Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

 

 

 

Commission

File Number

  

Exact Name of Registrant as Specified in its Charter,

Principal Office Address and Telephone Number

   State of
Incorporation
   I.R.S. Employer
Identification  No

001-06033

   United Continental Holdings, Inc.    Delaware    36-2675207
   77 W. Wacker Drive, Chicago, Illinois 60601      
   (312) 997-8000      

001-11355

   United Air Lines, Inc.    Delaware    36-2675206
   77 W. Wacker Drive, Chicago, Illinois 60601      
   (312) 997-8000      

001-10323

   Continental Airlines, Inc.    Delaware    74-2099724
   1600 Smith Street, Dept HQSEO, Houston, Texas 77002      
   (713) 324-2950      

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

United Continental Holdings, Inc.   Yes  x    No  ¨   United Air Lines, Inc.   Yes  x    No  ¨
Continental Airlines, Inc.   Yes  x    No  ¨    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Table of Contents

United Continental Holdings, Inc.

   Yes  x    No  ¨   United Air Lines, Inc.    Yes  x    No  ¨

Continental Airlines, Inc.

   Yes  x    No  ¨     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

United Continental Holdings, Inc.

   Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

United Air Lines, Inc.

   Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Continental Airlines, Inc.

   Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

United Continental Holdings, Inc.

   Yes  ¨    No  x     

United Air Lines, Inc.

   Yes  ¨    No  x     

Continental Airlines, Inc.

   Yes  ¨    No  x     

The number of shares outstanding of each of the issuer’s classes of common stock as of October 21, 2011 is shown below:

 

United Continental Holdings, Inc.  

330,852,949 shares of common stock ($0.01 par value)

205 (100% owned by United Continental Holdings, Inc.)

United Air Lines, Inc.  

There is no market for United Air Lines, Inc. common stock.

1,000 (100% owned by United Continental Holdings, Inc.)

Continental Airlines, Inc.  

There is no market for Continental Airlines, Inc. common stock.

OMISSION OF CERTAIN INFORMATION

This combined Form 10-Q is separately filed by United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc. United Air Lines, Inc. and Continental Airlines, Inc. meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format allowed under that General Instruction.

 

 

 


Table of Contents

United Continental Holdings, Inc.

United Air Lines, Inc.

Continental Airlines, Inc.

Report on Form 10-Q

For the Quarter Ended September 30, 2011

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

United Continental Holdings, Inc.:

  

Statements of Consolidated Operations

     3   

Consolidated Balance Sheets

     4   

Condensed Statements of Consolidated Cash Flows

     6   

United Air Lines, Inc.:

  

Statements of Consolidated Operations

     7   

Consolidated Balance Sheets

     8   

Condensed Statements of Consolidated Cash Flows

     10   

Continental Airlines, Inc.:

  

Statements of Consolidated Operations

     11   

Consolidated Balance Sheets

     12   

Condensed Statements of Consolidated Cash Flows

     14   

Combined Notes to Condensed Consolidated Financial Statements (United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc.)

     15   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 4. Controls and Procedures

     52   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     53   

Item 1A. Risk Factors

     54   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     54   

Item 6. Exhibits

     54   

Signatures

     55   

Exhibit Index

     56   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Operating revenue:

        

Passenger:

        

Mainline

   $ 7,265      $ 3,744        19,892      $ 10,173   

Regional

     1,779        1,011        4,945        2,766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     9,044        4,755        24,837        12,939   

Cargo

     283        175        882        522   

Special revenue item (Note 1)

     —          —          107        —     

Other operating revenue

     844        487        2,356        1,400   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,171        5,417        28,182        14,861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Aircraft fuel

     3,371        1,534        9,270        4,227   

Salaries and related costs

     2,020        1,129        5,742        3,180   

Regional capacity purchase

     619        417        1,807        1,210   

Landing fees and other rent

     476        268        1,451        796   

Aircraft maintenance materials and outside repairs

     447        262        1,330        729   

Depreciation and amortization

     384        232        1,157        676   

Distribution expenses

     377        204        1,102        574   

Aircraft rent

     255        82        760        244   

Special charges (Note 10)

     120        63        343        187   

Other operating expenses

     1,167        685        3,443        1,980   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,236        4,876        26,405        13,803   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     935        541        1,777        1,058   

Nonoperating income (expense):

        

Interest expense

     (227     (177     (731     (540

Interest income

     6        5        15        8   

Interest capitalized

     10        2        24        7   

Miscellaneous, net

     (64     16        (94     44   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (275     (154     (786     (481
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     660        387        991        577   

Income tax expense (benefit)

     7        —          13        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 653      $ 387      $ 978      $ 578   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share, basic

   $ 1.97      $ 2.30      $ 2.96      $ 3.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share, diluted

   $ 1.69      $ 1.75      $ 2.59      $ 2.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 6,984      $ 8,069   

Short-term investments

     1,373        611   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     8,357        8,680   

Restricted cash

     50        37   

Receivables, less allowance for doubtful accounts (2011 — $7; 2010 — $6)

     1,713        1,613   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $81; 2010 — $64)

     628        466   

Deferred income taxes

     643        591   

Prepaid expenses and other

     595        658   
  

 

 

   

 

 

 
     11,986        12,045   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     15,692        15,181   

Other property and equipment

     3,059        2,890   
  

 

 

   

 

 

 
     18,751        18,071   

Less — accumulated depreciation and amortization

     (3,717     (2,858
  

 

 

   

 

 

 
     15,034        15,213   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     359        230   

Capital leases—

    

Flight equipment

     1,468        1,741   

Other property and equipment

     220        217   
  

 

 

   

 

 

 
     1,688        1,958   

Less — accumulated amortization

     (532     (456
  

 

 

   

 

 

 
     1,156        1,502   
  

 

 

   

 

 

 
     16,549        16,945   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2011 — $630; 2010 — $504)

     4,772        4,917   

Restricted cash, cash equivalents and investments

     337        350   

Investments

     92        103   

Other, net

     795        715   
  

 

 

   

 

 

 
     10,519        10,608   
  

 

 

   

 

 

 
   $ 39,054      $ 39,598   
  

 

 

   

 

 

 

(continued on next page)

 

4


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 3,761      $ 2,998   

Frequent flyer deferred revenue

     2,507        2,582   

Accounts payable

     1,808        1,805   

Accrued salaries and benefits

     1,404        1,470   

Current maturities of long-term debt

     1,201        2,411   

Current maturities of capital leases

     138        252   

Other

     1,079        1,127   
  

 

 

   

 

 

 
     11,898        12,645   
  

 

 

   

 

 

 
    

Long-term debt

     10,873        11,434   

Long-term obligations under capital leases

     945        1,036   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     3,343        3,491   

Advanced purchase of miles

     1,711        1,159   

Postretirement benefit liability

     2,393        2,344   

Pension liability

     1,428        1,473   

Deferred income taxes

     1,641        1,585   

Lease fair value adjustment, net

     1,188        1,371   

Other

     1,322        1,333   
  

 

 

   

 

 

 
     13,026        12,756   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock

     —          —     

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 330,849,396 and 327,922,565 shares at September 30, 2011 and December 31, 2010, respectively

     3        3   

Additional capital invested

     7,110        7,071   

Accumulated deficit

     (4,725     (5,703

Stock held in treasury, at cost

     (31     (31

Accumulated other comprehensive income (loss)

     (45     387   
  

 

 

   

 

 

 
     2,312        1,727   
  

 

 

   

 

 

 
   $ 39,054      $ 39,598   
  

 

 

   

 

 

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net income

   $ 978      $ 578   

Adjustments to reconcile net income to net cash provided (used) by operating activities —

    

Depreciation and amortization

     1,157        676   

Amortization of debt and lease fair value adjustment

     (171     12   

Special items, non-cash portion (Notes 1 and 10)

     (15     112   

Increase in advance ticket sales

     762        499   

Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles

     82        (118

Increase in receivables

     (517     (295

Increase in accounts payable

     1        87   

Increase in other current assets

     (209     (59

Increase in other accrued liabilities

     24        160   

Net change in fuel hedge cash collateral

     (61     10   

Other, net

     112        139   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,143        1,801   
  

 

 

   

 

 

 
    

Cash Flows from Investing Activities:

    

Capital expenditures

     (510     (212

Aircraft purchase deposits paid, net

     (121     (42

(Increase) decrease in restricted cash

     (4     71   

Proceeds from sale of property and equipment

     107        25   

Purchases of short-term investments, net

     (754     —     

Other, net

     —          6   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,282     (152
  

 

 

   

 

 

 
    

Cash Flows from Financing Activities:

    

Proceeds from issuance of long-term debt

     142        1,995   

Payments of long-term debt

     (1,925     (1,529

Principal payments under capital leases

     (199     (201

Other, net

     36        (18
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (1,946     247   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents during the period

     (1,085     1,896   

Cash and cash equivalents at beginning of the period

     8,069        3,042   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 6,984      $ 4,938   
  

 

 

   

 

 

 
    

Investing and Financing Activities Not Affecting Cash:

    

Property and equipment acquired through the issuance of debt

   $ 130      $ 467   

Reclassification of debt to advanced purchases of miles

     (270     —     

Reclassification of debt discount to other assets

     60        —     

UAL 8% Contingent Senior Unsecured Notes, net of discount

     49        —     

Interest paid in kind on UAL 6% Senior Notes

     18        17   

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Operating revenue:

        

Passenger:

        

Mainline

   $ 4,032      $ 3,744      $ 10,916      $ 10,173   

Regional

     1,084        1,011        3,021        2,766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     5,116        4,755        13,937        12,939   

Cargo

     177        175        535        522   

Special revenue item (Note 1)

     —          —          88        —     

Other operating revenue

     564        489        1,543        1,406   
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,857        5,419        16,103        14,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Aircraft fuel

     1,949        1,534        5,294        4,227   

Salaries and related costs

     1,092        1,129        3,117        3,180   

Regional capacity purchase

     407        417        1,190        1,210   

Landing fees and other rent

     246        268        773        796   

Aircraft maintenance materials and outside repairs

     299        262        881        729   

Depreciation and amortization

     228        232        684        676   

Distribution expenses

     194        204        580        574   

Aircraft rent

     82        82        243        244   

Special charges (Note 10)

     72        63        236        187   

Other operating expenses

     709        679        2,081        1,973   
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,278        4,870        15,079        13,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     579        549        1,024        1,071   

Nonoperating income (expense):

        

Interest expense

     (135     (172     (462     (525

Interest income

     2        5        7        8   

Interest capitalized

     6        2        12        7   

Miscellaneous, net

     (35     15        (43     44   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (162     (150     (486     (466
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     417        399        538        605   

Income tax expense (benefit)

     2        —          2        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 415      $ 399      $ 536      $ 606   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

7


Table of Contents

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,070      $ 4,665   

Short-term investments

     186        —     
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     4,256        4,665   

Restricted cash

     50        37   

Receivables, net of allowance for doubtful accounts (2011 — $6; 2010 — $5)

     865        1,004   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $69;

2010 — $61)

     347        321   

Receivables from related parties

     228        135   

Deferred income taxes

     387        373   

Prepaid expenses and other

     413        366   
  

 

 

   

 

 

 
     6,546        6,901   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     9,061        8,718   

Other property and equipment

     2,213        2,086   
  

 

 

   

 

 

 
     11,274        10,804   

Less — accumulated depreciation and amortization

     (3,200     (2,717
  

 

 

   

 

 

 
     8,074        8,087   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     57        51   

Capital leases—

    

Flight equipment

     1,468        1,741   

Other property and equipment

     52        49   
  

 

 

   

 

 

 
     1,520        1,790   

Less — accumulated amortization

     (519     (453
  

 

 

   

 

 

 
     1,001        1,337   
  

 

 

   

 

 

 
     9,132        9,475   
  

 

 

   

 

 

 

Other assets:

    

Intangibles, less accumulated amortization (2011 — $518; 2010 — $473)

     2,298        2,343   

Restricted cash

     201        190   

Investments

     91        97   

Other, net

     570        622   
  

 

 

   

 

 

 
     3,160        3,252   
  

 

 

   

 

 

 
   $ 18,838      $ 19,628   
  

 

 

   

 

 

 

(continued on next page)

 

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Table of Contents

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Advance ticket sales

   $ 2,116      $ 1,536   

Frequent flyer deferred revenue

     1,529        1,703   

Accounts payable

     1,022        907   

Accrued salaries and benefits

     907        938   

Current maturities of long-term debt

     476        1,546   

Current maturities of capital leases

     135        249   

Payables to related parties

     61        63   

Other

     765        950   
  

 

 

   

 

 

 
     7,011        7,892   
  

 

 

   

 

 

 
    

Long-term debt

     5,350        5,480   

Long-term obligations under capital leases

     765        858   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,059        2,321   

Advanced purchase of miles

     1,442        1,159   

Postretirement benefit liability

     2,127        2,091   

Pension liability

     105        101   

Deferred income taxes

     746        731   

Other

     952        972   
  

 

 

   

 

 

 
     7,431        7,375   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 shares at both September 30, 2011 and December 31, 2010

     —          —     

Additional capital invested

     3,430        3,421   

Accumulated deficit

     (4,953     (5,489

Accumulated other comprehensive income (loss)

     (196     91   
  

 

 

   

 

 

 
     (1,719     (1,977
  

 

 

   

 

 

 
   $ 18,838      $ 19,628   
  

 

 

   

 

 

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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UNITED AIR LINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net income

   $ 536      $ 606   

Adjustments to reconcile net income to net cash provided (used) by operating activities—

    

Depreciation and amortization

     684        676   

Amortization of debt and lease fair value adjustment

     11        12   

Special items, non-cash portion (Notes 1 and 10)

     (19     112   

Increase in advance ticket sales

     579        499   

Decrease in frequent flyer deferred revenue and advanced purchase of miles

     (150     (118

Increase in receivables

     (237     (294

Increase in accounts payable

     112        88   

Increase in other current assets

     (88     (92

Increase (decrease) in other accrued liabilities

     (38     161   

Net change in fuel hedge cash collateral

     (61     10   

Other, net

     109        137   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,438        1,797   
  

 

 

   

 

 

 
    

Cash Flows from Investing Activities:

    

Capital expenditures

     (332     (212

Aircraft purchase deposits paid, net

     (6     (42

(Increase) decrease in restricted cash

     (28     71   

Proceeds from sale of property and equipment

     15        25   

Purchases of short-term investments, net

     (180     —     

Other, net

     —          6   
  

 

 

   

 

 

 

Net cash used in investing activities

     (531     (152
  

 

 

   

 

 

 
    

Cash Flows from Financing Activities:

    

Proceeds from issuance of long-term debt

     —          1,995   

Payments of long-term debt

     (1,316     (1,528

Principal payments under capital leases

     (198     (201

Other, net

     12        (15
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (1,502     251   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents during the period

     (595     1,896   

Cash and cash equivalents at beginning of the period

     4,665        3,036   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 4,070      $ 4,932   
  

 

 

   

 

 

 
    

Investing and Financing Activities Not Affecting Cash:

    

UAL 8% Contingent Senior Unsecured Notes, net of discount

   $ 49      $ —     

Interest paid in kind on UAL 6% Senior Notes

     18        17   

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Successor     Predecessor     Successor     Predecessor  
     Three Months
Ended
September 30,
2011
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

Operating revenue:

          

Passenger:

          

Mainline

   $ 3,229      $ 2,884      $ 8,970      $ 7,777   

Regional

     695        610        1,924        1,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     3,924        3,494        10,894        9,503   

Cargo

     105        115        346        328   

Special revenue item (Note 1)

     —          —          19        —     

Other operating revenue

     343        326        955        957   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,372        3,935        12,214        10,788   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Aircraft fuel

     1,422        1,006        3,976        2,872   

Salaries and related costs

     906        909        2,575        2,527   

Regional capacity purchase

     211        207        617        608   

Landing fees and other rent

     230        228        678        656   

Aircraft maintenance materials and outside repairs

     152        126        455        399   

Depreciation and amortization

     156        124        473        380   

Distribution expenses

     183        169        523        474   

Aircraft rent

     171        230        516        689   

Special charges (Note 10)

     48        13        107        47   

Other operating expenses

     533        481        1,531        1,416   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,012        3,493        11,451        10,068   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     360        442        763        720   
   

Nonoperating income (expense):

          

Interest expense

     (88     (102     (259     (288

Interest income

     3        2        7        6   

Interest capitalized

     4        5        12        17   

Miscellaneous, net

     (41     7        (76     (13
  

 

 

   

 

 

   

 

 

   

 

 

 
     (122     (88     (316     (278
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     238        354        447        442   

Income tax expense

     2        —          6        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 236      $ 354      $ 441      $ 441   
  

 

 

   

 

 

   

 

 

   

 

 

 
   

Earnings per share, basic

       $ 2.52        $ 3.16   
      

 

 

     

 

 

 

Earnings per share, diluted

       $ 2.16        $ 2.81   
      

 

 

     

 

 

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 2,908      $ 3,398   

Short-term investments

     1,187        611   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     4,095        4,009   

Receivables, net of allowance for doubtful accounts (2011 — $1; 2010 — $1)

     848        609   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $12;

2010 — $3)

     281        246   

Deferred income taxes

     254        225   

Receivables from related parties

     —          3   

Prepaid expenses and other

     184        185   
  

 

 

   

 

 

 
     5,662        5,277   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     6,631        6,463   

Other property and equipment

     846        804   
  

 

 

   

 

 

 
     7,477        7,267   

Less — accumulated depreciation and amortization

     (517     (141
  

 

 

   

 

 

 
     6,960        7,126   

Purchase deposits for flight equipment

     302        178   

Capital leases — other property and equipment

     168        168   

Less — accumulated amortization

     (13     (3
  

 

 

   

 

 

 
     155        165   
  

 

 

   

 

 

 
     7,417        7,469   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2011 — $112; 2010 — $31)

     2,476        2,575   

Restricted cash, cash equivalents and investments

     135        160   

Other, net

     368        375   
  

 

 

   

 

 

 
     7,502        7,633   
  

 

 

   

 

 

 
   $ 20,581      $ 20,379   
  

 

 

   

 

 

 

(continued on next page)

 

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CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30,
2011
     December 31,
2010
 

LIABILITIES AND STOCKHOLDER’S EQUITY

     

Current liabilities:

     

Advance ticket sales

   $ 1,645       $ 1,463   

Frequent flyer deferred revenue

     978         879   

Accounts payable

     790         902   

Accrued salaries and benefits

     496         532   

Current maturities of long-term debt

     724         865   

Payables to related parties

     66         —     

Current maturities of capital leases

     3         3   

Other

     333         236   
  

 

 

    

 

 

 
     5,035         4,880   
  

 

 

    

 

 

 
     

Long-term debt

     5,111         5,536   

Long-term obligations under capital leases

     180         178   
     

Other liabilities and deferred credits:

     

Frequent flyer deferred revenue

     1,284         1,170   

Advanced purchase of miles

     270         —     

Postretirement benefit liability

     265         253   

Pension liability

     1,323         1,372   

Lease fair value adjustment, net

     1,192         1,374   

Deferred income taxes

     817         784   

Other

     469         522   
  

 

 

    

 

 

 
     5,620         5,475   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholder’s equity:

     

Common stock at par, $0.01 par value; authorized and outstanding 1,000 shares at both September 30, 2011 and December 31, 2010

     —           —     

Additional capital invested

     4,146         4,115   

Retained earnings (accumulated deficit)

     346         (95

Accumulated other comprehensive income

     143         290   
  

 

 

    

 

 

 
     4,635         4,310   
  

 

 

    

 

 

 
   $ 20,581       $ 20,379   
  

 

 

    

 

 

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

CONTINENTAL AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Successor     Predecessor  
     Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

Cash Flows from Operating Activities:

      

Net income

   $ 441      $ 441   

Adjustments to reconcile net income to net cash provided (used) by operating activities—

      

Depreciation and amortization

     473        380   

Amortization of debt and lease fair value adjustment

     (182     —     

Special items, non-cash portion (Notes 1 and 10)

     4        18   

Increase in advance ticket sales

     183        400   

Increase in frequent flyer deferred revenue and advanced purchase of miles

     233        141   

Increase in receivables

     (370     (199

Increase (decrease) in accounts payable

     (47     44   

Increase in other current assets

     (83     (176

Increase in other accrued liabilities

     23        230   

Other, net

     30        28   
  

 

 

   

 

 

 

Net cash provided by operating activities

     705        1,307   
      

Cash Flows from Investing Activities:

      

Capital expenditures

     (178     (246

Aircraft purchase deposits paid, net

     (116     10   

Decrease in restricted cash

     25        3   

Proceeds from sale of property and equipment

     92        32   

Purchases of short-term investments, net

     (574     (171
  

 

 

   

 

 

 

Net cash used in investing activities

     (751     (372
      

Cash Flows from Financing Activities:

      

Proceeds from issuance of long-term debt

     142        1,025   

Payments of long-term debt

     (609     (836

Other, net

     23        28   
  

 

 

   

 

 

 

Net cash used in financing activities

     (444     217   
  

 

 

   

 

 

 

Increase in cash and cash equivalents during the period

     (490     1,152   

Cash and cash equivalents at beginning of the period

     3,398        2,546   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 2,908      $ 3,698   
  

 

 

   

 

 

 
      

Investing and Financing Activities Not Affecting Cash:

      

Property and equipment acquired through the issuance of debt

   $ 130      $ 467   

Reclassification of debt to advanced purchases of miles

     (270     —     

Reclassification of debt discount to other assets

     60        —     

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.,

UNITED AIR LINES, INC. AND CONTINENTAL AIRLINES, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL”) is a holding company and its principal, wholly-owned subsidiaries are United Air Lines, Inc. (together with its consolidated subsidiaries, “United”) and, effective October 1, 2010, Continental Airlines, Inc. (together with its consolidated subsidiaries, “Continental”). All significant intercompany transactions are eliminated.

This Quarterly Report on Form 10-Q is a combined report of UAL, United and Continental. We sometimes use the words “we,” “our,” “us,” and the “Company” for disclosures that relate to all of UAL, United and Continental Successor (defined below). As UAL consolidates United for financial statement purposes, disclosures that relate to United activities also apply to UAL; and, effective October 1, 2010, disclosures that relate to Continental Successor activities also apply to UAL. When appropriate, UAL, United and Continental are named specifically for their related activities and disclosures.

Continental Acquisition Accounting. As a result of the application of the acquisition method of accounting, Continental’s financial statements prior to October 1, 2010 are not comparable with Continental’s financial statements for periods on or after October 1, 2010. References to “Successor” refer to Continental on or after October 1, 2010, after giving effect to the application of acquisition accounting. References to “Predecessor” refer to Continental as reported prior to October 1, 2010.

Interim Financial Statements. The UAL, United and Continental unaudited condensed consolidated financial statements shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The significant reclassifications are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). Effective January 1, 2011, the Company reclassified costs associated with the redemption of frequent flyer miles for awards other than travel on United or Continental from operating revenue to operating expenses. This reclassification increased revenue and other operating expenses in the three and nine months ended September 30, 2010 by $23 million and $65 million, respectively, but had no effect on earnings for those periods. These reclassifications were made to conform the financial statement presentation of UAL, United and Continental. The UAL, United and Continental financial statements should be read together with the information included in the 2010 Annual Report.

NOTE 1—NEW ACCOUNTING PRONOUNCEMENTS

Multiple-Deliverable Revenue Arrangements

Frequent Flyer Awards. United and Continental have frequent flyer programs that are designed to increase customer loyalty. Program participants earn mileage credits (“miles”) by flying on United, Continental and certain other participating airlines. Program participants can also earn miles through purchases from non-airline partners that participate in the Company’s loyalty programs. We sell miles to these partners, which include retail merchants, credit card issuers, hotels and car rental companies, among others. Miles can be redeemed for free, discounted or upgraded air travel and non-travel awards. The Company records its obligation for future award redemptions using a deferred revenue model.

In the case of the sale of air transportation services, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale that represents the fair value of the miles, as described further below. In the case of miles sold to third parties, historically, we have had two primary revenue elements: marketing and air transportation.

The adoption of Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”), as described below, resulted in the revision of the accounting for certain aspects of the Company’s frequent flyer accounting.

Passenger Tickets

Effective January 1, 2011, the Company began applying the provisions of ASU 2009-13, which resulted in a change to the Company’s accounting for passenger ticket sales that include the issuance of miles that may be redeemed for free travel or other products or services at a future date. Under the Company’s accounting policy prior to January 1, 2011, the Company estimated the weighted average equivalent ticket value by assigning a fair value to the miles that were issued in connection with the sale of air transportation. The fair value of the miles was deferred and the residual amount of ticket proceeds was recognized as passenger revenue at the time the air transportation was provided.

 

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Table of Contents

Effective January 1, 2011, the Company began applying the new guidance to determine the estimated selling price of the air transportation and miles as if each element were sold on a separate basis and to allocate the total consideration to each of these elements on a pro rata basis. The estimated selling price of miles is computed using an estimated weighted average equivalent ticket value that is adjusted by a sales discount that considers a number of factors, including ultimate fulfillment expectations associated with miles sold in flight transactions to various customer groups.

As a result of the prospective adoption, the new accounting policy was only applied to new sales of air transportation beginning in 2011. Generally, as compared to the historical accounting policy, for passenger tickets sold with miles earned, the new accounting policy decreases the value of miles that the Company records as deferred revenue and increases the passenger revenue recorded at the time air transportation is provided. Due to the average period from the purchase of air transportation to the provision of air transportation, the new accounting policy was only applicable to a portion of the Company’s multiple element ticket transactions recorded during 2011. The application of the new accounting method resulted in the following increases to revenue (in millions, except per share amounts):

 

    

Three Months Ended
September 30, 2011

    

Nine Months Ended
September 30, 2011

 
     UAL      United      Continental      UAL      United      Continental  

Operating revenue

   $ 93       $ 56       $ 37       $ 254       $ 159       $ 95   

Per basic share

   $ 0.28             $ 0.77         

Per diluted share

   $ 0.24             $ 0.64         

We estimate that application of the new accounting method for the last three months of 2011 will increase UAL’s revenue as compared to revenue that would have been recorded under the historical method of accounting, at levels that are expected to be substantially consistent with those recorded during the third quarter.

Co-branded Credit Card Partner Mileage Sales

United and Continental each had significant contracts to sell frequent flyer miles to their co-branded credit card partner, Chase Bank USA, N.A. (“Chase”). Miles can be redeemed for free, discounted or upgraded air travel and non-travel awards. On June 9, 2011, these contracts were modified and the Company entered into one agreement with Chase (the “Co-Brand Agreement”). The Company applied the provisions of ASU 2009-13 to the Co-Brand Agreement as a materially modified contract.

Under the Co-Brand Agreement and ASU 2009-13, we have identified five revenue elements in the agreement: air transportation; use of the United brand and access to frequent flyer member lists; advertising; baggage services; and airport lounge usage (together, excluding air transportation, the “marketing-related deliverables”). The fair value of the elements is determined using management’s estimated selling price of each element. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Co-Brand Agreement in order to determine the allocation of proceeds to each of the multiple elements to be delivered.

The new guidance changed the allocation of arrangement consideration to the number of units of accounting; however, the pattern and timing of revenue recognition for those units did not change. The Company records passenger revenue related to the air transportation element when the transportation is delivered. The other elements are generally recognized as other operating revenue when earned.

The application of the new accounting standard decreases the value of the air transportation deliverable related to the Co-Brand Agreement that the Company records as deferred revenue (and ultimately passenger revenue when redeemed awards are flown) and increases the value primarily of the marketing-related deliverables recorded in other revenue at the time these marketing-related deliverables are provided. Excluding the effects disclosed in the “Special Revenue Item” section below, the impact of adoption of ASU 2009-13 resulted in the following estimated increases to revenue (in millions, except per share amounts):

 

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Table of Contents
    

Three Months Ended
September 30, 2011

    

Nine Months Ended
September 30, 2011

 
     UAL      United      Continental      UAL      United      Continental  

Operating revenue

   $ 42       $ 37       $ 5       $ 58       $ 46       $ 12   

Per basic share

   $ 0.13             $ 0.18         

Per diluted share

   $ 0.11             $ 0.15         

While revenue recognition is subject to fluctuation based on credit card sales volumes and frequent flyer redemption patterns, the Company expects, as a result of the Co-Brand Agreement, that revenue will increase by approximately $50 million in the fourth quarter of 2011. These estimates are subject to variability primarily depending on the volume of future transactions.

Pending new or materially modified contracts after January 1, 2011, certain other non-airline partners who participate in the loyalty programs and to which we sell miles remain subject to our historical residual accounting method.

Special Revenue Item

The transition provisions of ASU 2009-13 require that the Company’s existing deferred revenue balance be adjusted retroactively to reflect the value of any undelivered element remaining at the date of contract modification as if we had been applying ASU 2009-13 since the initiation of the Co-Brand Agreement. We applied this transition provision by revaluing the undelivered air transportation element using its new estimated selling price as determined in connection with the contract modification. This estimated selling price was lower than the rate at which the undelivered element had been deferred under the previous contracts and thus we recorded the following one-time non-cash adjustment to decrease frequent flyer deferred revenue and increase special revenue (in millions):

 

    

Nine Months Ended

September 30, 2011

 
     UAL      United      Continental  

Special revenue item

   $ 107       $ 88       $ 19   

Per basic share

   $ 0.33         

Per diluted share

   $ 0.27         

NOTE 2—EARNINGS PER SHARE

The table below represents the computation of UAL basic and diluted earnings per share amounts and the number of securities that have been excluded from the computation of diluted earnings per share amounts because they were antidilutive (in millions, except per share amounts):

 

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Table of Contents
      Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  

UAL basic earnings per share:

         

Net income

   $ 653      $ 387       $ 978      $ 578   

Less: Income allocable to participating securities

     (2     —           (3     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings available to common stockholders

   $ 651      $ 387       $ 975      $ 577   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average shares outstanding

     330        168         329        168   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per share, basic

   $ 1.97      $ 2.30       $ 2.96      $ 3.44   
  

 

 

   

 

 

    

 

 

   

 

 

 

UAL diluted earnings per share:

         

Earnings available to common stockholders

   $ 651      $ 387         975      $ 577   

Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes

     2        18         31        53   

Effect of Continental 4.5% Convertible Notes

     2        —           7        —     

Effect of UAL 5% Senior Convertible Notes

     —          4         —          —     

Effect of Continental 6% Convertible Junior Subordinated Debentures

     4        —           —          —     

Effect of UAL 6% Senior Convertible Notes

     4        4         13        13   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings available to common stockholders including the effect of dilutive securities

   $ 663      $ 413       $ 1,026      $ 643   
  

 

 

   

 

 

    

 

 

   

 

 

 

UAL diluted shares outstanding:

         

Basic weighted average shares outstanding

     330        168         329        168   

Effect of restricted stock units and employee stock options

     1        2         2        1   

Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes

     5        22         13        22   

Effect of Continental 4.5% Convertible Notes

     12        —           12        —     

Effect of UAL 5% Senior Convertible Notes

     —          3         —          —     

Effect of Continental 6% Convertible Junior Subordinated Debentures

     4        —           —          —     

Effect of UAL 6% Senior Convertible Notes

     40        40         40        40   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted average shares outstanding

     392        235         396        231   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per share, diluted

   $ 1.69      $ 1.75       $ 2.59      $ 2.78   
  

 

 

   

 

 

    

 

 

   

 

 

 

UAL potentially dilutive shares excluded from diluted per share

amounts:

         

Restricted stock and units and stock options

     7        5         6        5   

Continental 6% Convertible Junior Subordinated Debentures

     —          —           4        —     

UAL 5% Senior Convertible Notes (Note 9)

     —          —           —          3   

UAL’s 6% Senior Notes due 2031, with a principal amount of $633 million as of September 30, 2011, can be redeemed, and the $62.5 million of UAL’s 8% Contingent Senior Notes (the “8% Notes”), which UAL is obligated to issue no later than February 14, 2012, will be redeemable when issued with either cash or shares of UAL common stock, or in the case of mandatory redemption, a combination thereof, at UAL’s option. These notes are not included in the diluted earnings per share calculation because, if UAL were to redeem the notes, it is UAL’s intent to redeem these notes with cash. See Note 8 of this report for additional information on the 8% Notes.

During the second quarter of 2011, UAL repurchased at par value approximately $570 million of the $726 million outstanding principal amount of its 4.5% Senior Limited-Subordination Convertible Notes due 2021 with cash after the notes were put to UAL by the noteholders. For the nine months ended September 30, 2011, the dilutive effect of the 4.5% Senior Limited-Subordination Convertible Notes due 2021 was excluded from the diluted earnings per share calculations from the date that notice was given of the Company’s intent to pay the notes put to it in cash up to the June 30, 2011 repurchase date.

 

18


Table of Contents

The table below represents the computation of Continental Predecessor’s basic and diluted earnings per share amounts (in millions, except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2010  

Continental Predecessor basic earnings per share:

     

Earnings available to common stockholders

   $ 354       $ 441   
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     140         140   
  

 

 

    

 

 

 

Earnings per share, basic

   $ 2.52       $ 3.16   
  

 

 

    

 

 

 
     

Continental Predecessor diluted earnings per share:

     

Earnings available to common stockholders

   $ 354       $ 441   

Effect of 5% Convertible Notes

     2         10   

Effect of 6% Convertible Junior Subordinated Debentures

     3         10   

Effect of 4.5% Convertible Notes

     3         7   
  

 

 

    

 

 

 

Earnings available to common stockholders including the effect of dilutive securities

   $ 362       $ 468   
  

 

 

    

 

 

 
     

Continental Predecessor diluted shares outstanding:

     

Basic weighted average shares outstanding

     140         140   

5% Convertible Notes

     9         9   

6% Convertible Junior Subordinated Debentures

     4         4   

4.5% Convertible Notes

     12         12   

Employee stock options

     2         2   
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     167         167   
  

 

 

    

 

 

 

Earnings per share, diluted

   $ 2.16       $ 2.81   
  

 

 

    

 

 

 
     
Continental Predecessor potentially dilutive shares excluded from diluted per share amounts:      

Employee stock options

     2         2   

NOTE 3—INCOME TAXES

Our effective tax rates are lower than the federal statutory rate of 35% primarily because of the impact of the reduction to existing valuation allowances. We continue to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets will ultimately not be realized.

NOTE 4—EMPLOYEE BENEFIT PLANS

Defined Benefit Pension and Other Postretirement Benefit Plans. The Company’s net periodic benefit cost includes the following components (in millions):

 

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Table of Contents
     Pension Benefits
Three Months Ended
September 30,
    Other  Postretirement
Benefits

Three Months Ended
September 30,
 

UAL

   2011     2010     2011     2010  

Service cost

   $ 22      $ 1      $ 11      $ 8   

Interest cost

     44        2        32        29   

Expected return on plan assets

     (36     (2     (1     (1

Amortization of unrecognized gain and prior service cost

     (5     —          —          (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 25      $ 1      $ 42      $ 33   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

United

                        

Service cost

   $ 2      $ 1      $ 8      $ 8   

Interest cost

     2        2        29        29   

Expected return on plan assets

     (3     (2     (1     (1

Amortization of unrecognized gain and prior service cost

     —          —          —          (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 1      $ 1      $ 36      $ 33   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Continental (a)

                        

Service cost

   $ 20      $ 17      $ 3      $ 3   

Interest cost

     42        40        3        3   

Expected return on plan assets

     (33     (29     —          —     

Amortization of unrecognized (gain) loss and prior service cost

     (5     25        —          4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 24      $ 53      $ 6      $ 10   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.

 

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Table of Contents
     Pension Benefits     Other Postretirement
Benefits
 
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 

UAL

   2011     2010     2011     2010  

Service cost

   $ 66      $ 4      $ 35      $ 23   

Interest cost

     133        7        95        87   

Expected return on plan assets

     (105     (7     (2     (2

Amortization of unrecognized gain and prior service cost

     (17     (1     (1     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 77      $ 3      $ 127      $ 99   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

United

                        

Service cost

   $ 5      $ 4      $ 25      $ 23   

Interest cost

     7        7        85        87   

Expected return on plan assets

     (8     (7     (2     (2

Amortization of unrecognized gain and prior service cost

     (1     (1     —          (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 3      $ 3      $ 108      $ 99   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Continental (a)

                        

Service cost

   $ 61      $ 50      $ 10      $ 7   

Interest cost

     126        119        10        10   

Expected return on plan assets

     (97     (82     —          —     

Amortization of unrecognized (gain) loss and prior service cost

     (16     72        (1     13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 74      $ 159      $ 19      $ 30   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.

During the nine months ended September 30, 2011, Continental contributed $135 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $31 million to its tax-qualified defined benefit pension plans in October 2011.

Share-Based Compensation. In February 2011, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.5 million shares of restricted stock that vest pro-rata over three years on the anniversary of the grant date. These awards also include approximately 3.0 million performance-based restricted stock units (“RSUs”) (equivalent to approximately 1.9 million RSUs at the target performance level), consisting of approximately 1.2 million RSUs that vest based on UAL’s return on invested capital for the period beginning January 1, 2011 and ending December 31, 2013, and 1.8 million RSUs that vest based on the achievement of merger-related goals. Vesting of a portion of the merger incentive RSUs is based on the achievement of certain merger-related milestones and vesting of the remainder of the merger incentive RSUs is based on the achievement of revenue and cost synergies over a three-year performance period ending December 31, 2013. If the specified performance conditions are achieved, cash payments will be made shortly after the end of the performance period or achievement of the specified merger milestone, as applicable, based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the performance-based RSUs as liability awards. The table below presents information related to share-based compensation expense (in millions):

 

21


Table of Contents
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Share-based compensation expense

           

UAL (a)

   $ 13       $ 9       $ 40       $ 30   

Continental Predecessor

        49            57   

 

      September 30, 2011      December 31, 2010  

Unrecognized share-based compensation expense

   $ 57       $ 43   

 

(a) Includes expense recognized in integration-related costs for the three and nine months ended September 30, 2011.

Profit Sharing Plans. In 2011, substantially all employees participate in profit sharing plans, which pay 15% of total pre-tax earnings, excluding special items and stock compensation expense, to eligible employees when pre-tax profit, excluding special items, profit sharing expense and stock-based compensation program expense, exceeds $10 million. Eligible U.S. co-workers in each participating work group will receive a profit sharing payout using a formula based on the ratio of each qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic workgroups. The international profit sharing plan pays eligible non-U.S. co-workers the same percentage of annual pay that is calculated under the U.S. profit sharing plan. Assuming all work groups are eligible to participate in profit sharing, UAL recorded profit sharing and related payroll tax expense of $152 million and $242 million in the three and nine months ended September 30, 2011, respectively. The actual amount of profit sharing that the Company will distribute to eligible employees in 2012 depends on the Company’s full year financial results and the pool of employees eligible to participate. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations.

During 2010, United and Continental maintained separate employee profit sharing plans for the employees of each respective subsidiary. During the three months ended September 30, 2010, United and Continental Predecessor recorded profit sharing and related payroll tax expense of $90 million and $58 million, respectively. During the nine months ended September 30, 2010, United and Continental Predecessor recorded profit sharing and related payroll tax expense of $153 million and $77 million, respectively.

NOTE 5—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements as of September 30, 2011 and December 31, 2010 (in millions):

 

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Table of Contents
00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000
     September 30, 2011      December 31, 2010  
     Total     Level 1      Level 2     Level 3      Total     Level 1      Level 2     Level 3  
     UAL  

Cash and cash equivalents

   $ 6,984      $ 6,984       $ —        $ —         $ 8,069      $ 8,069       $ —        $ —     

Short-term investments:

                   

Auction rate securities

     121        —           —          121         119        —           —          119   

CDARS

     276        276         —          —           45        45         —          —     

Asset-backed securities

     411        411         —          —           258        258         —          —     

Corporate debt

     474        474         —          —           135        135         —          —     

U.S. government and agency notes

     25        25         —          —           39        39         —          —     

Other fixed income securities

     66        66         —          —           15        15         —          —     

EETC

     60        —           —          60         66        —           —          66   

Fuel derivatives, net

     (75     —           (75     —           375        —           375        —     

Foreign currency derivatives

     (3     —           (3     —           (7     —           (7     —     

Restricted cash (a)

     135        135         —          —           160        160         —          —     

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000
     United (a)  

Cash and cash equivalents

   $ 4,070      $ 4,070       $ —        $ —         $ 4,665       $ 4,665       $ —         $ —     

Short-term investments:

                     

Asset-backed securities

     31        31         —          —           —           —           —           —     

Corporate debt

     137        137         —          —           —           —           —           —     

U.S. government and agency notes

     2        2         —          —           —           —           —           —     

Other fixed income securities

     16        16         —          —           —           —           —           —     

EETC

     60        —           —          60         66         —           —           66   

Fuel derivatives, net

     (48     —           (48     —           277         —           277         —     

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000
      Continental  

Cash and cash equivalents

   $ 2,908      $ 2,908       $ —        $ —        $ 3,398      $ 3,398       $ —        $ —     

Short-term investments:

                  

Auction rate securities

     121        —           —          121        119        —           —          119   

CDARS

     276        276         —          —          45        45         —          —     

Asset-backed securities

     380        380         —          —          258        258         —          —     

Corporate debt

     337        337         —          —          135        135         —          —     

U.S. government and agency notes

     23        23         —          —          39        39         —          —     

Other fixed income securities

     50        50         —          —          15        15         —          —     

Fuel derivatives, net

     (27     —           (27     —          98        —           98        —     

Foreign currency derivatives

     (3     —           (3     —          (7     —           (7     —     

Restricted cash

     135        135         —          —          160        160         —          —     

Convertible debt derivative asset

     199        —           —          199        286        —           —          286   

Convertible debt option liability

     (103     —           —          (103     (164     —           —          (164

 

(a) United’s restricted cash is recorded at cost.

The tables below present disclosures about the activity for “Level Three” financial assets and financial liabilities for the three and nine months ended September 30 (in millions):

 

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Table of Contents
     Three Months Ended September 30,  
     2011     2010  

UAL (a)

   Auction Rate
Securities
    EETC     EETC  

Balance at June 30

   $ 121      $ 65      $ 61   

Settlements

     —          (2     (2

Reported in earnings—unrealized

     1        —          —     

Reported in other comprehensive income

     (1     (3     4   
  

 

 

   

 

 

   

 

 

 

Balance at September 30

   $ 121      $ 60      $ 63   
  

 

 

   

 

 

   

 

 

 

 

(a) For 2010, amounts also represent United. For 2011, United’s only Level Three recurring measurements are the above EETCs.

 

     Nine Months Ended September 30,  
     2011     2010  

UAL (a)

   Auction Rate
Securities
     EETC     EETC  

Balance at January 1

   $ 119       $ 66      $ 51   

Settlements

     —           (4     (4

Reported in earnings—unrealized

     2         —          —     

Reported in other comprehensive income

     —           (2     16   
  

 

 

    

 

 

   

 

 

 

Balance at September 30

   $ 121       $ 60      $ 63   
  

 

 

    

 

 

   

 

 

 

 

(a) For 2010, amounts also represent United. For 2011, United’s only Level Three recurring measurements are the above EETCs.

 

      Successor - 2011     Predecessor - 2010  

Continental

   Auction
Rate
Securities
    Convertible
Debt
Supplemental
Derivative
Asset (a)
    Convertible
Debt
Conversion
Option
Liability (a)
    Auction Rate
Securities
     Auction Rate
Securities  Put

Right
 

Balance at June 30

   $ 121      $ 251      $ (143   $ 117       $ —     

Sales

     —          —          —          —           —     

Gains (losses):

           

Reported in earnings:

           

Realized

     —          —          —          —           —     

Unrealized

     1        (52     40        —           —     

Reported in other comprehensive income

     (1     —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30

   $ 121      $ 199      $ (103   $ 117       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) These derivatives are not designated as hedges. The Convertible Debt Supplemental Derivative Asset is classified in “Other Asset - Other, net”, and the Convertible Debt Conversion Option Liability is classified in “Other liabilities and deferred credits - Other” in Continental’s consolidated balance sheets. The earnings impact is classified in “Nonoperating income (expense) - Miscellaneous, net” in Continental’s statements of consolidated operations.

 

24


Table of Contents
      Successor - 2011     Predecessor - 2010  

Continental

   Auction
Rate
Securities
     Convertible
Debt
Supplemental
Derivative Asset

(a)
    Convertible
Debt
Conversion
Option
Liability (a)
    Auction Rate
Securities
    Auction Rate
Securities Put
Right
 

Balance at January 1

   $ 119       $ 286      $ (164   $ 201      $ 20   

Sales

     —           —          —          (106     —     

Gains (losses):

           

Reported in earnings:

           

Realized

     —           —          —          23        (21

Unrealized

     2         (87     61        —          1   

Reported in other comprehensive income (loss)

     —           —          —          (1     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30

   $ 121       $ 199      $ (103   $ 117      $ —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) These derivatives are not designated as hedges. The Convertible Debt Supplemental Derivative Asset is classified in “Other Asset - Other, net”, and the Convertible Debt Conversion Option Liability is classified in “Other liabilities and deferred credits - Other” in Continental’s consolidated balance sheets. The earnings impact is classified in “Nonoperating income (expense) - Miscellaneous, net” in Continental’s statements of consolidated operations.

As of September 30, 2011, Continental’s auction rate securities, which had a par value of $145 million, an amortized cost basis of $119 million and unrealized gains of $2 million, were variable-rate debt instruments with contractual maturities generally greater than ten years and with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that Continental holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

During the first nine months of 2010, Continental Predecessor sold, at par, auction rate securities having a par value of $106 million. Certain of these auction rate securities were subject to a put right granted to Continental by an institution permitting Continental to sell to the institution certain auction rate securities at their full par value. Continental classified the auction rate securities underlying the put right as trading securities and elected the fair value option under applicable accounting standards for the put right, with changes in the fair value of the put right and the underlying auction rate securities recognized in earnings currently. Continental recognized gains on the sales using the specific identification method. The gains were substantially offset by the cancellation of the related put rights. The net gains are included in miscellaneous nonoperating income (expense) in Continental Predecessor’s statements of consolidated operations and were not material.

As of September 30, 2011, United’s enhanced equipment trust certificate (“EETC”) securities, which were repurchased in open market transactions in 2007, have an amortized cost basis of $66 million and unrealized losses of $6 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

The Continental Successor debt-related derivatives presented in the table above relate to (a) supplemental indenture agreements that provide that Continental’s convertible debt, which was previously convertible into shares of Continental common stock, is convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in Continental’s convertible debt that are required to be separated and accounted for as though they are free-standing derivatives as a result of the Continental debt becoming convertible into the common stock of a different reporting entity. These derivatives are reported in Continental’s separate financial statements and eliminated in consolidation for UAL. See the Company’s 2010 Annual Report for additional information.

The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above as of September 30, 2011 and December 31, 2010 (in millions):

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

UAL debt

   $ 12,074       $ 12,151       $ 13,845       $ 14,995   

United debt

     5,826         5,565         7,026         7,350   

Continental Successor debt

     5,835         5,717         6,401         6,663   

Fair value of the financial instruments included in the tables above was determined as follows:

 

25


Table of Contents

Description

  

Fair Value Methodology

Cash, Cash Equivalents, Short-term Investments, Investments and Restricted Cash    The carrying amounts approximate fair value because of the short-term maturity of these assets and liabilities. These assets have maturities of less than one year except for the EETCs, auction rate securities and corporate debt.
   Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, or (c) internally-developed models of the expected future cash flows related to the securities.
Fuel Derivatives    Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.
Foreign Currency Derivatives    Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.
Debt    Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.
Convertible Debt Derivative Asset and Option Liability    The Company used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and discount rate.

NOTE 6—HEDGING ACTIVITIES

Aircraft Fuel Hedges. The Company has a risk management strategy to hedge a portion of its price risk related to projected aircraft fuel requirements. The Company periodically enters into derivative contracts to mitigate the adverse financial impact of potential increases in the price of fuel. The Company does not enter into derivative instruments for non-risk management purposes. Prior to April 1, 2010, United’s fuel hedges were not accounted for as fair value or cash flow hedges under accounting principles related to hedge accounting. Effective April 1, 2010, United designated substantially all of its outstanding fuel derivative contracts, which settle in periods subsequent to June 30, 2010, as cash flow hedges under applicable accounting standards. In addition, substantially all new fuel derivative contracts entered into subsequent to April 1, 2010 were designated as cash flow hedges.

For fuel derivative instruments designated as cash flow hedges, the Company records the effective portion of periodic changes in the fair value of the derivatives in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to miscellaneous nonoperating income (expense) in the statements of consolidated operations. Nonoperating income (expense) for the three and nine months ended September 30, 2011 includes $56 million and $87 million, respectively, of expense resulting from ineffectiveness caused by a decrease in fuel hedge values in excess of the decrease in aircraft fuel prices during the quarter. The impact has been concentrated in hedges utilizing crude oil derivative contracts.

The Company records each derivative instrument as a derivative asset or liability (on a gross basis) in its consolidated balance sheets and, accordingly, records any related collateral on a gross basis.

As of September 30, 2011, our projected fuel requirements for the remainder of 2011 were hedged as follows:

 

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Table of Contents
     Maximum Price      Minimum Price  
     % of
Expected
Consumption
    Weighted
Average  Price
(per gallon)
     % of
Expected
Consumption
    Weighted
Average  Price
(per gallon)
 

UAL (a)

         

Heating oil collars

     19   $ 3.27         19   $ 2.63   

Heating oil call options

     5        3.23         N/A        N/A   

Heating oil swaps

     4        2.93         4        2.93   

West Texas Intermediate (“WTI”) crude oil call options

     12        2.35         N/A        N/A   

WTI crude oil swaps

     10        2.19         10        2.19   

Aircraft fuel call options

     2        3.21         N/A        N/A   

Aircraft fuel swaps

     4        3.03         4        3.03   
  

 

 

      

 

 

   

Total

     56        37  
  

 

 

      

 

 

   

 

(a) As of September 30, 2011, UAL had also hedged 34% of projected first half 2012 fuel consumption.

The following tables present information about the financial statement classification of the Company’s derivatives (in millions):

 

           September 30, 2011      December 31, 2010  

Derivatives designated as hedges

   Balance Sheet
Location
   UAL      United      Continental      UAL      United      Continental  

Assets:

                    

Fuel contracts due within one year

   Receivables    $ 25       $ 14       $ 11       $ 375       $ 277       $ 98   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                    

Fuel contracts due within one year

   Other Current
Liabilities
   $ 100       $ 62       $ 38       $ —         $ —         $ —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

      Amount of Gain (Loss)
Recognized

in AOCI on Derivatives
(Effective portion)
     Gain (Loss)
Reclassified from
AOCI into Income

(Fuel Expense)
(Effective Portion)
    Amount of Gain (Loss)
Recognized in

Income (Nonoperating
Expense)

(Ineffective Portion)
 
      Three Months Ended
September 30,
     Three Months Ended
September 30,
    Three Months Ended
September 30,
 

Fuel contracts

   2011     2010      2011
     2010     2011
    2010  

UAL

   $ (181   $ 79       $ 94       $ (72   $ (56   $ 12   

United

     (91     79         90         (72     (33     12   

Continental (a)

     (90     33         4         (16     (23     —     

 

(a) For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.

 

      Amount of Gain (Loss)
Recognized

in AOCI on Derivatives
(Effective portion)
    Gain (Loss)
Reclassified from
AOCI into Income

(Fuel Expense)
(Effective Portion)
    Amount of Gain (Loss)
Recognized in

Income (Nonoperating
Expense)

(Ineffective Portion)
 
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 

Fuel contracts

   2011     2010     2011      2010     2011     2010  

UAL

   $ 112      $ (66   $ 526       $ (72   $ (87   $ 9   

United

     145        (66     427         (72     (38     9   

Continental (a)

     (33     (4     99         (23     (49     (2

 

(a) For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.

 

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Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The following table presents information related to the Company’s derivative credit risk as of September 30, 2011 (in millions):

 

     UAL      United      Continental  

Net derivative liability with counterparties

   $ 75       $ 48       $ 27   

Collateral held by the Company

     —           —           —     

Collateral posted by the Company (a)

     2         2         —     

Potential loss related to the failure of the Company’s counterparties to perform

     1         —           1   

 

(a) Classified as a current receivable.

NOTE 7—COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) for the three and nine months ended September 30 included the following (in millions):

 

     UAL     United     Continental
Successor (a)
    Continental
Predecessor (a)
 

Three Months Ended September 30,

   2011     2010     2011     2010     2011     2010  

Net income

   $ 653      $ 387      $ 415      $ 399      $ 236      $ 354   

Other comprehensive income (loss) adjustments, before tax:

            

Investments

     (4     4        (3     4        (1     —     

Fuel derivative financial instruments:

            

Reclassification into earnings

     (94     72        (90     72        (4     16   

Change in fair value

     (181     79        (91     79        (90     33   

Employee benefit plans:

            

Amortization of net actuarial (gains) losses

     (5     (3     —          (3     (5     21   

Amortization of prior service cost

     —          —          —          —          —          8   

Other

     (1     4        —          4        (1     (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) adjustments, before tax

     (285     156        (184     156        (101     70   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (a)

   $ 368      $ 543      $ 231      $ 555      $ 135      $ 424   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) There were no income tax effects for either period due to the recording of valuation allowance.

 

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     UAL     United     Continental
Successor (a)
    Continental
Predecessor (a)
 

Nine Months Ended September 30,

   2011     2010     2011     2010     2011     2010  

Net income

   $ 978      $ 578      $ 536      $ 606      $ 441      $ 441   

Other comprehensive income (loss) adjustments, before tax:

              

Investments

     (2     16        (3     16        1        —     

Fuel derivative financial instruments:

              

Reclassification into earnings

     (526     72        (427     72        (99     23   

Change in fair value

     112        (66     145        (66     (33     (4

Employee benefit plans:

              

Amortization of net actuarial (gains) losses

     (18     (10     (1     (10     (17     62   

Amortization of prior service cost

     —          —          —          —          —          23   

Other

     2        1        (1     1        1        (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) adjustments, before tax

     (432     13        (287     13        (147     93   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
              

Total comprehensive income (a)

   $ 546      $ 591      $ 249      $ 619      $ 294      $ 534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) There were no income tax effects for either period due to the recording of valuation allowance.

NOTE 8—COMMITMENTS AND CONTINGENCIES

General Guarantees and Indemnifications. In the normal course of business, the Company enters into numerous real estate leasing and aircraft financing arrangements that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities under which the Company typically indemnifies the lessors and any tax/financing parties against tort liabilities that arise out of the use, occupancy, operation or maintenance of the leased premises or financed aircraft. Currently, the Company believes that any future payments required under these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). Additionally, certain leased premises such as fueling stations or storage facilities include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premises.

Legal and Environmental Contingencies. The Company has certain contingencies resulting from litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the information currently available, the views of legal counsel, the nature of contingencies to which the Company is subject and prior experience, that the ultimate disposition of these contingencies will not materially affect the Company’s consolidated financial position or results of operations.

The Company records liabilities for legal and environmental claims when a loss is probable and reasonably estimable. These amounts are recorded based on the Company’s assessments of the likelihood of their eventual disposition. The amounts of these liabilities could increase or decrease in the near term, based on revisions to estimates relating to the various claims.

The Company believes that it will have no financial exposure for claims arising out of the events of September 11, 2001 in light of the provisions of the Air Transportation Safety and System Stabilization Act of 2001 limiting claimants’ recoveries to insurance proceeds, the resolution of the wrongful death and personal injury cases by settlement, the resolution of the majority of the property damage claims and the withdrawal of all related proofs of claim from UAL Corporation’s Chapter 11 bankruptcy proceeding.

Contingent Senior Unsecured Notes. UAL is obligated under an indenture to issue to the Pension Benefit Guarantee Corporation (“PBGC”) up to $500 million aggregate principal amount of 8% Notes in up to eight equal tranches of $62.5 million if certain financial triggering events occur (with each tranche issued no later than 45 days following the end of any applicable fiscal year). A triggering event occurs when UAL’s EBITDAR, as defined in the 8% Notes indenture, exceeds $3.5 billion over the prior 12 months ending June 30 or December 31 of any applicable fiscal year. The 12 month measurement periods began with the fiscal year ended December 31, 2009 and will end with the fiscal year ending December 31, 2017. It is the Company’s policy to record an obligation for a tranche at the end of the 12 month measurement period when it is known that a financial triggering event has been met. If any 8% Notes are issued, the Company will not receive any cash. Any 8% Notes

 

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issued will result in a charge to earnings equal to the fair value of the 8% Notes required to be issued. The payment of liabilities arising in connection with the 8% Notes will be included as cash flows from operating activities in the Company’s statements of consolidated cash flows. Two tranches of 8% Notes could be issued on the same date if financial triggering events occur on both EBITDAR measurement periods ended June 30 and December 31 of the same year. UAL common stock can be issued in lieu of the 8% Notes only if the issuance of such 8% Notes would cause a default under other outstanding securities.

A financial triggering event under the 8% Notes indenture occurred at June 30, 2011 and, as a result, UAL is obligated to issue one tranche of $62.5 million of the 8% Notes no later than February 14, 2012. This tranche will mature June 30, 2026, with interest accruing from the triggering event measurement date at a rate of 8% per annum that is payable in cash in semi-annual installments starting June 30, 2012. The tranche of 8% Notes will be callable, at UAL’s option, at any time at par, plus accrued and unpaid interest. UAL recorded a liability for the fair value of the $62.5 million tranche in the second quarter of 2011, which totaled $49 million. This $49 million charge is an integration-related cost classified as a special charge because the financial results of UAL, excluding Continental’s results