GOLDMAN, SACHS & CO. SEVENTEENTH ANNUAL AIR CARRIER CONFERENCE
February 11, 2002

Good afternoon everyone. Thanks for having me here today.

Before I begin, I'm obliged to pass along a few words from our lawyers. As you would hope, we will be discussing our expectations for future capacity, costs, unit revenue, load factors, yields and net earnings. This information is forward-looking and actual results could differ materially from expected results. Factors that could cause a significant difference between actual and expected results are noted in our 8-K filed January 31 with the SEC.

I hope you all had a pleasant and uneventful flight here, one undisturbed by an irate passenger seeking additional seating in the cockpit. Let me remind you however, that United will be installing taser guns in every cockpit, although our pilots are pretty good with an ax.

We all know security in today's environment is no laughing matter. And the passengers and crew of that flight last week acted heroically. The important thing about that incident is that everything worked as it should. The reinforced door held and when the passenger tried to crawl in through an emergency panel, our crew dealt with the situation, as they are trained to.

Clearly the world has changed since September 11, and there's no going back. Our industry today confronts the most challenging operational and revenue environment in its long history. We still have enormous hurdles in front of us. Nevertheless, we at United believe that we're making the right strategic moves that will get us on the road to financial stability.

Within a few days of the September 11 attacks, we realized that quick and aggressive action was necessary. Our primary response was to re-size the airline to match what we correctly believed would be - at least for the short term - significantly reduced passenger demand. Our strategic cuts in capacity, expenses and capital spending served us well, although they couldn't prevent record losses for the fourth quarter and full year.

Excluding special items, we posted a fourth quarter net lost of $640 million, which translates into a loss of $11.74 per basic share. And while we don't want to downplay such a substantial number, it was a lot better than what was expected of us.

Why was it better? The answer is execution.

Under exceptionally trying circumstances, the people of United executed well in the fourth quarter, which resulted in a lot of good things. Our expense performance was stellar. Thanks to quickly reducing salaries and discretionary spending, along with some help from fuel prices, our cost per ASM was down 3%.

We also delivered solid operating performance. United's 2001 holiday season was one our best in years. Our domestic completion rate of 99.6% was one of the tops in the industry. In addition, we deferred aircraft deliveries and dramatically reduced capital spending throughout the quarter. Our revenue numbers showed steady improvement. And our liquidity was strong. We finished the year with $2.6 billion in cash, while significantly improving the cash burn rate throughout the quarter.

Now for the bad news. For the full year, we incurred a net loss of $1.8 billion, or $33.23 per basic share. Although we're not the only one in the industry to post record losses, no enterprise can afford to sustain losses at such staggering levels without making major, permanent changes in how it conducts business.

So the management team at United, under the leadership of our new CEO, Jack Creighton, has been focused exclusively these last several months on crafting a recovery plan, one that will restore us to financial stability and give us a platform for future growth. We do have a plan, and, just as important, we have the liquidity, the access to capital and - thus - the time we need to make sure it can deliver the results we want.

Let's talk about the financial recovery plan in some detail. The plan has four fundamental planks:

  • First, we need to adjust the size of the airline and slash the costs associated with operating it. We've accomplished much of this plank already as you'll see.
  • Second, we need to maximize revenues by bringing business and leisure travelers back to the airline, and by increasing the revenue we earn from each and every ticket we sell.
  • Third, we need to reduce our labor rates across all of our employee groups through a program of shared sacrifice, and;
  • Fourth, we need to provide and maintain the liquidity we need to fuel the enterprise while the plan is being implemented.

    • I don't want to minimize the challenge we have before us, but I am encouraged by the progress we have made thus far. With every day that passes, our costs are more closely aligning with our revenues. The revenues themselves are slowly climbing, month after month, back toward last year's levels. On the operations side, our customer satisfaction numbers are back where they should be. We are looking forward to making even greater strides once our plan is fully in place.

    Let's take a look at the first element of our plan - creating and operating a smaller, less costly enterprise.

    After September 11, we examined every area we could quickly adjust, from our schedule to our onboard service, to see how we could wring costs out of the system and get them in line with revenues. There were no sacred cows. Everything was on the table.

    And while, at the time, the measures we took went a bit further than our competitors' actions, I think our prudence ultimately paid off. Most of you are already quite familiar with our actions. We cut our schedule and shrunk capacity 23%. We completed an early retirement of two fleets, reducing to five the number of fleet types we have, which will significantly improve our efficiency. Beyond that, we worked successfully with our aircraft manufacturers to defer delivery of more than $2 billion worth of aircraft - without penalty I should add. We made the difficult decision to implement the largest furlough in company history - reducing the workforce by about 20,000 employees.

    And the results speak for themselves.

    The two aircraft types we retired resulted in a fleet 10% smaller than the one we began with. We also reduced aircraft utilization, which caused ASMs to decrease at double that rate. Staffing decreased about 20%. Costs came down in line with ASMs. In short, we re-sized the airline to 80% of its prior level and ratcheted costs down to match the smaller, more efficient airline.

    Our capital-spending program was also slashed. We cut our planned capital spending for 2002 by 50%, to $1.2 billion. In addition, our aircraft capital spending for next year has been reduced to zero, and total capital spending for 2003 is expected to be well below 2002 levels. Capital spending for 2004 may increase a bit versus 2003, but will remain far below the levels we saw in the late nineties.

    Before I move on to the next plank of our financial recovery plan, let me take a moment to talk about our fleet. As I said earlier, United accelerated the retirement of our B727's and our B737-200's in the last quarter. We retired 99 aircraft, leaving us with one of the youngest fleets in the industry. Our aircraft are, on average, just eight years old. As I mentioned, we've also been able to reduce the number of the types of aircraft in our fleet to just five. We expect improved efficiencies in maintenance, training and scheduling as we move forward with a streamlined stable of aircraft.

    But we know we can't simply cut our way to financial stability. Our recovery plan includes an extensive review of the way we attract and keep our customers, as well as ensuring that they pay a fair amount for the value they receive from us.

    As I mentioned, in the wake of September 11, we dramatically cut our capacity. But we didn't stop there. We took a further step back and fundamentally reexamined our schedule, in light of the cuts. We took advantage of a bad situation and rebuilt the schedule from the ground up. In doing so, we reduced the number of banks we operate at our hubs, but increased the size of those banks to enhance connectivity, even while reducing capacity. In addition, we shortened the flying day and cut out-of-bank flying.

    In revamping our schedule, we focused on revenue efficiency, not just market share. As a consequence, our load factors have consistently out-performed the industry since the changes went into effect.

    Fundamental to our revenue recovery is our unparalleled network. Our global network, our international alliances, and our strategically placed U.S. hubs give us confidence that we are positioned to perform well as the economy recovers.

    Despite our strong loads, however, we've been challenged on the unit revenue side. Our large international operation has hurt us because a number of our important overseas markets have suffered more than U.S. domestic markets. We've also taken a disproportionate unit revenue hit because of fear of impending labor disruption, which, hopefully, will soon be behind us. Finally, our strong presence in business markets - normally a plus - became a large negative due to business revenue declining faster than leisure revenue.

    But the news isn't all bad. Our unit revenue has steadily climbed each month from September through January. We began in September at 30% below last year's performance and ended January at just 15% to 17% below.

    As the market changes and the economy continues to move forward, we will respond. Increased demand has already prompted us to add back 127 flights in April. These additions are driven by demand, not market share.

    Our ability to please our customers will obviously play a significant role in driving revenues. Thanks largely to the hard work and determination of our employees, our customer satisfaction numbers have fully recovered from the labor-disruption-induced lows of 2000.

    But to continue moving customer satisfaction measures up, we need to offer solid operating performance. And, despite the necessary hassles created by additional security enhancements, we have posted some great results in operating performance. From October through January, we dramatically improved our on-time departure and arrival performance. Our December departure performance was the best for any December on record. But in January, we did even better, both departure and arrival performance set records.

    The third plank of our financial recovery plan may be the toughest one to pull off, but I'm convinced we can do it. It requires employee sacrifice, shared across all employee groups.

    Labor accounts for 38 percent of our expenses, and therefore labor savings will constitute a critical part of our recovery. Our current salary levels were set in a different revenue environment, one that we may not see for some time to come, and so adjustments will be required from both represented and unrepresented employees.

    This step will only happen with the active cooperation of our unions. Early on, Jack Creighton opened the books to them and initiated frank discussions about the need for shared sacrifice. All of us on Jack's team are determined that this will be a collaborative and equitable process - but it is something that must happen. We believe the union leadership is convinced as well - and that the coming conversations won't be about whether to make cuts, but about how to distribute them fairly. Fortunately or unfortunately, United has been through this before and I'm confident we can do it again.

    While I would like to give you a timetable for adjusting our labor rates, I simply can't right now. We will not be able to make much progress toward our goal until we have resolution of the outstanding IAM contracts. And, to that end - let me give you a quick update.

    On January 22, we announced that we would accept the recommendations of the Presidential Emergency Board for contract settlement with the IAM District 141M, which represents our mechanics. That recommendation has been put to the mechanics for a vote, which is scheduled for tomorrow, February 12.

    In addition, we have an open contract with IAM 141, which represents our airport and reservations employees. We will reopen negotiations with this group today under the auspices of the National Mediation Board.

    We're cautiously optimistic that we'll get both of these contracts wrapped up soon.

    Which brings us to the fourth and final element of our plan, which is to ensure we have the financing and liquidity to achieve financial stability and get on with the rebuilding of United Airlines.

    While the losses we incurred in 2001 dealt a blow to our balance sheet, our liquidity position remains strong. As of December 31, our cash balance was $2.6 billion.

    We continue to rein in our cash consumption. Our fourth quarter daily cash burn rate averaged $10 million. While fourth quarter cash flow is seasonally weak, this is still no small number. Having said that, what we saw in our fourth quarter was steady improvement each month, on a year-over-year basis. In fact, the cash burn in December 2001 was slightly better than in December 2000.

    Let me point out two important facets of our liquidity profile. First, despite what you might read in the paper, our profile doesn't differ so much from similarly sized competitors. And second, our liquidity will give us the time we need to put our Financial Recovery Plan in place.

    While we continue to focus our near-term efforts on eliminating the negative cash flow, we improved our liquidity late last month when we closed on a $775 million dollar private debt financing of 10- and 15-year-old aircraft. Obtaining long term financing, at attractive terms, was an encouraging way to start the new year.

    And, even though we think we already have sufficient liquidity to implement our Financial Recovery Plan, United is fortunate to have other resources that contribute to our financial strength, including unencumbered aircraft. We also enjoy substantial non-aircraft assets in the form of our enviable route network and our loyalty programs among others.

    We are also studying whether, when, or if, we will access the federal government loan guarantees. Obviously, we'd prefer not to use the program, but we won't rule it out.

    We are hungry to succeed and return to financial stability and greatness. Here's how we define greatness: running a tight ship, providing safe and secure air travel for our customers and our employees, achieving tier-one performance, and serving and satisfying our customers.

    I know there's been discussion, even among our competitors, regarding the financial situation at United. Let me be clear - while this has not been an easy time for any airline, and our situation is not all that different from some others, we are taking the steps necessary to return to financial stability. We at United will have the time necessary to work with our unions to get our cost structure in line. Our recovery plan is already bearing fruit. Passenger loads are up and cash burn is normalizing, and we are constructively working with our employees to develop creative ways to overcome our challenges.

    I recognize that some of our competitors will take opportunities in today's tough market to try to attack a powerful competitor like United. I'm here to tell you that our financial status is good and our balance sheet is solid. I'm willing to set our cash on hand, cash burn, assets, network strength and earnings potential against any of our large hub-and-spoke competitors.

    Nobody would be knocking United if they didn't see the strength of our recovery plan. Our colleagues at the other airlines are on notice: United's in this business for the long term, and we're more focused than ever on profitably serving our customers.

    Now, before I conclude, I want to commend all our employees - those onboard, at the gate, in the ops centers, under the wing, all of them - for the tremendous job they have done during these very challenging times. Their hard work has been critical to what we have achieved so far and how we will fare going forward.

    Despite the struggle we have ahead of us, I believe we are on the road to stability. No company can sustain even minimal losses indefinitely, much less losses in the billions, but I believe we have the assets in place - tangible and intangible - to give us the time we need to put our cost structure right.

    The road to recovery will not be without shared sacrifices, but I am confident the people of United have the will and the ability to make it happen.

    Thank you for having me. I'll be happy to take any questions you might have.