United Airlines 2007 Annual Report Download - page 44

presentation. Previously, GDS and credit card transaction fees were classified as components of purchased services and commissions were reported as a separate
expense item in the UAL and United 2006 Annual Reports.
Mainline aircraft fuel increased $179 million, or 4%, in the year ended December 31, 2007 as compared to 2006. This net fuel variance was due to a 4%
increase in the average price per gallon of jet fuel from $2.11 in 2006 to $2.18 in 2007, resulting from unfavorable market conditions. Included in the 2007
average price per gallon was an $83 million net hedge gain; a net fuel hedge loss of $26 million is included in the 2006 average price per gallon.
UAL salaries and related costs remained relatively flat in 2007 as compared to 2006. The Company recognized $49 million of share-based compensation
expense in 2007 as compared to $159 million in 2006. There were no significant grants in 2007 as compared to 2006, which included a large number of grants
associated with the Company's emergence from bankruptcy. Additionally, immediate recognition of 100% of the cost of awards granted to retirement-eligible
employees on the grant date, together with accelerated vesting of grants within the first twelve months after the grant date, accounted for most of the decrease in
share-based compensation expense. Also benefiting the 2007 period was the absence of the $22 million severance charge incurred in 2006. Offsetting the
decreased share-based compensation and severance expense was a slight increase in salaries and related costs as a result of certain wage increases as well as a
$110 million increase in profit sharing, including related employee taxes, which is based on annual pre-tax earnings. As noted above, this increase is due to
increased pre-tax earnings and an increase in the payout percentage from 7.5% in 2006 to 15% in 2007.
Regional affiliate expense, which includes aircraft fuel, increased $117 million, or 4%, during 2007 as compared to 2006. Regional affiliate capacity
increased 4% in 2007, which was a major contributor to the increase in expense. Including the special revenue item of $8 million, our regional affiliate operating
income was $53 million higher in the 2007 period as compared to the 2006 period. The margin improvement was due to improved revenue performance, which
was due to increased yield and traffic, and cost control. Factors impacting regional affiliate margin include the restructuring of regional carrier capacity
agreements, the replacement of some 50-seat regional jets with 70-seat regional jets and regional carrier network optimization. All of these improvements were
put in place throughout 2006; therefore, we realized some year-over-year benefits in 2007. Regional affiliate fuel expense increased $81 million, or 10%, from
$834 million in 2006 to $915 million in 2007 due to a 9% increase in the average price of fuel and a 1% increase in consumption.
Purchased services were up 8% in 2007 as compared to 2006, primarily due to increased information technology and other costs incurred in support of the
Company's customer and employee initiatives. Information technology expenses increased due to an increase in non-capitalizable information technology related
expenditures, generally occurring during the planning and scoping phases, for new applications in 2007. In addition, airport operations handling and security
costs increased due to the new USPS contract and new international routes, among other factors.
Aircraft maintenance materials and outside repairs expense increased $157 million, or 16%, year-over-year primarily due to inflationary increases related to
our V2500 engine maintenance contract and the cost of component parts, as well as the impact of increases in airframe and engine repair volumes.
A charge of $18 million in 2007 for surplus and obsolete aircraft parts inventory accounted for approximately half of the 4% increase in depreciation and
amortization.
Ongoing efforts to efficiently utilize our rented facilities have offset contractual rent increases, keeping 2007 rent expense in line with 2006 rent expense.
In 2007, United's mainline revenues increased by 6%. During the same period of time, distribution expenses, which include commissions, GDS fees and
credit card fees decreased 2% from $798 million
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Source: UNITED AIR LINES INC, 10-K, February 29, 2008