       In-flight sales consist of alcoholic beverages, telephone, ATM, and fax

services, as well as, a variety of television and entertainment services. Freight

accounts for close to 75% of United’s cargo shipments, with mail making up the other

25%. United’s cargo revenues increased 15% from 1996 to 1997, and now make up

5% of the company’s overall revenues. With $892 million in cargo revenue, United

is the largest cargo-revenue-producing airline in the United States (1997 Annual

Report p. 19).

Unions and the Employee Stock Ownership Plan (ESOP)

       In the past, United has had some trouble with its employee unions. In 1976,

the airline paid a million-dollar settlement in an anti-discrimination lawsuit filed by

female and minority employees. And in 1979, United lost $72 million due to a month

long strike (Simley p. 129).

       To solve some of these problems, United underwent major changes in 1994.

Gerald Greenwald was elected the new company CEO. He oversaw the buyout of

United Airlines and its conversion into the largest employee owned corporation.

United’s pilots’ and machinists’ unions now own 60% of the company (Leonhardt p.




                                            4
42). Under the employee stock ownership plan, employees forgo wage and benefit

increases in exchange for stock in United Airlines.

       United also developed its own “airline-within-a-airline” in 1994. The

employees named the new airline Shuttle by United. Shuttle was developed for many

reasons including providing passengers with an alternative in the growing low-cost,

high frequency, and short-haul market up and down the West Coast, creating

additional jobs for United employees, and feeding United’s hubs. Shuttle provides

service to 20 West Coast cities and offers 466 daily departures (Student Resource

Guide p. 2)

       The ESOP agreement was reviewed in 1996 to make sure employee wages

were comparable to the industry. In March of 1997, the unions reached an agreement

with United that increased wages 5% in July of 1997 and an additional 5% in July of

1998. The agreement also provided a provision to restore wages to pre-ESOP levels

in 2000 (1996 Annual Report p. 3).

CEO

       On March 25, 1999, the Board of Directors of UAL Corporation elected

James E. Goodwin to succeed Gerald Greenwald as chairman and chief executive

officer. Goodwin has been the president and chief operating officer of United since

September of 1998. He will assume his new duties in July of 1999 (UAL Board, p. 1)

       Goodwin is a 32-year veteran of United Airlines. His previous positions with

the company include running the North American and overseas operations and the

San Francisco maintenance center. Labor officials have praised the board’s decision




                                          5
because of Goodwin’s knowledge of the company and his ability to make

subordinates feel involved in decision-making (Leonhardt p. 44).

       The biggest challenge facing the new CEO will be labor negotiations. By

April 2000, United and its two employee unions must decide whether or not to renew

the 1994 employee stock ownership plan (ESOP). Approving the plan means

employees will give up higher wages in return for stock. A majority of the pilots

want to renew the plan because of United’s five-year stock performance. However,

the machinists are not as happy with ESOP 2. If talks do not go well, United could

face the same kind of labor problems that have plagued American and Northwest

Airlines.




                                          6
   Environment Analysis

   Macroeconomic Analysis

          Sales of industries, such as airlines or luxury consumption goods, critically

   depend on macroconditions: sales rise when the economic conditions improve and

   decline when economic conditions deteriorate (Benningga, p. 140). Since airline

   industry is both labor and capital intensive, its yield can be expressed as a function of

   leading economic indicators such as the ∆% in labor rate, the ∆% of fuel price per

   gallon and the ∆% of interest rate. The historical date for the years 1988 – 1997 is

   gathered and then converted to constant index at 1997 = 100 with is showed below:

Nominal
            Yield        CPI        Labor     Fuel     Interest          Percentage Change (%)
  Year                            (per emp
           (cents)     97=100     per year) (per gal.)   (%)           Labor       Fuel        Interest
  1988      11.88                  44,915.2       53.4      9.67       2.95%      -4.54%        3.47%
  1989      12.43                  46,581.7       60.2     10.46       3.58%     11.32%         7.57%
  1990      12.76                  47,384.0       77.8     10.11       1.69%     22.58%         -3.54%
  1991      12.74                  50,268.0       70.0      8.56       5.74%     -11.17%       -18.04%
  1992      12.50                  52,789.5       65.5      8.34       4.78%      -6.84%        -2.63%
  1993      13.06                  55,692.3       60.2      8.54       5.21%      -8.73%        2.35%
  1994      12.60                  57,901.6       54.8      9.22       3.82%      -9.83%        7.38%
  1995      12.87                  60,633.0      55.8       9.83       4.50%      1.70%         6.21%
  1996      13.10                  62,040.0      65.2       9.14       2.27%     14.42%         -7.57%
  1997      13.13                  63,437.0      63.1       7.58       2.20%      -3.33%       -20.57%

Real
  1988      21.10       56.3      79,778.4          94.9      17.18   -6.30%     -14.51%        -5.74%
  1989      19.98       62.2      74,890.2          96.8      16.82   -6.53%      2.02%         -2.12%
  1990      18.47       69.1      68,573.2         112.6      14.62   -9.21%     13.99%        -15.03%
  1991      17.03       74.8      67,203.2          93.6      11.45   -2.04%     -20.34%       -27.78%
  1992      15.78       79.2      66,653.4          82.7      10.53   -0.82%     -13.13%        -8.67%
  1993      15.66       83.4      66,777.4          72.2      10.24    0.19%     -14.50%        -2.83%
  1994      14.43       87.3      66,324.9          62.8      10.56   -0.68%     -14.96%        3.05%
  1995      14.05       91.6      66,193.2          60.9      10.74   -0.20%      -3.14%        1.59%
  1996      13.60       96.3      64,423.7          67.7       9.49   -2.75%     10.03%        -13.09%
  1997      13.13       100       63,437.0          63.1       7.58   -1.56%      -7.30%       -25.20%




                                               7
       Yield – measure revenue of the industry. In this case yield is measured in

cents and is indexed at 1997 = 100.

       Labor – the industry’s largest cost item. Labor cost absorbs about 30% of the

average carrier’s revenues. Therefore, the change in labor cost has significant effect

on their income. In this case the labor cost per employee is indexed at 1997 = 100

       Fuel – the second largest cost item. Fuel cost absorbs about 10%-15% of the

average carrier’s revenues. In this case the average price/gallon of jet fuel is indexed

at 1997 = 100

       Interest – most carriers are highly leveraged. Therefore, the change in interest

rate has directly effect on their CF and NPV. In this case the interest rate is indexed

at 1997 = 100

       From the information above, regression model for airline industry’s real yield

is:

       Yield = 12.98 – 99.71(∆%L) – 15.57(∆%F) +6.27(∆%I)

       Yield    - airline industry revenue per passenger mile
       ∆%L      - percentage change in labor cost per employee
       ∆%F      - percentage change in fuel price per gallon
       ∆%I      - percentage change in interest rate

       R2 = 85.56% - the change in fuel price (%), the change in labor cost (%)

                and the change in interest rate (%) explain 85.56% of yield.

       F Value = 18.885 > 4.76 - at 5% level of significance the F Value is

                greater than the critical F. Therefore, this model is a “good fit”.

       Significance F = 0.001850657 < .05 – at 95% confidential level, this model

                is significance.




                                            8
Industry Analysis

       The U.S. airlines industry took in estimated revenues of $90 billion in 1997,

of which some $81 billion (90%) was derived from passenger fare. In addition to

passenger fares, the industry obtained another $9 billion by carrying mail and cargo

and from in-flight sales. In comparison, revenues totaled $86.2 billion in 1996, with

$76.6 billion (89%) in passenger fares. Domestic travel accounted for 78% of

passenger revenues in 1997; international travel accounted for 22% (Standard p.8).

       Airlines derive their revenues primarily from the fares they charge to transport

passengers. They also earn revenues by transporting mail and cargo and by selling

in-flight services and alcoholic beverages.

       The airline industry has transformed the commercial world into one big

market place. Consequently, many business people use air travel to make sales trips,

visit far-flung factories, and attend industry conventions. In its latest survey of air

travel (1995), the Travel Industry Association (TIA) found that 41% of air trips were

made for business purposes.

       The business traveler is the industry’s principal moneymaker. A United

Airlines survey in 1997 determined that just 9% of its passengers (in business class)

were contributing 44% of its revenues. Business travelers generate high yields for

airlines because they typically book flights at the last minute, when fares are highest.

Because their firms pick up the tab, they tend to be relatively price-insensitive

(Standard p.16).




                                              9
Industry Structure

       The airline industry is an imperfect oligopoly. A few major carriers; UAL,

AMR, DAL and NW dominate long-haul passenger traffic, while several dozen small

carriers compete for short-haul flights (Standard, p. 16).


                                      1997 Market Share
                                  (Based on revenue passenger-miles)
                                                                       UAL
                                                                       20%
                     Others
                      34%




                                                                             AMR
                                                                             18%


                               NW
                               12%                          DAL
                                                            16%
                   Source: Airlines Industry Survey, May 14, 1998




                                             10
Airline size categories

       According to Airlines Industry Survey, the Department of Transportation

(DOT) classifies airlines as following; major, national, or regional carriers, according

to the size of their revenue base.

   Major airlines – carriers whose revenues exceed $1.0 billion. They typically

    operate jet aircraft with 150 to 400 seats on an average stage (or flight) length of

    about 1,000 miles. The large aircraft used for international flights can travel

    5,000 miles before refueling.

   National airlines – carriers whose revenues fall between $100 million and $1

    billion. Despite their designation, some of these carriers may limit their service to

    regional markets, while others may offer international service. Their aircraft may

    have somewhat smaller seating capacity than the major’, about 100 to 150 seats.

    Additionally, national carriers may operate more short-haul flights and typically

    specialize in point-to-point service.

   Regional airlines - carriers whose receive revenues of less than $100 million.

    This category contains two distinct types: commuter lines and the start-up carrier.

    Commuter lines – primarily serve low-density, short-haul markets.

    Start-up carriers – classified as regional because of their revenue base, may

    initially serve a single region; however, their goal is to offer broad coverage.




                                            11
Competition Analysis

       Airlines confront a variety of competitors. In some markets, major airlines

face competition from other majors and from national and regional airlines as well.

All airlines compete with other transportation modes, such as automobiles, railroads,

and buses.

       Following deregulation in 1978, competition in the airline industry intensified.

As regulatory barriers to entry were dismantled and risk capital poured in, established

carriers faced an unending parade of aggressive start-up airlines that targeted larger

carriers’ high-margin business. In recent years, competitive pressures have eased as

capacity has tightened and carriers have limited their geographic reach.

       The automobile is the airline industry’s chief competitor. Airline travel is

neither practicable nor economical for short traps. According to the Travel Industry

Association, some 70% of auto trips were under 600 miles in 1995 (latest available),

compared with only 11% of airlines trips. For long distances, air travel is preferred.

Some 75% of airline trips exceed 1,000 miles, while only 13% of auto trips exceed

that distance.

       Airlines also face competition from intercity railroads, specifically Amtrak,

whose fares are partly subsidized by the U.S. government. While Amtrak operates

some long-distance routes, its passengers use it for an average journey length of about

280 miles. Intercity bus travel, although much more popular than railroads, rarely

competes directly with air travel because the typical bus journey is just 140 miles.

       Airlines compete with each other on other service and price. For business

travelers, flight frequency and reliability are critical, while cuisine and frequent-flyer




                                            12
programs also are influential. Small airlines that cannot obtain gate space during

peak travel periods are unable to attract business travelers.

       Service information is disseminated by the U.S. Department of

Transportation’s (DOT) Office of Consumer Affairs, which each month reports the

on-time performance for the larger airlines. The DOT also collects and disseminates

information about airlines’ performance in baggage handling and overall complaint

record. These statistics can influence business travelers’ carrier selection. Leisure

travelers are less affected by such reports; aside from the few first-class nonbusiness

passengers, price is the leisure traveler’s biggest concern.

       In differentiating themselves from their competitors, airlines may strive to

build brand loyalty through frequent-flyer programs. Targeted mainly to business

travelers, frequent-flyer programs let travelers chalk up bonus miles by taking flights

or by conducted business with other organizations that have tie-ins with the airlines.

These bonus miles can be redeemed for free air tickets. Frequent-flyer programs are

desinged to promote repeat business for an airline; members tend not to defect to

another airline to reap minor price savings.




                                           13
Price Competition

        Price competition is a fundamental weapon that carriers commonly use to win

a greater share of the leisure market. Fare differentials of just a few dollars can

persuade leisure travelers to select one airline over another or to make their journey

by a different mode. In contrast, business fares are rarely discounted and do not

change as often.

        However, since airlines view their seats as a perishable inventory. Once a

plane is aloft, its empty seats can no longer be sold. To prevent such loss of

inventory, the industry has developed sophisticated computer programs to help

determine how much demand there will be for each route at different times of the day,

days of the week, and seasons of the year.

        Airlines also attempt to calculate how much of a flight should be booked by a

given point in time through a process known as yield management. Yield

management alerts the carrier to abnormal booking patterns, to which it can react by

either cutting or raising fares well before a flight departs.

        Furthermore, to attract leisure travelers, airlines advertise deeper discounted

fare. But most passengers do not get these fares because, by law, carriers do not have

to offer more than 10% of the seats on a flight at the discounted rate. On a given

flight, passengers who are flying coach may have booked fares at as many as dozen

different prices. Carriers offer different level of fares according to the length of time

in advance that the flight is booked. Walk-up fares, paid by passengers at the airport

gate at departure time, are the highest.




                                            14
       On the other hand, since deregulation, the airline industry has been prone to

periodic bursts of destructive fare wars. Some of the blame lies in the aggressive

pricing tactics of start-up carriers, which operate with substantially lower costs than

the major airlines.

       Generally, the industry is susceptible to fare wares when the level of capacity

is fare in excess of the level of demand. Because airlines have high fixed costs (for

equipment and terminal facilities) relative to their marginal costs (the cost of flying

one additional passenger), fare wars can reach extremes before order is restored.




                                           15
        Traffic Analysis

        Revenue passenger miles (RPMs)

               RPMs is an indicator measures the total number of passengers carried by the

        industry’s 10 largest airlines multiplied by the number of miles flown. Since the 10

        largest carriers account for some 94% of total U.S. traffic, RPMs is a great indicator

        to measure how much the industry has grown in the past years (Standard p. 21).

               According to the table and graph below, in the past five years (1998-1997),

        RPMs has been growing at an average rate of 3.92%. Using that geometric means,

        next year RPMs can be predicted to be 605.43 billions RPMs.




              RMPs          RMPs                                  RMPs (Billions)
 Year       (Billions)     Growth
                                              650
 1988         423.30        4.45%
                                              600
 1989         432.71        2.18%
 1990         457.93         5.51%            550
 1991         447.95        -2.23%
                                              500
 1992         478.55         6.39%
 1993         489.65         2.27%            450
 1994         519.38         5.72%
 1995         540.66         3.94%            400
                                                     1988 1989 1990 1992 1993 1994 1995 1997 1998
 1996         578.66         6.57%
 1997         605.43         4.42%           RMPs 423.30432.71 457.93478.55 489.65519.38 540.66605.43 629.17
1998 (F)      629.17         3.92%




                                                    16
Operating Cost Analysis

Labor

        According to Airlines Industry Survey, labor is the industry’s largest cost

item, absorbing about 30% of the average carrier’s revenues (Standard p.19), it is a

factor to be watched closely. Although some airlines spend as little as 22%, some

others spend as much as 36% of their revenues on labor. Such disparities depend on

the carrier’s efficiency and the labor intensiveness of their routes. For example,

airlines that serve meals require more flight attendants and cleaning personnel than

airlines that do not. In addition, outsourcing certain tasks such as maintenance or

reservation services both reduces labor costs as a percentage of total costs and cuts

total costs as well (Standard p24).

        According to the regression model:

                   Yield = 12.98 – 99.71(∆%L) – 15.57(∆%F) +6.27(∆%I)

        If the labor cost (L) change by 1% and all other variables holding constant, the

yield should change 86.73 cents.




                                           17
Fuel

        Airlines are energy-intensive operations. Fuel consumption rates are greatly

influenced by the age of a carrier’s aircraft; newer planes are more fuel-efficient than

older ones.

        Fuel prices are expected to fall in 1998. Jet fuel, which averaged 64.7 cents

per gallon in 1997 (a 1% rise over 1996) is expected to average about 52 cents, or

20% less in 1998. The reduced demand from Asia, and continued disarray within

OPEC have driven jet fuel prices to four-year lows. Iraq’s return to the oil markets

has also helped to depress fuel prices. Airlines, which consume about 18 billion

gallons annually, could save as much as $2 billion in fuel costs in 1998 (Standard

p24).

        According to the regression model:

        Yield = 12.98 – 99.71(∆%L) – 15.57(∆%F) +6.27(∆%I)

        If the price of fuel per gallon (F) change by 1% and all other variable holding

constant, the airlines industry’s yield should change by 2.59.




                                           18
Industry Outlook

       In 1998, the airlines industry is expected to grow 3.92% to post the record

high at 629.16 billion revenue passenger miles (RPMs), up 23.73 billion RPMs

posted in 1997. The 1997’s gain is a bit slower than the 4.8% average growth rate the

industry registered between 1986 and 1996 because of the higher fares have prompted

curtailment of travel, and Asian travel has plummeted in some markets. However,

according to Airlines Industry Survey, over the long run, air travel is expected to

continue to grow at approximately two times the rate of increase for real GDP.



            Year      GDP ($B)           GDP g       RMPs (B) RMPs g
            1987      5,750.57                        404.47
            1988      5,952.83           3.40%        423.30   4.45%
            1989      6,093.51           2.31%        432.71   2.18%
            1990      6,078.96          -0.24%        457.93   5.51%
            1991      6,105.25           0.43%        447.95  -2.23%
            1992      6,327.12           3.51%        478.55   6.39%
            1993      6,476.86           2.31%        489.65   2.27%
            1994      6,688.61           3.17%        519.38   5.72%
            1995      6,825.80           2.01%        540.66   3.94%
            1996      7,093.12           3.77%        578.66   6.57%
            1997      7,364.63           3.69%        605.43   4.42%
                   1998 Growth           2.43%                 3.92%


       Business travel, which accounts for 40% of passengers, may be flat in 1998,

given that corporate profits are expected to grow a meager 0.3% before taxes in 1998,

following a robust 8.3% gain in 1997. Meanwhile, airlines keep ratcheting up

business fares. American Express’s Business Fare Index rose 16% in 1997.

Corporations have reacted to the higher fares by encouraging their executives to fly


                                           19
cheaper coach class and even to stretch their trip to include a Saturday stay to qualify

for deeply discounted leisure class rates. If this trend become pervasive, airlines will

face a squeeze on margins.

       The outlook for vacation and personal travel in 1998 (both international and

domestic) appears positive. Leisure travel, which accounts for about 60% of

enplanements, is being buoyed by strong consumer sentiment and strong dollar.

Unemployment is expected to average 4.7% in 1998 – the lowest level in 30 years.

Stadard & Poor’s projects that disposable personal income will advance 5.4% in

1998, after seeing a 4.9% increase in 1997.

       The strength in consumer sector is reflected in the sentiment consumer sector

is reflected in the sentiment readings calculated by the Conference Board, a private

research firm. In February 1998, consumer sentiment reached a 30-year high at

147.4, up sharply from the 47.3 nadir recorded in early 1992. With consumers in fine

spirits, more dollars will be allocated for leisure and traveling.

       International travel, which accounts for 26% of RPMs, will lag the overall

growth anticipated in domestic markets. Still, it will climb a respectable 3.5% in

1998, down from 5.3% in crease recorded in 1996. A strong dollar, while helping

make vacations to Europe affordable, is hurting travelers coming to the U.S.

Additionally, traffic in most of Asia has deteriorated, reflected the region’s currency

and economic crises (Standard p.




                                            20
                                              Growth Projection

               Under the assumption that UAL’s sales appreciates at the rate of inflation, the

constant-dollar sales of UAL can be estimated by adjusting the reported annual sales

to changes in the consumer price index (CPI). The conversion of UAL’s sales as

reported in its financial statements for the year 1988 – 1998 to Sales figure expressed

in 1997 dollars is presented in the following table and graph.


                            Nominal                                                       Real
             Year          UAL Sales             Growth                 CPI            UAL Sales             Growth
                               ($M)                (%)                97=100              ($M)                 (%)
             1987           8,292.790                                  51.4             16,133.83
             1988            8,981.74                  7.67%           56.3             15,953.36                  -1.13%
             1989            9,793.64                  8.29%           62.2             15,745.39                  -1.32%
             1990           11,037.48                 11.27%           69.1             15,973.19                   1.43%
             1991           11,662.58                  5.36%           74.8             15,591.68                  -2.45%
             1992           12,889.70                  9.52%           79.2             16,274.87                   4.20%
             1993           14,511.00                 11.17%           83.4             17,399.28                   6.46%
             1994           13,950.00                 -4.02%           87.3             15,979.38                  -8.89%
             1995           14,943.00                  6.65%           91.6             16,313.32                   2.05%
             1996           16,362.00                  8.67%           96.3             16,990.65                   3.99%
             1997           17,378.00                  5.85%            100             17,378.00                   2.23%
                          1998 Growth                  5.66%                          1998 Growth                   1.17%


                                  UAL's Sales in Nominal vs. Real
                18,000

                17,000

                16,000

                15,000

                14,000
(millions)




                13,000

                12,000

                11,000

                10,000

                 9,000

                 8,000
                           1988      1989      1990      1991      1992      1993      1994     1995      1996      1997
               Nominal 8,981.74 9,793.64 11,037.48 11,662.58 12,889.70 14,511.00 13,950.00 14,943.00 16,362.00 17,378.00
               Real      15,953.36 15,745.39 15,973.19 15,591.68 16,274.87 17,399.28 15,979.38 16,313.32 16,990.65 17,378.00


                                                             21
                             Ratio Analysis


Liquidity Ratios

                             UAL    UAL    UAL    UAL    UAL     UAL
                            CORP CORP CORP CORP CORP            CORP
                            Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LIQUIDITY
Current ratio                  0.56      0.54        0.69     0.65     0.76     0.64
Quick Ratio                    0.36      0.33        0.47     0.49     0.60     0.45
Working Capital per Share    -40.13    -39.46      -27.41   -34.45   -12.04   -30.70
Cash flow per Share           29.34     22.78       21.73    16.12      7.9    19.57

                             AMR    AMR    AMR    AMR    AMR    AMR
                            CORP CORP CORP CORP CORP            CORP
                            Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LIQUDITY
Current Ratio                 0.90      0.80         0.67     0.63     0.61    0.72
Quick Ratio                   0.68      0.57         0.44     0.40     0.34    0.49
Working Capital per Share    -3.15     -6.02       -10.18   -11.83   -11.39   -8.51
Cash Flow per Share          12.87     12.69         9.52     9.76     6.73   10.31

                            DELTA DELTA DELTA DELTA DELTA DELTA
                             AIRL   AIRL   AIRL   AIRL   AIRL   AIRL
                            Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LIQUIDITY
Current Ratio                  0.70     0.90        0.88      0.91     0.95    0.87
Quick Ratio                    0.52     0.72        0.73      0.73     0.75    0.69
Working Capital per Share    -16.50    -5.25       -8.40     -6.20    -3.01   -7.87
Cash Flow per Share           21.22    11.66       18.03       6.3     6.73   12.79

                            USAIR USAIR USAIR USAIR USAIR USAIR
                            Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LIQUIDITY
Current Ratio                  1.1          0.81     0.64     0.49     0.53     0.71
Quick Ratio                    0.9          0.68     0.49     0.34     0.33     0.55
Working capital per Share     2.72         -8.37   -14.21   -18.72   -17.88   -11.29
Cash Flow per Share          14.61          9.01     7.43    -5.49    -0.52     5.01




                                      22
Current Ratio


                        A firm’s current ratio indicates its ability to meet short-term obligations. It is

measured by dividing current assets by current liabilities. The current ratio is the

single best indicator of a company’s ability to convert assets into cash and pay off

short-term liabilities. This ratio is an adequate measure of the financial strength of a

company in the short-term and can be used to compare similar companies in the same

industry. A high current ratio could mean that the company has a lot of money tied

up in nonproductive assets, such as cash, or marketable securities or in inventory. But

for UAL, it is not the case.


                                      Liquidity Ratios
  Current Ratio




                  1.5
                    1
                  0.5
                    0
                             1993     1994      1995      1996      1997
                                                Year

                                    UAL      AMR       DAL        USAir

                                    Average Current Ratio

                    1
                  0.9
                  0.8
                  0.7                                                 UAL
                  0.6                                                 AMR
  Ratio




                  0.5                                                 DAL
                  0.4                                                 USAir
                  0.3                                                 AVERAGE
                  0.2
                  0.1
                    0




                                                             23
Quick Ratio

              A firms’s quick ratio is measured by current assets minus inventories divided

by current liabilities. As it is seen from the current ratio, UAL’s quick ratio is also a

little lower than the industry average. This indicates UAL’s assets are less liquid than

its comparables. UAL’s quick ratio is low compared to the industry. Since UAL’s

average collection period is low, accounts receivable can be collected and the

company should be able to pay off its current liabilities.


                                   Liquidity Ratios

                      1
      Quick Ratio




                    0.8
                    0.6
                    0.4
                    0.2
                      0
                          1993      1994      1995     1996     1997
                                              Years

                             UAL           AMR        DAL      USAir




                                 Average Quick Ratio

                    0.8
                    0.6
            Ratio




                    0.4
                    0.2
                      0

                    UAL   AMR     DAL      USAir   Average Comparables




                                                      24
Cash Flow per Share

             Cash flow per share is defined as the cash flow from operations minus

preferred stock dividends divided by the number of the number of common shares

outstanding. From 1993 to 1997 UAL’s cash flows have increased. During this

period sales increased 20%. UAL also has fewer shares of stock outstanding

compared to the rest of the industry and UAL does not pay dividends.


                                   LIQUIDITY

                     40
     CASH FLOW PER




                     30
        SHARE




                     20
                     10
                      0
                     -10    1993   1994     1995     1996         1997

                                           YEARS

                           UAL     AMR        DAL         USAIR




                            Average Cash Flow per Share
              25

              20                                          UAL

              15                                          AMR
     Ratio




                                                          DAL
              10
                                                          USAir
               5                                          Comparables Average

               0




                                                    25
Working Capital per Share

             Working capital per share is measured by current assets minus current

liabilities divided by number of shares of outstanding. Generally, the working capital

ratio should be positive. A positive ratio indicates a company has sufficient resources

to cover its current liabilities. However, our calculations indicate UAL and its

comparables all have negative working capital per share, and UAL has the worst

ratio.


                                   LIQUIDITY

                      10
   CAPITAL PER




                       0
    WORKING

     SHARE




                     -10   1993     1994   1995     1996    1997
                     -20
                     -30
                     -40
                     -50
                                           YEARS

                       UAL         AMR     DAL          USAIR




              Average Working Capital per Share

             0.00
            -10.00
    Ratio




            -20.00
            -30.00
            -40.00

            UAL      AMR     DAL   USAir   Average Comparables




                                                   26
Activity Ratios

                      UAL          UAL          UAL       UAL       UAL UAL CORP
                     CORP         CORP         CORP      CORP      CORP
                     Dec-97       Dec-96       Dec-95    Dec-94    Dec-93 Average
ACTIVITY
Inventory Turnover     42.53        43.42        45.93     44.96    44.63      44.29
Receivables            17.27        17.11        16.24     13.88    12.89      15.48
Turnover
Total Asset             1.22         1.35         1.28      1.13     1.16       1.23
Turnover
Average Collection        21              21       22        26        28      23.60
per Days
Days to Sell                  8            8        8         8         8             8
Inventory
Operating Cycle           29              29       30        34        36      31.60


                      AMR          AMR          AMR       AMR       AMR      AMR
                     CORP         CORP         CORP      CORP      CORP      CORP
                     Dec-97       Dec-96       Dec-95    Dec-94    Dec-93   Average
ACTIVITY
Inventory Turnover     24.37        24.03        22.26     19.91    20.35      22.18
Receivables            13.50        14.01        14.34     15.25    16.91      14.80
Turnover
Total Asset             0.90         0.89         0.87      0.83     0.83       0.86
Turnover
Average Collection        27              26       25        24        21      24.60
per Days
Days to Sell              15              15       16        18        18      16.40
Inventory
Operating Cycle           42              41       41        42        39      41.00


                     DELTA        DELTA        DELTA     DELTA DELTA        DELTA
                      AIRL         AIRL         AIRL      AIRL   AIRL        AIRL
                     Dec-97       Dec-96       Dec-95    Dec-94 Dec-93      Average
ACTIVITY
Inventory Turnover    309.53       149.35       161.64    146.62   131.11     179.65
Receivables            14.22        14.46        14.86     12.74    10.39      13.33
Turnover
Total Asset             1.09         1.02         1.01      1.04     1.09       1.05
Turnover
Average Collection        25              25       24        28        35      27.40
per Days


                                     27
Days to Sell                  1            2        2         2         3       2.00
Inventory
Operating Cycle           26              27       26        31        37      29.40


                     USAIR        USAIR        USAIR     USAIR     USAIR     USAIR
                     Dec-97       Dec-96       Dec-95    Dec-94    Dec-93   Average
ACTIVITY
Inventory Turnover     31.19        29.86        26.85     22.18    18.27      25.67
Receivables            26.72        24.71        23.12     20.32    26.07      24.19
Turnover
Total Asset             1.07         1.12         1.09      1.02     1.05       1.07
Turnover
Average Collection        13              15       16        18        14      15.20
per Days
Days to Sell              12              12       13        16        20      14.60
Inventory
Operating Cycle           25              27       29        34        34      29.80




                                     28
Total Assets Turnover

            Total assets turnover measures the turnover of all the firm’s assets. It is

defined as sales divided by total assets. If the firm’s ratio is lower than the industry,

sales should be increased, some assets should be sold or a combination of these things

should be done. UAL’s total assets turnover ratio has been relatively flat over the

past five years, this is also true of its competitors. However, UAL’s ratio is above the

industry average indicating it is handling its assets in an efficient manner.



                               Total Assets Turnover

            1.5

             1
    Ratio




            0.5

             0
                   1993         1994        1995          1996        1997
                                            Years

                              UAL       AMR         DAL      USAir




                          Average Total Assets Turnover

   1.40
   1.20
                                                            UAL
   1.00
                                                            AMR
   0.80
                                                            DAL
   0.60
                                                            USAir
   0.40
                                                            Comparables Average
   0.20
   0.00




                                               29
Average Collection Period

            Average collection period is used to appraise accounts receivable, and it is

calculated by dividing accounts receivable by average daily sales to find the amount

of sales that are tied up in receivables. Over the past 5 years, UAL’s collection period

has been declining which means UAL has more cash on hand. UAL can use this cash

to retire debt or invest in assets. Even though UAL’s average collection period is

above the industry average, the recent decline in its collection period is a positive sign

for the future.


                     Average Collection Period

          40
          35
          30
          25
   Days




          20
          15
          10
           5
           0
                  1993      1994       1995      1996     1997
                                      Years

                       UAL         AMR        DAL        USAir




                             Average Collection Period


          30.00

          25.00
                                                          UAL
          20.00                                           AMR
   Days




          15.00                                           DAL

          10.00                                           USAir
                                                          Average Comparables
           5.00

           0.00




                                                30
Profitability Ratios

                        UAL       UAL           UAL    UAL    UAL          UAL
                       CORP      CORP          CORP CORP CORP             CORP
                       Dec-97    Dec-96        Dec-95 Dec-94 Dec-93      Average
PROFITABILITY
Net Profit Margin         5.51         3.67    2.53       0.55   -0.21        2.41
Return on Assets          5.57         4.26    2.79       0.15   -0.50        2.45
Return on Equity         37.70        54.27 -135.98      -5.70   -5.46      -11.03
Return on Investment     14.19        13.13    8.71       0.54   -1.34        7.05


                        AMR       AMR           AMR    AMR    AMR         AMR
                       CORP      CORP          CORP CORP CORP             CORP
                       Dec-97    Dec-96        Dec-95 Dec-94 Dec-93      Average
PROFITABILITY
Net Profit Margin         5.30         6.22      1.16    1.41    -0.61       2.70
Return on Assets          4.71         5.39      0.98    0.88    -4.42       1.51
Return on Equity         15.85        19.50      5.24    5.21    -4.88       8.18
Return on Investment      9.75        10.82      1.77    1.53    -1.36       4.50


                       DELTA     DELTA DELTA DELTA DELTA                 DELTA
                        AIRL      AIRL   AIRL   AIRL   AIRL               AIRL
                       Dec-97    Dec-96 Dec-95 Dec-94 Dec-93             Average
PROFITABILITY
Net Profit Margin         6.28         1.25      2.41    -3.31 -3.46          0.63
Return on Assets          6.63         0.61       1.7    -4.36 -4.42          0.03
Return on Equity          28.1         2.91     11.28   -35.38 -27.45        -4.11
Return on Investment     17.04         1.52      4.06   -10.82 -9.19          0.52


                       USAIR     USAIR         USAIR USAIR USAIR          USAIR
                       Dec-97    Dec-96        Dec-95 Dec-94 Dec-93      Average
PROFITABILITY
Net Profit Margin        12.04          3.23      1.6    -9.79   -4.93       0.43
Return on Assets         11.48          2.32     0.49   -11.21   -6.15      -0.61
Return on Equity        132.56        -21.89    -3.28    68.23   99.36      55.00




                                 31
Net Profit Margin

           Net profit margin is calculated by dividing net income by sales. UAL’s net

profit margin is above the industry average due to its efforts to hold costs down. Low

costs generally indicate efficient operations. If two firms have identical operations --

their sales, operating costs, and EBIT are the same, but one firm uses more debt than

the other, then that firm will have to a higher interest expense.

            The firm paying higher interest charges will have a lower net income, and if

sales are constant, this will result in a lower profit margin. Since the airline industry

is highly leveraged net profit margins are generally lower than in other industries.

UAL’s net income has been improving for several reasons: fuel prices have

decreased, load factors have increased, travel agent commissions have decreased, and

debt has decreased.




                             PROFITABILITY

                15
                10
   NET PROFIT
    MARGIN




                 5
                 0
                 -5   1993    1994   1995     1996    1997
                -10
                -15
                                     YEARS

                        UAL       AMR        DAL     USAIR




                                              32
                                      Average Net Profit Margin

   3

 2.5
                                                                      UAL
   2
                                                                      AMR
 1.5                                                                  DAL
                                                                      USAir
   1
                                                                      Average Comparables
 0.5

   0



Return on Assets

                       Return on assets is measured by dividing net income by total assets. This is a

widely used measure of profitability and higher percentages tend to indicate more

profitable companies. UAL’s return on assets is a result of its increase in sales and

more efficient use of assets.


                                      PROFITABILITY

                       15
    RETURN ON ASSETS




                       10
                        5
                        0
                        -5   1993       1994     1995    1996     1997

                       -10
                       -15
                                                YEARS

                                  UAL          AMR      DAL     USAIR




                                                         33
                           Average Return on Assets

            3
          2.5
            2
                                                      UAL
          1.5                                         AMR
  Ratio




            1                                         DAL
          0.5                                         USAir
                                                      Average Comparables
            0
          -0.5
           -1



Return on Equity

             Return on equity is the rate of return on stockholders’ investment. It is

calculated by net income divided by common equity. Return on investment indicates

how well common stockholders’ money is being used. The decrease in UAL’s return

on equity in 1995 is due to the retirement and replacement of 94 aircraft. The new

aircraft are more efficient and require less fuel and maintenance this accounts for the

increase in return on equity after 1995.


                              PROFITABILITY

                 200.00
   RETURN ON




                 100.00
     EQUITY




                   0.00
                 -100.00    1993   1994    1995      1996     1997

                 -200.00
                                          YEARS

                     UAL        AMR       DAL         USAIR




                                                34
      Average Return on Equity

60
50
40                               UAL
30                               AMR
20                               DAL
10                               USAir

 0                               Average Comparables

-10
-20




                       35
Leverage Ratios


                                UAL    UAL    UAL    UAL    UAL    UAL
                               CORP CORP CORP CORP CORP CORP
                               Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LEVERAGE
Total Debt/Invested Cap. (%)   68.9 82.28 109.88 129.73            84.96    95.15
Total Debt/Total Assets (%)   27.07   26.7 35.24 36.94             31.54    31.50
Total Assets/Common Equity     6.76 12.74 -48.71 -37.23            10.95   -11.10
(%)
Long-Term Debt/Shrhldr       165.68 310.35  N/A    N/A            293.35
Equity (%)

                                AMR AMR AMR AMR             AMR    AMR
                               CORP CORP CORP CORP CORP CORP
                               Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LEVERAGE
Total Debt/Invested Cap. (%)    43.75     49.91   68.72   76.35    66.48    61.04
Total Debt/Total Assets (%)     21.14     24.86   37.85   44.11    40.69    33.73
Total Assets/Common Equity       3.36      3.62    5.37     5.9     6.05     4.86
(%)
Long Term Debt/Shrhldr          62.56     80.13 189.57 233.08     176.66   148.40
Equity (%)

                               DELTA DELTA DELTA DELTA DELTA DELTA
                                AIRL AIRL AIRL AIRL         AIRL   AIRL
                               Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LEVERAGE
Total Debt/Invested Cap. (%)    42.24     46.84   65.77   72.25    65.89    58.60
Total Debt/Total Assets (%)     16.44     18.59   27.45   29.14    31.71    24.67
Total Assets/Common Equity       4.24      4.81    6.65    8.11     6.21     6.00
(%)
Long Term Debt/Shrhldr          56.81     81.22   160.3 205.74    186.26 138.066
Equity (%)

                               USAIR USAIR USAIR USAIR USAIR USAIR
                               Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Average
LEVERAGE
Total Debt/Invested Cap. (%) 74.42 96.77 108.98 108.11             84.67    94.59
Total Debt/Total Assets (%)   31.19 35.85 40.23 43.79              36.81    37.57
Total Assets/Common Equity 11.54 -9.44 -6.63 -6.13                -16.16    -5.36
(%)
Long Term Debt/Shrhldr       223.93                               447.50
Equity (%)                          N/A  N/A   N/A


                                     36
Total Debt to Total Assets

              The numbers from Compustat are actually the long-term debt to total assets.

This ratio measures the percentage of funds provided by creditors. Creditors prefer

low debt ratios because the lower the ratio, the greater their protection against losses

in the event of bankruptcy.

              UAL is highly levered because it operates in a mature industry, with intense

competition, and a very low growth rate. Since assets = total liabilities + total equity,

this figure will range from 0-100%. The higher the level of debt the more important

it is for a company to have positive earnings and steady cash flow. Debt in and of

itself is not bad, but since it requires the timely payment of interest to debt holders. It

is important to analyze whether or not a company will have adequate resources to

meet its obligations in the future.


              Average Total Debt to Total Assets

         40
                                                      UAL
         30
                                                      AMR
 Ratio




         20                                           DAL
                                                      USAR
         10
                                                      AVERAGE
         0




                              LEVERAGE

                50
 ASSETS in %
 DEBT/TOTAL




                40
   TOTAL




                30
                20
                10
                 0
                       1993    1994    1995    1996     1997
                                      YEARS

                     UAL      AMR      DAL      USAIR
                                                37
                              Cash Flow Valuation

Free Cash Flow (FCF)

        Free cash flow is the amount of cash that is readily available for distribution to

shareholders. It is expressed as:

            FCF = PAT + Depreciation ± ∆ Current Assets and Current Liabilities

                                    + Interest Expense ± ∆ Fixed Assets

        As seen from the FCF table and bar graph, UAL has done very well. It has

increased its FCF from negative $929 million in 1995 to a positive $226 million in

1997.

Reasons for UAL’s better FCF:

1. From 1995 to 1997, UAL increased its sales by 20%. This increase in sales

   directly affected or resulted in an increase in FCF.

2. UAL’s acquisition of fixed assets decreased. This resulted in higher net profit

   after taxes. Higher net profit after taxes causes higher free cash flows.

3. Interest expense decreased. This means less interest expense was deducted or

   charged against profits; this will result in higher profits after taxes. All other

   things equal, higher profits after taxes equals higher free cash flows.




                                             38
                                                       Free Cash Flow

                3000                    1997                                 1996                            1995
                2000

                1000

                      0

                -1000

                -2000

                -3000

                -4000
                           UAL       AMR      DAL     US     UAL      AMR      DAL     US     UAL      AMR            DAL     US

PAT                        950       985      854     319    600      1105     156     263    378          196        294     119
Depreciation               724       1244     710     311    740      1204     634     316    724      1259           622     352
Change in WC                -21      -550     860     -788   209      -460     -71     -788   -622         -240       304     -242
Acct. CFO                  1653      1679     2424    -158   1549     1849     719     -209   480      1215           1220    229
Interest Exp.              291       399      207     256    295      499      269     267    399          684        292     303
Finance CFO                1944      2078     2631    98     1844     2348     988     58     879      1899           1512    532
Chg. in Fixed Asset        -1718    -1456     -3104   -368   -2163   -1349    -1016    715    -1808        -373       -1486    3
FCF                        226       622      -473    -270   -319     999      -28     773    -929     1526            26     535




                                            Free Cash Flow (millions)

            2000
                                       1997                          1996                        1995
            1500

            1000

                500

                  0

            -500

          -1000
                          UAL AMR DAL            US    UAL AMR DAL            US      UAL AMR DAL                US
            FCF 226                622 -473 -270 -319 999             -28     773 -929 1526           26      535




                                                              39
WACC Calculation

Risk Free Rate (Rf )= 3.8%

Required Return for Small Firm Common Stock (Rm) = 12.7%

                                      1997

Equity                                2,337

Debt                                  8,218

Corporate Tax Rate (t)        =       39%

Weight of Equity (W1)         =       48%

Weight of Debt (W2)           =       52%

Beta of Stock ()             =       1.25

Kr = Rf +  (Rm – Rf)         =    3.8% + 1.25(12.7% - 3.8%) = 14.93%

WACC                          = W1(Kr) + W2(Int*(1-t))          = 9.49%

Residual Cash Flow (RCF)

         Residual cash flow (RCF) is expressed as finance cash flow from operations

minus weighted average cost of capital (WACC) multiplied by average total assets.



                 RCF = Finance CFO – WACC (Average Total Assets)



         Residual cash flow measures the residual amount of finance cash flow from

operations after deducting its cost of financing assets. As seen in the 1997 residual

cash flow bar chart below, United’s performance is better than the industry average.

Among the comparables, only Delta Airlines outperformed United Airlines. There

are several reasons why UAL had a better residual free cash flow. All other things



                                          40
equal, UAL’s consistent increase in finance cash flow from operations over the past

four years accounted for a consistent increase in residual cash flow. When computing

either residual cash flow or cash flow return on investment, some of the same

variables are used; therefore, an increase in cash flow return on investment generally

results in an increase in residual cash flow.


                                             CFO        WACC    Avg. Asset
                         UAL                   1944      0.0949      14240
                         US                      98      0.1038       7952
                         AMR                   2078        0.11      20706
                         DAL                   2631        0.11      12484




                                    1997 RCF (millions)

                2000

                1000

                   0

                -1000
                        IND. AVG.    UAL        US       AMR       DAL
                 RCF     230.83     592.62    -727.42   -199.66   1257.76




Economic Value Added (EVA)

       Economic Value Added (EVA) is expressed as profit after taxes (PAT) minus

the weighted average cost of capital (WACC) multiplied by average total assets.




                                               41
                  EVA = PAT – WACC (Average Total Assets)




                                        EVA

                      0

                  -500

                -1000

                -1500

                -2000

                -2500
                          Ind.
                                    UAL       US       AMR       DAL
                          Avg.

              Dec-97      -678      -401      -505     -1293     -854
              Dec-96      -831      -554      -489     -1098 -1184
              Dec-95 -1077          -733      -595     -1951 -1028
              Dec-94 -1653 -1090 -1395 -1907 -2218


       Economic value added measures how profitable a business entity. The higher

a firm’s economic value added the better its performance. As shown in the economic

value added table and bar graph above, UAL’s three-year performance is better than

the industry average. Furthermore, UAL outperformed the other three comparable

airlines (US Airways, American and Delta Airlines).

Reasons for UAL’s better EVA

       According to the April 19, 1999 issue of BusinessWeek UAL’s executives are

among the highest paid in the airline industry. For example, the ex-Chairman and



                                        42
CEO G. Greenwald received $1.502 million in salary and bonuses last year. J.E.

Goodwin, the company’s president and COO, received $620,000 in compensation

(Executive p. 91). The point we want to make is that UAL’s executives are paid well

because under their leadership UAL’s economic value added improved from negative

$1,090 million in 1994 to negative $401 million in 1997.

       A sales increase of 20% from 1995 to 1997 also contributed to the

improvement of UAL’s economic value added. We learned from classroom lectures

that when sales increase, profit after taxes (PAT) also increase, and all other being

things equal, economic value added will also increase.

Cash Flow Return on Investment (CFROI)

       Cash flow return on investment (CFROI) is expressed as finance cash flow

from operations (CFO) divided by average total assets.




                                           43
                  CFROI = Finance CFO/ Average Total Assets



                                         CFROI


       25.00%
       20.00%
       15.00%
       10.00%
        5.00%
        0.00%
       -5.00%
                 Ind. Avg.        UAL           US          AMR          DAL
       Dec-97      13.36%       13.10%         9.31%      10.04%        21.00%
       Dec-96       8.11%       14.12%         -0.41%     11.28%        7.44%
       Dec-95       8.50%       12.13%         6.50%       2.55%        12.80%

       Cash flow return on investment measures the relationship between cash flow

generated from financial operations and average total assets. All other things being

equal, a higher percentage indicates the effective use of financial resources. As

depicted in the cash flow return on investment tables and bar graph above, UAL’s

three-year performance is above the industry average. This indicates UAL is doing

well compared to the competition.

Reasons for UAL’s better CFROI

       As shown in statement of free cash flows, UAL’s finance cash flow from

operations over the three-year period increased consistently. They were $879, $1844

and $1944 for the years 1995, 1996 and 1997 respectively. Increases in the finance




                                          44
cash flow from operations brought about increases in the cash flow return of

investment.

Pro-forma Statements

       The pro-forma statements shown below are based on the historical financial

statements of United Airlines over the past ten years. When building the pro-forma

statements for United, great care was taken to incorporate many of the ‘Model One’

assumptions mentioned by the authors of our textbook, Corporate Finance A

Valuation Approach, by Simon Benning and Oded Sarrig. The assumptions made

when building the United Airlines pro-forma statements included the following:

1. It is assumed that UAL finances its activities through debt. That is borrowed cash

   is used to defray or pay down company debts. Therefore, Debt is the ‘plug’ for

   the pro-forma balance sheet.

2. For this project it is assumed that UAL’s growth rate includes inflation, so it is a

   nominal growth rate. Hence, a nominal required return is used to maintain

   consistency.

3. Another assumption is that nearly all the items found in the pro-forma statements

   are expressed as a percentage of sales.

4. The constant sales growth rate of 4.6 percent is based on the arithmetic average of

   sales figures over the past ten years.

5. It is assumed that all cash flows are derived at yearend.




                                            45
        Financial Statement Items as a Percentage of Sales

        Sales Growth                         4.6%

        Initial Sales                  $17,378,000,000

        Fixed Assets / Sales                 73.97%

        Current Assets / Sales               16.96%

        Current Liab. / Sales                30.20%

        Cost of Goods Sold / Sales           88.59%

        Tax Rate                             39%

        Depreciation Rate                    33%

                            Pro-forma Income Statement (in millions of $)


                                                         Year
     Profit/Loss        1997       1998      1999        2000      2001      2002      2003
Sales                    17,378     18,177    19,014      19,888    20,803    21,760    22,761
COGS                     15,395     16,358    17,110      17,897    18,721    19,582    20,483
Gross Profit              1,983      1,820     1,903       1,991     2,082     2,178     2,278
Int. Exp.                   291        304       318         333       348       364       381
Dep. Exp.                   724        757       792         829       867       907       948
Other Rev.                1,132      1,184     1,239       1,296     1,355     1,417     1,483
Non-op. Exp.                188        197       206         215       225       235       246
Special Items               378        395       414         433       452       473       495
Pretax Income             1,534      1,350     1,412       1,477     1,545     1,616     1,690
Total Income Tax            561        526       551         576       603       630       659
Profit After Tax            973        823       861         901       942       986     1,031
Other adj.                  101        106       111         116       121       126       132
Adj. Net Inc.               872        718       751         785       821       859       899




                                                 46
                            Pro-forma Balance Sheet (in millions of $)




                               1997       1998        1999      2000       2001        2002      2003
Assets
Cash&Equivalents                   845       1,052     1,100      1,151      1,204       1,259     1,317
Net Receivables                  1,051       1,308     1,369      1,431      1,497       1,566     1,638
Inventories                        355         442       462        484        506         529       553
Other Current Assets               697         868       908        949        993       1,039     1,087
Total Current Assets             2,948       3,670     3,839      4,015      4,200       4,393     4,595

Fixed Assets
Plant&Equipment                 16,833     17,789     18,800     19,867     20,996      22,188    23,449
Depreciation                     5,741      6,018      6,308      6,612      6,930       7,265     7,615
Investments                        223        226        229        233        236         239       243
Other Assets                     1,540      1,690      1,855      2,036      2,234       2,452     2,690
Total Assets                    15,803     17,358     18,415     19,539     20,735      22,008    23,362

Liabilities
Account Payable                  1,030       1,232     1,474      1,763      2,109       2,523     3,019
Accrued Expenses                 2,545       3,333     4,365      5,717      7,488       9,807    12,844
Other Current Liabilities        1,673       2,014     2,424      2,917      3,511       4,225     5,086
L-term Debt                      8,218       8,335     7,595      6,467      4,830       2,526      -647

Equity
Capital Surplus                  2,700      2,824      2,954      3,090      3,232       3,381     3,536
Retained Earnings                  300        314        328        343        359         376       393
Treasury Stock                     663        693        725        759        794         830       868
Total Liab.&Equity              15,803     17,358     18,415     19,539     20,735      22,008    23,362


                                   Pro-forma Free Cash Flow

                              1997         1998         1999           2000          2001        2002
Profit After Taxes               973        1,018        1,065          1,114         1,165       1,218
Depreciation                     724          757          792            829           867         907
Chg. Current Assets             (266)        (278)        (291)          (304)         (318)       (333)
Chg. Current Liab.               245          256          268            280           293         307
Acct CFO                       1,676        1,753        1,834          1,918         2,006       2,099
Interest Expense                 291          304          318            333           348         364
Finance CFO                    1,967        2,057        2,152          2,251         2,355       2,463
Chg. In Fixed Asset              956        1,000        1,046          1,094         1,144       1,197
Free Cash Flow                 1,011        1,058        1,106          1,157         1,210       1,266
                                                 47
Terminal Value

       The terminal value for UAL is the assigned value at the end of our

projections. Below is a free cash flow stream for UAL from 1998 through 2002. As

our pro-forma balance sheet shows, from the year 2002 onward, all UAL’s debts will

be paid off. To find UAL’s terminal value, we discounted UAL’s free cash flow from

1998 through 2002. The constant growth rate, as indicated earlier, was 4.6 %. The

discount rate is 12.7 %.

Cash Flow Stream


          1998             1999        2000        2001         2002

         $1,058        $1,106         $1,157      $1,210      $1,266


Valuation Exercise

     Year                    1998         1999       2000          2001         2002
Discounted FCF              1,058        1,011      1,011         1,010        1,010


We calculated UAL’s value to be $5,053 million.

Computation of Stock Price per Share

Stock price per Share = Value of firm / Total Common Shares Outstanding

                           = $5,053 / 58.364

                           = $86.58




                                           48
                                   Conclusion

       The market price per share for UAL’s stock as of April 30, 1999 was $80.25.

Since our projected stock price per share for UAL is $86.58 and the market price is

$80.25, we believe that UAL’s stock is undervalued. Therefore, potential investors,

as well as stockholders, should buy UAL’s stock.




                                         49

				
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