UAL Posts $17 Billion Loss

Mostly, it was because of noncash reorganization costs representing unsecured claims.
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UAL

(UALAQ)

, which is preparing to emerge next month from bankruptcy court protection, said Friday that it narrowed its operating loss in the fourth quarter as revenue improvements and cost reductions offset fuel-price increases.

The parent of United Airlines, the world's second-largest air carrier, reported an operating loss of $182 million, compared with a $570 million loss in the same quarter a year earlier, despite a $397 million jump in fuel expenses. UAL credited a 10% gain in revenue and cost cuts in other areas.

However, on the bottom line, UAL said its fourth-quarter net loss was $17 billion, or $145 a basic share, including noncash reorganization expenses of $17 billion. The reorganization costs represent mostly unsecured claims allowed during the bankruptcy process.

Operating revenue for the quarter, including mainline and regional affiliates, was $4.39 billion, up from $3.99 billion in the same quarter a year earlier. United said it is benefiting from improved ticket pricing, from its decision to move aircraft to more profitable international routes and from capacity reductions by its U.S. competitors in domestic and Asian markets, especially Japan.

The unsecured claims, along with similar ones the company has recognized in previous periods, are expected to be settled when United leaves bankruptcy for "a minor fraction" of the amount of the claims recorded. As a result, it expects to report a "substantial" gain in early 2006. The company, which has been operating under Chapter 11 since December 2002, doesn't expect these items to have a significant effect on its cash position.

United said it has revised its fuel estimates, widely thought to have been too low, for the coming year. It now expects mainline fuel prices for the first quarter to average $1.92 a gallon and for the full-year to average $1.81 a gallon. For all of 2006, United now anticipates fuel expenses will be roughly $885 million more than its previous assumption, which was based on a mainline fuel price of $1.48 a gallon. The carrier expects to be able to offset some, but not all, of this increase through higher revenue.

"We have made fundamental, sustainable changes to United's business and established a solid financial platform," said Glenn Tilton, United's chairman, CEO and president. "Moving forward, our focus is on our customers and continuous improvement in everything we do to drive increased margins and renew profitability. Although operating earnings for both the fourth quarter and the full year 2005 have improved significantly -- despite an increase in system fuel price of over 40 percent -- we know we can do better."

The airline said the best indicator of its post-reorganization financial performance is its loss excluding reorganization costs and special items. Excluding these charges, UAL reported a loss for the fourth quarter and full year totaling $297 million and $557 million, respectively. This represents year-over-year improvements of $333 million and $729 million.

United's cost per available seat mile, excluding fuel and other special items is now 7.45 cents, down from 8.3 cents for the same period a year earlier. Salaries and related costs were down 27%, primarily reflecting labor- and benefit-cost reductions.

Analyst Ray Neidl of Calyon Securities said he found the airline's results disappointing.

"I am worried over fuel costs continuing to go up and higher-then-expected

costs per available seat mile," Neidl said. "But it doesn't matter. It's what happens going forward, and whether the employees will continue to cooperate. That will determine the future of the company." He doesn't own the stock.

The full-year operating loss was $219 million, compared with an $854 million operating loss for 2004. The year-over-year improvement was driven by a $1 billion increase in revenue and a $1 billion reduction in nonfuel costs. Partly offsetting those gains was a $1.4 billion increase fuel costs for mainline and regional operations.

The company ended the quarter with an unrestricted cash balance of $1.8 billion, and a restricted cash balance of $957 million, for a total of $2.7 billion. The unrestricted cash balance increased by $49 million during the quarter.

"In every year of our restructuring, United has steadily improved operating earnings. Our cost per available seat mile is now competitive, and revenue continues to outpace the industry average," said Jake Brace, United's executive vice president and chief financial officer. "The recent over-subscription by our lenders of United's exit financing facility demonstrates the market's confidence that United now has the financial and operating flexibility to meet the shifting challenges in our industry, including current high fuel prices."