UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20052006
OR
[ ] oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-06033
UAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-2675207 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) |
Location: 1200 East Algonquin Road, Elk Grove Township, Illinois | 60007 | |
Mailing Address: P. O. Box 66919, Chicago, Illinois | 60666 | |
(Address of principal executive offices) | (Zip Code) |
Registrant'sRegistrant’s telephone number, including area code:(847) 700-4000
Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class | Name of Each Exchange on Which Registered | |||||
Common Stock, $.01 par value | NASDAQ Global Select Market | |||||
Securities registered pursuant to Section 12 (g) of the Act:None
Title of Each Class
Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes[ ] No[X]Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes[ ] No[X]Yes o No x
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. Yes [X]x No [ ]o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated“accelerated filer and large accelerated filer"filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer o | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes[ ] No[X ]Yes o No x
The aggregate market value of voting stock held by non-affiliates of the Registrant was $184,915,925$3,099,707,715 as of June 30, 2005.2006.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X]x No [ ]o
The number of shares of common stock outstanding as of March 27, 2006February 28, 2007 was 97,406,273.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference from the Company’s definitive proxy statement for its 2007 Annual Meeting of Stockholders to be held on May 10, 2007.
UAL Corporation and Subsidiary Companies Report on Form 10-K
For the Year Ended December 31, 20052006
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 | ||
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 119 | ||
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 124 | |
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2
UAL Corporation (together with its consolidated subsidiaries, "we," "our," "us," "UAL"“we,” “our,” “us,” “UAL” or the "Company"“Company”) was incorporated under the laws of the State of Delaware on December 30, 1968. World headquarters is located at 1200 East Algonquin Road, Elk Grove Township, Illinois 60007. The mailing address is P.O. Box 66919, Chicago, Illinois 60666 (telephone number (847) 700-4000).
UAL is a holding company whose principal subsidiary is United Air Lines, Inc. ("United"(“United”). United'sUnited’s operations, which consist primarily of the transportation of persons, property, and mail throughout the U.S. and abroad, accounted for most of UAL'sUAL’s revenues and expenses in 2005.2006. United provides these services through full-sized jet aircraft (which we referthe Company refers to as our "mainline"its “mainline” operations), as well as smaller aircraft in its regional operations conducted under contract by "United“United Express®"” carriers.
United is one of the largest passenger airlines in the world with more than 3,600 flights a day to more than 200 destinations through its mainline and United Express services. United offers 1,600approximately 1,550 average daily mainline (including Ted(SM)) departures to more than 120 destinations in 2830 countries and two U.S. territories.territories, including the Washington Dulles-Rome service commencing in the first half of 2007. In addition, United will commence its Washington Dulles-Beijing service on March 28, 2007 having received final U. S. Department of Transportation (“DOT”) approval for this route in February 2007. United provides regional service, connecting primarily with United'svia United’s domestic hubs, through marketing relationships with United Express carriers, which provide more than 2,0002,050 average daily departures to more than 150approximately 160 destinations. United serves virtually every major market around the world, either directly or through its participation in the Star Alliance®, the world'sworld’s largest airline network.
United offers a portfolio of services that we believethe Company believes will allow it to generate a revenue premium by meeting distinct customer needs. This strategy of market segmentation is intended to optimize margins and costs by offering the right service to the right customer at the right time. This portfolio includes:
- These services include:
·United mainline, including United First®, United Business® and Economy Plus®,
which now offersthe last providing three to five inches of extra legroom on all United mainline flights (including Ted), and on explus(SM) regional jet flights; ·Ted, a low-fare service,
expanded in 2005 from 47 tonow operates 56 aircraftserving 19and serves 20 airports withmore than 240over 230 daily departures from all United hubs;·p.s. (SM)
-—a premium transcontinental service connecting New York with Los Angeles and San Francisco; and·United Express,
which now includes more thanwith a total fleet of 290 aircraft operated by regional partners, including over 100 70-seat aircraft that offer explus,United'sUnited’s premium regional service, redefining the regional jet experience.
The Company also generates significant revenue through its Mileage Plus® Frequent Flyer Program ("(“Mileage Plus"Plus”), United Cargo(SM), and United Services. Mileage Plus contributed over $800approximately $600 million to passenger and other revenue in 20052006 and helps the companyCompany attract and retain high-value customers. United Cargo generated over $700$750 million in freight and mail revenue in 2005.2006. United Services generated over $275approximately $280 million in revenue in 20052006 by utilizing downtime of otherwise under-utilized resources.
The Company believes its restructuring has made United competitive with network airline peers. In every year of the restructuring, beginning in 2003, the Company has improved its financial performance. The Company's 2005Company’s 2006 financial results clearly demonstrate this progress - despite an increase in fuelthe price of over 40 percent. While the cost of mainline fuel has increased more than $2.0of over 160% since 2002. Since emerging from bankruptcy on February 1, 2006, the Company
generated operating income of $499 million for the eleven months ended December 31, 2006. Mainline fuel expense in this period was $4.5 billion. These amounts compare to an operating loss of $2.8 billion sinceand mainline fuel expense of $1.9 billion in 2002, the year the Company has reduced operating losses by approximately $2.6 billion over the same period.filed for bankruptcy as discussed below.
Throughout the restructuring process, United employees delivered some of the best operational performance metrics in the Company's recent history. For example, in 2005, United ranked number one in fewest denied boardings, number two in Arrival:14, and number three in fewest mishandled bags among the seven major domestic carriers.
ManagementManagement’s goal is focused on margin enhancement by deliveringto further improve profit margins through continuous improvements to theits core business across its operations by reducingfocusing on superior customer service, controlling unit costs and improving revenue execution, developingunit revenues by offering differentiated products and services and realizing revenue premiums. TheHaving completed its reorganization and prepared a solid platform for growth, the Company is now building on its core competitive advantages, including strong brand recognition, its leading loyalty program and broad global airline network.
The Company intends to continue to drive performance through a corporate culture of accountability and continuous improvement.
The Company'sCompany’s web address is www.united.com. The information contained on or connected to the Company’s web address is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the U.S. Securities and Exchange Commission (“SEC”). Through this website, the Company'sCompany’s filings with the Securities and Exchange Commission ("SEC"),SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are accessible without charge as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
This Form 10-K contains various "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company'sCompany’s expectations and beliefs concerning future events, based on information available to usthe Company on the date of the filing of this Form 10-K, and are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from those referenced in the forward-looking statements are listed in the Item 1A. Risk Factors and "Outlook" of Management's Discussion and Analysis of Financial Condition and Results of Operations. We disclaimFactors. The Company disclaims any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.
Bankruptcy Considerations
The following discussion provides general background information regarding the Company'sCompany’s Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information pertaining to its bankruptcy filings may be obtained at www.pd-ual.com. See also Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11"11,” in the Notes to Consolidated Financial Statements.
On December 9, 2002 (the "Petition Date"“Petition Date”), UAL, United, and 26 direct and indirect wholly-owned subsidiaries (collectively, the "Debtors"“Debtors”) filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"“Bankruptcy Court”). On October 20, 2005, the Debtors filed the Debtor's First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code and the First Amended Disclosure Statement for Reorganizing Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the "Disclosure Statement"). On October 21, 2005, the Bankruptcy Court approved the Disclosure Statement.
Commencing on October 27, 2005, the Disclosure Statement, ballots for voting to accept or reject the proposed plan of reorganization and other solicitation documents were distributed to all classes of creditors eligible to vote on the proposed plan of reorganization. On January 20, 2006, the Bankruptcy Court confirmed the Debtors'Debtors’ Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the "Plan“Plan of Reorganization"Reorganization”). The Plan of Reorganization became effective and the Debtors emerged from bankruptcy protection on February 1, 2006 (the "Effective Date"“Effective Date”). On the Effective Date, UAL implemented fresh start accountingfresh-start reporting in accordance with American Institute of Certified Public Accountants'Accountants’ Statement of Position 90-7 "“Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("” (“SOP 90-7"90-7”). See Note 20, "Pro Forma Fresh Start Balance Sheet (Unaudited)" in the Notes to Consolidated Financial Statements.
The Plan of Reorganization generally provides for the full payment or reinstatement of allowed administrative claims, priority claims, and secured claims, and the distribution of new equity and debt securities to the Debtors'Debtors’ creditors employees and othersemployees in satisfaction of allowed unsecured and deemed claims. The Plan of Reorganization contemplates UAL issuing up to 125 million shares of common stock (out of the one billion shares of new common stock authorized under its certificate of incorporation). The new common stock was listed on the NASDAQ National Market and began trading under the symbol "UAUA" “UAUA”
on February 2, 2006. TheUltimately, distributions of common stock, subject to certain holdbacks as described in the Plan of Reorganization, will generally be made as follows:
·Approximately 115 million shares of common stock to unsecured creditors and
employees,
- employees;
·Up to 9.825 million shares of common stock
and(or options(oror other rights to acquire shares) under themanagement equity incentive plan ("MEIP"Management Equity Incentive Plan (“MEIP”) approved by the BankruptcyCourt,Court; and
·Up to 175,000 shares of common stock
and(or options(oror other rights to acquire shares) under thedirector equity incentive plan ("DEIP"Director Equity Incentive Plan (“DEIP”) approved by the Bankruptcy Court.
The Plan of Reorganization also provides for the issuance of the following debt and equity securities:
5,000,000· 5 million shares of 2% mandatorily convertible preferred stock
which wereissued to the Pension Benefit Guaranty Corporation("PBGC"(“PBGC”) shortly after the Effective Date;
·Approximately $150 million in aggregate principal amount of 5% senior convertible
5%noteswhich wereissued to holders of certain municipal bonds shortly after the Effective Date;
Approximately· $726 million in aggregate principal amount of
additional4.5% senior limited-subordination convertible noteswhich are issuable withinissued in July 2006 to certain irrevocable trusts established for thefirst six months after the Effective Date to employees;
$500benefit of certain employees (the “Limited-Subordination Notes”);· $500 million in aggregate principal amount of 6% senior
unsecurednoteswhich wereissued to thePBCGPBGC shortly after the Effective Date; and
$500· $500 million in aggregate principal amount of 8% senior
unsecuredcontingent notes (in up to eight equal tranches of $62.5 million) issuable to the PBGCsubject toupon the satisfaction of certain contingencies.
Pursuant to the Company’s Plan of Reorganization, the Limited-Subordination Notes were required to be issued within 180 days of the Effective Date with a conversion price equal to 125% of the average closing price for the 60 consecutive trading days following February 1, 2006, and an interest rate established so the notes would trade at par upon issuance. In July 2006, the Company reached agreement with five of the seven eligible employee groups to modify the conversion price to instead be based upon the volume-weighted average price of the common stock over the two trading days ending on July 25, 2006. This modification resulted in a new conversion price of $34.84, rather than of $46.86, which was the conversion price under the initial terms of the notes. Because the reduction in the conversion price resulted in a benefit to noteholders, the Company was able to issue the notes at an interest rate of 4.5%, which is a lower rate of interest than would have been required under the initial terms in order for the notes to trade at par upon issuance. The Company reached agreement with the two other employee groups to pay them cash totaling approximately $0.4 million rather than issuing additional notes of similar value. See Note 11, “Debt Obligations,” in the Notes to Consolidated Financial Statements for further information.
Pursuant to the Plan of Reorganization, UAL common stock, preferred stock, and Trust Originated Preferred Securities ("TOPrS") issued prior tobefore the Petition Date were canceled on the Effective Date, and no distribution will bewas made to holders of those securities.
On the Effective Date, the Company secured access to up to $3.0 billion in secured exit financing (the "Credit Facility"“Credit Facility”) which consistsconsisted of a $2.8$2.45 billion term loan, a $350 million delayed draw term loan and a $200 million revolving credit line. On the Effective Date, $2.45 billion of the $2.8$2.45 billion term loan and the entire revolving credit line, wasconsisting of $161 million in cash and $39 million of letters of credit, were drawn and used to repay the Debtor-In-Possession credit facility (the "DIP Financing"“DIP Financing”) and to make other payments required upon exit from bankruptcy, as well as to provide ongoing liquidity to conduct post-reorganization operations. Subsequently, during the first quarter of 2006, the Company repaid $161 millionthe entire outstanding balance on the revolving credit line and accessed the remaining $350 million ondelayed draw term loan. In
February 2007, the term loan.Company prepaid $972 million of its Credit Facility debt and amended certain terms of the Credit Facility. For further details on the Credit Facility including the prepayment and related facility amendment (the “Amended Credit Facility”), see Note 9, "Long-term Debt"11, “Debt Obligations,” in the Notes to Consolidated Financial Statements.
Until recently, the Company had an ongoing dispute with respect to a group of mostly-public financiers (the "Public Debt Group") involving 14 aircraft financed under the Series 1997-1 Enhanced Equipment Trust Certificates ("1997-1 EETC"). In August 2005, United provided notice to the 1997-1 EETC trustee of its intention to purchase the Tranche A certificates, which would permit it to secure long-term access to the 14 aircraft subject to that financing. The Company previously had acquired the 1997-1 EETC Tranche B and Tranche C certificates in a market transaction as a precursor to utilizing the transaction par buyout mechanism to purchase the Tranche A certificates. However, a dispute arose between the Company and the holders of the Tranche A certificates regarding the amount necessary to pay the current certificate holders in full, and that matter was the subject of litigation. On March 17, 2006, the Bankruptcy Court entered an order approving the Company's settlement with the Public Debt Group in connection with the 1997-1 EETC transaction. The settlement resolves all pending litigation in connection with the 1997-1 EETC transaction and aircraft and provides for a permanent mutual release of all related claims. On March 20, 2006, the Company remitted $281 million to the 1997-1 EETC trustee as final payment for the Tranche A certificates. The Company refinanced the 14 aircraft with the $350 million term loan provided under the Credit Facility.
SignificantMatters Remaining to be Resolved in Bankruptcy CourtCourt.. During the course of ourits Chapter 11 proceedings, the Company successfully reached settlements with most of its creditors and resolved most pending claims against the Debtors. However, certain significant matters remain to be resolved in the Bankruptcy Court. For details, see Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11 - 11—Bankruptcy Considerations,"” in the Notes to Consolidated Financial Statements.
Operations
Segments. Segments.UAL operates its businesses through fivetwo reporting segments: North America, Pacific, Atlantic, Latin America (allmainline and United Express. In 2006, in light of which are operated by United)the Company’s bankruptcy-related restructuring and organizational changes, management reevaluated the Company’s segment reporting. As a result, the Company determined that the geographic regions and UAL Loyalty Services, LLC ("ULS"(“ULS”), which it previously reported as segments, were no longer segments requiring disclosure under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). UAL now manages its business as an integrated network with assets deployed across integrated mainline and regional carrier networks, whereas in the past United focused its business management decisions within specific geographic regions and services. This new focus on managing the business seeks to maximize the profitability of the overall airline network. The operations of ULS are included in mainline operations. See “UAL Loyalty Services, LLC,” below for further information on its business activities. Financial information on UAL'sUAL’s reportable segments, including restated segment information for 2005 and 2004, can be found in Note 18, "Segment Information"9, “Segment Information,” in the Notes to Consolidated Financial Statements.
During 2005, United carried approximately 67 million mainline revenue passengers and flew approximately 114Mainline.Mainline operating revenues were $16.4 billion mainline revenue passenger miles ("RPMs"). United operating statistics reported in this Form 10-K (which we refer to as "mainline" operations) do not include the operations of United Express regional carriers, since these entities are independent carriers who report those operating statistics separately to the Department of Transportation ("DOT").
Operating revenues attributed to United's North America segment were $10.82006, $15.0 billion in 2005 $10.5and $14.5 billion in 2004 and $9.9 billion in 2003. Operating revenues attributed to United's international segments were $5.6 billion in 2005, $5.1 billion in 2004 and $4.2 billion in 2003.
North America.2004. As of December 31, 2005, United's2006, mainline domestic operations served 8685 destinations primarily throughout North Americathe U.S. and Canada and operated hubs in Chicago, Denver, Los Angeles, San Francisco and Washington, D.C. In 2005, United's North AmericaMainline international operations including United Express, accounted for 62% of operating revenues.
Pacific. United servesserve the Pacific, from its U.S. gateway cities of Chicago, Honolulu, Los Angeles, New York, San FranciscoAtlantic, and Seattle. United providesLatin America regions. The Pacific region includes nonstop service to Beijing, Hong Kong, Nagoya, Osaka, Seoul, (summer seasonal), Shanghai, Sydney and Tokyo. United also providesTokyo (with service to Taipei scheduled to commence in June 2007); direct service via its Tokyo hub to Bangkok, Hong Kong, Seoul, Singapore and Taipei as well asvia its Tokyo hub; direct service via Hong Kong to Ho Chi Minh City and Singapore via Hong Kong, and to Melbourne via SydneySydney. The Atlantic region includes nonstop service to Melbourne. In 2005, United's Pacific operations accounted for 18% of operating revenues.
Atlantic. Washington, D.C. is United's primary gateway to Europe, serving Amsterdam, Brussels, Frankfurt, London, Munich, Paris and Zurich, and Paris. Chicago is United's secondary gatewaywith service to Europe, serving Amsterdam (summer seasonal), Frankfurt, London, Munich and Paris.Rome scheduled to commence in April 2007. In 2006, United commenced service from Washington Dulles to Kuwait City as part of the Atlantic region. United also provides nonstop service between San Francisco and each of London and Frankfurt; and between London and each of Los Angeles and New York. United provides seasonal service between Chicago andto Bermuda. In 2005, United's Atlantic operations accounted for 12% of operating revenues.
The Latin America. United serves four points in South America from its Chicago and Washington, D.C. hubs withAmerican region offers nonstop service to Buenos Aires and Sao Paulo and direct service to Montevideo (via Buenos Aires) and Rio de Janeiro (via Sao Paulo). UnitedThe Latin American region also serves various Mexican and Caribbean points from its five hubsMexico destinations including Aruba, Cancun, Cozumel, Mexico City, Puerto Vallarta, San Jose del Cabo, and Ixtapa/Zihuatanejo (seasonal); various Caribbean points including Aruba and seasonal service to Montego Bay, Nassau, Punta Cana, and St. Maarten. United servesMaarten; and Central America from its Los Angeles hub toincluding Guatemala City, and San Salvador and from its Chicago hub to Liberia, Costa Rica. InRica (seasonal).
Operating revenues attributed to mainline domestic operations were $10.0 billion in 2006, $9.0 billion in 2005 United'sand $9.1 billion in 2004. Operating revenues attributed to mainline international operations were $6.4 billion in 2006, $6.0 billion in 2005 and $5.3 billion in 2004. For purposes of the Company’s geographic revenue reporting, the Company considers destinations in Mexico to be part of the Latin America operations accounted for approximately 3% of operating revenues.
UAL Loyalty Services, LLC. ULS focuses on expandingregion as opposed to the non-core marketing businesses of United and building customer loyalty. ULS operates substantially all United-branded travel distribution and customer loyalty e-commerce activities, such as united.com. In addition, ULS owns and operates Mileage Plus, being responsible for member relationships, communications and account management; while United is responsible for other aspects of Mileage Plus, including the Elite Premier, Premier Executive and Premier Executive 1K loyalty programs, and the establishment of award mileage redemption programs and airline-related customer loyalty recognition policies. United is also responsible for managing relationships with its Mileage Plus airline partners, while ULS manages relationships with non-airline business partners, such as the Mileage Plus Visa Card, hotels, car rental companies and dining programs, among others. ULS accounted for 5% of 2005 operating revenues.
In 2005, the Bankruptcy Court approved a corporate restructuring that (a) moved Ameniti Travel Clubs, Inc. (formerly known as Confetti, Inc.) as a subsidiary of ULS to a subsidiary of MyPoints.com, Inc. ("MyPoints"); (b) moved MyPoints as a subsidiary of ULS to a subsidiary of UAL; (c) moved ULS as a subsidiary of UAL to a subsidiary of United; and (d) converted ULS from a corporation to a limited liability company. This restructuring was completed on March 21, 2005. For additional information, seeNorth America region. See Note 22, "UAL Loyalty Services LLC"9, “Segment Information,” in the Notes to Consolidated Financial Statements. for financial information on the mainline and United Express segments and operating revenues by geographic regions as reported to the DOT.
6
As of December 31, 2006, the mainline segment operated 460 aircraft and produced approximately 143 billion available seat miles (“ASMs”) and 117 billion revenue passenger miles (“RPMs”) during 2006.
United Express. United Express operating revenues were $2.9 billion in 2006, $2.4 billion in 2005 and $1.9 billion in 2004. United has contractual relationships with various regional carriers to provide regional jet and turboprop service branded as United Express. United Express is a seamlessan extension of the United product linemainline network (United, Ted and p.s.). SkyWest Airlines, Mesa Airlines, Colgan Airlines, Chautauqua Airlines, Shuttle America, Trans States Airlines and GoJet Airlines are all United Express carriers, most of which operate under capacity purchase agreements. The terms ofUnder these agreements, require United to paypays the regional carriers contractually-agreed amountsfees (carrier-controlled costs) for operating these flights plus a variable reimbursement (incentive payment) based on agreed performance metrics. The carrier-controlled costs are based on specific rates for various operating expenses of the United Express carriers, such as crew expenses, maintenance and aircraft ownership, some of which are multiplied by specific operating statistics (e.g., block hours, departures) while others are fixed monthly amounts. The incentive payment is a markup applied to the carrier-controlled costs for superior operational performance. Under these capacity agreements, United is responsible for all fuel costs incurred.incurred as well as landing fees, facilities rent and de-icing costs, which are passed through without any markup. In return, the regional carriers operate this capacity on schedules determined by United, whowhich also determines pricing, revenues and inventory levels and assumes the inventory and distribution risk for the available seats.
The capacity agreements which United has entered into with United Express carriers do not include the provision of ground handling services. As a result, United Express sources ground handling support from a variety of third-party providers as well as by utilizing internal United resources in some cases.
While the regional carriers operating under capacity purchase agreements comprise over 95% of United Express flying, wethe Company also havehas limited prorate agreements with SkyWest Airlines, Trans States Airlines and Colgan Airlines. Under these prorate agreements, United and its prorate partners agree to divide revenue collected from each passenger according to a formula, while both United and the prorate partners are individually responsible for their own costs of operations. Generally, United also collects a program fee from prorate partnersColgan Airlines to cover certain marketing and distribution costs such as credit card transaction fees, global distribution systems ("GDS"(“GDS”) transaction fees, and frequent flyer costs. Unlike capacity purchase agreements, these prorate agreements require the regional carrier to retain the control and risk of scheduling, market selection, and seat pricing and inventory infor its markets.flights.
AtAs of December 31, 2005,2006, United Express carriers operated 292290 aircraft generating $2.4and produced approximately 16 billion in operating revenuesASMs and $2.7 billion in operating expenses during 2005. The program also produced 14 billion available seat miles ("ASMs") and 1112 billion RPMs in 2005.during 2006.
Ted. In February of 2004, United launched Ted in Denver to eightprovide a tailored single-class service, including Economy Plus seating, to better serve leisure destinations and by August 2004, 47 Airbus 320s were flying in Ted markets. In March 2005,the United announced plans to expand its Ted fleet from 47 tonetwork. Currently 56 aircraft by converting an additional nine A320 aircraft to theare configured for Ted configuration. The newservice. Ted aircraft (all inprovides service by mid-December 2005) provide additional service out of United'sfrom United’s hubs in Denver, Washington Dulles, and Chicago O'HareO’Hare International Airport ("O'Hare"(“O’Hare”), Los Angeles and San Francisco to marketsdestinations in Arizona, California, Florida, Louisiana, Nevada, Mexico and the Caribbean, and to be flying soon between Phoenix and Los Angeles.Caribbean. As of December 15, 2005,31, 2006, Ted providesprovided service from all of United'sUnited’s hubs to 12 11destinations in the U.S., including its territories, and threefour in Mexico.
United Cargo.United Cargo offers both domestic and international shipping through a variety of services including United Small Package Delivery, T.D. Guaranteed, First Freight, International FreightEXP (“Express”), and Global SP.GEN (“General”) cargo services. Freight shipments account forcomprise approximately 80%85% of United Cargo'sCargo’s volumes, with mail accounting forcomprising the remainder. During 2005,2006, United Cargo accounted for approximately 4% of UAL'sUAL’s operating revenues by generating $729$750 million in freight and mail revenue, a 4%3% increase versus 2004. Since United Cargo is not a separate reporting segment, United Cargo revenues are allocated to the North America, Pacific, Atlantic and Latin America reporting segments, based upon the actual flown revenue associated with these segments. The majority of United Cargo revenues are earned in the international segments of the Company's operations.2005.
United Services.United Services is a global airline support business offering customers comprehensive solutions for their aircraft maintenance, repair and overhaul ("MRO"(“MRO”), airportaircraft ground
handling and training needs.flight crew training. United Services brings nearly 80 years of experience employee talent and the highest level of operational integrity to more than 150serve approximately 140 airline customers worldwide. MRO services account for approximately three quarters75% of United Services'Services’ revenue with ground handling and flight crew training accounting for the remainder. MRO revenue sources include engine maintenance, maintenance of high techhigh-tech components, including avionics, line maintenance and landing gear services.maintenance. During 2005,2006, United Services generated over $275approximately $280 million in revenue, a 10%12% increase as compared to 2004.2005.
Fuel. Fuel.In 2005,2006, fuel was ourthe Company’s largest operating expense. OurThe Company’s annual mainline and United Express fuel costs and consumption arewere as follows:
|
| 2006 |
| 2005 |
| ||||||||||||||||
|
| Mainline |
| United |
| Mainline |
| United |
| ||||||||||||
Gallons consumed (in millions) |
|
| 2,290 |
|
|
| 373 |
|
|
| 2,250 |
|
|
| 353 |
|
| ||||
Average price per gallon, including tax and hedge impact |
|
| $ | 2.11 |
|
|
| $ | 2.23 |
|
|
| $ | 1.79 |
|
|
| $ | 2.01 |
|
|
Cost (in millions) |
|
| $ | 4,824 |
|
|
| $ | 834 |
|
|
| $ | 4,032 |
|
|
| $ | 709 |
|
|
During 2005, United Express consumed 353 million gallons of fuel costing United approximately $709 million. This expense is classified as "Regional affiliates"Regional affiliates expense in the Statements of Consolidated Operations.
The price and availability of jet fuel significantly affect ourthe Company’s results of operations. A significant rise in jet fuel prices was the primary reason that ourthe Company’s fuel expense increased in each of the last two years. The Company expects to be able to offset some, but not all, of any future fuel expense increases through higher revenues.revenues and the use of fuel hedge contracts.
To ensure adequate supplies of fuel and to provide a measure of control over fuel costs, we arrangethe Company arranges to have fuel shipped on major pipelines and stored close to ourits major hub locations. Although wethe Company currently dodoes not anticipate a significant reduction in the availability of jet fuel, a number of factors make predicting fuel prices and fuel availability uncertain, including increasedchanges in world energy demand, due to the improving global economy, geopolitical uncertainties affecting energy supplies from oil-producing nations, industrial accidents, threats of terrorism directed at oil supply infrastructure, extreme weather conditions causing temporary shutdowns of production and refining capacity, and changes in relative demand for other petroleum products that may impact the quantity and price of jet fuel produced from period to period.
Alliances.United has entered into a number of bilateral and multilateral alliances with other airlines, expanding travel choices for our customers through these relationships by participating in markets worldwide that United does not serve directly. These marketing alliances typically include one or more of the following features: joint frequent flyer program participation; code sharing of flight operations (whereby selected seats on one carrier'scarrier’s flights can be marketed under the brand name of another carrier); coordination of reservations, ticketing, andpassenger check-in, baggage handling and flight schedules; and other resource-sharing activities.
The most significant of these arrangements is the Star Alliance, a global integrated airline network co-founded by United in 1997. As of December 31, 2005,February 1, 2007, Star Alliance carriers served approximately 790serve over 800 destinations in over 138150 countries with over 15,00014,000 average daily flights. Current Star Alliance partners, in addition to United, are Air Canada, Air New Zealand, All Nippon Airways, Asiana, the Austrian Airlines Group, (which includes Austrian Airlines, Lauda Air and Austrian Arrows, formerly Tyrolean), bmi, LOT Polish Airlines, Lufthansa, SAS, Singapore Airways, South African Airways, Spanair, Swiss, TAP Portugal, Thai International Airways and US AirwaysAirways.
In 2006, Star Alliance accepted the applications of Air China, Shanghai Airlines and Varig.Turkish Airlines to join the alliance. These airlines are in the process of completing their Star Alliance joining requirements.
During the first half of 2006, South African Airways and Swiss International Air Lines will be integrated into Star Alliance.8
United currently also has independent marketing agreements with other air carriers, not currently members of the Star Alliance, including Air China, Air Dolomiti, Aloha, BWIA West Indies Airways, Continental Connection (operated by Gulfstream), Fair Inc. dba "ANA Connection,"Gulfstream International, Great Lakes Airlines, (a regional carrier),TACA Group, Island Air, Shanghai Airlines and Virgin Blue.
Mileage Plus.Mileage Plus builds customer loyalty by offering awards and services to frequent travelers. Mileage Plus members can earn mileage credit for flights on United, United Express, Ted, members of the Star Alliance, and certain other airlines that participate in the program. Miles also can be earned by purchasing the goods and services of our non-airline partners, such as hotels, car rental companies, and credit card issuers. Mileage credits can be redeemed for free, discounted or upgraded travel and non-travel awards. There are nearly 4850 million members enrolled in Mileage Plus. For a detailed description of the accounting treatment of Mileage Plus awards,program activity, which was changed to a deferred revenue model upon the adoption of fresh-start reporting on the Effective Date, see "Critical“Critical Accounting Policies"Policies” in Management'sItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
UAL Loyalty Services, LLC.ULS focuses on expanding the non-core marketing businesses of United and building airline customer loyalty. ULS operates substantially all United-branded travel distribution and customer loyalty e-commerce activities, such as united.com. In addition, ULS owns and operates Mileage Plus, being responsible for member relationships, communications and account management; while United is responsible for other aspects of Mileage Plus, including elite membership programs such as Global Services, Premier, Premier Executive and Premier Executive 1K, and the establishment of award mileage redemption programs and airline-related customer loyalty recognition policies. United is also responsible for managing relationships with its Mileage Plus airline partners, while ULS manages relationships with non-airline business partners, such as the Mileage Plus Visa Card, hotels, car rental companies and dining programs, among others.
Distribution Channels. The majority of United'sUnited’s airline seat inventory continues to be distributed through the traditional channels of travel agencies and GDS.TheGDS, such as Sabre and Galileo. The growing use of alternative distribution systems, including the Company'sCompany’s website and GDS new entrants, however, provides United with an opportunity to lower its ticket distribution costs. To encourage customer use of lower-cost channels and capitalize on these cost-saving opportunities, the Company will continue to expand the capabilities of its website, www.united.com, and we guaranteeit guarantees the availability of the lowest prices on united.com.
Seasonality.The air travel business is subject to seasonal fluctuations. The Company'sCompany’s operations can be adversely impacted by severe weather and the first and fourth quarter results of operations normally reflect lower travel demand. Historically, results of operations are better in the second and third quarters which reflect higher levels of travel demand.
Domestic Competition.The domestic airline industry is highly competitive and volatile.dynamic. In domestic markets, new and existing carriers are generally free to initiate service between any two points inwithin the U.S. United'sUnited’s competitors consist primarily of other airlines, a number of whom are low-cost carriers ("LCCs"(“LCC(s)”) with lower-cost structures than United's,United’s, and, to a lesser extent, other forms of transportation.
About 80 percent82% of United'sUnited’s domestic revenue is now exposed to LCCs, which is more than double the percentage from a decade ago.LCC competition. In January 2006 and early 2007, Southwest Airlines, ("Southwest")JetBlue Airways and other LCCs have initiated new service or expanded their service from Denver, United's second-largestcertain of United’s hub to Chicago (Midway), Las Vegas and Phoenix. Southwest also began service between Denver and two more cities, Baltimore and Salt Lake City, in March 2006.cities. United already competeshas experience competing directly with LCCs in all five of theseits markets and believes it is well positioned to compete effectively with Southwest.effectively.
In January 2006, Independence Air ceased operations. In the last year, Independence Air had operated as many as 600 flights daily to and from Washington Dulles airport, United's east-coast hub. As a result of Independence Air's cessation of operations, United expects to benefit from a larger share of Washington-area passenger traffic and an improved fare environment to and from Washington, D.C. However, we anticipate that competition from LCCs and other U.S. airlines, including several large network carriers who are currently restructuring in bankruptcy, will continue to intensify across the domestic system in the future.
Domestic pricing decisions are largely affected by the need to meet competition from other U.S. airlines. Fare discounting by competitors has historically had a negative effect on the Company'sCompany’s financial results because United generallyoften finds it necessary to match competitors'competitors’ fares to maintain passenger traffic. Historically, attempts
Attempts by United and other network airlines to raise fares have often failedfail due to lack of competitive matching by LCCs.LCCs; however, because of the pressure of higher fuel prices and other industry conditions, some fare increases have occurred. Because of different cost structures, low ticket prices that generate a profit for ana LCC have usually had a negative effect on the Company'sCompany’s financial results. The introduction of Ted by United in early 2004 was designed to provide United with a lower-cost operation in selected leisure markets, under which United can be more economically competitive with its LCC rivals.
International CompetitionCompetition.. In United'sUnited’s international networks, the Company competes not only with U.S. airlines, but also with foreign carriers. Competition on specified international routes is subject to varying degrees of governmental regulations. See "Industry Regulation"“Industry Regulation,” below. As the U.S. is the largest market for air travel worldwide, United'sUnited’s ability to generate U.S. originating traffic from its integrated domestic route systems provides United with an advantage over non-U.S. carriers. Foreign carriers are prohibited by U.S. law from carrying local passengers between two points in the U.S. and United experiences comparable restrictions in foreign countries. In addition, U.S. carriers are often constrained from carrying passengers to points beyond designated international gateway cities due to limitations in air service agreements or restrictions imposed unilaterally by foreign governments. To compensate for these structural limitations, U.S. and foreign carriers have entered into alliances and marketing arrangements that allow these carriers to feed traffic to each other's flights.other’s flights (see "Alliances"“Alliances,” above, for further details).
Insurance.United carries hull and liability insurance of a type customary in the air transportation industry, in amounts whichthat the Company deems adequate,appropriate, covering passenger liability, public liability and damage to United'sUnited’s aircraft and other physical property. United also maintains other types of insurance such as property, directors and officers, cargo, automobile and the like, with limits and deductibles that are standard within the industry. Since the September 11, 2001 terrorist attacks, the Company'sCompany’s insurance premiums have increased significantly. Additionally, after September 11, 2001, commercial insurers canceled United'sUnited’s liability insurance for losses resulting from war and associated perils (terrorism, sabotage, hijacking and other similar events). The U.S. government subsequently agreed to provide commercial war-risk insurance for U.S. based airlines until August 31, 20062007 covering losses to employees, passengers, third parties and aircraft. The Secretary of Transportation may extend the policythis coverage until December 31, 2006.2007. If the U.S. government does not extend this coverage beyond August 31, 2006,2007, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all. See "Increases“Increases in insurance costs or reductions in insurance coverage may adversely impact ourthe Company’s operations and financial results"results” in the Item 1A. Risk Factors., below.
Industry Regulation
Domestic Regulation.General.
General. All carriers engaged in air transportation in the United States are subject to regulation by the DOT. Among its responsibilities, the DOT has authority to issueissues certificates of public convenience and necessity for domestic air transportation (no air carrier, unless exempted, may provide air transportation without a DOT certificate of public convenience and necessity), grants international route authorities, approves international code share agreements, regulates methods of competition and enforces certain consumer protection regulations, such as those dealing with advertising, denied boarding compensation and baggage liability.
Airlines also are regulated by the Federal Aviation Administration ("FAA"(“FAA”), a division of the DOT, primarily in the areas of flight operations, maintenance and other safety and technical matters. The FAA has authority to issue air carrier operating certificates and aircraft airworthiness certificates, prescribe maintenance procedures, and regulate pilot and other employee training, among other responsibilities. From time to time, the FAA issues rules that require air carriers to take certain actions, such as the inspection or modification of aircraft and other equipment, that may cause usthe Company to incur substantial, unplanned expenses. The airline industry is also subject to various other federal, state and local
laws and regulations. The U.S. Department of Homeland Security ("DHS"(“DHS”) has jurisdiction over virtually all aspects of civil aviation security. See "“Legislation",” below. The U.S. Department of Justice has jurisdiction over certain airline competition matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail. Labor relations in the airline industry are generally governed by the Railway Labor Act ("RLA"(“RLA”). We areThe Company is also subject to inquiries by the DOT, FAA and other U.S. and international regulatory bodies.
Airport Access.Access. Access to landing and take-off rights, or "slots,"“slots,” at threeseveral major U.S. airports and many foreign airports served by United are, or recently have been, subject to government regulation. The FAA has designated John F. Kennedy International Airport ("Kennedy"(“JFK”) andin New York, LaGuardia Airport ("LaGuardia"(“LaGuardia”) in New York and Ronald Reagan Washington National Airport in Washington, D.C. as "high“high density traffic airports"airports” and has limited the number of departure and arrival slots at those airports. Slot restrictions at O'HareO’Hare were eliminated in July 2002 and are slated to bewere eliminated at KennedyJFK and LaGuardia byin January 2007. From time to time, the elimination of slot restrictions has impacted ourUnited’s operational performance and reliability.
To address congestion concerns and delaysNotwithstanding the formal elimination of slot restrictions at O'Hare, United and American Airlines reached agreement withO’Hare in July 2002, the FAA imposed temporary restrictions on flight operations there beginning in January 2004 to reduce each of theiraddress air traffic congestion concerns. In August 2006, the FAA issued a longer-term rule restricting flight schedules at O'Hare. We reduced our flight schedule at O'Hare beginning February 2004 between the peak hours of 1:00 p.m. and 8:00 p.m. In addition, effective March 2004, we again depeaked our flight schedule by 5%. Subsequently, United, American Airlines and certain other carriers complied with the FAA's request to further depeak afternoon operations at O'Hare resultingO’Hare, which remains in a slight reduction in operations overall beginning in November 2004. In 2005, the FAA proposed longer-term rules to address congestion at O'Hareeffect until 2008, which additional capacity is expected to be available at the airport. In the meantime,2008.
At LaGuardia, the FAA has orderedproposed an interim rule that the existing operatingwould impose caps and restrictions remainon flight operations similar to those in effect untilat O’Hare. The interim rule took effect in January 2007 when the earlier of October 28, 2006high density rule expired.The FAA has also proposed a longer-term rule at LaGuardia that is designed to control air traffic congestion there indefinitely. The longer-term proposal contains several novel elements that could impact United’s schedule and operational performance at LaGuardia. It is not possible to predict whether or the date on which the long-termwhen such longer-term rules become effective.might take effect.
Legislation.Legislation. The airline industry is also subject to legislative activity that can have an impact on operations and costs. Specifically, the law that authorizes federal excise taxes and fees assessed on airline tickets expires in September 2007. In 2007, Congress is likelywill attempt to begin the process of reauthorizing thesepass comprehensive reauthorization legislation to impose a new funding structure and make other aviation programs in 2006.changes to FAA operations. Past aviation reauthorization bills have touched onaffected a wide range of areas of interest to the industry, including air traffic control operations, capacity control issues, airline competition issues, aircraft and airport technology requirements, safety issues, taxes, fees and other funding issues.sources.
Additionally, since September 11, 2001, aviation security has been and continues to be a subject of frequent legislative action, requiring changes to our security processes and increasing the cost of security procedures for the Company. The Aviation and Transportation Security Act (the "Aviation“Aviation Security Act"Act”), enacted in November 2001, has had wide-ranging effects on our operations. The Aviation Security Act made the federal government responsible for virtually all aspects of civil aviation security, creating a new Transportation Security Administration ("TSA"(“TSA”), which is a part of the DHS pursuant to the Homeland Security Act of 2002. Under the Aviation Security Act, substantially all security screeners at airports are now federal employees and significant other aspects of airline and airport security are now overseen by the TSA. Pursuant to the Aviation Security Act, funding for airline and airport security is provided in part by a passenger security fee of $2.50 per flight segment (capped at $10.00 per round trip), which is collected by the air carriers from passengers and remitted to the government. In addition, air carriers are required to submit to the government an additional security fee equal to the amount each air carrier paid for security screening of passengers and property in 2000. In January 2006, United and a number of U.S. and foreign carriers were notified by the TSA that a substantial increase in the additional security fee would be imposed retroactively to the beginning of 2005, and continuing into 2006 and future years. United, together with many other affected carriers, is currently disputing this fee assessment. ItCongress is expected thatto continue to focus on changes to aviation security lawslaw and processesrequirements in 2007. Particular areas of attention that could result in increased costs for air carriers will continue to be under reviewlikely include new requirements on cargo screening, possible deployment of antimissile technology on passenger aircraft and subject to change by the federal government in the future.potential for increased passenger and carrier security fees.
International Regulation.
General.General. International air transportation is subject to extensive government regulation. In connection with ourUnited’s international services, we arethe Company is regulated by both the U.S. government and the governments of the foreign countries we serve.United serves. In addition, the availability of international routes to U.S. carriers is regulated by treaties and related aviation agreements between the U.S. and foreign governments, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments.
Airport Access.Access. Historically, access to foreign markets has been tightly controlled through bilateral agreements between the U.S. and each foreign country involved. These agreements regulate the number of markets served, the number of carriers allowed to serve each market, and the frequency of carriers'carriers’ flights. Since the early 1990s, the U.S. has pursued a policy of "open skies"“open skies” (meaning all carriers have access to the destination), under which the U.S. government has negotiated a number of bilateral agreements allowing unrestricted access to foreign markets. Additionally, all of the airports that United serves in Europe and Asia maintain slot controls, and many of these are restrictive due to congestion at these airports. London Heathrow, Frankfurt and Tokyo Narita are among the most restrictive due to capacity limitations, and United has significant operations at these locations.
Further, ourUnited’s ability to serve some countries and expand into certain others is limited by the absence altogether of aviation agreements between the U.S. and the relevant governments. Shifts in U.S. or foreign government aviation policies can lead to the alteration or termination of air service agreements between the U.S. and other countries. Depending on the nature of the change, the value of ourUnited’s route authorities may be materially enhanced or diminished.
In November 2005,February 2007, the U.S. government and the European Union ("EU"(“EU”) Commission concluded the negotiation of a proposed transatlantic aviation agreement to replace the existing bilateral arrangements between the U.S. government and the 25 EU member states. The EU Council of Transport Ministers (the “Council”) must approve the agreement. Itagreement by unanimous vote. The Council is expected thatscheduled to consider the Council will vote on thematter at its next meeting in late March 2007.
The proposed agreement in June 2006. If approved, the agreement is expected to go into effect in the summer of 2007.
The proposedU.S./EU agreement is based on the U.S. open skies model and would authorize U.S. airlines to operate between the United States toand any point in the EU and beyond, free from government restrictions on capacity, frequencies and scheduling and provides EU carriers with reciprocal rights in these U.S.-EUU.S./EU markets. Currently, only 1516 of the 2527 EU member states have open skies agreements with the United States. Importantly, theThe agreement would authorize all U.S. and EU carriers to operate services between the United States and London Heathrow, thereby adding competition to United’s Heathrow operation, although Heathrow is slot and as a result, the Company and bmi will be able to takes steps to implement the antitrust immunity the carriers previously received from regulators on both sides of the Atlantic, but which was suspended pending the opening of access to Heathrow.terminal constrained.
The proposed agreement would also resolve a legal issue concerning the “nationality” clauses in the existing bilateral agreements between the U.S.United States and the EU member statesstates. The proposed agreement would replace this clause with a community carrier clause that has resultedwould allow carriers owned and controlled by EU citizens to operate services to the United States from any point in the EU.
The proposed agreement would confer a number of additional rights on EU carriers that are designed to redress what the EU considers to be an imbalance between U.S. carrier access to the intra-EU market versus EU carrier access to the U.S. domestic market. In particular, EU ownership of more than 50 percent of a U.S. carrier will not be presumed to violate the actual control by U.S. citizens requirement, provided foreign ownership of the voting equity of the U.S. carrier does not exceed the statutory limit of 25 percent. U.S. ownership of EU carriers may not exceed 49.9 percent and the EU may enact legislation restricting US ownership of the voting stock of EU airlines to 25 percent. The agreement also provides EU passenger carriers with the right to operate between the U.S. and a limited number of non-EU countries and does not provide reciprocal rights to U.S. carriers. It is uncertain at this early stage what commercial effects these provisions may have.
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If the Council approves the agreement, it is scheduled to go into effect during the winter season of 2007 with a transition to open skies for Ireland in the summer season of 2008. If the Council does not approve the agreement, the EU Commission calling onmay call upon the EU member states to renounce their air servicesexisting bilateral agreements with the United States because they allegedly do not comply with U.S. law. To date, no EU member state has indicated a willingness to renounce its air services agreement with the U.S.or face infringement proceedings. If EU member states do renounce suchtheir agreements with the U.S., the status of ourUnited’s existing antitrust immunity with ourits European partners would be in doubt because the immunity is based upon an open skies agreement between the United StatesU.S. and the applicable EU member state.
The EU Commission has or is expected to propose important new legislation inby the near futureend of 2007 that will also impact the Company. The EU Commission is expected toNew proposed legislation may officially sanction secondary slot trading. Thistrading, which is a current practice among carriers that involves the sale, purchase or lease of slots. If adopted, that legislation should resolve disputes about the legality of slot exchanges at EU airports.airports and permit carriers to continue with this longstanding practice. In addition, on December 20, 2006, the EU Commission will soon propose legislation to deregulate GDS. We expect GDS deregulation to result in a reduction in the Company's distribution costs. Finally, the EU Commission is expected to proposeproposed legislation to include aviation within the EU'sEU’s existing emissions trading scheme by 2013. Suchscheme. If adopted, such a measure could add significantly to the costs of operating in Europe. The precise cost to United will depend upon the terms of the legislation enacted, which would determine whether United will be forced to buy emission allowances and the cost at which these allowances may be obtained.
AnPursuant to an agreement reached in December 2005, a full open skies agreement between the U.S.United States and Canada is expectedlikely to take effect in September 2006. We anticipateearly 2007. The DOT is expected to finalize its tentative decision from December 2006 approving United’s proposed 9-party antitrust immunity application (including United, Air Canada, Lufthansa, SAS, Austrian, Swiss, LOT, TAP and bmi). At that an open skies agreement between the U.S. and Canada will permittime, United and Air Canada will be permitted to expand their existing antitrust immunity whichbeyond the currently is limited in application to theallowed transborder region.
Environmental Regulation.
The airline industry is subject to increasingly stringent federal, state, local, and foreign environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils, and waste materials. OurNew regulations surrounding the emission of greenhouse gases (such as carbon dioxide) are being considered for promulgation both internationally and within the United States. United will be carefully evaluating the potential impact of such proposed regulations. Other areas of developing regulations include the State of California rule-makings regarding air emissions from ground support equipment and a federal rule-making concerning the discharge of deicing fluid. The airline industry is also subject to other environmental laws and regulations, including those that require usthe Company to remediate soil or groundwater to meet certain objectives. Compliance with all environmental laws and regulations can require significant expenditures. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, (commonlycommonly known as "Superfund")“Superfund,” and similar environmental cleanup laws, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at facilitieslocations that have been identified as requiring response actions. WeThe Company also conductconducts voluntary environmental assessment and remediation actions. Environmental cleanup obligations can arise from, among other circumstances, the operation of aircraft fueling facilities, and primarily involve airport sites. Future costs associated with these activities are currently not expected to have a material adverse affect on ourthe Company’s business.
As of December 31, 2005,2006, the Company and its subsidiaries had approximately 57,00055,000 active employees, of whom approximately 80% are81% were represented by various U.S. labor organizations.
As of December 31, 2005,2006, the employee groups, number of employees and labor organization for each of United'sUnited’s collective bargaining groups were as follows:
Employee Group | Number of | Union(1) | Contract Open | ||||||||
Public Contact/Ramp & Stores/Food Service | |||||||||||
| Employees/Security Officers/Maintenance | |||||||||||
| Instructors/Fleet Technical Instructors | 17,203 | IAM | January 1, 2010 | ||||||||
Flight Attendants | 14,920 | AFA | January 8, 2010 | ||||||||
Pilots | 6,439 | ALPA | January 1, 2010 | ||||||||
Mechanics & Related | 5,524 | AMFA | January 1, 2010 | ||||||||
Engineers | 255 | IFPTE | January 1, 2010 | ||||||||
Dispatchers | 167 | PAFCA | January 1, 2010 | ||||||||
(1) Air Line Pilots Association ("ALPA"), Association of Flight Attendants - Communication Workers of America ("AFA"); Aircraft Mechanics Fraternal Association ("AMFA"); International Association of Machinists and Aerospace Workers ("IAM"(“IAM”); Professional Airline, Association of Flight ControlAttendants—Communication Workers of America (“AFA”), Air Line Pilots Association ("PAFCA"(“ALPA”); Transport Workers Union ("TWU", Aircraft Mechanics Fraternal Association (“AMFA”); and, International Federation of Professional and Technical Engineers ("IFPTE"(“IFPTE”) and Professional Airline Flight Control Association (“PAFCA”).
(2) Initial contract with the IFPTE was ratified on March 8, 2006 with an initial effective date of March 1, 2006.
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The following risk factors should be read carefully when evaluating ourthe Company’s business and the forward-looking statements contained in this report and other statements wethe Company or ourits representatives make from time to time. Any of the following risks could materially adversely affect ourthe Company’s business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this report.
Risks Related to Ourthe Company’s Business
Continued periods of historically high fuel costs or significant disruptions in the supply of aircraft fuel could have a material adverse impact on ourthe Company’s operating results.
OurThe Company’s operating results have been and continue to be significantly impacted by changes in the availability or price of aircraft fuel. Previous record-high fuel prices increased substantially in 20052006 as compared with 2004. We atto 2005. At times, haveUnited has not been able to increase ourits fares when fuel prices have risen due to the highly competitive nature of the airline industry, and weit may not be able to do so in the future. Although we arethe Company is currently able to obtain adequate supplies of aircraft fuel, it is impossible to predict the future availability or price of aircraft fuel. In addition, from time to time we enterthe Company enters into hedging arrangements to protect against rising fuel costs. OurThe Company’s ability to hedge in the future, however, may be limited due to market conditions and other factors.
Additional terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, could negatively affect usthe Company and the airline industry.
The terrorist attacks of September 11, 2001 involving commercial aircraft severely and adversely affected ourthe Company’s financial condition and results of operations, as well as prospects for the airline industry generally. Among the effects we experienced from the September 11, 2001 terrorist attacks were substantial flight disruption costs caused by the FAA-imposed temporary grounding of the U.S. airline industry'sindustry’s fleet, significantly increased security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and significantly decreased traffic and passenger revenue per RPM ("yield"revenue passenger mile (“yield”).
Additional terrorist attacks, even if not made directly on the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated national threat warnings or selective cancellation or redirection of flights) could materially and adversely affect usthe Company and the airline industry. The war in Iraq and additional international hostilities could also potentially have a material adverse impact on ourthe Company’s financial condition, liquidity and results of operations. OurThe Company’s financial resources might not be sufficient to absorb the adverse effects of any further terrorist attacks or an increase in post-war unrest in Iraq or other international hostilities involving the United States.
The airline industry is highly competitive and susceptible to price discounting.
The U.S. airline industry is characterized by substantial price competition, especially in domestic markets. Some of our competitors have substantially greater financial resources or lower-cost structures than we do,United does, or both. In recent years, the market share held by LCCs has increased significantly. For the last several years, largeLarge network carriers, like United, have generallyoften had a lack of pricing power inwithin domestic markets.
In addition, U.S. Airways, Northwest, Delta and several small U.S. competitors have recently filed to reorganizereorganized or are currently reorganizing under bankruptcy protection. Other carriers could file for bankruptcy or threaten to do so to reduce their costs. Carriers operating under bankruptcy protection can operate in a manner that could be adverse to usthe Company and could emerge from bankruptcy as more vigorous competitors.
From time to time the U.S. airline industry has undergone consolidation, as in the recent merger of U.S. Airways and America West, and may experience additional consolidation in the future. United routinely monitors changes in the competitive landscape and engages in analysis and discussions regarding its strategic position, including alliances, asset acquisitions and business combinations. If other airlines participate in merger activity, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of United.
Additional security requirements may increase ourthe Company’s costs and decrease ourits traffic.
Since September 11, 2001, the DHS and the TSA have implemented numerous security measures that affect airline operations and costs, and are likely to implement additional measures in the future. In addition, foreign governments have also begun to institute additional security measures at foreign airports we serve.United serves. A substantial portion of the costs of these security measures is borne by the airlines and their passengers, increasing ourthe Company’s costs and/or reducing ourits revenue.
Security measures imposed by the U.S. and foreign governments after September 11, 2001 have increased ourUnited’s costs and may further adversely affect usthe Company and ourits financial results, and additionalresults. Additional measures taken to enhance either passenger or cargo security procedures and/or to recover associated costs in the future may result in similar adverse effects.
Extensive government regulation could increase ourthe Company’s operating costs and restrict ourits ability to conduct ourits business.
Airlines are subject to extensive regulatory and legal compliance requirements that result in significant costs. In addition to the enactment of the Aviation Security Act, laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce airline revenue. The FAA from time to time also issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures by the Company. We expectThe Company expects to continue incurring material expenses to comply with the regulations of the FAA and other agencies. Additionally, we operate
United operates under a certificate of public convenience and necessity issued by the DOT. If the DOT altered, amended, modified, suspended or revoked ourUnited’s certificate, it could have a material adverse effect on ourits business. The FAA can also limit United’s airport access by limiting the number of departure and arrival slots at “high density traffic airports” and local airport authorities may have the ability to control access to certain facilities or the cost of access to such facilities, which could have an adverse effect on the Company’s business.
Many aspects of ourUnited’s operations are also subject to increasingly stringent federal, state and local laws protecting the environment. Future regulatory developments in the U.S. and abroad could adversely affect operations and increase operating costs in the airline industry. For example, potential future actions that may be taken by the U.S. government, foreign governments, or the International Civil Aviation Organization to limit the emission of greenhouse gases by the aviation sectorindustry are unknownuncertain at this time, but the impact to usthe Company and ourits industry iswould likely to be adverse and could be significant.
The ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the United States and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be made available. WeUnited currently operates on a number of international routes under government arrangements that limit the number of carriers, capacity, or the number of carriers allowed access to particular airports. If an open skies policy were to be adopted for any of these routes, such an event could have a material adverse impact on the Company’s financial position and results of operations and could result in the impairment of material amounts of related intangible assets.
Further, the Company’s operations in foreign countries are subject to various laws and regulations in those countries. The Company cannot provide any assurance that current laws and regulations, or laws or regulations enacted in the future, will not adversely affect us.its financial condition or results of operations.
OurThe Company’s results of operations fluctuate due to seasonality and other factors associated with the airline industry. Our future financial condition and results of operations will be further affected by the adoption of fresh start accounting; and by the future resolution of bankruptcy-related contingencies.
Due to greater demand for air travel during the summer months, revenuerevenues in the airline industry in the second and third quarters of the year isare generally stronger than revenuerevenues in the first and fourth quarters of the year. OurThe Company’s results of operations generally reflect this seasonality, but have also been impacted by numerous other factors that are not necessarily seasonal including, among others, the imposition of excise and similar taxes, extreme or severe weather, air traffic control delays and general economic conditions. As a result, ourthe Company’s quarterly operating results are not necessarily indicative of operating results for an entire year and historical operating results are not necessarily indicative of future operating results.
As a result of our bankruptcy reorganization, we are subject to the adoption of fresh start accounting as prescribed by generally accepted accounting principles ("GAAP"). As required by fresh start accounting, our assets and liabilities will be adjusted to fair value, and certain assets and liabilities not previously recognized in the Company's financial statements will be recognized under fresh start accounting. Because we completed our reorganization and adopted fresh start accounting on February 1, 2006, our reported assets and liabilities at December 31, 2005 do not yet give effect to the adjustments that will result from the adoption of fresh start accounting and, as a result, will change materially. Accordingly, ourThe Company’s financial condition and results of operations from and aftermay be further affected by the Effective Date will not be comparable tofuture resolution of bankruptcy-related contingencies.
Despite the financial condition and results of operations reflected in our historical consolidated financial statements. For further information about fresh start accounting, see Note 20, "Pro Forma Fresh Start Balance Sheet - (Unaudited)" in the Notes to Consolidated Financial Statements.
Additionally, despite ourCompany’s exit from bankruptcy on February 1, 2006, several significant matters remain to be resolved in connection with ourits reorganization under Chapter 11 of the United States Bankruptcy Code. Unfavorable resolution of these matters could have a material adverse effect on ourthe Company’s business. For additional detail regarding these matters, see Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11- 11—Bankruptcy Considerations"Considerations,” in the Notes to Consolidated Financial Statements.
The Company’s initiatives to improve the delivery of its products and services to its customers, reduce costs, and increase its revenues may not be adequate or successful.
The Company continues to identify and implement continuous improvement programs to improve the delivery of its products and services to its customers, reduce its costs and increase its revenues. Some of these efforts are focused on cost savings in such areas as telecommunications, airport services, catering, maintenance materials, aircraft ground handling and regional affiliates. A number of the Company’s ongoing initiatives involve significant changes to the Company’s business that it may be unable to implement successfully. The adequacy and ultimate success of the Company’s programs and initiatives to improve the delivery of its products and services to its customers, reduce its costs and increase its revenues cannot be assured.
Union disputes, employee strikes and other labor-related disruptions may adversely affect ourthe Company’s operations.
Approximately 80%81% of the employees of UAL are represented for collective bargaining purposes by U.S. labor unions. These employees are organized into sevensix labor groups represented by sevensix different unions.
Relations between air carriers and labor unions in the United States are governed by the RLA. Under the RLA, a carrier must maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board. This process continues until either the parties have reached agreement on a new CBA or the parties are released to "self-help"“self-help” by the National Mediation Board. Although in most circumstances the RLA prohibits strikes, shortly after release by the National Mediation Board carriers and unions are free to engage in self-help measures such as strikes and lock-outs. NoneAll of ourthe Company’s U.S. labor agreements become amendable untilin January 1, 2010. There is also a risk that disgruntleddissatisfied employees, either with or without union involvement, could engage in illegal slow-downs, work stoppages, partial work
stoppages, sick-outs or other actions short of a full strike that could individually or collectively harm the operation of the airline and impair its financial performance.
Increases in insurance costs or reductions in insurance coverage may adversely impact ourthe Company’s operations and financial results.
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial airlines. Accordingly, ourthe Company’s insurance costs increased significantly and ourits ability to continue to obtain certain types of insurance remains uncertain. We haveThe Company has obtained third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if weit had obtained this insurance in the commercial insurance market. Should the government discontinue this coverage, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all. If we arethe Company is unable to obtain adequate war risk insurance, ourits business could be materially and adversely affected.
If any of ourUnited’s aircraft were to be involved in an accident, wethe Company could be exposed to significant tort liability. The insurance we carryit carries to cover damages arising from any future accidents may be inadequate. InIf the event that ourCompany’s insurance is not adequate, weit may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate could create a public perception that our aircraft are not safe or reliable, which could harm our reputation, result in decreased customer traffic and adversely impact our financial condition and results of operations.
We relyThe Company relies heavily on automated systems to operate ourits business and any significant failure of these systems could harm ourits business.
We dependThe Company depends on automated systems to operate ourits business, including ourits computerized airline reservation systems, our flight operations systems, our telecommunication systems and our commercial websites, including united.com. OurUnited’s website and reservation systems must be able to accommodate a high volume of traffic and deliver important flight information, as well as process critical financial transactions. Substantial or repeated website, reservations systems or telecommunication systems failures could reduce the attractiveness of ourUnited’s services versus ourits competitors and materially impair ourits ability to market ourits services and operate ourits flights.
OurThe Company’s business relies extensively on third-party providers. Failure of these parties to perform as expected, or unexpected interruptions in ourthe Company’s relationships with these providers or their provision of services to us,the Company, could have an adverse effect on ourits financial condition and results of operations.
We haveThe Company has engaged a growing number of third-party service providers to perform a large number of functions that are integral to ourits business, such as operation of United Express flights, operation of customer service call centers, provision of information technology infrastructure and services, provision of maintenance and repairs, provision of various utilities and performance of aircraft fueling operations, and manyamong other vital functions and services. We doThe Company does not directly control these third-party providers, although we doit does enter into agreements with many of them whichthat define expected service performance. Any of these third-party providers, however, may materially fail to meet their service performance commitments to the Company. The failure of these providers to adequately perform their service obligations, or other unexpected interruptions of services, may reduce ourthe Company’s revenues and increase ourits expenses or prevent usUnited from operating ourits flights and providing other services to ourits customers. In addition, ourthe Company’s business and financial performance could be materially harmed if ourits customers believe that ourits services are unreliable or unsatisfactory.
18
OurThe Company’s high level of fixed obligations could limit ourits ability to fund general corporate requirements and obtain additional financing, could limit ourits flexibility in responding to competitive developments and could increase ourits vulnerability to adverse economic and industry conditions.
We haveThe Company has a significant amount of financial leverage from fixed obligations, including the Amended Credit Facility, aircraft lease and debt financings, leases of airport property and other facilities, and other material cash obligations. In addition, as of February 2, 2007, the Company hashad pledged substantially all of its available assets as collateral to secure its various fixed obligations.obligations, except for certain aircraft and related parts with an estimated current market value of approximately $2.5 billion.
OurThe Company’s high level of fixed obligations and lack of significant unencumbered assets or a downgrade in our existingthe Company’s credit ratingratings could impair ourits ability to obtain additional financing, if needed, and reduce ourits flexibility in theto conduct of ourits business. Certain of ourthe Company’s existing indebtedness also requires the Companyit to meet covenants and financial tests to maintain ongoing access to those borrowings. See Note 9, "Long-term Debt"11, “Debt Obligations,” in the Notes to Consolidated Financial Statements for further details. A failure to timely pay our fixed costs,its debts or other material uncured breach of ourits contractual obligations could result in a variety of adverse consequences, including the acceleration of ourthe Company’s indebtedness, the withholding of credit card sale proceeds by ourits credit card service providers and the exercise of other remedies by ourits creditors and equipment lessors whichthat could result in material adverse effects on ourthe Company’s operations and financial condition. In such a situation, it is unlikely that wethe Company would be able to fulfill ourits obligations to repay the accelerated indebtedness, make required lease payments, or otherwise cover ourits fixed costs.
OurThe Company’s net operating loss carry forwardsforward may be limited.
At December 31, 2005, prior to our emergence from bankruptcy, we had estimatedThe Company has a net operating loss (“NOL”) carry forwards ("NOLs") to be $7.0forward of approximately $2.7 billion for federal and state income tax purposes that primarily originated before UAL’s emergence from bankruptcy and will expire over a five to twenty year period. TheThis tax benefit is mostly attributable to federal NOL carry forwards of $7.0 billion. If the Company expects that the issuance of its common stock to creditors upon emergence from bankruptcy may have the effect of increasing these NOLs in 2006. If we were to have a change of ownership within the meaning of Section 382 of the Internal Revenue Code, under current conditions, ourits annual federal NOL utilization could be limited to an amount equal to ourits market capitalization at the time of the ownership change multiplied by the federal long-term tax exempt rate.
To avoid a potential adverse effect on the Company'sCompany’s ability to utilize its NOLsNOL carry forward for federal income tax purposes after the Effective Date, the Company'sCompany’s certificate of incorporation contains a "5%“5% Ownership Limitation,"” applicable to all stockholders except the PBGC. The 5% Ownership Limitation remains effective until February 1, 2011. While the purpose of these transfer restrictions is to prevent a change of ownership from occurring within the meaning of Section 382 of the Internal Revenue Code (which ownership change would materially and adversely affect the Company'sCompany’s ability to utilize its NOLsNOL carry forward or other tax attributes), no assurance can be given that such an ownership change will not occur, in which case the availability of the Company'sCompany’s substantial NOLsNOL carry forward and other federal income tax attributes would be significantly limited or possibly eliminated.
The Company has identified a material weakness in its internal control over financial reporting associated with tax accounting as of December 31, 2006 that, if not properly remediated, could result in material misstatements in its financial statements in future periods.
Based on an evaluation of our internal control over financial reporting as of December 31, 2006, our management has concluded that such internal control over financial reporting was not effective as of such date due to the existence of a deficiency in the operation of our internal accounting controls, which constituted a material weakness in our internal control over financial reporting. While the controls were properly designed and did not result in a material misstatement, they did not operate effectively to ensure proper accounting and disclosure of income taxes. The Company has suffered from high management attrition during its reorganization. The material weakness was primarily related to high staff turnover in the tax department.
As defined in Public Company Accounting Oversight Board Auditing Standard No. 2, a material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of a Company’s annual or interim financial statements will not be prevented or detected.
Because of this material weakness, there is a risk that a material misstatement of our annual or quarterly financial statements may not be prevented or detected. The Company has taken and will continue to take whatever steps are necessary to remediate the material weakness, including the hiring of staff, use of external advisors, as well as implementing a more rigorous review process of tax accounting and disclosure matters. We cannot guarantee, however, that such remediation efforts will correct the material weakness such that our internal control over financial reporting will be effective. In the event that we do not adequately remedy this material weakness, or if we fail to maintain effective internal control over financial reporting in future periods, our access to capital could be adversely affected.
The Company is subject to economic and political instability and other risks of doing business globally.
The Company is a global business with operations outside of the United States from which it derives approximately one-third of its operating revenues. The Company’s operations in Asia, Latin America, Middle East and Europe are a vital part of its worldwide airline network. Volatile economic, political and market conditions in these international regions may have a negative impact on the Company’s operating results and its ability to achieve its business objectives. In addition, significant or volatile changes in exchange rates between the U.S. dollar and other currencies, the imposition of exchange controls or other currency restrictions may have a material adverse impact upon the Company’s liquidity, revenues, costs, or operating results.
The loss of skilled employees upon whom we dependthe Company depends to operate ourits business or the inability to attract additional qualified personnel could adversely affect ourits results of operations.
We believeThe Company believes that ourits future success will depend in large part on ourits ability to attract and retain highly qualified management, technical and other personnel. WeThe Company may not be successful in retaining key personnel or in attracting and retaining other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel could adversely affect ourits business.
WeThe Company could be adversely affected by an outbreak of a disease that affects travel behavior.
An outbreak of a disease that affects travel behavior, such as Severe Acute Respiratory Syndrome ("SARS")(SARS) or avian flu, could have a material adverse impact on ourthe Company’s business, financial condition and results of operations.
Risks RelatedCertain provisions of the Company’s governance documents could discourage or delay changes of control or changes to Our Common Stock
Our common stock has a very limited trading history and its market price may be volatile.the board of directors of the Company.
Because our common stock began trading after the Effective Date on the NASDAQ National Market on February 2, 2006, there is very little trading history. The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control.
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of UAL (the “Governance Documents”) may make it difficult for stockholders to change the composition of ourthe Company’s board of directors and may discourage takeover attempts that some of ourits stockholders may consider beneficial.
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of UALGovernance Documents may have the effect of delaying or preventing changes in control if ourthe Company’s board of directors determines that such changes in control are not in the best interests of UAL and its stockholders.
These provisions of the Governance Documents are not intended to prevent a takeover, but are intended to protect and maximize the value of our stockholders'the Company’s stockholders’ interests. While these provisions have the effect of encouraging persons seeking to acquire control of our companythe Company to negotiate
with ourthe board of directors, they could enable ourthe board of directors to prevent a transaction that some, or a majority, of ourits stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
Risks Related to the Company’s Common Stock
The Company’s common stock has a limited trading history and its market price may be volatile.
Because the Company’s common stock began trading on the NASDAQ National Market on February 2, 2006, there is limited trading history. The market price of its common stock may fluctuate substantially due to a variety of factors, many of which are beyond the Company’s control.
The issuance of additional shares of ourthe Company’s common stock, including upon conversion of ourits convertible preferred stock and ourits convertible notes, could cause dilution to the interests of ourits existing stockholders.
In connection with ourthe Company’s emergence from Chapter 11 bankruptcy protection, wethe Company issued 5,000,000 shares of 2% convertible preferred stock. This preferred stock may be converted into shares of ourthe Company’s common stock upon the earlier of February 1, 2008, or upon a fundamental change or change in control of the Company. Further, the preferred stock is mandatorily convertible 15 years from the issuance date. WeThe Company also issued approximately $150 million in convertible 5% notes shortly after the Effective Date, and we are required to issuesubsequently issued approximately $726 million in additional convertible 4.5% notes within the first six months after the Effective Date.on July 25, 2006. Holders of these securities may convert them into shares of ourthe Company’s common stock according to their terms. If the holders of the convertible preferred stock or the holders of the convertible notes decidedwere to exercise their rights to convert their securities into common stock, it could cause substantial dilution to existing stockholders. For further information, see Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11 - 11—Bankruptcy Considerations"Considerations” and Note 11—“Debt Obligations,” in the Notes to Consolidated Financial Statements.
OurThe Company’s certificate of incorporation authorizes us up to 1one billion shares of common stock. In certain circumstances, wethe Company can issue shares of common stock without stockholder approval. In addition, ourthe board of directors is authorized to issue additional series of up to 250 million shares of preferred stock without any action on the part of ourthe Company’s stockholders. OurThe board of directors also has the power, without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, conversion rights, dividend rights, preferences over ourthe Company’s common stock with respect to dividends or if we liquidate, dissolvethe Company liquidates, dissolves or windwinds up ourits business and other terms. If we issuethe Company issues preferred stock in the future that has a preference over ourits common stock with respect to the payment of dividends or upon ourits liquidation, dissolution or winding up, or if we issuethe Company issues preferred stock with voting rights that dilute the voting power of ourits common stock, the rights of holders of ourits common stock or the market price of ourits common stock could be adversely affected. We areThe Company is also authorized to issue, without stockholder approval, other securities convertible into either preferred stock and,or, in certain circumstances, common stock. In the future wethe Company may decide to raise capital through offerings of ourits common stock, securities convertible into ourits common stock, or rights to acquire these securities or ourits common stock. The issuance of additional shares of common stock or securities convertible into common stock could result in dilution of existing stockholders'stockholders’ equity interests in us.the Company. Issuances of substantial amounts of ourits common stock, or the perception that such issuances could occur, may adversely affect prevailing market prices for ourthe Company’s common stock and wethe Company cannot predict the effect this dilution may have on the price of ourits common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
21
None.
ITEM 2. PROPERTIES.
Flight Equipment
As of December 31, 2005, United's mainline operating aircraft fleet totaled 460 jet aircraft, of which 230 were owned and 230 were leased. Details of theUAL’s mainline operating fleet as of December 31, 20052006 are provided in the following table:
| Aircraft Type | |||||||||||
| A319-100 | 120 | 33 | 22 | 55 | 6 | ||||||
| A320-200 | 148 | 42 | 55 | 97 | 7 | ||||||
| B737-300 | 123 | 11 | 53 | 64 | 17 | ||||||
| B737-500 | 108 | 27 | 3 | 30 | 14 | ||||||
| B747-400 | 347 | 20 | 10 | 30 | 10 | ||||||
| B757-200 | 172 | 44 | 53 | 97 | 14 | ||||||
| B767-300 | 213 | 17 | 18 | 35 | 11 | ||||||
| B777-200 | 267 | 36 | 16 | 52 | 7 | ||||||
| Total Operating Fleet | 230 | 230 | 460 | 11 | |||||||
Aircraft Type |
|
|
| Average |
| Owned |
| Leased |
| Total |
| Average |
| ||||||||||
A319-100 |
|
| 120 |
|
|
| 33 |
|
|
| 22 |
|
|
| 55 |
|
|
| 7 |
|
| ||
A320-200 |
|
| 148 |
|
|
| 42 |
|
|
| 55 |
|
|
| 97 |
|
|
| 9 |
|
| ||
B737-300 |
|
| 123 |
|
|
| 15 |
|
|
| 49 |
|
|
| 64 |
|
|
| 18 |
|
| ||
B737-500 |
|
| 108 |
|
|
| 30 |
|
|
| — |
|
|
| 30 |
|
|
| 15 |
|
| ||
B747-400 |
|
| 347 |
|
|
| 18 |
|
|
| 12 |
|
|
| 30 |
|
|
| 11 |
|
| ||
B757-200 |
|
| 172 |
|
|
| 45 |
|
|
| 52 |
|
|
| 97 |
|
|
| 15 |
|
| ||
B767-300 |
|
| 213 |
|
|
| 17 |
|
|
| 18 |
|
|
| 35 |
|
|
| 12 |
|
| ||
B777-200 |
|
| 267 |
|
|
| 46 |
|
|
| 6 |
|
|
| 52 |
|
|
| 8 |
|
| ||
Total Operating Fleet |
|
|
|
|
|
| 246 |
|
|
| 214 |
|
|
| 460 |
|
|
| 12 |
|
| ||
As of December 31, 2005,2006, all of the aircraft owned by usUAL were encumbered under debt agreements. The amendment of the Credit Facility, creating the Amended Credit Facility on February 2, 2007, enabled the Company to remove 101 aircraft from the Amended Credit Facility collateral pool. For additional information on accounting for aircraft financings see Note 9, "Long-Term Debt"11, “Debt Obligations” and Note 10, "Lease Obligations"16, “Lease Obligations,” in the Notes to Consolidated Financial Statements.
We haveUnited has entered into various leases relating to ourits use of airport landing areas, gates, hangar sites, terminal buildings and other airport facilities in most of the municipalities we serve.it serves. These leases were subject to assumption or rejection under the Chapter 11 process. As of December 31, 2005, we2006, United had assumed major facility leases in Washington (Dulles and Reagan), Denver (terminal lease only), San Francisco, Newark (terminal lease only), Austin, Cleveland, Columbus, Detroit (terminal lease only), Las Vegas, Oakland, Portland, Fort Meyers (fuel system lease only), Orange County and Tucson. Major facility leases expire at San Francisco in 2011 and 2013, Washington-DullesWashington Dulles in 2014, Chicago O'HareO’Hare in 2018, Los Angeles in 2021 and Denver in 2025.
We ownThe Company owns a 66.5-acre complex in suburban Chicago consisting of more than 1 million square feet of office space for ourits former world headquarters, a computer facility and a training center. WeUnited also ownowns a flight training center, located in Denver, which can accommodateaccommodates 36 flight simulators and more than 90 computer-based training stations. We ownThe Company owns a limited number of other properties, including a reservations facility in Denver and a crew hotel in Honolulu. All of these facilities are mortgaged.
OurBeginning in March 2007, the Company will move approximately 350 management employees, including its senior management, to its new headquarters in downtown Chicago. The Company’s new corporate headquarters will be located at 77 West Wacker Drive, where the Company leases approximately 137,000 square feet of office space. The Company’s former world headquarters, located in suburban Elk Grove Township, will become the Operations Center. Consistent with the Company’s goals of achieving additional cost savings and operational efficiencies, the Company will relocate employees from several of its other suburban Chicago facilities into the new Operations Center.
The Company’s Maintenance Operation Center at San Francisco International Airport occupies 130 acres of land, 2.9 million square feet of floor space and 9 aircraft hangar bays under a lease expiring in 2013.
OurUnited’s off-airport leased properties have historically included a number of ticketing, sales and general office facilities in the downtown and suburban areas of most of the larger cities within the United system. As part of ourthe Company’s restructuring and cost containment efforts, we haveUnited closed, terminated or rejected all of ourits former domestic city ticket office leases. We continueUnited continues to lease and operate a number of administrative, reservations, sales and other support facilities worldwide. United also continues to evaluate opportunities to reduce space requirements at its airports and off-airport locations.
23
In re: UAL Corporation, et. al.
As discussed above, on the Petition Date the Debtors filed voluntary petitions to reorganize their businesses under Chapter 11 of the Bankruptcy Code. On October 20, 2005, the Debtors filed the Debtor'sDebtor’s First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code and the Disclosure Statement. The Bankruptcy Court approved the Disclosure Statement on October 21, 2005.
Commencing on October 27, 2005, the Disclosure Statement, ballots for voting to accept or reject the proposed plan of reorganization and other solicitation documents were distributed to all classes of creditors eligible to vote on the proposed plan of reorganization. After a hearing on confirmation, on January 20, 2006, the Bankruptcy Court confirmed the Plan of Reorganization. The Plan of Reorganization became effective and the Debtors emerged from bankruptcy protection on the Effective Date.
Numerous pre-petition claims still await resolution in the Bankruptcy Court due to the Company'sCompany’s objections to either the existence of liability or the amount of the claim. The process of determining whether liability exists and liquidating the amounts due is likely to continue for the remainder of 2006.through 2007. Additionally, certain significant matters remain to be resolved in the Bankruptcy Court. For details see Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11 - 11—Bankruptcy Considerations,"” in the Notes to Consolidated Financial Statements.
Air Cargo/Passenger Surcharge Investigations
In February 2006, the European Commission and the U.S. Department of Justice commenced an international investigation into what government officials describe as a possible price fixing conspiracy relating to certain surcharges included in tariffs for carrying air cargo. In June 2006, United received a subpoena from the U.S. Department of Justice requesting information related to certain passenger pricing practices and surcharges applicable to international passenger routes. The Company is cooperating fully. United is considered a source of information for the investigation, not a target. In addition to the federal grand jury investigation, United and other air cargo carriers have been named as defendants in over ninety class action lawsuits alleging civil damages as a result of the purported air cargo pricing conspiracy. Those lawsuits have been consolidated for pretrial activities in the United States Federal Court for the Eastern District of New York. United has entered into an agreement with the majority of the private plaintiffs to dismiss United from the class action lawsuits in return for an agreement to cooperate with the plaintiffs’ factual investigation. More than fifty additional putative class actions have also been filed alleging violations of the antitrust laws with respect to passenger pricing practices. Those lawsuits have been consolidated for pretrial activities in the United States Federal Court for the Northern District of California (“Federal Court”). United has entered a settlement agreement with a number of the plaintiffs in the passenger pricing cases to dismiss United from the class action lawsuits in return for an agreement to cooperate with the plaintiffs’ factual investigation. The settlement agreement is subject to review and approval by the Federal Court. Penalties for violating competition laws can be severe, involving both criminal and civil liability. The Company is cooperating with the grand jury investigations while carrying out its own internal review of its pricing practices, and is not in a position to evaluate the potential financial impact of this litigation at this time. However, a finding that the Company violated either U.S. antitrust laws or the competition laws of some other jurisdiction could have a material adverse impact on the Company.
Summers v. UAL Corporation ESOP, et. al.
Certain participants in the UAL Corporation Employee Stock Ownership Plan ("ESOP"(“ESOP”) sued the ESOP, the ESOP Committee and State Street Bank and Trust Company ("(“State Street"Street”) in the U.S. District Court for the Northern District of Illinois (the "District Court"(“the District Court”) in February 2003 seeking monetary damages in a purported class action that alleges that the ESOP Committee breached its fiduciary duty by not selling UAL stock held by the ESOP commencing as of July 19, 2001. The ESOP Committee appointed State Street in September 2002 to act as investment manager and fiduciary to manage the assets of the ESOP itself. The parties entered into a stipulation under which the plaintiffs agreed to proceed only against the $10 million in insurance proceeds available from a policy held by UAL Corporation in return for the Company and the ESOP Committee's agreement to lift the automatic stay and allow the litigation to proceed. As a part of this agreement, the ESOP Committee agreed to withdraw the indemnification claims they filed against the Company in the Chapter 11 case. The District Court subsequently entered an order certifying the class, which both State Street and the ESOP Committee defendants appealed.
In August 2005, a proposed settlement was reached between the plaintiffs and the ESOP Committee defendants. The agreed upon settlement amount is to be paid out of the $5.2 million in insurance proceeds remaining $10 million insurance proceeds.after deducting legal fees. State Street is not a party to settlement and objected to the settlementagreement during the required fairness hearing.hearing before the District Court. The District Court nevertheless approved the settlement agreement in October 2005.2005, but also granted State StreetStreet’s motion for summary judgment, dismissing the underlying claims. Both sides appealed thatfrom the District Court’s decision, toand as a result, no settlement funds have been disbursed pending a ruling on appeal. In June 2006, the United States Court of Appeals for the Seventh Circuit (“Court of Appeals”) affirmed the lower court’s ruling dismissing the claims against State Street and in effect rendering State Street’s challenge to the settlement agreement moot. Both parties requested the United States Supreme Court (“Supreme Court”) to review the decision of the Court of Appeals. Also,On February 20, 2007, the DistrictSupreme Court granted State Street's motiondeclined both parties’ requests to review the Court of Appeals decision, bringing this dispute to a final conclusion and foreclosing any potential claim for summary judgment. The plaintiffs have appealed that decision in turn. All appeals have been consolidated and are scheduled for oral argument on April 4, 2006.
State Street filed a pre-petition indemnification claimindemnity against the Company under its Investment Manager Agreement as Trustee of the ESOP at the beginning of the Chapter 11 case. On March 2, 2006, State Street filed an application in the Chapter 11 case seeking allowance and payment of an administrative claim of approximately $4.1 million to indemnify State Street for defense costs incurred in the litigation. A hearing on State Street's application is scheduled for April 28, 2006.Company.
Litigation Associated with September 11 Terrorism
Families of 94 victims of the September 11 terrorist attacks filed lawsuits asserting a variety of claims against the airline industry. United and American Airlines, as the two carriers whose flights were hijacked, are the central focus of the litigation, but a variety of additional parties have been sued on a number of legal theories ranging from collective responsibility for airport screening and security systems that allegedly failed to prevent the attacks to faulty design and construction of the World Trade Center towers. In excess of 97% of the families of the deceased victims received awards from the September 11th Victims Compensation Fund of 2001, which was established by the federal government, and consequently are now barred from making further claims against the airlines. World Trade Center Properties, Inc. and The Port Authority of New York and New Jersey have filed cross-claims in the wrongful death litigation against all of the aviation defendants as owners of the World Trade Center property for property damage sustained in the attacks. The insurers of various tenants at the World Trade Center have filed subrogation claims for damages as well. In the aggregate, September 11th claims are estimated to be well in excess of $10 billion. By statute, these matters were consolidated in the U.S. District Court for the Southern District of New York, and airline exposure was capped at the limit of the liability coverage maintained by each carrier at the time of the attacks. While the temporary suspension of litigation activity is no longer in place inIn the personal injury and wrongful death matters, settlement discussions continue and the parties have reached settlements in several matters. The Company anticipates that any liability it may face arising from the events of September 11, 2001 could be significant, but will be subject to the statutory limitation to the amount of its insurance coverage.
Environmental Proceedings
In accordance with an order issued by the California Regional Water Quality Control Board in June 1999, United, along with most of the other tenants of the San Francisco International Airport, has been investigating potential environmental contamination at the airport (geographically including United’s San Francisco maintenance center) and conducting monitoring and/or remediation when needed. Work underUnited’s projected costs associated with this order includes investigation and remediation that were significantly reduced in 2006; therefore, the Company does not consider this to be a material proceeding.
United is conducting for solvent impacts to soil, bedrock, and groundwaterrecently completed negotiations with the Bay Area Air Quality Management District regarding notices of violations received at United'sits San Francisco Maintenance Center.maintenance center and payment of associated penalties.
Internal Revenue Service Matter
In 1999, UAL Corporation entered into a restructuring of its risk management function for retiree medical benefits in an attempt to control the spiraling costs of medical care. As part of the redesign of this function, UAL partnered with Blue Cross Blue Shield of Illinois-Health Care Service Corporation. Upon audit of UAL’s 1999 federal income tax return, the U.S. Internal Revenue Service (“IRS”) took the position that this restructuring was the same as, or substantially similar to, a listed tax shelter transaction. The IRS proposed a penalty for “gross valuation misstatement” under Section 6662(h)(1) of the Internal Revenue Code in the amount of approximately $16 million. The settlement of the issue resulted in a penalty payment by UAL in 2006 in the amount of approximately $2 million.
Other Legal Proceedings
UAL and United are involved in various other claims and legal actions involving passengers, customers, suppliers, employees and government agencies arising in the ordinary course of business. FromAdditionally, from time to time, we becomethe Company becomes aware of potential non-compliance with applicable environmental regulations, which have either been identified by the Company (through our internal compliance programs such as its environmental compliance auditing program)audits) or through notice from a governmental entity. In some instances, these matters could potentially become the subject of an administrative or judicial proceeding and could potentially involve monetary sanctions. We believe, afterAfter considering a number of factors, including (but not limited to) the views of legal counsel, the nature of contingencies to which we arethe Company is subject and prior experience, management believes that the ultimate disposition of these contingencies will not materially affect ourits consolidated financial position or results of operations.
26
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and United are listed below, along with their ages as of December 31, 2006, tenure as officer, and business background for at least the last five years.
Jane Allen.Age 55. Ms. Allen has been Senior Vice President—Human Resources of United (air transportation) since May 2006. From June 2003 to May 2006, Ms. Allen served as Senior Vice President of Onboard Services for United. Before joining United, Ms. Allen served as the head of American Airlines’ Flight Services (air transportation) from 1997 to 2003.
Graham W. Atkinson.Age 55. Mr. Atkinson has been Executive Vice President—Chief Customer Officer for United since September 2006. From January 2004 to September 2006, Mr. Atkinson served as Senior Vice President—Worldwide Sales and Alliances for United. From June 2001 to January 2004, Mr. Atkinson served as Senior Vice President—International for United.
Frederic F. Brace. Age 49. Mr. Brace has been Executive Vice President and Chief Financial Officer of the Company and United since August 2002. From September 2001 to August 2002, Mr. Brace served as the Company and United’s Senior Vice President and Chief Financial Officer.
Sara A. Fields. Age 63. Ms. Fieldshas beenSenior Vice President—Office of the Chairman of United since May 2006. From December 2002 to May 2006, Ms. Fields served as Senior Vice President—People of United. From January to December 2002, Ms. Fields served as United’s Senior Vice President—People Services and Engagement. From July 1994–July 2002, Ms. Fields previously served as Senior Vice President—Onboard Service of United.
Gerald F. Kelly.Age 59. Mr. Kelly has been Senior Vice President—Continuous Improvement, Strategic Sourcing and Chief Information Officer (“CIO”) of United since November 2005. From 2002 to 2005, Mr. Kelly served as CIO and Senior Vice President for Procurement and Continuous Improvement at Sears, Roebuck & Co. (retailer), from which he retired in April 2005. From 2001 to 2002, Mr. Kelly served as Business Advisor to Williams-Sonoma (retailer).
Paul R. Lovejoy.Age 52. Mr. Lovejoy has been Senior Vice President, General Counsel and Secretary of the Company and United since June 2003. From September 1999 to June 2003, Mr. Lovejoy was a partner with Weil, Gotshal & Manges LLP (law firm).
Peter D. McDonald.Age 55. Mr. McDonald has been Executive Vice President and Chief Operating Officer of the Company and United since May 2004. From September 2002 to May 2004, Mr. McDonald served as Executive Vice President—Operations of the Company and United. From January to September 2002, Mr. McDonald served as United’s Senior Vice President—Airport Operations. From May 2001 to January 2002, Mr. McDonald served as United’s Senior Vice President—Airport Services.
Rosemary Moore.Age 56. Ms. Moore has been the Senior Vice President—Corporate and Government Affairs of United since December 2002. From November to December 2002, Ms. Moore was the Senior Vice President—Corporate Affairs of United. From October 2001 to October 2002, Ms. Moore was the Vice President—Public and Government Affairs of ChevronTexaco Corporation (global energy).
John P. Tague.Age 44. Mr. Tague has been Executive Vice President—Chief Revenue Officer of the Company and United since April 2006. From May 2004 to April 2006, he served as Executive Vice President—Marketing, Sales and Revenue of the Company and United. From May 2003 to May 2004, Mr. Tague was Executive Vice President—Customer of the Company and United. From 1997 to August 2002, Mr. Tague was the President and Chief Executive Officer of ATA Holdings Corp. (air transportation).
Glenn F. Tilton. Age 58. Mr. Tilton has been Chairman, President and Chief Executive Officer of the Company and United since September 2002. From October 2001 to August 2002, Mr. Tilton served as
Vice Chairman of ChevronTexaco Corporation (global energy). Previously, Mr. Tilton served as Chairman and Chief Executive Officer of Texaco Inc. (global energy), a position he assumed in February 2001.
There are no family relationships among the executive officers or the directors of the Company. The executive officers are elected by the Board each year, and hold office until the organization meeting of the Board in the next subsequent year and until his or her successor is chosen or until his or her earlier death, resignation or removal.
29
ITEM 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Shares of UAL Common Stock issued and outstanding immediately prior tobefore the Effective Date of our Plan of Reorganization (the "Old“Old Common Stock"Stock”) traded on the over-the-counter market (OTCBB) under the symbol UALAQ.OB from April 3, 2003 to February 1, 2006.
The following table sets forth the ranges of high and low sales prices per share of the Old Common Stock during the last two completed fiscal years.
On February 1, 2006, the Old Common Stock was canceled pursuant to the terms of the Plan of Reorganization and we havethe Company has no continuing obligations under the Old Common Stock.
Pursuant to the Plan of Reorganization, wethe Company issued or reserved for issuance up to 125,000,000 shares of common stock (the "New“New Common Stock"Stock”) comprised of: (a) 115,000,000 shares to be distributed as the Unsecured Distributionto unsecured creditors and the Employee Distributionemployees in accordance with the terms of the Plan of Reorganization; (b) up to 9,825,000 shares and options (or other rights to acquire shares) pursuant to the terms of the Management Equity Incentive Plan;MEIP; and (c) up to 175,000 shares and options (or other rights to acquire shares) pursuant to the terms of the Director Equity Incentive Plan.DEIP. Beginning February 2, 2006, the New Common Stock has traded on thea NASDAQ National Marketmarket under the symbol UAUA.
We The following table sets forth the ranges of high and low sales prices per share of the Old Common Stock and New Common Stock during the last two completed fiscal years.
|
|
|
| Old Common Stock |
| New Common Stock |
| ||||||||
|
|
|
| High |
| Low |
| High |
| Low |
| ||||
2006: |
|
|
|
|
|
|
|
|
|
|
| ||||
|
| 1st quarter |
| $ | 1.18 |
| $ | 0.02 |
| $ | 43.00 |
| $ | 29.51 |
|
|
| 2nd quarter |
| (a) |
| (a) |
| 40.05 |
| 26.02 |
| ||||
|
| 3rd quarter |
| (a) |
| (a) |
| 32.17 |
| 21.90 |
| ||||
|
| 4th quarter |
| (a) |
| (a) |
| 46.54 |
| 26.77 |
| ||||
2005: |
|
|
|
|
|
|
|
|
|
|
| ||||
|
| 1st quarter |
| $ | 1.51 |
| $ | 0.89 |
| (b) |
| (b) |
| ||
|
| 2nd quarter |
| 2.40 |
| 0.92 |
| (b) |
| (b) |
| ||||
|
| 3rd quarter |
| 1.62 |
| 0.32 |
| (b) |
| (b) |
| ||||
|
| 4th quarter |
| 1.35 |
| 0.49 |
| (b) |
| (b) |
| ||||
(a)The Old Common Stock was canceled pursuant to the terms of the Plan of Reorganization and no further trading occurred after February 1, 2006.
(b)The New Common Stock commenced trading on February 2, 2006.
The Company suspended the payment of cash dividends on the Old Common Stock in 2002 and we dodoes not currently anticipate paying any dividends on the New Common Stock in the future.Stock. Additionally, under the provisions of ourthe Amended Credit Facility ourthe Company’s ability to pay dividends on or repurchase New Common Stock is restricted. See Note 9, "Long-Term Debt"11, “Debt Obligations,” in the Notes to Consolidated Financial Statements for more information related to dividend restrictions under the Amended Credit Facility. Any future determination to pay dividends will be at the discretion of ourthe board of directors, subject to applicable limitations under Delaware law.
Based on reports by the Company'sCompany’s transfer agent for the New Common Stock, there were 1,326approximately 1,200 record holders of ourits New Common Stock as of March 27,February 28, 2007.
The following graph shows the cumulative total shareholder return for the New Common Stock during the period from February 2, 2006 to December 31, 2006. Five year historical data is not presented as a result of the significant period the Company was in bankruptcy and since the financial results of the Successor Company are not comparable with the results of the Predecessor Company, as discussed in.
The graph also shows the cumulative returns of the S&P 500 Index and the AMEX Airline Index (“AAI”) of eleven investor-owned airlines. The comparison assumes $100 was invested on February 2, 2006 (the date UAUA began trading on NASDAQ) in New Common Stock and in each of the indices shown and assumes that all dividends paid were reinvested.
Performance Graph |
|
Note:The stock price performance shown in the graph above should not be considered indicative of potential future stock price performance.
Common stock repurchases in the fourth quarter of fiscal year 2006 were as follows:
Period |
|
|
| Total number |
| Average price |
| Total number of |
| Maximum number of |
| |||||||||
10/01/06-10/31/06 |
|
| — |
|
|
| $ | — |
|
|
| — |
|
|
| (b) |
|
| ||
11/01/06-11/30/06 |
|
| 2,195 |
|
|
| 38.80 | �� |
|
| — |
|
|
| (b) |
|
| |||
12/01/06-12/31/06 |
|
| 767 |
|
|
| 41.09 |
|
|
| — |
|
|
| (b) |
|
| |||
Total |
|
| 2,962 |
|
|
| $ | 39.40 |
|
|
| — |
|
|
| (b) |
|
| ||
(a) Shares withheld from employees to satisfy certain tax obligations due upon the vesting of restricted stock.
(b) The MEIP provides for the withholding of shares to satisfy tax obligations due upon the vesting of restricted stock. The MEIP does not specify a maximum number of shares that may be repurchased.
31
ITEM 6. SELECTED FINANCIAL DATA.
In connection with its emergence from Chapter 11 bankruptcy protection, the Company adopted fresh-start reporting in accordance with SOP 90-7 and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). As a result of the adoption of fresh-start reporting, the financial statements prior to February 1, 2006 are not comparable with the financial statements after February 1, 2006. References to “Successor Company” refer to UAL on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to “Predecessor Company” refer to UAL prior to February 1, 2006.
| Successor |
|
|
| Predecessor |
| |||||||||||||||||||||
|
| Period from |
|
|
| Period from |
| Year Ended December 31, |
| ||||||||||||||||||
(In millions, except rates) |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||||||||
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating revenues |
|
| $ | 17,882 |
|
|
|
|
| $ | 1,458 |
|
| $ | 17,379 |
| $ | 16,391 |
| $ | 14,928 |
| $ | 15,822 |
| ||
Operating expenses |
|
| 17,383 |
|
|
|
|
| 1,510 |
|
| 17,598 |
| 17,245 |
| 16,288 |
| 18,659 |
| ||||||||
Fuel expenses—mainline |
|
| 4,462 |
|
|
|
|
| 362 |
|
| 4,032 |
| 2,943 |
| 2,072 |
| 1,921 |
| ||||||||
Reorganization (income) expense |
|
| — |
|
|
|
|
| (22,934 | ) |
| 20,601 |
| 611 |
| 1,173 |
| 10 |
| ||||||||
Net income (loss)(a) |
|
| 25 |
|
|
|
|
| 22,851 |
|
| (21,176 | ) | (1,721 | ) | (2,808 | ) | (3,212 | ) | ||||||||
Basic earnings (loss) per share |
|
| 0.14 |
|
|
|
|
| (196.61 | ) |
| (182.29 | ) | (15.25 | ) | (27.36 | ) | (53.55 | ) | ||||||||
Diluted earnings (loss) per share |
|
| 0.14 |
|
|
|
|
| (196.61 | ) |
| (182.29 | ) | (15.25 | ) | (27.36 | ) | (53.55 | ) | ||||||||
Cash dividends declared per common |
|
| — |
|
|
|
|
| — |
|
| — |
| — |
| — |
| — |
| ||||||||
Balance Sheet Data at period-end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total assets |
|
| $ | 25,369 |
|
|
|
|
| $ | 19,555 |
|
| $ | 19,342 |
| $ | 20,705 |
| $ | 21,979 |
| $ | 23,656 |
| ||
Long-term debt and capital lease obligations, including current portion |
|
| 10,600 |
|
|
|
|
| 1,432 |
|
| 1,433 |
| 1,204 |
| 852 |
| 700 |
| ||||||||
Liabilities subject to compromise |
|
| — |
|
|
|
|
| 36,336 |
|
| 35,016 |
| 16,035 |
| 13,964 |
| 13,833 |
| ||||||||
Mainline Operating Statistics(b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
RPMs |
|
| 117,470 |
|
|
|
|
| (b) |
|
| 114,272 |
| 115,198 |
| 104,464 |
| 109,460 |
| ||||||||
ASMs |
|
| 143,095 |
|
|
|
|
| (b) |
|
| 140,300 |
| 145,361 |
| 136,630 |
| 148,827 |
| ||||||||
Passenger load factor |
|
| 82.1 | % |
|
|
|
| (b) |
|
| 81.4 | % | 79.2 | % | 76.5 | % | 73.5 | % | ||||||||
Yield(c) |
|
| 12.19 | ¢ |
|
|
|
| (b) |
|
| 11.25 | ¢ | 10.83 | ¢ | 10.79 | ¢ | 11.06 | ¢ | ||||||||
Passenger revenue per ASM (PRASM) |
|
| 10.04 | ¢ |
|
|
|
| (b) |
|
| 9.20 | ¢ | 8.63 | ¢ | 8.32 | ¢ | 8.19 | ¢ | ||||||||
Operating revenue per ASM (RASM)(d) |
|
| 11.49 | ¢ |
|
|
|
| (b) |
|
| 10.66 | ¢ | 9.95 | ¢ | 9.81 | ¢ | 9.77 | ¢ | ||||||||
Operating expense per ASM (CASM)(e) |
|
| 11.23 | ¢ |
|
|
|
| (b) |
|
| 10.59 | ¢ | 10.20 | ¢ | 10.52 | ¢ | 11.45 | ¢ | ||||||||
Fuel gallons consumed |
|
| 2,290 |
|
|
|
|
| (b) |
|
| 2,250 |
| 2,349 |
| 2,202 |
| 2,458 |
| ||||||||
Average price per gallon of jet fuel, including tax and hedge impact |
|
| 210.7 | ¢ |
|
|
|
| (b) |
|
| 179.2 | ¢ | 125.3 | ¢ | 94.1 | ¢ | 78.2 | ¢ | ||||||||
(a)Net income (loss) was significantly impacted in the Predecessor Company periods due to the reorganization items related to the Company’s restructuring in bankruptcy. (In Millions, Except Per Share and Rates) Income Statement Data: Operating revenues Operating expenses Fuel expenses - mainline Reorganization expenses Loss before extraordinary item and cumulative effect Net loss Per share amounts, basic and diluted: Loss before extraordinary item and cumulative effect Net Loss Cash dividends declared per common share Balance Sheet Data at year-end: Total assets Long-term debt and capital lease obligations, including current portion, and redeemable preferred stock Liabilities subject to compromise Operating Statistics and Other (Note 1): Revenue passengers RPMs ASMs Passenger load factor Breakeven passenger load factor Yield (Note 2) Passenger revenue per ASM (Note 3) Operating revenue per ASM (Note 4) Operating expense per ASM (Note 5) Fuel gallons consumed - mainline Average price per gallon of jet fuel, including tax and hedge impact
Note 1 - Operating statistics include only the mainline operations of United. (b)Mainline operations of United exclude the operations of independent regional carriers operating as United Express. Statistics included in the Successor period were calculated using the combined results of the Successor period from February 1 to December 31, 2006 and the Predecessor January 2006 period.
Note 2 - (c)Yield is calculated as follows: Unitedmainline passenger mainline revenue Less: Industry excluding industry and employee discounted tickets Divided by RPMsfares per RPM.
Note 3 - Passenger(d)RASM is operating revenues excluding United Express passenger revenue per ASM ("PRASM") is calculated as follows: United passenger mainline revenue Divided by ASMsASM.
Note 4 - Operating revenue(e)CASM is operating expenses excluding United Express operating expenses per ASM ("RASM") is calculated as follows: UAL operating revenues Less: Passenger revenue - Regional affiliates Divided by ASMsASM.
Note 5 - Operating expense per ASM ("CASM") is calculated as follows:32
ITEM 7. MANAGEMENT'S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OverAs discussed further in Item 1. Business, the past severalCompany derives virtually all of its revenues from airline related activities. The most significant source of airline revenues is passenger revenues; however, Mileage Plus, United Cargo, and United Services are also significant sources of operating revenues. The airline industry is highly competitive, and is characterized by intense price competition. Fare discounting by United’s competitors has historically had a negative effect on the Company’s financial results because it is generally required to match competitors’ fares to maintain passenger traffic. Future competitive fare adjustments may negatively impact the Company’s future financial results. The Company’s most significant operating expense is jet fuel. Jet fuel prices are extremely volatile and are largely uncontrollable by the Company. UAL’s historical and future earnings have been and will continue to be significantly impacted by jet fuel prices. The impact of recent jet fuel price increases is discussed below. The Company’s results in 2006 were significantly impacted by the adoption of fresh-start reporting upon its emergence from bankruptcy. See the “Fresh-Start Reporting” section below for a discussion of the of the significant fresh-start items that impacted the Company’s earnings in 2006.
Bankruptcy Matters.On December 9, 2002, UAL, United and 26 direct and indirect wholly-owned subsidiaries filed voluntary petitions to reorganize its business under Chapter 11 of the Bankruptcy Court. The Company emerged from bankruptcy on February 1, 2006, under a Plan of Reorganization that was approved by the Bankruptcy Court. In connection with its emergence from Chapter 11 bankruptcy protection, the Company adopted fresh-start reporting, which resulted in significant changes in post-emergence financial statements, as compared to UAL’s historical financial statements, as is further discussed in the “Financial Results”section below. Also, see Note 1, “Voluntary Reorganization Under Chapter 11—Bankruptcy Considerations,” in the Notes to Consolidated Financial Statements and Item 1. Business for further information regarding bankruptcy matters.
Recent Developments.The Company believes its restructuring has made the Company competitive with its network airline peers. The Company’s financial performance has continued to improve despite significant increases in fuel prices, as noted below. Average mainline unit fuel expense has increased 68% from 2004 to 2006, which has negatively impacted the Company’s operating margin. However, the Company has been able to overcome rising fuel costs through its restructuring accomplishments, improved revenues and other means, which have contributed to the generation of operating income of $447 million in calendar-year 2006, as compared to operating losses of $219 million and $854 million in 2005 and 2004, respectively.
United seeks to continuously improve the delivery of its products and services to its customers, reduce unit costs, and increase unit revenues. Together with these initiatives, some of the Company’s more significant recent developments are noted as follows:
· In February 2007, the Company prepaid $972 million of Credit Facility debt and amended certain terms of the Credit Facility. The Amended Credit Facility requires significantly less collateral as compared to the Credit Facility and is expected to provide net interest expense savings of approximately $70 million annually. This amount represents the net impact of reduced interest expense and interest income as a result of lower cash and debt balances, as well as a more favorable interest rate on the Amended Credit Facility. See the “Liquidity and Capital Resources” section, below, and Note 11, “Debt Obligations,” in the Notes to Consolidated Financial Statements for further information related to this new facility.
· In 2006, the Company announced a program to reduce then-projected 2007 expenses by $400 million. The Company has identified specific programs to realize these savings, and continues
to identify and evaluate other savings opportunities. For example, the Company expects to reduce costs by approximately $200 million through savings in such areas as telecommunications, airport services, catering, maintenance materials and aircraft ground handling. The Company also expects to reduce advertising and marketing costs by as much as $60 million. Increased operational efficiencies, through the implementation of such initiatives as a new flight planning system and reduced block times are expected to generate approximately $40 million in savings. In addition, the Company estimates it will achieve a $100 million reduction in general and administrative expenses, which includes a reduction of salaried and management positions. The Company realized approximately $135 million of the projected $400 million of 2007 cost reductions in 2006, and is on track to achieve $265 million of projected cost savings in 2007.
· In the second quarter of 2006, the General Services Administration (“GSA”) awarded its annual U.S. government employee travel contracts for its upcoming fiscal year beginning October 1, 2006. The GSA selected United to provide certain air transportation services for which the estimated annual revenue to United will be approximately $540 million, or 27.4% of the total estimated GSA employee travel award. This award level represents a 6.7 point increase over the prior contract year.
· Effective September 2006, United began charging travel agents within North America a $3.50 per passenger segment fee if low cost booking channels are not used. In 2006, United also renegotiated its agreements with four major GDS providers to allow access to low cost booking options for United’s appointed travel agencies. Increased use of low cost booking channels is expected to reduce United’s product distribution expenses.
· In the third quarter of 2006, United announced the addition of 22 new flights from Washington Dulles, which increased departures from Dulles by 14 percent in the fall of 2006 as compared to the fall of 2005. In early 2007, the DOT awarded United the route between Washington Dulles-Beijing and this nonstop service will commence on March 28, 2007. The Company plans to reallocate existing aircraft to serve this new route.
· The Company continues to identify and implement continuous improvement programs, and is actively training key employees in continuous improvement strategies and techniques. These include such initiatives as optimization of aircraft and airport facilities and selected outsourcing of activities to more cost-effective service providers. The Company expects that these programs, as well as the aforementioned expense reduction programs, will produce economic benefits which will be necessary to mitigate inflationary cost pressures in other categories of operating expenses, such as airport usage fees, aircraft maintenance, and employee healthcare benefits, among others.
Financial Results.Upon UAL’s emergence from Chapter 11 bankruptcy protection, the Company adopted fresh-start reporting in accordance with SOP 90-7. Thus, the consolidated financial statements before February 1, 2006 reflect results based upon the historical cost basis of the Company while the post-emergence consolidated financial statements reflect the new basis of accounting, which incorporates fair value adjustments recorded from the application of SOP 90-7. Therefore, financial statements for the post-emergence periods are not comparable to the pre-emergence period financial statements. The adoption of fresh-start reporting had a significantly negative impact on the Company’s results of operations. The significant differences in accounting results are discussed under “Fresh-Start Reporting,” below.
For purposes of providing management’s year-over-year discussions of UAL’s financial condition and results of operations, management has compared the combined 2006 annual results consisting of the Successor Company’s results for the eleven months ended December 31, 2006 and the Predecessor Company’s January 2006 results, to the Predecessor Company’s annual 2005 and 2004 results. References to “Successor Company” refer to UAL on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to “Predecessor Company” refer to UAL before its exit from bankruptcy on February 1, 2006.
The table below presents a reconciliation of the Company’s net income (loss) to net income (loss), excluding reorganization items for the three years ended December 31, 2006. Presentation of results for the combined twelve month period of 2006, as described in the preceding paragraph, and the presentation of net income excluding reorganization items, are non-GAAP measures. However, the Company believes that these year-over-year comparisons of the results of operations, as shown in the table below, provide management and investors a useful perspective of the Company’s core business and on-going operational and financial performance and trends, since reorganization items pertain to accounting for the effects of the bankruptcy restructuring and are not recurring. In addition, the combined twelve month period of 2006 is presented to improve comparability with the full years of 2005 and 2004.
|
|
|
|
| Combined |
| Predecessor |
| ||||||||||||||||||||
|
| Predecessor |
| Successor |
| Twelve |
| Twelve |
| Twelve |
| |||||||||||||||||
(In millions) |
|
|
| Period from |
| Period from |
| Months |
| Months |
| Months |
| |||||||||||||||
|
| 2006 |
| 2006 |
| 2006(a) |
| 2005 |
| 2004 |
| |||||||||||||||||
Net income (loss) |
|
| $ | 22,851 |
|
|
| $ | 25 |
|
|
| $ | 22,876 |
|
|
| $ | (21,176 | ) |
|
| $ | (1,721 | ) |
| ||
Reorganization items, net |
|
| (22,934 | ) |
|
| — |
|
|
| (22,934 | ) |
|
| 20,601 |
|
|
| 611 |
|
| |||||||
Net income (loss), excluding reorganization items, net |
|
| $ | (83 | ) |
|
| $ | 25 |
|
|
| $ | (58 | ) |
|
| $ | (575 | ) |
|
| $ | (1,110 | ) |
| ||
(a) The combined period includes the results for one month ended January 31, 2006 (Predecessor Company) and eleven months ended December 31, 2006 (Successor Company).
The Company’s improved results of operations in 2006, as compared with 2005 and 2004, were influenced by a number of significant factors, including fresh-start reporting and other factors that are described below.
Fresh-Start Reporting.
Under fresh-start reporting at the Effective Date, the Company’s asset values were remeasured using fair value, and were allocated in conformity with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). The excess of reorganization value over the net fair value of tangible and identifiable intangible assets and liabilities was recorded as goodwill. In addition, fresh-start accounting also requires that all assets and liabilities be stated at fair value or at the present values of the amounts to be paid using appropriate market interest rates, except for deferred taxes, which are accounted for in conformity with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS 109”). The Company’s results in 2006 were significantly impacted by fresh-start reporting and other non-cash expenses; the most significant impacts are discussed below.
· As part of fresh-start reporting the Company changed its accounting for Mileage Plus from the incremental cost model to the deferred revenue model. Under the incremental cost method, the estimated liability was based on incremental costs and adjustments were made to both operating revenues and advertising expense. Under the deferred revenue model a portion of ticket revenue from Mileage Plus members, and other qualifying mileage transactions, is allocated to deferred revenue at fair value to reflect the Company’s obligation for future award redemptions. This change in accounting negatively impacted the Company’s operating revenues by approximately $158 million in 2006 as compared to 2005. The negative revenue impact was partially offset by a reduction in advertising expense of approximately $27 million which the Company estimates would have been recorded if the incremental cost method had been continued. Mileage Plus accounting is discussed further in “Critical Accounting Policies,” below.
35
· The Company recorded non-cash share-based compensation expense of $159 million in 2006 in association with its MEIP and DEIP plans as approved under the Plan of Reorganization. This expense was not recognized in 2005 and 2004, because prior to 2006 the Company accounted for its share-based compensation plans under the intrinsic method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
· In 2006, the Company recognized non-cash depreciation and amortization charges of $74 million on assets that were recorded at fair value as part of fresh-start reporting, including definite-lived intangible assets that were recognized under fresh-start accounting. UAL did not recognize similar asset values or related amortization expense in the preceding annual periods.
· The adjustment of the Company’s postretirement plan liabilities to fair value at fresh-start resulted in the elimination of unrecognized prior service credits and actuarial losses for its non-pension postretirement plan. The elimination of these unrecognized items negatively impacted the Company’s 2006 expenses by approximately $51 million.
· Aircraft rent was negatively impacted by approximately $101 million. This included an unfavorable impact of $66 million related to deferred gains on pre-emergence sale-leaseback transactions that were eliminated as part of fresh-start reporting. Before fresh-start reporting, these deferred gains were being amortized into earnings over the lease terms as a reduction of the related aircraft rent expense. Also due to the restructuring of aircraft financings in bankruptcy, the Company’s operating leases were at average rates below market value; therefore, a deferred charge was recorded to adjust these leases to fair value. Amortization of this deferred charge resulted in additional rent expense of approximately $35 million in 2006.
· The Company recognized additional non-cash interest expense of approximately $51 million for the amortization of debt and capital lease obligation discounts that were recorded upon its emergence from bankruptcy to adjust its debt and capital lease obligations to fair value.
· At UAL’s emergence from bankruptcy, there were certain unresolved matters which are considered to be preconfirmation contingencies. The Company initially recorded an obligation for its best estimate of the amounts it expected to pay to resolve these matters. Adjustments to these initial estimates are recorded in current results of operations. The most significant of these were classified as Special items in the Company’s 2006 Statement of Consolidated Operations and include a net benefit of $12 million related to the San Francisco International Airport (“SFO”) and Los Angeles International Airport (“LAX”) municipal bond obligations and a benefit of $24 million related to the termination of certain of the Company’s non-qualified pension plans. The Company adjusted its estimated liabilities for these preconfirmation contingencies during the eleven months ended December 31, 2006 to the amounts the Company now believes to be probable based on court rulings and other updated information. In addition to the special items previously noted, other accruals and accrual adjustments provided an additional net benefit of approximately $29 million to 2006 operating expenses. See Note 1, “Voluntary Reorganization Under Chapter 11—Claims Resolution Process,” in the Notes to Consolidated Financial Statements for additional information related to these adjustments.
Other Factors.
· Operating revenues increased $2.0 billion, or 11%, in 2006 as compared to 2005 and by $2.9 billion, or 18%, in 2006 as compared to 2004. Revenues increased in 2006 and 2005 largely due to passenger revenue growth from United’s improved worldwide airline network performance and a more healthy revenue environment for United and the airline industry, have been faced with severe business challenges and fundamental changeswhich was significantly aided by constrained industry capacity growth during these periods. However, United’s passenger revenue growth rate has slowed in the airline industry which have produced material adverse impacts onlatter part of 2006, with the Company's results of operations, financial position and liquidity. The Company reported losses from operations of $219 million, $854 million and $1,360 million for years ended December 31, 2005, 2004 and 2003, respectively; and reported net losses of $21.2 billion, $1.7 billion and $2.8 billion for2006 fourth quarter operating
revenues increasing 5% over the same respective periods. The Company had been operating under Chapter 11 bankruptcy protection since December 9, 2002 and emerged on February 1, 2006.
In the last few years, operating revenues for the airline industry in general, as well as for United, have been adversely impacted by a number of factors. The growth of LCCs; excess industry seat capacity; pricing transparency; periodic unfavorable general economic conditions that have reduced the demand for high-yield business travel; global events such as the war in Iraq, the outbreak of SARS in early 2003 as well as the general public's fear of future terrorist attacks since September 11, 2001; and the enactment of federal taxes on ticket sales to fund additional airport security measures, have caused yield to decline from 13.25 cents in 2000 (the last year we reported an operating profit) to 11.25 cents in 2005.
In 2005, yield partially recovered, increasing by 4% over 2004 and 2003. Passenger load factor improved to 81.4% from 79.2% in 2004 and 76.5% in 2003. PRASM was 9.20 cents, or 7% higher than 2004 and 11% higher than 2003. These results reflect a 3% reduction in system capacity from 2004 to 2005, but a 3% increase in capacityquarter in 2005, over 2003. As announcedas compared to a growth rate of 10% in the fourth quarter of 2004,2005 over the Company has shifted significant amountssame quarter in 2004. Fourth quarter revenues in 2006 were also negatively impacted by severe winter storms in Denver and Chicago, as discussed below. These revenues were also adversely affected by Mileage Plus accounting in 2006 as discussed above.
· United Express contributed $77 million to operating income in 2006 as compared to negative contributions to operating results of capacity$317 million in 2005 and $494 million in 2004. This improvement is due to an improved regional operations cost structure resulting from domestic to international markets and believes that its and other airlines actions to reduce domestic overcapacity are contributing to recent unit revenue improvements.
The Company's operating expenses have fluctuated as it sought to restructure its obligations in bankruptcy, adjust its mainline and regional carrier operating capacity to match marketplace demand, and cope with historically high jet fuel prices throughout recent years. CASM increased from 10.65 cents in 2000 to 12.03 cents in 2001, and then declined back to 10.59cents in 2005. In spite of significant accomplishments in restructuring our operating expenses, including significant contributions from employees and creditors through the bankruptcy process, highreorganization, network optimization similar to that achieved for the mainline operation, and the replacement of some 50-seat regional jets with 70-seat regional jets providing both first class and Economy Plus service, among other factors.
· Mainline fuel costs have had asignificantly trended upward since 2004, increasing by $792 million between 2005 and 2006, and by $1.9 billion between 2004 and 2006. These increases are primarily due to significant adverse affect on unit operating costs, particularlyincreases in market prices for jet fuel. The Company’s average cost per gallon for jet fuel, including taxes and hedge impacts, increased from approximately $1.25 in 2004, to $1.79 in 2005, and 2004. In 2005, CASM was 4% and 1% higher than it wasto $2.11 in 2004 and 2003, respectively. The increase2006. Similar increases were experienced in mainlinethe average cost per gallon of jet fuel pricefor United Express between periods, added approximately nine tenthswhich is classified as Regional affiliates expense in the Statements of a cent,Consolidated Operations.
· Aircraft maintenance materials and one point four cents,outside repairs expense increased $128 million, or 15%, in 2006 as compared to CASM2005, and by $262 million, or 35%, in 2006 as compared to 2004. As further discussed in the “Results of Operations” section below, these increases are due to several factors, including higher volumes of outsourced maintenance, increased rates under certain long-term maintenance contracts and aging engines within United’s fleet.
· Interest expense increased $288 million in 2006 as compared to 2005, and by $321 million as compared to 2004, primarily due to increased debt outstanding of approximately $1.4 billion as a result of the Company’s new capital structure resulting from its emergence from bankruptcy on February 1, 2006 and 2003,the fresh-start reporting adjustments discussed above. The increased interest expense was partially offset by increased interest income of $211 million in 2006, as compared to 2005. The Predecessor Company included $6 million and $60 million of interest income in reorganization items, net in accordance with SOP 90-7, for January 2006 and calendar-year 2005, respectively.
· The January 2006 reorganization income of approximately $22.9 billion primarily relates to the discharge of liabilities and other fresh-start adjustments recorded in connection with the Company’s implementation of the Plan of Reorganization preparatory to its emergence from bankruptcy. In 2005, mainline fuel expense was our largest categorythe reorganization charges of operating expense, surpassing salary and related costs which have traditionally been our largest operating cost.
Chapter 11 Restructuring Efforts
By using the means available to the Company throughout the bankruptcy process as well as focusing on continuous improvement initiatives to increase the efficiency and effectiveness of its operations, the Company expects to realize approximately $7$20.6 billion in average annual cash and contractual savings. These savings were primarily derived from labor and benefit restructurings (including the termination of all of the Company's under-funded defined benefitfor pension, plans in the U.S.), implementation of business improvement initiatives, restructuring of its relationships with its United Express partners,employee-related, and aircraft financing restructurings. In total, our restructuring has made the Company cost-competitive with other U.S. network carriers.
Laborclaim charges of $8.9 billion, $6.5 billion and Benefit Restructuring. In addition to pay and benefit reductions imposed on its salaried and management workforce, the Company reached consensual agreements with each of its labor unions to reduce labor costs through a combination of lower pay rates, decreased benefit costs and higher productivity. Additionally, all represented employee groups agreed to eliminate requirements in their respective CBAs to maintain a defined benefit pension plan. Thus, the Company terminated all of its under-funded U.S. defined benefit pension plans. The Pilot Plan is subject to the outcome of the matters being considered by the District Court as more fully described in$3.0 billion, respectively. For additional information, see Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11 - Significant Matters Remaining to be Resolved in Bankruptcy Court"11—Financial Statement Presentation,” in the Notes to the Consolidated Financial Statements. These CBAs are not amendable until January 2010 and contain no "snapback" or "re-opener" provisions.Statements.
In exchange for these savings,Liquidity.As of December 31, 2006, the Company agreedhad total cash, including restricted cash and short-term investments, of $5.0 billion. The Company’s strong cash position resulted from its recapitalization upon emergence from bankruptcy, together with strong operating cash flows of $1.6 billion in 2006, as compared to provide each employee group$1.1 billion in 2005 and $0.1 billion in 2004.
As noted above, in February 2007, the Company reduced its cash by approximately $1.0 billion to a level that it believes is more optimal for its capital structure. The cash was used to prepay a portion of the equity provided to general unsecured creditors under the PlanCompany’s Credit Facility, which accordingly reduced debt by $972 million. As part of Reorganization. Each employee group received a distribution (or a "deemed claim") based upon a portion of the value of cost savings provided by that group. The total value of the deemed claim amount that was used to determine this distribution to employees was approximately $7.4 billion.
Further,transaction, the Company agreed to provide to its U.S. employees, both unionentered into the Amended Credit Facility consisting of an amended and non- represented, over $726 million in convertible notes, to be issued no later than six months after the Effective Date. These notes were promised in recognition that, among other things, allrestated revolving credit, term loan and guaranty agreement of these employee groups agreed to the termination of their defined benefit pension plans.$2.1 billion.
Business Improvement Initiatives. The Company has successfully implemented certain business improvement initiatives primarily focused on optimizing resourcessignificant contractual cash payment obligations associated with debt, aircraft leases and lowering distribution costs, including such initiatives as loweringaircraft purchase commitments, among others. See the cost of aircraft maintenance“Liquidity and airport operations through more efficient use of laborCapital Resources” section, below, for further information related to the Amended Credit Facility and non-labor resources; call center automation and off shoring; renegotiation of United Express capacity agreements; and providing customers with low-cost alternatives to reserve and purchase airline seats. The Company will continue to identify opportunities to operate our business more efficiently through similar continuous improvement initiatives in the future.Company’s contractual obligations.
Contingencies.Significant Matters Remaining to be Resolved in Bankruptcy Court. During the course of ourits Chapter 11 proceedings, the Company successfully reached settlements with most of its creditors and resolved most pending claims against the Debtors. However,The following discussion provides a summary of the following material matters remainyet to be resolved in the Bankruptcy Court.Court, as well as other contingencies. For further details,information on these matters, see Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11 - Bankruptcy Considerations"Considerations” and Note 15, “Commitments, Contingent Liabilities and Uncertainties,” in the Notes to the Consolidated Financial Statements.
Section 1110 Aircraft Restructuring. The Company negotiated with its aircraft lessors and lenders to restructure debt and lease financings to reduce aircraft ownership costs to current market rates, and was successful in reaching agreements to restructure such transactions with respect to a majority of our financed aircraft. However, certain aircraft financings are still unresolved and subject to further negotiations. United cannot accurately predict the outcome of these negotiations, and it could potentially have a material adverse impact on the Company.
Municipal Bond ObligationsObligations.. The Company is a party to numerous long-term agreements to lease certain airport and maintenance facilities that are financed through tax-exempt municipal bonds that are issued by various local municipalities to build or improve airport and maintenance facilities. As a result of the Company'sCompany’s bankruptcy filing, we wereUnited was not permitted to make payments on unsecured pre-petition debt. The Company had been advised that these municipal bonds may behave been unsecured (or in certain instances, partially secured) pre-petition debt. Therefore, through the bankruptcy process, the Company had either settled or rejected certain pre-petition debt associated with the municipal bonds. The ultimate disposition of a portionIn 2006, certain of the outstandingCompany’s municipal bond obligations remains subjectrelating to JFK, LAX and SFO have been conclusively adjudicated through the uncertain outcome of pending litigation.
Claims Resolution Process. DespiteBankruptcy Court as financings and not true leases, while the Company's emergence from Chapter 11 protection, many unsecured proofs of claim remain unresolved. Since the Effective Date and in accordance with the termsbonds relating to Denver International Airport (“DEN”) have been conclusively adjudicated as a true lease. The Company has guaranteed $261 million of the Plan of Reorganization,DEN bonds as discussed in Capital Commitments and Off-Balance Sheet Arrangements below. There remains pending litigation to determine the Company has continued to review the claims register and believes that manyvalue of the filed proofs of claim are invalid, untimely, duplicative, or overstated,security interests, if any, that the bondholders at LAX and therefore isSFO have in the process of objecting to such claims. Differences between claim amounts filed and the Company's estimates of claims to be allowed are being investigated and will be resolved in connection with its claims resolution process. In this regard, it should be noted that the claims reconciliation process may result in material adjustments after the Effective Date.underlying UAL leaseholds.
Pension TerminationsBenefit Terminations.. Currently, there is a dispute as to whether In June 2006, the District Court entered an order approving the termination of the United Airlines Pilot Defined Benefit Pension Plan (the "Pilot Plan"(“Pilot Plan”) was effectively terminated under the Employee Retirement Income Security Act ("ERISA") Section 4042 with a termination date of December 30, 2004.. ALPA, and the United Retired Pilots Benefit Protection Association and seven retired pilots (collectively, "URPBPA"(“URPBPA”) and the PBGC each filed noticesappeals with the Court of appeal and in FebruaryAppeals. On October 25, 2006, the District Court reversed the Bankruptcy Court's order based on a determination that the Bankruptcy Court lacked "core" jurisdiction over the Involuntary Termination Proceeding. However,of Appeals affirmed the District Court did not address the substantive merits of the Bankruptcy Court's ruling. The District Court remanded the proceedings to the Bankruptcy Court so that the Bankruptcy Court could submit proposed findings and conclusions of law to be forwarded to the District Court for review, which has since happened. The District Court's determination (and that of any court considering an appeal of the District Court's order) regardingCourt’s order approving the termination of the Pilot Plan mayeffective December 30, 2004. Both ALPA and URPBPA have a material adverse effectfiled petitions for writ of certiorari from the Supreme Court. The Supreme Court has yet to rule on either petition.If the Company's financial performance.
ALPA Convertible Notes. In January 2005, United filed a motion seeking approvaltermination order is ultimately reversed by the Supreme Court and it results in the reversal of the new CBA with ALPA pursuant to Section 363(b)termination of one or more of the Bankruptcy Code. The Bankruptcy Court approved the ALPA agreement over the objections of various parties. The active pilots ratified the agreement, and the Bankruptcy Court entered an order approving the ALPA agreement (the "ALPA Order"). In February 2005, URPBPA filed its notice of appeal of the ALPA Order based principally on the allegation that United was unfairly treating the retired pilots by not distributing the same unsecured notes to the retired pilots that it was distributing to the active pilots pursuant to the ALPA agreement. In June 2005, the District Court entered an order and memorandum opinion dismissing URPBPA's appeal of the ALPA Order as interlocutory. URPBPA appealed the District Court's judgment to the Court of Appeals. The parties fully briefed the matter and the Court of Appeals heard oral argument in February 2006, though it has not yet ruled on the matter. Additionally, the Company filed with the Court of Appeals a motion to dismiss the appeal on the ground that (i) no effective relief can be granted to the appellants and/or (ii) if relief could be granted, it would be highly inequitable to do so. The Court of Appeals has not yet ruled on United's motion to dismiss or indicated whether it will hear further argument on the matter.
Objections to the Plan of Reorganization Confirmation. Two parties have filed notices of appeal of the order confirming the Plan of Reorganization. If the Bankruptcy Court were to grant these appeals,Company’s previously defined benefit pension plans, it could have a materially adverse effect on the Company’s results of operations and financial condition.
There is also a dispute with respect to the continuing obligation of United to pay non-qualified pension benefits to retired pilots pending settlement of the involuntary termination proceeding. On October 6, 2005, the Bankruptcy Court ruled that the Company was obligated to make payment of all non-qualified pension benefits for October 2005. During the first quarter of 2006, the District Court dismissed the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order in light of its earlier decision reversing the Bankruptcy Court’s termination order. On October 25, 2006, the Court of Appeals reversed the District Court’s order dismissing for lack of ripeness the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order and remanded the case with instructions to reverse the Bankruptcy Court’s order compelling payment of non-qualified benefits for October 2005. On November 6, 2006, ALPA filed a petition for rehearing on the Court of Appeals reversal of the October 6, 2005 order. Both ALPA and URPBPA filed petitions for writ of certiorari from the Supreme Court on this issue. The Supreme Court has yet to rule on either petition.
38
In March 2006, the Bankruptcy Court ruled that the Company was obligated to make payment of all pilot non-qualified pension benefits for the months of November and December 2005 and January 2006. The Bankruptcy Court also ruled that the Company’s obligation to pay pilot non-qualified pension benefits ceased as of January 31, 2006. The Company filed a notice of appeal of the Bankruptcy Court’s ruling to the District Court. URPBPA and ALPA also filed notices of appeal with respect to the Bankruptcy Court’s order, which were subsequently consolidated with the Company’s appeal. United agreed with URPBPA and ALPA to pay into an escrow account the disputed non-qualified pension benefits for the months of November and December 2005 and January 2006, an aggregate amount totaling approximately $17 million. The District Court affirmed the Bankruptcy Court’s ruling in September 2006. The Company filed a notice of appeal of the District Court’s ruling to the Court of Appeals. URPBPA and ALPA also appealed the District Court’s decision. The Company subsequently filed a motion to consolidate its appeal from the Bankruptcy Court’s October 2005 non-qualified benefits order with the three appeals from the Bankruptcy Court’s March 2006 non-qualified benefits order. The Court of Appeals denied the Company’s motion, but issued an order staying briefing on the March 2006 non-qualified benefits order until further order of the Court of Appeals. In light of the Court of Appeals’ October 25, 2006 decision described above, the Company is reasonably optimistic of a successful outcome of its appeal in this matter, although there can be no assurances that the ultimate outcome of this appeal will be favorable to the Company.
Legal and Environmental.UAL has certain contingencies resulting from litigation and claims (including environmental issues) incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) 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. When appropriate, the Company accrues for these matters based on its assessments of the likely outcomes 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.
New regulations surrounding the emission of greenhouse gases (such as carbon dioxide) are being considered for promulgation both internationally and within the United States. The Company will be carefully evaluating the potential impact of such proposed regulations.
The Company anticipates that if ultimately found liable, its damages from claims arising from the events of September 11, 2001, could be significant; however, the Company believes that, under the Air Transportation Safety and System Stabilization Act of 2001, its liability will be limited to its insurance coverage.
As described in the “Overview” section above, presentation of the combined twelve month period of 2006 is a non-GAAP measure; however, management believes it is useful for comparison with the full years of 2005 and 2004.
The air travel business is subject to seasonal fluctuations. OurThe Company’s operations can be adversely impacted by severe weather and ourits first and fourth quarter results normally reflect lower travel demand. Historically, because of these seasonal factors, results of operations are better in the second and third quarters which reflect higher levels of travel demand.quarters.
Summary of Results. UAL'sEarnings from operations increased $666 million to $447 million in 2006 as compared to a loss from operations of $219 million in 2005. Excluding reorganization items, the net loss was $58 million in 2006 which represents an improvement of $517 million over the net loss in 2005 was $219 million, comparedof $575 million. These improvements are due to losses from operations of $854 million in 2004 and $1.4 billion in 2003. UAL'sthe net loss for 2005 was $21.2 billion, or $182.29 per share, compared to net losses of $1.7 billion, or $15.25 per share in 2004 and $2.8 billion, or $27.36 per share in 2003.
Effective February 1, 2006, the Company is no longer operating under Chapter 11 protection. As a resultimpact of the Company's emergence from bankruptcy and the adoption of fresh start accounting, the 2005 financial results are not indicative of future results.
In addition, fuel price fluctuations can have a material impact on the Company's future financial performance. For example, a one cent change in fuel price can either increase or decrease the Company's annual operating expenses by approximately $20 million.
The 2005 results include $18 million in operating special items and $20.6 billion in reorganization expenses related to the Company's bankruptcy filing.
The 2004 results included a favorable adjustment to passenger mainline revenue of $60 million and non-operating special items of $5 million. Additionally, non-operating expense includes $158 million in gains from the sale of investments as well as $611 million in reorganization expenses related to the Company's bankruptcy filing.
The 2003 results include operating special items of $178 million (including curtailment and special termination charges of $152 million) and non-operating special items of $251 million. Additionally, non-operating expense includes $300 million in government compensation and $158 million in gains from the sale of investments, as well as $1.2 billion in reorganization expenses related to the Company's bankruptcy filing.
Certain of these items are described more fully indiscussed below, among other factors. See Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11," Note 3, "Special Items," and Note 7 "Investments"11—Financial Statement Presentation,” in the Notes to Consolidated Financial Statements for further information on reorganization items.
Operating Revenues.
2006 Compared to 2005
The following table illustrates the year-over-year dollar and percentage changes in major categories of operating revenues.
| Predecessor |
| Successor |
| Combined |
| Predecessor |
|
|
|
|
| ||||||||||||||||||
|
| Period from |
| Period from |
| Period |
| Year |
| $ |
| % |
| |||||||||||||||||
(Dollars in millions) |
|
|
| 2006 |
| 2006 |
| 2006(a) |
| 2005 |
| Change |
| Change |
| |||||||||||||||
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Passenger—United Airlines |
|
| $ | 1,074 |
|
|
| $ | 13,293 |
|
|
| $ | 14,367 |
|
|
| $ | 12,914 |
|
| $ | 1,453 |
|
| 11 |
|
| ||
Passenger—Regional Affiliates |
|
| 204 |
|
|
| 2,697 |
|
|
| 2,901 |
|
|
| 2,429 |
|
| 472 |
|
| 19 |
|
| |||||||
Cargo |
|
| 56 |
|
|
| 694 |
|
|
| 750 |
|
|
| 729 |
|
| 21 |
|
| 3 |
|
| |||||||
Other operating revenues |
|
| 124 |
|
|
| 1,198 |
|
|
| 1,322 |
|
|
| 1,307 |
|
| 15 |
|
| 1 |
|
| |||||||
|
|
| $ | 1,458 |
|
|
| $ | 17,882 |
|
|
| $ | 19,340 |
|
|
| $ | 17,379 |
|
| $ | 1,961 |
|
| 11 |
|
| ||
(a)The combined 2006 period includes the results for one month ended January 31, 2006 (Predecessor Company) and eleven months ended December 31, 2006 (Successor Company).
Strong demand, industry capacity restraint, yield improvements, United’s resource optimization initiatives, and ongoing airline network optimization all contributed to a $2.0 billion increase in total operating revenue to $19.3 billion in 2006. The 11% mainline passenger revenue increase was due to both increased traffic and higher average ticket prices; United reported a 3% increase in mainline traffic on a 2% increase in capacity and an 8% increase in yield. Severe winter storms in December 2006 at the Chicago and Denver hubs, which resulted in the cancellation of approximately 3,900 United and United Express flights at these locations, had the estimated impact of reducing revenue by $40 million and reducing total expenses by $11 million. As discussed in “Critical Accounting Policies,” below, the Company changed the accounting for its frequent flyer obligation to a deferred revenue model upon its emergence from bankruptcy which negatively impacted revenues by $158 million. This resulted in increased deferred revenue due to a net increase in miles earned by Mileage Plus customers that will be redeemed in future years.
The 19% increase in regional affiliate revenues was also due to traffic and yield improvements as indicated in the table below.
The increase in cargo revenue was primarily due to improved yield, which was partially due to higher fuel surcharges between periods.
The table below presents selected passenger revenues and operating data by geographic region and the Company’s mainline and United Express segments expressed as period-to-period changes:
2006 |
|
|
| North |
| Pacific |
| Atlantic |
| Latin |
| Mainline |
| United |
| Consolidated |
| ||||||||||
Increase (decrease) from 2005(a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Passenger revenues (in millions) |
|
| $ | 1,022 |
| $ | 234 |
| $ | 118 |
| $ | 79 |
|
| $ | 1,453 |
| $ | 472 |
|
| $ | 1,925 |
| ||
Passenger revenues |
|
| 13% |
| 9% |
| 6% |
| 19% |
|
| 11% |
| 19% |
|
| 13% |
| |||||||||
ASMs |
|
| 4% |
| —% |
| (2)% |
| 9% |
|
| 2% |
| 9% |
|
| 3% |
| |||||||||
RPMs |
|
| 4% |
| 1% |
| (2)% |
| 13% |
|
| 3% |
| 13% |
|
| 4% |
| |||||||||
Load factor (percent) |
|
| 0.3 pts |
| 1.4 pts |
| 0.7 pts |
| 2.6 pts |
|
| 0.7 pts |
| 2.7 pts |
|
| 0.8 pts |
| |||||||||
Yield(b) |
|
| 9% |
| 8% |
| 9% |
| 6% |
|
| 8% |
| 6% |
|
| 9% |
| |||||||||
(a)The combined 2006 period includes the results for one month ended January 31, 2006 (Predecessor Company) and eleven months ended December 31, 2006 (Successor Company).
As of first quarter 2005, certain operating revenues that are associated with our Mileage Plus program were reclassified as a result of a corporate restructuring. Prior periods have been reclassified to conform to this presentation. For further details, see Note 22, "UAL Loyalty Services, LLC" in the Notes to Consolidated Financial Statements.(b)Yields exclude charter revenue and revenue passenger miles.
2005 Compared withto 2004 -
The following table illustrates the year-over-year dollar and percentage changes in major categories of operating revenues.
(Dollars in millions) |
|
|
| 2005 |
| 2004 |
| $ |
| % |
| |||||||
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Passenger—United Airlines |
| $ | 12,914 |
| $ | 12,542 |
|
| $ | 372 |
|
|
| 3 |
|
| ||
Passenger—Regional Affiliates |
| 2,429 |
| 1,931 |
|
| 498 |
|
|
| 26 |
|
| |||||
Cargo |
| 729 |
| 704 |
|
| 25 |
|
|
| 4 |
|
| |||||
Other operating revenues |
| 1,307 |
| 1,214 |
|
| 93 |
|
|
| 8 |
|
| |||||
Total |
| $ | 17,379 |
| $ | 16,391 |
|
| $ | 988 |
|
|
| 6 |
|
| ||
The table below presents selected passenger revenues and operating data by geographic region and the Company’s mainline and United Express segments expressed as period-to-period changes:
2005 |
|
|
| North |
| Pacific |
| Atlantic |
| Latin |
| Mainline |
| United |
| Consolidated |
| ||||||||||
Increase (decrease) from 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Passenger revenues (in millions) |
|
| $ | (153) |
| $ | 364 |
| $ | 101 |
| $ | 60 |
|
| $ | 372 |
| $ | 498 |
|
| $ | 870 |
| ||
Passenger revenues |
|
| (2)% |
| 16% |
| 6% |
| 16% |
|
| 3% |
| 26% |
|
| 6% |
| |||||||||
ASMs |
|
| (10)% |
| 13% |
| 1% |
| 16% |
|
| (3)% |
| 21% |
|
| (2)% |
| |||||||||
RPMs |
|
| (6)% |
| 12% |
| 1% |
| 16% |
|
| (1)% |
| 23% |
|
| 1% |
| |||||||||
Load factor |
|
| 3.7 pts |
| (0.9) pts |
| 0.1 pts |
| 0.1 pts |
|
| 2.2 pts |
| 1.0 pts |
|
| 2.0 pts |
| |||||||||
Yield(a) |
|
| 5% |
| 4% |
| 7% |
| (2)% |
|
| 4% |
| 3% |
|
| 5% |
| |||||||||
(a)Yields exclude charter revenue and revenue passenger miles.
Operating Revenues.Consolidated operating revenues increased 6%, or $988 million, or 6%, in 2005 as compared to 2004 and mainline RASM increased 7% from 9.95 cents to 10.66 cents. Mainline passenger revenues increased 3%, or $372 million, or 3%, due to a 4% increase in yield slightly offset by a decline in RPMs of 1%. ASMs decreased 3%; however, passenger load factor increased 2.2 points to 81.4%. The following analysis by market is based on information reported to the DOT for United mainline passenger operations: 2005 Passenger revenues (in millions) $ 12,914 $ 8,011 $ 2,654 $ 1,825 $ 424 Passenger revenue per ASM Increase (Decrease) from 2004: Passenger revenues (in millions) Passenger revenues (percent) ASMs Passenger load factor RPMs Yield Passenger revenue per ASM
Passenger revenues - regional affiliatesrevenues—Regional Affiliates increased 26% or $498 million, or 26%, in 2005 as compared to 2004 mainly due to increased volume of United Express regional carrier flying. Cargo revenues increased 4%, or $25 million, or 4%, in 2005 as compared to 2004 due to a 1% increase in cargo ton miles combined with a 2% increase in cargo yield. Other operating revenues increased 8%, or $93 million, or 8%, primarily due to increases in third-party maintenance revenues and ULS revenues, partially offset by a decrease in United Airlines Fuel Corporation ("UAFC"(“UAFC”) fuel sales to third parties.
41
Operating Expenses. Consolidated
2006 Compared to 2005
The table below includes the year-over-year dollar and percentage changes in operating expenses. Significant fluctuations are discussed below.
|
| Predecessor |
| Successor |
| Combined |
| Predecessor |
|
|
|
|
| |||||||||||||||||
(Dollars in millions) |
|
|
| Period from |
| Period from |
| Period |
| Year |
| $ |
| % |
| |||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Aircraft fuel |
|
| $ | 362 |
|
|
| $ | 4,462 |
|
|
| $ | 4,824 |
|
|
| $ | 4,032 |
|
| $ | 792 |
|
| 20 |
|
| ||
Salaries and related costs |
|
| 358 |
|
|
| 3,909 |
|
|
| 4,267 |
|
|
| 4,027 |
|
| 240 |
|
| 6 |
|
| |||||||
Regional affiliates |
|
| 228 |
|
|
| 2,596 |
|
|
| 2,824 |
|
|
| 2,746 |
|
| 78 |
|
| 3 |
|
| |||||||
Purchased services |
|
| 134 |
|
|
| 1,595 |
|
|
| 1,729 |
|
|
| 1,524 |
|
| 205 |
|
| 14 |
|
| |||||||
Aircraft maintenance materials and outside repairs |
|
| 80 |
|
|
| 929 |
|
|
| 1,009 |
|
|
| 881 |
|
| 128 |
|
| 15 |
|
| |||||||
Depreciation and amortization |
|
| 68 |
|
|
| 820 |
|
|
| 888 |
|
|
| 856 |
|
| 32 |
|
| 4 |
|
| |||||||
Landing fees and other rent |
|
| 75 |
|
|
| 801 |
|
|
| 876 |
|
|
| 915 |
|
| (39 | ) |
| (4 | ) |
| |||||||
Cost of third party sales |
|
| 65 |
|
|
| 614 |
|
|
| 679 |
|
|
| 685 |
|
| (6 | ) |
| (1 | ) |
| |||||||
Aircraft rent |
|
| 30 |
|
|
| 385 |
|
|
| 415 |
|
|
| 402 |
|
| 13 |
|
| 3 |
|
| |||||||
Commissions |
|
| 24 |
|
|
| 291 |
|
|
| 315 |
|
|
| 305 |
|
| 10 |
|
| 3 |
|
| |||||||
Special operating items (Note 19) |
|
| — |
|
|
| (36 | ) |
|
| (36 | ) |
|
| 18 |
|
| (54 | ) |
| — |
|
| |||||||
Other operating expenses |
|
| 86 |
|
|
| 1,017 |
|
|
| 1,103 |
|
|
| 1,207 |
|
| (104 | ) |
| (9 | ) |
| |||||||
|
|
| $ | 1,510 |
|
|
| $ | 17,383 |
|
|
| $ | 18,893 |
|
|
| $ | 17,598 |
|
| $ | 1,295 |
|
| 7 |
|
| ||
(a)The combined period includes the results for one month ended January 31, 2006 (Predecessor Company) and eleven months ended December 31, 2006 (Successor Company).
In 2006, United implemented a resource optimization initiative that increased the number of mainline ASMs by 1% and United Express ASMs by 3%, for a consolidated ASM impact of 2%, without the use of additional aircraft. In addition to generating increased revenue, this contributed to additional variable expenses such as fuel, salaries, and other expense items.
Higher fuel costs have had a significantly adverse effect on the Company’s operating expenses in 2006 as compared to 2005. In 2006, mainline aircraft fuel expense increased 20% due to an increase in average mainline fuel cost from $1.79 per gallon in 2005 to $2.11 per gallon in 2006, while fuel consumption increased 2% on a similar increase in mainline capacity. The Company recognized a net fuel hedge loss of $26 million in aircraft fuel expense in 2006, which is included in the $2.11 per gallon average cost, whereas in 2005 most fuel hedging gains and losses were recorded in non-operating income and expense. In 2005, the Company recorded $40 million of fuel hedging gains in non-operating income, as discussed below.
Salaries and related costs increased $240 million, or 6%, in 2006 as compared to the prior year. In 2006 the Company recorded $159 million of expense, representing 4% of the increase in salaries and related costs, for the Successor Company’s share-based compensation plans because of the adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” effective January 1, 2006. In addition, the Company incurred an additional $26 million related to employee performance incentive programs in 2006 as compared to 2005. The Company also recorded $64 million in higher postretirement expenses and $35 million in higher medical and dental expenses in 2006 than in 2005. Salaries also increased due to merit increases awarded to employees in 2006, which were infrequent throughout bankruptcy. These cost increases were partially offset by a 6% year-over-year improvement in
labor productivity resulting from the Company’s continuous improvement efforts, together with selective outsourcing of certain non-core functions. In 2006, the Company achieved its goal to reduce 1,000 management and administrative positions.
The Company’s most significant regional affiliate expenses are capacity payments to the regional carriers and fuel expense. Fuel accounted for 30% of the Company’s regional affiliate expense in 2006, as compared to 26% in 2005. Fuel cost increased due to increased market prices for jet fuel, as discussed above, and increased fuel consumption from higher capacity. The Company’s regional affiliate expense increased only 3% despite a 9% increase in capacity due to the benefits of restructured lower-cost regional carrier capacity agreements in 2006 along with regional carrier network optimization and the replacement of some 50-seat regional jets with 70-seat regional jets. The 3% increase in regional affiliates expense includes an 18% increase in fuel costs. See Note 2(i), “Summary of Significant Accounting Policies—United Express,” in the Notes to Consolidated Financial Statements for further discussion of the Regional affiliates expense.
Purchased services increased $205 million, or $35314%, in 2006, as compared to 2005, primarily due to an increase of approximately $120 million in outsourcing costs for various non-core work activities; a $31 million increase in certain professional fees, which were classified as reorganization expenses by the Predecessor Company; and a $24 million increase in credit card fees due to higher passenger revenues. The offsetting benefits of higher outsourcing costs are reflected in a 4% reduction in manpower associated with the 6% labor productivity improvement noted for salaries and related costs.
In 2006, aircraft maintenance materials and outside repairs expense increased $128 million, or 15%, from 2005 primarily due to engine-related maintenance rate increases as well as increased volume.
As discussed in Note 1, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,” in the Notes to Consolidated Financial Statements, the Company revalued its assets and liabilities to estimated fair values. In 2006, amortization expense increased $162 million due to the recognition of $453 million of additional definite-lived intangible assets; however, this increase was offset by decreased depreciation expense from fresh-start reporting adjustments that significantly reduced depreciable tangible asset book values to fair value. The impact of the decrease in tangible asset valuation was significant as depreciation and amortization only increased $32 million despite the $162 million increase in intangible asset amortization and incremental depreciation on post-emergence property additions.
Other operating expense decreased $104 million in 2006, as compared to 2005. The adoption of fresh-start reporting, which included the revaluation of the Company’s frequent flyer obligation to estimated fair value and the change in accounting policy to a deferred revenue model for the Successor Company reduced other expense by $27 million. For periods on or after February 1, 2006, adjustments to the frequent flyer obligation are recorded to passenger and other operating revenues, whereas periodic adjustments under the Predecessor Company’s incremental cost basis were recognized in both operating revenues and other operating expense. See “Critical Accounting Policies,” below, for further details. Various cost savings initiatives also reduced the Company’s costs in 2006 as compared to 2005.
In 2006, the Company recognized a net benefit of approximately $36 million to operating expense resulting from the resolution of preconfirmation contingencies for the estimated liability for SFO and LAX municipal bond obligations, and favorable adjustments to preconfirmation contingencies related to the pilots non-qualified pension plan. In 2005, the Company recognized a charge of $18 million for aircraft impairments related to the planned accelerated retirement of certain aircraft. See Note 19, “Special Items,” in the Notes to Consolidated Financial Statements for further information.
43
2005 Compared to 2004
The following table presents the year-over-year dollar and percentage changes in operating expenses for the Predecessor Company in 2005 as compared to 2004.
(Dollars in millions) |
|
|
| 2005 |
| 2004 |
| $ |
| % |
| |||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Aircraft fuel |
| $ | 4,032 |
| $ | 2,943 |
| $ | 1,089 |
|
| 37 |
|
| ||
Salaries and related costs |
| 4,027 |
| 5,006 |
| (979 | ) |
| (20 | ) |
| |||||
Regional affiliates |
| 2,746 |
| 2,425 |
| 321 |
|
| 13 |
|
| |||||
Purchased services |
| 1,524 |
| 1,462 |
| 62 |
|
| 4 |
|
| |||||
Aircraft maintenance materials and outside repairs |
| 915 |
| 964 |
| (49 | ) |
| (5 | ) |
| |||||
Depreciation and amortization |
| 881 |
| 747 |
| 134 |
|
| 18 |
|
| |||||
Landing fees and other rent |
| 856 |
| 874 |
| (18 | ) |
| (2 | ) |
| |||||
Cost of third party sales |
| 685 |
| 709 |
| (24 | ) |
| (3 | ) |
| |||||
Aircraft rent |
| 402 |
| 533 |
| (131 | ) |
| (25 | ) |
| |||||
Commissions |
| 305 |
| 305 |
| — |
|
| — |
|
| |||||
Special operating items (Note 19) |
| 18 |
| — |
| 18 |
|
| — |
|
| |||||
Other operating expenses |
| 1,207 |
| 1,277 |
| (70 | ) |
| (5 | ) |
| |||||
|
| $ | 17,598 |
| $ | 17,245 |
| $ | 353 |
|
| 2 |
|
| ||
Overall, operating expense increased only 2% in 2005 from 2004. The significant changes from 2004 and mainline CASM increased 4% from 10.20 cents to 10.59 cents.2005 included:
· Operating expenses: (In millions) Aircraft fuel (a) Salaries and related costs (b) Regional affiliates (c) Purchased services Landing fees and other rent Aircraft maintenance (d) Depreciation and amortization Cost of sales Aircraft rent (e) Commissions Special items (Note 3) Other Total
(a)IncreasedA $1.1 billion, or 37%, increase in aircraft fuel expense was primarilyas a result ofdue to a 43% increase in the average cost of fuel (including tax and hedge impact), partially offset by a 4% decrease in consumption.
(b) Decreased· Salaries and related costs decreased by $1.0 billion, or 20%, primarily due to cost savings associated with lowersalarysalaries andbenefit ratesbenefits as well as lower full-time equivalent employees. The decrease in salaries and related costs was driven by wage and benefit concessions resulting from negotiations with employees and productivity improvements.
(c) Increased· Regional affiliates increased $321 million primarily as a result of increased fuel costs and volumes of United Express regional carrier flying, partially offset by new and amended contract savings.
(d) Increased· A $134 million increase in aircraft maintenance materials and outside repairs resulted primarilydue tofrom higher levels of purchased maintenance activity. This increaseiswas partially offset by certain productivity and labor rate improvements, the effects of which areincludedreflected in(b) above.salaries and related costs.
(e) Decreased· A $131 million decrease in aircraft rent was due to the restructuring of aircraft lease obligations and fleet reductions.
Other income (expense).
2006 Compared to 2005 Other non-operating
The following table illustrates the year-over-year dollar and percentage changes in consolidated other income (expense).
|
| Predecessor |
| Successor |
| Combined |
| Predecessor |
|
|
|
|
|
| |||||||||||||||||||
|
| Period from |
| Period from |
| Period |
| Year |
| $ |
| % |
|
| |||||||||||||||||||
(Dollars in millions) |
|
|
| 2006 |
| 2006 |
| 2006(a) |
| 2005 |
| Change |
| Change |
|
| |||||||||||||||||
Operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest expense |
|
| $ | (42 | ) |
|
| $ | (728 | ) |
|
| $ | (770 | ) |
|
| $ | (482 | ) |
|
| $ | (288 | ) |
|
| (60 | ) |
| |||
Interest income |
|
| 6 |
|
|
| 243 |
|
|
| 249 |
|
|
| 38 |
|
|
| 211 |
|
|
| 555 |
|
| ||||||||
Interest capitalized |
|
| — |
|
|
| 15 |
|
|
| 15 |
|
|
| (3 | ) |
|
| 18 |
|
|
| — |
|
| ||||||||
Miscellaneous, net |
|
| — |
|
|
| 14 |
|
|
| 14 |
|
|
| 87 |
|
|
| (73 | ) |
|
| (84 | ) |
| ||||||||
|
|
| $ | (36 | ) |
|
| $ | (456 | ) |
|
| $ | (492 | ) |
|
| $ | (360 | ) |
|
| $ | (132 | ) |
|
| (37 | ) |
| |||
The Company incurred a $288 million increase in interest expense, amountedwhich was partly due to $20.9 billion in 2005 (which included $20.6 billionthe higher outstanding principal balance of reorganization items, net)the Credit Facility for the Successor Company, as compared to $872the lower DIP Financing balance for the Predecessor Company. Interest expense in 2006 was also unfavorably impacted by the associated amortization of various discounts which were recorded on debt instruments and capital leases to record these obligations at fair value upon the adoption of fresh-start reporting. Interest income increased $211 million year-over-year, reflecting a higher cash balance in 2004 (which included $52006, as well as higher rates of return on certain investments. Interest income also increased due to the classification of most interest income in 2005 as reorganization expense in accordance with SOP 90-7. In 2005, the Company recorded $40 million of special items, $611fuel hedge gains which did not qualify for hedge accounting in non-operating income, while in 2006 the $26 million of reorganization items, net realized and unrealized loss from economic fuel hedges was recognized in aircraft fuel expense.
2005 Compared to 2004
The following table presents year-over-year dollar and percentage changes in consolidated other income (expense) for the Predecessor Company in 2005 as compared to 2004.
(Dollars in millions) |
|
|
| 2005 |
| 2004 |
| $ |
| % |
| |||||||
Operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense |
| $ | (482 | ) | $ | (449 | ) |
| $ | (33 | ) |
|
| (7 | ) |
| ||
Interest income |
| 38 |
| 25 |
|
| 13 |
|
|
| 52 |
|
| |||||
Interest capitalized |
| (3 | ) | 1 |
|
| (4 | ) |
|
| — |
|
| |||||
Gain on sale of investments (Note 7) |
| — |
| 158 |
|
| (158 | ) |
|
| — |
|
| |||||
Non-operating special items (Note 19) |
| — |
| 5 |
|
| (5 | ) |
|
| — |
|
| |||||
Miscellaneous, net |
| 87 |
| (1 | ) |
| 88 |
|
|
| — |
|
| |||||
|
| $ | (360 | ) | $ | (261 | ) |
| $ | (99 | ) |
|
| (38 | ) |
| ||
The Company reported a gain of $158 million from the sale of gains on sales). For further information, see Note 1, "Voluntary Reorganization Under Chapter 11 - Financial Statement Presentation", Note 3, "Special Items" and Note 7, "Investments"its investment in the Notes to Consolidated Financial Statements. InterestOrbitz in 2004. In addition, an increase in interest expense increasedof $33 million, or 7%, or $33 million,in 2005 was due to higher interest and fees applicable to the increased outstanding debt on the DIP Financing between periods.
2004 Compared with 2003 -
Operating Revenues. Consolidated operating revenues increased by 10%, or $1.5 billion, in 2004 as compared to 2003, and mainline RASM increased 1% from 9.81 cents to 9.95 cents. Mainline passenger revenues increased 10%, or $1.2 billion, primarily due to a 10% increase in RPMs. ASMs increased 6% and passenger load factor increased 2.7 points to 79.2%. The following analysis by market is based on information reported to the DOT for United mainline passenger operations: 2004 Passenger revenues (in millions) Passenger revenue per ASM Increase (Decrease) from 2003: Passenger revenues (in millions) Passenger revenues (percent) ASMs Passenger load factor RPMs Yield Passenger revenue per ASM
Passenger revenues - regional affiliates increased 26% or $402Company recorded $40 million in 2004 as compared to 2003 mainly due to increased volume of United Express regional carrier flying. Cargo revenues increased by 12%, or $74 million, in 2004 as compared to 2003 due to a 5% increase in cargo ton miles and a 6% increase in cargo yields. Other operating revenues decreased 14%, or $191 million, primarily due to a decrease of $295 million in UAFC fuel sales to third parties, partially offset by increases in third-party maintenance revenues and ULS revenues.
Operating expenses: ChangeOperating Expenses. Consolidated operating expenses increased 6%, or $957 million, in 2004 as compared to 2003 and CASM decreased 3% from 10.52 cents to 10.20 cents. (In millions) Aircraft fuel (a) Salaries and related costs Regional affiliates (b) Purchased services (c) Landing fees and other rent Aircraft maintenance (d) Depreciation and amortization Cost of sales (e) Aircraft rent (f) Commissions (g) Other Special items (Note 3) Total
(a) Increased primarily as a result of a 33% increase in the average costof fuel(including tax andhedgeimpact) and a 7% increasegains inconsumption.
(b) Increased primarily as a result of increasedMiscellaneous, net in 2005 since they did not qualify for hedge accounting. There were no significant fuelcosts and volumes of United Express regional carrier flying.
(c) Increased as a result of higher levels of outsourcing of cargo handling and aircraft cleaning; higher credit card discount fees and computer reservation system fees associated with higher passenger revenues; and increased professional fees.
(d) Increased due to higher levels of maintenance activity, including contracted maintenance and maintenance materials.
(e) Decreased primarily due to lower third-party fuel sales by UAFC.
(f) Decreased due to restructuring of aircraft lease obligations and fleet reductions.
(g) Increased due to higher commissionable passenger revenues.
2005, the other significant item that was included $5in Miscellaneous, net was approximately $25 million of special items, $611 millionforeign currency transaction gains from the revaluation of reorganization items, netcertain foreign currency denominated debt and $158 million of gains on sales), as compared to $1.4 billion in 2003 (which included $251 million of special items, $1.2 billion of reorganization items, net, $158 million of gains on sales and $300 million of government compensation). For further information, seepension obligations.
See Note 1, "Voluntary“Voluntary Reorganization Under Chapter 11 - 11—Financial Statement Presentation", Note 3, "Special Items" and Note 7, "Investments"Presentation,” in the Notes to Consolidated Financial Statements. Interest expense decreased 15%, or $78 million, primarily due to a lower number of mortgaged aircraft and lower fees and interest associated with our DIP Financing. Interest income decreased 55%, or $30 million, primarily due to interest income for further information on IRS tax refunds received in 2003 and higher amounts of interest earned on restricted cash in 2004.Reorganization items, net.
Liquidity and Capital Resources
LiquidityLiquidity.. UAL'sUAL’s total of cash and cash equivalents, restricted cash and short-term investments including restricted cash, was $5.0 billion and $2.8 billion at December 31, 2006 and 2005, compared to $2.2 billion atrespectively, including restricted cash of $847 million and $957 million, respectively. At December 31, 2004.2006, the Company reclassified $972 million of its long-term debt to current maturities to reflect its intent to prepay a portion of the Credit Facility. In February 2007, the Company reduced its cash position by $972 million through the prepayment of part of its Credit Facility debt. This debt prepayment reduced the Company’s cash balance to a level that it believes is more optimal. In addition, certain terms of the Credit Facility were amended in February 2007. The Amended Credit Facility consists of a $1.8 billion term loan and a $255 million revolving commitment. At the Company’s option, interest payments are based on either a base rate, as defined in the Amended Credit Facility, or at LIBOR plus 2%. This applicable margin on LIBOR rate loans is a significant reduction of 1.75% from the Credit Facility. The Amended Credit Facility frees up a significant amount of assets that had been pledged as collateral under the Credit Facility. See the “Capital Commitments and Off-Balance Sheet Arrangements” section, below, for information related to scheduled maturities on the Amended Credit Facility. In January 2007, the Company decided to terminate the interest rate swap that had been used to hedge the future interest payments under the original Credit Facility term loan of $2.45 billion. In the first quarter of 2007, the Company expects to expense approximately $16 million of deferred financing costs related to the prepaid portion of the Credit Facility.
As of December 31, 2005, we had $957 million in restricted cash, an increase of $80 million as compared to December 31, 2004. Restricted cash primarily represents cash collateral to secure workers'workers’ compensation obligations, security deposits for airport leases and reserves with institutions that process ourUnited’s credit card ticket sales. Prior to 2003, we met manyCertain of these obligations (which were smaller in amount) through surety bonds or secured letters of credit; however, such facilities are currently largely unavailable to us. As a result, we may be required to post significant additional cash collateral to meet such obligations in the future.
In October 2005, we entered into a new processing agreement for MasterCard and Visa credit card transactions with JPMorgan Chase Bank, N.A. and Paymentech, L.P. The agreement replaces our former processing agreement with National Processing Company (which expired on January 15, 2006) and provides credit card processing services for transactionsarrangements are based on and after January 11, 2006. The processing agreement required us to initially establish a restricted cash reserve to secure the potential obligations to customers using a credit card form of payment in the event the Company does not provide the ticketed transportation services. The amount of this reserve is determined by applying a reserve percentage to the Company's aggregate then-outstanding bank card air traffic liability. The reserve percentage will vary between zero and 100% based upon ourliability, the Company’s credit rating and our abilityits compliance with certain debt covenants. Credit rating downgrades or debt covenant noncompliance could materially increase the Company’s reserve requirements.
Cash Flows from Operating Activities.
2006 compared to comply with the fixed charge ratio and unrestricted2005
The Company generated cash covenants under the Credit Facility. See Note 9, "Long-Term Debt"from operations of $1.6 billion in 2006 compared to $1.1 billion in 2005. The higher operating cash flow generated in 2006 was due to improved results of operations as discussed above in the Notes“Results of Operation” section, together with differences in the timing and amount of working capital items, and other smaller changes. As discussed in the “Fresh-Start Reporting” section, above, UAL’s 2006 net income includes significant non-cash items.
The Company does not have any significant defined benefit pension plan contribution requirements as most of the Company-sponsored plans were replaced with defined contribution plans upon its emergence from bankruptcy. The Company contributed approximately $259 million and $11 million to Consolidated Financial Statements. The processing agreement expires onits defined contribution plans and non-U.S. pension plans, respectively, in the eleven months ended December 31, 2012.2006.
Concurrently with entering into the processing agreement, we entered into an amendment46
2005 compared to our agreement with Chase Bank USA N.A. ("Chase") regarding the Mileage Plus Visa card under which Chase pays for frequent flyer miles earned by Mileage Plus members for making purchases using the Mileage Plus Visa card. In addition to extending the agreement until 2012 and making certain other adjustments in the relationship, the agreement provides for an advance purchase of miles approximately equal to the initial amount of the reserve account under the processing agreement. As a result, the reserve account provisions of the processing agreement initially did not have a significant effect on our liquidity. Any significant future increase in the reserve percentage under the processing agreement could have an adverse effect on our liquidity.2004
Operating Activities.For the year ended December 31, 2005, weUAL generated cash from operations of $1.1 billion, an increase ofa $980 million as compared toincrease over cash generated from operations of $99 million in 2004 and an 8% increase over the $1.0 billion in cash generated from operations in 2003.2004. The higher operating cash generated in 2005 iswas largely due to increased passenger revenues and lower salary and related costs, partially offset by increased fuel costs. The operating cash generated in 2003 included the receiptimproved results of $365 million in income tax refunds and $314 million in government compensation,operations, together with increased advanced ticket sales and differences in amounts and timing of other working capital changes.
In October 2003, United and one of its subsidiaries, UAFC, entered into an agreement with a third-party to supply approximately 50% of the fuel required by United and UAFC and to assume some of their supply, infrastructure and third-party sale agreements. The third-party acquires fuel on behalf of United and UAFC, transports it and maintains minimum inventory levels at specified locations for subsequent sale to them. Under this arrangement, the Company generated approximately $105 million of additional working capital during 2004 by reducing working capital requirements for fuel inventory and accounts receivable.
The Company contributed $127 million towards its U.S. qualified defined benefit pension fundsplans in 2004, and $6 million in 2003, but made no such cash contributions in 2006 or 2005. In addition, theThe Company contributed $61 million $75 million and $80$75 million in 2005 2004 and 2003,2004, respectively, largely towards its non-U.S. pension plans and its U.S. non-qualified pension plans. Detailed information regarding ourthe Company’s pension plans is included in Note 15, "Retirement8, “Retirement and Postretirement Plans"Plans,” in the Notes to Consolidated Financial Statements.
Cash Flows from Investing Activities.
2006 Compared to 2005
Cash used by investing activities was $250 million in 2006 as compared to $291 million in 2005. Cash released from segregated funds after exit from bankruptcy in 2006 provided $200 million in cash proceeds, and the sale of the subsidiary MyPoints.com, Inc. in 2006 generated an additional $56 million in cash proceeds. Cash used for increases in short-term investments in 2006 was $235 million, as compared to $1 million provided from the sale of short-term investments in 2005. A reduction in restricted cash balances provided $110 million of cash proceeds in 2006, as compared to cash used to increase restricted cash of $80 million in 2005. Required restricted cash balances in 2006 have decreased slightly from 2005 as a result of the Company’s emergence from bankruptcy, among other factors.
In 2006, the Company did not reject or return any aircraft under Section 1110 of the Bankruptcy Code, although the sale of nine non-operating B767-200 aircraft during this period provided $19 million in cash proceeds from the disposition of property and equipment. The Company used $362 million in cash for the acquisition of property and equipment in 2006, as compared to $470 million in 2005.
2005 Compared to 2004
Overall, cash used in investing activities wasof $291 million in 2005 andwas comparable to cash used of $296 million in 2004 compared to cash generated from investing activities of $339 million in 2003. During 2003, changes to the Company's liquidity needs and the interest rate environment resulted in the Company no longer purchasing investments with maturities in excess of 90 days. This change significantly reduced cash proceeds from short-term investments in 2005 and 2004.
During 2005, theThe Company sold ten B727, five B737 and seven B767 aircraft and rejected or returned to the lessorfinanciers 30 B737 aircraft, ten B767 aircraft and one B747 aircraft under Section 1110 of the Bankruptcy Code.Code in 2005. The Company then reacquired eight of the previously-returned B767 aircraft, of which four were purchased by the Company from the Public Debt Group and subsequently sold to a third-party and simultaneously leased back, and of which four aircraft were acquired directly by a third-party from the Public Debt Group and subsequently leased to the Company. In addition, the Company, as part of its agreement with the Public Debt Group, purchased six additional B767 aircraft from the Public Debt Group, which were subsequently sold to and leased back from third parties.
Additionally, duringDuring 2004, wethe Company received $218 million from the sales of ourits investments in Orbitz and Air Canada.Canada, and used $198 million to provide increased cash deposits classified as restricted, and $267 million for the acquisition of property and equipment.
Cash Flows from Financing Activities.
2006 Compared to 2005
Cash generated through financing activities was $782 million in 2006 compared to cash used of $110 million in 2005. In 2003, we received $1502006, the Company made principal payments under long-term debt and capital lease obligations totaling $2.1 billion, which included $1.2 billion for the repayment of the DIP Financing.
In 2006, the Company obtained access to up to $3.0 billion in secured exit financing which consisted of a $2.45 billion term loan, a $350 million relateddelayed draw term loan and a $200 million revolving credit line. On the Effective Date, $2.45 billion of the $2.8 billion term loan and the entire revolving credit line was drawn and used to repay the DIP Financing and to make other payments required upon exit from bankruptcy, as well as to provide ongoing liquidity to conduct post-reorganization operations. Subsequently, the Company repaid borrowings under the revolving credit line and accessed the remaining $350 million on the delayed draw term loan. For further details on the Credit Facility, see Note 11, “Debt Obligations,” in the Notes to Consolidated Financial Statements. At December 31, 2006, the Company had a total of $2.8 billion of debt and $63 million in letters of credit outstanding under the Credit Facility.
During 2006, the Company secured control of 14 aircraft that were included in the 1997-1 EETC transaction by remitting $281 million to the sale1997-1 EETC trustee on behalf of our investmentsthe holders of the Tranche A certificates. The Company subsequently refinanced the 14 aircraft on March 28, 2006 with the $350 million delayed draw term loan provided under the Credit Facility. The 14 aircraft are comprised of four B737 aircraft, two B747 aircraft, four B777 aircraft and four A320 aircraft.
Significant 2006 non-cash financing and investment activities included the conversion of six B757 aircraft and one B747 aircraft from leased to owned status resulting in Hotwire, Orbitzadditional aircraft assets and Cendant.debt obligations of $242 million. The Company completed definitive documentation for this transaction in July 2006, as discussed in Note 1—“Voluntary Reorganization Under Chapter 11—Bankruptcy Considerations,” in the Notes to Consolidated Financial Statements. In addition, in the first quarter of 2006 the Successor Company completed a transaction that converted certain mortgaged aircraft to capital leases for $137 million. See Note 17, “Statement of Consolidated Cash Flows—Supplemental Disclosures,” in the Notes to Consolidated Financial Statements.
Financing Activities.2005 Compared to 2004
Cash used in financing activities was $110 million in 2005 compared to $72 million in 2004 and $404 million in 2003.2004. During 2005, wethe Company made principal payments under long-term debt, DIP Financing, and capital lease obligations of $285 million, $16 million, and $94 million, respectively. The total cash used for these payments was $395 million in 2005, as compared to total cash used of $737 million for principal payments under debt and capital lease obligations in 2004. In 2005 as compared to 2004, a decrease of $203 million in proceeds from the DIP financing offset the significant decrease in principal payments.
During 2005, wethe Company made $16 million in principal payments on the DIP Financing. In addition, wethe Company renegotiated and expanded ourits DIP Financing facility, allowing usit to borrow an additional $310 million during 2005. The amended DIP Financing facility also permitted usthe Company to make capital expenditures not exceeding $750 million towards aircraft acquisitions, with cash expenditures for such acquisitions not to exceed $300 million. This capital expenditures basket was created primarily to allow the Company to purchase certain aircraft that were controlled by the Public Debt Group, all of which were already in ourits fleet or had been in ourits fleet in the recent past. The Company raised $253 million in connection with the subsequent long-termfinancinglong-term financing of ten of the B767 aircraft acquired from the Public Debt Group.
During 2004, we made $313 million in principal payments on the DIP Financing. In addition, we renegotiated and expanded our DIP Financing availability, allowing us to borrow an additional $513 million.
During 2003, the sale of two B747 aircraft and certain equity investments enabled us to pay down a portion of the DIP Financing, allowing for additional amounts to be drawn during the year. This activity resulted in a net reduction to our obligations under the DIP Financing of $37 million.
At December 31, 2005, we had a total of $1.2 billion in debt outstanding under the DIP Financing and $39 million in letters of credit. The DIP Financing was repaid on the Effective Date with the proceeds from the Credit Facility. For further details, see Note 1, "Voluntary Reorganization Under Chapter 11 - DIP Financing" in the Notes to Consolidated Financial Statements.
The Company secured access to up to $3.0 billion in exit financing which consists of a $2.8 billion term loan and a $200 million revolving credit line. On the Effective Date, $2.45 billion of the $2.8 billion term loan and the entire revolving credit line was drawn and used to repay the DIP Financing as noted above and to make other payments required upon exit from bankruptcy, as well as to provide ongoing liquidity to conduct post-reorganization operations. Subsequently, the Company repaid $161 million on the revolving credit line and accessed the remaining $350 million on the term loan. For further details on the Credit Facility, see Note 9, "Long-term Debt" in the Notes to Consolidated Financial Statements.
Capital Commitments and Off-Balance Sheet Arrangements.OurUAL’s business is very capital intensive, requiring significant amounts of capital to fund the acquisition of assets, particularly aircraft. In the past, we have
the Company has funded the acquisition of aircraft through outright purchase, by issuing debt, by entering into capital or operating leases, or through vendor financings. WeThe Company also often enterenters into long-term lease commitments with airports to ensure access to terminal, cargo, maintenance and other required facilities. As can be seen in the table below, these operating lease commitments (which are sometimes referred to as "off-balance sheet arrangements") are significant.
Following is a summary of ourthe Company’s material contractual obligations as of December 31, 2005: 2006:(In billions) Long-term debt, including current portion Long-term debt included in liabilities subject to compromise Capital lease obligations Operating lease obligations Postretirement obligations Capital spending commitments Total
| One year |
| Years |
| Years |
| After |
|
|
| ||||||||||
(In millions) |
|
|
| or less |
| 2 and 3 |
| 4 and 5 |
| 5 years |
| Total |
| |||||||
Long-term debt, including current portion(a) |
|
| $ | 715 |
|
| $ | 1,443 |
| $ | 1,777 |
| $ | 5,452 |
| $ | 9,387 |
| ||
Interest payments(b) |
|
| 669 |
|
| 1,190 |
| 968 |
| 1,324 |
| 4,151 |
| |||||||
Capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Mainline(c) |
|
| 240 |
|
| 470 |
| 586 |
| 679 |
| 1,975 |
| |||||||
United Express(c) |
|
| 15 |
|
| 29 |
| 25 |
| 19 |
| 88 |
| |||||||
Aircraft operating lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Mainline |
|
| 358 |
|
| 668 |
| 610 |
| 1,239 |
| 2,875 |
| |||||||
United Express(d) |
|
| 413 |
|
| 818 |
| 738 |
| 1,117 |
| 3,086 |
| |||||||
Other operating lease obligations |
|
| 507 |
|
| 951 |
| 859 |
| 3,464 |
| 5,781 |
| |||||||
Postretirement obligations(e) |
|
| 161 |
|
| 321 |
| 312 |
| 709 |
| 1,503 |
| |||||||
Capital spending commitments(f) |
|
| 128 |
|
| 76 |
| 691 |
| 1,577 |
| 2,472 |
| |||||||
Total |
|
| $ | 3,206 |
|
| $ | 5,966 |
| $ | 6,566 |
| $ | 15,580 |
| $ | 31,318 |
| ||
(a)Amounts represent contractual amounts due (the one year or less column does not reflect the $972 million prepayment of the Credit Facility in February 2007, as this was not a contractual obligation at December 31, 2006).
Although we were not generally permitted to make any(b)Future interest payments on pre-petitionvariable rate debt asare estimated using estimated future variable rates based on a resultyield curve, and have not been adjusted for the February 2007 $972 million prepayment of the bankruptcy filing, we reachedCredit Facility.
(c)Includes non-aircraft capital lease payments of $4 million in each of the years 2007 through 2011. United Express payments are all for aircraft.
(d)Amounts represent lease payments that are made by United under capacity agreements with certainthe regional carriers who operate these aircraft financiers under Section 1110on United’s behalf.
(e)Amounts represent postretirement benefit payments, net of the Bankruptcy Code and received approval from the Bankruptcy Court to continue to make suchsubsidy receipts, through 2016. Benefit payments on certain aircraft debt and lease obligations. The amountsapproximate plan contributions as plans are substantially unfunded. Not included in the table above table represent only those obligationsare contributions related to the Company’s foreign pension plans. The Company does not have any significant contributions required by government regulations. The Company’s expected pension plan contributions for which we have finalized an agreement.2007 are $14 million.
At December 31, 2005, our future cash postretirement benefit payments approximated $1.6 billion(f)Amounts are principally for the period of 2006 through 2015. Due to uncertainties regarding significant assumptions involved in estimating future benefit payments under our postretirement obligations (such as health care cost trend ratesaircraft and discount rates), we are not able to reasonably estimate our future required cash flows beyond 2015.
At December 31, 2005, future commitments for the purchase of property and equipment, principally aircraft, approximated $1.8 billion, after deductingexclude advance payments. Our currentThe Company has the right to cancel its commitments are primarily for the purchase of A319 and A320 aircraft. In January 2006, we reached an agreement withaircraft; however, such action could cause the airframe manufacturer to delay, with the right to cancel these future orders. We also reached an agreement with the engine manufacturer eliminating all provisions pertaining to firm commitments and support for future Airbus aircraft. While this permits future negotiations on engine pricing with any engine manufacturer, restructured aircraft manufacturer commitments have assumed that aircraft will be delivered with installed engines at list price. As a result of these subsequent changes, estimated future commitments have increased to $2.5 billion in early 2006, after deducting advanced payments. An estimated $0.1 billion will be spent in 2006, $0.1 billion for years 2007 and 2008, $0.1 billion for years 2009 and 2010 and $2.2 billion thereafter. The dispositionforfeiture of $91 million of advance payments made bypayments.
In February 2007, the Company is subject to United taking future deliveryprepaid $972 million on the Credit Facility and amended certain of these aircraft.its terms. This prepayment increases (decreases) the Company’s expected debt payments in the table above by $972 million in 2007, $(10) million in each of the years 2008 through 2011 and $(932) million thereafter. The prepayment and amendment of interest rate terms increases (decreases) the Company’s total expected interest payments, as reported in the table above, by $(82) million in one year or less, $(252) million in combined years two and three, $(243) million in combined years four and five and $703 million after five years. Interest payments in the after five years period are higher because the Amended Credit Facility matures in 2014 while the Credit Facility would have matured in 2012 based on its original terms.
49
See Note 9, "Long-Term Debt,"2(i), “Summary of Significant Accounting Policies—United Express,” Note 10, "Lease Obligations," Note 15, "Retirement8, “Retirement and Postretirement Plans"Plans,” Note 11, “Debt Obligations,” and Note 16, "Commitments, Contingent Liabilities and Uncertainties"“Lease Obligations,” in the Notes to Consolidated Financial Statements for additional discussion of these items.
Off-Balance Sheet ArrangementsArrangements. - - An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company. UAL hasThe Company’s off-balance sheet arrangements related to (1)include operating leases, which are summarized in the contractual obligations table, above, and (4) above,certain municipal bond obligations as noteddiscussed below.
Certain municipalities issued municipal bonds on behalf of United to finance the construction of improvements at airport-related facilities. The Company also leases facilities at airports where municipal bonds funded at least some of the construction of airport-related projects. However, as a result of our bankruptcy filing, we were not permitted to make payments on unsecured pre-petition debt. We have been advised that our municipal bonds may be unsecured (or in certain instances, partially secured) pre-petition debt. The Company determined that these bonds were pre-petition obligations and accordingly reclassified certain accrued and unpaid rent pertaining to these off-balance sheet arrangements to liabilities subject to compromise. At December 31, 2005, $5102006, the Company guaranteed interest and principal payments on $261 million in principal of such bonds wasthat were issued in 1992 and are due in 2032 unless the Company elects not to extend its lease in which case the bonds are due in 2023. The outstanding butbonds and related guarantee are not recorded in the Company’s Statements of Consolidated Financial Position in accordance with GAAP. UAL guaranteed $60 millionThe related lease agreement is accounted for as an operating lease, and United guaranteed $510 millionthe related rent expense is recorded on a straight-line basis. The annual lease payments through 2023 and the final payment for the principal amount of suchthe bonds including accrued interest.are included in the operating lease payments in the contractual obligations table above. For further details, see Note 1 "Voluntary“Voluntary Reorganization Under Chapter 11 - 11—Bankruptcy Considerations"Considerations” and Note 16, "Commitments,15, “Commitments, Contingent Liabilities and Uncertainties - FinancingsUncertainties—Guarantees and Guarantees"Off-Balance Sheet Financing,” in the Notes to Consolidated Financial Statements.
We have various financing arrangements for aircraftFuel Consortia.The Company participates in whichnumerous fuel consortia with other carriers at major airports to reduce the lessors are trusts established specifically to purchase, financecosts of fuel distribution and lease aircraft to us. These leasing entities meetstorage. Interline agreements govern the criteria for variable interest entities; however, we are not considered the primary beneficiaryrights and responsibilities of the leasing entities sinceconsortia members and provide for the lease terms are consistent with market terms at the inceptionallocation of the overall costs to operate the consortia based on usage. The consortia (and in limited cases, the participating carriers) have entered into long-term agreements to lease certain airport fuel storage and do not include a residual value guarantee, fixed-price purchase optiondistribution facilities that are typically financed through tax-exempt bonds (either special facilities lease revenue bonds or similar feature that obligates usgeneral airport revenue bonds), issued by various local municipalities. In general, each consortium lease agreement requires the consortium to absorb decreases in value or entitles us to participate in increases in the value of the aircraft. These financing arrangements include 76 aircraft operating leases that contain a fair market value purchase option. These leases became effective upon the confirmation of the Plan of Reorganization.
The Company has 97 additionaloperating leases, for which all but 26 have a fixed price or fair market value purchase option. United does not guarantee the residual value of these aircraft.
In addition, the Company has operating leases for aircraft and facilities (including the aircraft noted above) with total future minimummake lease payments of $12.1 billion asin amounts sufficient to pay the maturing principal and interest payments on the bonds. As of December 31, 2005. For detailed information, see Note 10, "Lease Obligations"2006, approximately $484 million principal amount of such bonds were secured by fuel facility leases at major hubs in the Noteswhich United participates, as to Consolidated Financial Statements.
Capital Resources. J.P. Morgan Chase Bank, Citicorp USA, Inc., The CIT Group/Business Credit, Inc.which United and General Electric Capital Corporation provided our DIP Financing, a $1.7 billion financing facility (subject to a $100 million reserve for collateral maintenance and liquidation expenses) which was available to the Company while it was in bankruptcy. The DIP Financing consisted of a revolving credit and letter of credit facility of $200 million and a term loan of $1.5 billion, which was scheduled to mature on March 31, 2006. At December 31, 2005, we had outstanding borrowings of $1.2 billion and issued letters of credit totaling $39 million.
On the Effective Date, the Company secured access to the Credit Facility for an amount up to $3.0 billion which consists of a $2.8 billion term loan and a $200 million revolving credit line. The Credit Facility matures on February 1, 2012. On the Effective Date, $2.45 billioneach of the $2.8 billion term loan andsignatory airlines has provided indirect guarantees of the entire revolving credit linedebt. United’s exposure is approximately $171 million principal amount of such bonds based on its recent consortia participation. The Company’s exposure could increase if the participation of other carriers decreases. The guarantees will expire when the tax-exempt bonds are paid in full, which ranges from 2010 to 2028. The Company did not record a liability at the time these indirect guarantees were made.
Debt Covenants.The Company was drawn and used to repay the DIP Financing and to make other payments required upon exit from bankruptcy, as well as to provide ongoing liquidity to conduct post-reorganization operations. Subsequently, the Company repaid $161 million on the revolving credit line and accessed the remaining $350 million on the term loan. We expect to be in compliance with the Credit Facility covenants but there are no assurances weas of December 31, 2006. As part of the amendment to the Credit Facility completed in February 2007, several covenants were amended to provide the Company more flexibility. The Amended Credit Facility contains covenants that will be ablelimit the ability of United and the Guarantors to, do so.among other things, incur or guarantee additional indebtedness, create liens, pay dividends on or repurchase stock, make certain types of investments, pay dividends or other payments from United’s direct or indirect subsidiaries, enter into transactions with affiliates, sell assets or merge with other companies, modify corporate documents or change lines of business. The Amended Credit Facility also requires compliance with certain financial covenants. Failure to comply with the covenants could result in a default under the Amended Credit
Facility unless wethe Company were to obtain a waiver of, or otherwise mitigate theor cure, any such default. Additionally, the Amended Credit Facility contains a cross-default provision with respect to defaults on our other credit arrangements that exceed $40$50 million. A payment default could result in a termination of the Amended Credit Facility and a requirement to accelerate repayment of all outstanding facility borrowings. We believeThe Company believes that the combination of its existing cash and cash flows generated by operations as well as the net cash proceeds provided by the Credit Facility will be adequate to satisfy ourits projected liquidity needs over the next twelve months. For further details about ourthe Amended Credit Facility and the associated covenants, see Note 9, "Long-Term Debt"11, “Debt Obligations,” in the Notes to Consolidated Financial Statements.
Future FinancingFinancing.. Substantially all of ourthe Company’s unencumbered assets arewere pledged to the Credit Facility. SubjectFacility as of December 31, 2006. The Amended Credit Facility allowed the Company to release certain assets with an estimated market value of approximately $2.5 billion from the Credit Facility collateral pool, which are now unencumbered. The Amended Credit Facility does not place any specific restrictions on the Company’s ability to issue debt secured by these newly unencumbered assets. In addition, subject to the restrictions of ourits Amended Credit Facility, the Company could raise additional capital by issuing unsecured debt, equity or equity-like securities, monetizing or borrowing against certain assets or refinancing existing obligations to generate net cash proceeds. However, the availability and capacity of these funding sources cannot be assured or predicted.
Credit Ratings.As part of its exit from bankruptcy, United and UAL received a corporate credit rating of B (outlook stable) from Standard & Poor'sPoor’s and a corporate family rating of B2 (outlook stable) from Moody'sMoody’s Investors Services. These credit ratings are below investment grade levels. Downgrades from these rating levels could restrict the availability and/or increase the cost of future financing for the Company.
Price Competition. The airline industry is highly competitive, characterized by intense price competition. In early 2005, United's domestic competitors initiated fundamental changes to their fare structures to compete with the industry-wide expansion of LCC's. Fare discounting by our competitors has historically had a negative effect on our financial results because we are generally required to match competitors' fares to maintain passenger traffic. We are unable to accurately predict the potential financial impact of existing and future competitive fare adjustments on our financial results.
Foreign Operations. We generate revenues and incur expenses in numerous foreign currencies. Such expenses include fuel, aircraft leases, commissions, catering, personnel expense, advertising and distribution costs, customer service expenses and aircraft maintenance. Changes in foreign currency exchange rates impact our resultsThe Company’s Statements of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses.
Despite the adverse effects a strengthening foreign currency may have on demand for U.S. originating traffic, a strengthening of foreign currencies tends to increase reported revenue and operating income because our foreign currency-denominated operating revenue generally exceeds our foreign currency-denominated operating expense for each currency. Likewise, despite the favorable effects a weakening foreign currency may have on demand for U.S. originating traffic, a weakening of foreign currencies tends to decrease reported revenue and operating income.
Our biggest net foreign currency exposures are typically for the Chinese renminbi, Canadian dollar, Australian dollar, British pound, Korean won, Hong Kong dollar, European euro and Japanese yen. The table below sets forth our net exposure to various currencies for 2005: [Pending update] Currency (in millions) Chinese renminbi Canadian dollar Australian dollar British pound Korean won Hong Kong dollar European euro Japanese yen
Our foreign operations involve insignificantConsolidated Financial Position reflect material amounts of dedicated physical assets; however, we do have sizable intangible assets related to our previous acquisitions of Atlanticthe Company’s Pacific and Latin American route authorities.authorities, and its hub at London’s Heathrow Airport. See Note 2(k), "Summary“Summary of Significant Accounting Policies - Intangibles"Policies—Intangibles,” in the Notes to Consolidated Financial Statements for further information. Because operating authorities in international markets are governed by bilateral aviation agreements between the U.S. and foreign countries, changes in U.S. or foreign government aviation policies can lead to the alteration or termination of existing air service agreements that could adversely impact, and significantly impair, the value of our international route authorities. Significant changes in such policies could also have a material impact on ourthe Company’s operating revenues and expenses and results of operations. See Item 1. Business - "IndustryBusiness—International Regulation - International Regulation" for further information.
information and EnvironmentalItem 7A. Quantitative and Legal ContingenciesQualitative Disclosures above Market Risk. United has been named as a Potentially Responsible Party at certain Environmental Protection Agency or State Environmental Protection Agency ("EPA" or "State EPA") cleanup sites that have been designated as Superfund Sites. Our alleged proportionate contributions at for further information on the sites are minimal; however, at sites where the EPA or State EPA has commenced litigation or administrative proceedings, potential liability is joint and several. Additionally, we have participated in, and are participating in, remediation actions at certain other sites, primarily airports. We accrue the estimated cost of these remediation actions when we have determined that it is probable that we are liable. Environmental regulations and remediation processes are subject to future change, and determining the actual cost of remediation often requires further investigation and additional progress of the remediation. Therefore, the ultimate disposition cannot be exactly predicted. However, while such ultimate cost may vary from our current estimate, we believe the difference between the accrued reserve and the ultimate liability will not be material.
UAL has certain other contingencies resulting from the above environmental actions and other litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including, but not limited to, the views of legal counsel and the nature of such contingencies and prior experience, that the ultimate disposition of these contingencies is not likely to materially affect the Company's financial condition, operating results or liquidity.
The Company anticipates that if ultimately found liable,Company’s foreign currency risks associated with its damages from claims arising from the events of September 11, 2001 could be significant; however, we believe that, under the Air Transportation Safety and System Stabilization Act of 2001, our liability will be limited to our insurance coverage. We have not incurred any material environmental obligations relating to the events of September 11, 2001.foreign operations.
Critical Accounting Policies.Policies
Critical accounting policies are defined as those that are affected by significant judgments and uncertainties which potentially could result in materially different accounting under different assumptions and conditions. We haveThe Company has prepared the accompanying financial statements in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. We haveThe Company has identified the following critical accounting policies that impact the preparation of these financial statements.
Passenger Revenue Recognition.Recognition. As discussed in Note 2(c) "Summary of Significant Accounting Policies - Airline Revenues" in the Notes to Consolidated Financial Statements, passenger ticket sales are recorded as operating revenues when the transportation is provided. The value of unused passenger tickets and miscellaneous charge orders (“MCO’s”) is included in current liabilities as advance ticket sales. Additionally, we have interline agreementsUnited records passenger ticket sales as operating revenues when the transportation is provided or when the ticket expires. Non-refundable
tickets generally expire on the date of the intended flight, unless the date is extended by notification from the customer on or before the intended flight date. Fees charged in association with numerous other airlines whereby the other airline sellschanges or extensions to non-refundable tickets for future use on United and vice versa. Estimated settlement values in accordance with the interline agreements reached with other airlines are recorded as operating revenuespassenger revenue at the time the ticketfee is used on United. Adjustments between the estimated and actual values for interlineincurred. Change fees related to non-refundable tickets are recorded inconsidered a separate transaction from the air transportation because they represent a charge for the Company’s additional service to modify a previous reservation. Therefore, the pricing of the change fee and the initial customer reservation are separately determined and represent distinct earnings processes. Refundable tickets expire after one year. MCO’s are stored value documents that are either exchanged for a passenger ticket or refunded after issuance. United records an estimate of MCO’s that will not be exchanged or refunded as revenue ratably over the validity period based on historical results. Due to complex industry pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized as revenue using estimates both as to the timing of recognition and the amount of revenue to be recognized. These estimates are based on the evaluation of actual settlement occurs.historical results.
Accounting for Long-Lived Assets. We have approximately $13.2The Company has $11.5 billion in net book value of operating property and equipment at December 31, 2005.2006. In addition to the original cost of these assets, as adjusted by fresh-start reporting at February 1, 2006, their recorded value is impacted by a number of accounting policy elections, including the estimation of useful lives and residual values and, when necessary, the recognition of asset impairment charges.
WeExcept for the adoption of fresh-start reporting at February 1, 2006, whereby the Company remeasured long-lived assets at fair value, it is the Company’s policy to record assets acquired, including aircraft, at acquisition cost. Depreciable life is determined through economic analysis, such as reviewing existing fleet plans, obtaining appraisals and comparing estimated lives to other airlines that operate similar fleets. Older generation aircraft are assigned lives that are generally consistent with the experience of United and the practice of other airlines. As aircraft technology has improved, useful life has increased and we havethe Company has generally estimated the lives of those aircraft to be 30 years. Residual values are estimated based on historical experience with regards to the sale of both aircraft and spare parts, and are established in conjunction with the estimated useful lives of the related fleets. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are revised periodically to recognize changes in ourthe Company’s fleet plan and other relevant information. A one year increase in the average depreciable life of our aircraft would reduce annual depreciation expense by approximately $14$19 million.
OurIn accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company evaluates the carrying value of long-lived assets whenever events or changes in circumstances indicate that an impairment may exist.The Company’s policy is to recognize an impairment charge when an asset'sasset’s carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset'sasset’s book value and fair market value (sometimes estimated using appraisals). More often, we estimatethe Company estimates the undiscounted future cash flows for ourits various aircraft with financial models used by the Company to make fleet and scheduling decisions. These models utilize projections on passenger yield, fuel costs, labor costs and other relevant factors.factors, many of which require the exercise of significant judgment on the part of management. Changes in ourthese projections may expose the Company to future impairment charges by raising the threshold which future cash flows need to meet.
In 2005 and 2003, this process resulted in the recognition ofThe Company recognized impairment charges on assets held-for-sale of $5 million in 2006 and $18 million and $26 million, respectively, for the early retirement of certain aircraft.aircraft in 2005. See Note 3, "Special Items"2(l), “Summary of Significant Accounting Policies—Measurement of Impairments” and Note 19, “Special Items,” in the Notes to Consolidated Financial Statements.
See Note 2(f), "Summary“Summary of Significant Accounting Policies - Policies—Operating Property and Equipment"Equipment,” in the Notes to Consolidated Financial Statements for additional information regarding United'sUnited’s policies on accounting for long-lived assets.
Fresh-Start Reporting. In connection with its emergence from Chapter 11 protection as of February 1, 2006, the Company adopted fresh-start reporting in accordance with SOP 90-7. Accordingly, UAL’s assets, liabilities and equity were valued at their respective fair values as of the Effective Date. The excess reorganization value over the fair value of net tangible and identifiable intangible assets and liabilities has been reflected as goodwill in the accompanying Statements of Consolidated Financial Position.
Fair values of assets and liabilities represent the Company’s best estimates based on independent appraisals and valuations and, where the foregoing are not available, industry data and trends and by reference to relevant market rates and transactions. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the asset and liability valuations will be realized, and actual results could vary materially from those estimates. In accordance with SFAS 141, the preliminary measurement and allocation of fair value to assets and liabilities was subject to additional adjustment within one year after emergence from bankruptcy to provide the Company time to complete its valuation of its assets and liabilities. See Note 1, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,” and Note 2(k), “Summary of Significant Accounting Policies—Intangibles” in the Notes to Consolidated Financial Statements for further details related to the fresh-start fair value adjustments.
To facilitate the calculation of the enterprise value of the Successor Company, a set of financial projections were developed. Based on these financial projections, the equity value was estimated by the Company using various valuation methods, including (i) a comparison of the Company and its projected performance to the market values of comparable companies, (ii) a review and analysis of several recent transactions of companies in similar industries to the Company, and (iii) a calculation of the present value of projected future cash flows using the Company’s financial projections.
The estimated enterprise value and corresponding equity value are highly dependent upon achieving the future financial results set forth in the projections as well as the realization of certain other assumptions that cannot be guaranteed. The estimated equity value of the Company was calculated to be approximately $1.9 billion. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the reasonable control of the Company. Moreover, the market value of the Company’s common stock may differ materially from the fresh-start equity valuation.
Frequent Flyer Accounting. United's In accordance with fresh-start reporting, the Company revalued its frequent flyer obligation to estimated fair value at the Effective Date, which resulted in a $2.4 billion increase to the frequent flyer obligation. The Successor Company also has elected to change its accounting policy for its Mileage Plus frequent flyer program awards mileage credits to passengers who flya deferred revenue model. The Company believes that accounting for frequent flyer miles using a deferred revenue model is preferable, as it establishes a consistent valuation methodology for both miles earned by frequent flyers and miles sold to non-airline business partners.
Before the Effective Date, the Predecessor Company had used the historical industry practice of accounting for frequent flyer miles earned on United Ted,flights on an incremental cost basis as an accrued liability and as advertising expense, while miles sold to non-airline business partners were accounted for on a deferred revenue basis. As of the Effective Date, the deferred revenue value of all frequent flyer miles are measured using equivalent ticket value as described below, and all associated adjustments are made to passenger revenues.
The deferred revenue measurement method used to record fair value of the frequent flyer obligation on and after the Effective Date was to allocate an equivalent weighted-average ticket value to each outstanding mile, based upon projected redemption patterns for available award choices when such miles are consumed. Such value was estimated assuming redemptions on both United Express, the Star Allianceand other participating carriers and certain other airlines that participate in the program. Additionally, United sells mileage credits to participating airline partners in the Mileage Plus program, and ULS sells mileage credits to non-airline business partners. In any case,by estimating the outstanding miles may be redeemed for travel on United, or any airline that participates in the program (in which case, United pays a designated amount to reimburse the transporting carrier). The Company has an obligation to provide this future travel; therefore, we recognize a liability and corresponding expense for mileage earned by passengers who flew on United, Ted, United Express, Star Alliance partners, or one of the Mileage Plus airline partners. For miles earned by members through non-airline business partners, a portion of revenue from the sale of mileage is deferred and recognized when the transportation is provided.
At December 31, 2005, our estimated outstanding numberrelative proportions of awards to be issued against earnedredeemed by class of service within broad geographic regions of the Company’s operations, including North America, Atlantic, Pacific and outstanding mileage credits wasLatin America.
53
Under the new method of accounting adopted for this program at the Effective Date, the Company reduced operating revenue by approximately 10.1$158 million more in the eleven months ended December 31, 2006 to account for the effects of the program as compared to 10.2 millionthe reduction in revenues that would have been recognized using the Predecessor Company’s accounting method. The Company’s new accounting policy does not continue the use of the former incremental cost method, which impacted revenues and advertising expense under that prior policy. Assuming the use of the Predecessor Company’s accounting for this program, for the eleven months ended December 31, 2004. We currently estimate2006, the Company estimates that it would have recorded approximately 8.3$27 million of these awards will ultimately be redeemed and, accordingly, have recorded a liabilityadditional advertising expense.
The estimation of $923 million,the fair value of each award mile requires the use of several significant assumptions, for which includes the deferred revenue from the sale of miles to non-airline business partners. We utilize a number of estimates in accounting for the Mileage Plus program that requiresignificant management judgment as discussed below.
Members may not reach the threshold necessary for a free ticket award and outstanding miles may not always be redeemed for free travel. Therefore, based on historical data and other information, weis required. For example, management must estimate how many miles will neverare projected to be used for anredeemed on United, versus on other airline partners. Since the equivalent ticket value of miles redeemed on United and on other carriers can vary greatly, this assumption can materially affect the calculation of the weighted-average ticket value from period to period.
Management must also estimate the expected redemption patterns of Mileage Plus customers, who have a number of different award choices when redeeming their miles, each of which can have materially different estimated fair values. Such choices include different classes of service (first, business and exclude those milesseveral coach award levels), as well as different flight itineraries, such as domestic and international routings, and different itineraries within domestic and international regions of United’s and other participating carriers’ flight networks. Customer redemption patterns may also be influenced by program changes, which occur from ourtime to time and introduce new award choices, or make material changes to the terms of existing award choices. Management must often estimate the probable impact of such program changes on future customer behavior using limited data, which requires the use of significant judgment. Management uses historical customer redemption patterns as the best single indicator of future redemption behavior in making its estimates, but changes in customer mileage redemption behavior to patterns which are not consistent with historical behavior can result in material changes to deferred revenue balances, and to recognized revenue.
Management’s estimate of the Company's liability. We also estimate the average numberexpected breakage of miles as of the fresh-start date, and for recognition of breakage post-emergence, also requires significant management judgment. For customer accounts which are inactive for a period of 36 consecutive months, it has been United’s policy to cancel all miles contained in those accounts at the end of the 36 month period of inactivity. In early 2007, the Company announced that will be usedit is reducing the expiration period from 36 months to redeem an award, which can vary depending upon member choices18 months effective December 31, 2007. Under its deferred revenue accounting policy effective in 2006, the Company recognized revenue from alternative award categories. If average actualbreakage of miles used per award redeemed are more or less than previouslyby amortizing such estimated we must subsequently adjustbreakage over the liability36 month expiration period. However, current and corresponding expense. A hypothetical 1%future changes to program rules, such as the recent change in our estimate of breakage, currently estimated at 18%, has approximately a $3.5 million effect on the liability.
When a travel award level is attained by a Mileage Plus member, we record a liability forexpiration period, and program redemption opportunities can significantly alter customer behavior from historical patterns with respect to inactive accounts. Such changes may result in material changes to the estimated incremental cost to United of providing the related future travel, based on expected redemption. For award redemptions expected to occur on United, United's incremental costs are estimated to include variable items such as fuel, meals, insurance and ticketing costs, for what would otherwise be a vacant seat. The estimate of incremental costs does not include any indirect costs or contribution to overhead or profit. A change to these cost estimates, such as a significant change in jet fuel prices, could have a significant impact on our liability in the year of changedeferred revenue balance, as well as in future years, since underlying variable cost factors can differ significantlyrecognized revenues from period to period.the program. A hypothetical 1% change in the costCompany’s estimated breakage rate, estimated at 14% annually as of jet fuelDecember 31, 2006, has approximately a $783 thousandan $18 million effect on the liability.
In 2005, 1.9 million Mileage Plus travel awards were used on United, as compared to 1.7 million awards used in 2004, and 2.0 million in 2003. This number representsAt December 31, 2006, the Company’s outstanding number of awards for which travelmiles was actually providedapproximately 508.8 billion. The Company estimates that approximately 438.3 billion of these miles will ultimately be redeemed based on assumptions as of December 31, 2006 and, not the numberaccordingly, has recorded deferred revenue of available seats that were allocated to award travel. These awards represented 6.6% of United's total revenue passenger miles in 2005, 7.4% in 2004, and 9.0% in 2003. Passenger preference for Saver awards, which have stringent seat inventory level limitations but require the use of fewer miles to redeem the award, keeps the potential displacement of revenue passengers on United by award travel at a lower level than would be the case for less restrictive awards. Total miles redeemed for travel on United in 2005, including travel awards and class-of-service upgrades, represented 79% of the total miles redeemed, of which 70% were used for travel within the U.S. and Canada.
In addition to the awards issued for travel on United, approximately 21% of the total miles redeemed in 2005 were used for travel on partner airlines, such as Star Alliance members. In these cases, United estimates its liability based upon agreements with those partner airlines that specify reimbursement rates for those awards using a 12.5% historical redemption pattern of awards redeemed on partner airlines. Costs to United for awards issued on partner airlines are on average much higher than incremental costs of awards issued for travel on United. Therefore, a change in customer preference from redeeming awards on United to redeeming them on partner airlines can significantly increase the estimated cost of mileage credit obligations.$3.7 billion. A hypothetical 1% change in the redemptionCompany’s outstanding number of awards on partner airlinesmiles or the weighted-average ticket value has approximately an $8.3a $42 million effect on the liability. These assumptions do not include the impact of reducing the expiration period from 36 months to 18 months.
On March 7, 2006, United announcedGoodwill and Intangible Assets.In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company applies a fair value-based
impairment test to the book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that Mileage Plus elite members were eligible for merchandise rewards which offer a more diverse array of mileage-reward opportunities. This offer expands mileage awards beyond flights, hotel stays, dining certificates, car rentals and auction experiences, to include brand-name online merchandise. Thisan impairment loss may have been incurred, on an interim basis. An impairment charge could have a potential impactmaterial adverse effect on the Company's liability ifCompany’s financial position and results of operations in the averageperiod of recognition.
Upon the implementation of fresh-start reporting (see Note 1, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,” in the Notes to Consolidated Financial Statements) the Company’s assets, liabilities and equity were valued at their respective fair values. The excess of reorganization value over the fair value of net tangible and identifiable intangible assets and liabilities has been reflected as goodwill in the accompanying Statements of Consolidated Financial Position on the Effective Date. As discussed in Note 9, “Segment Information,” in the Notes to Consolidated Financial Statements, the entire goodwill amount of $2.7 billion at December 31, 2006 has been allocated to the mainline reportable segment. In addition, the adoption of fresh-start reporting resulted in the recognition of $2.2 billion of indefinite-lived intangible assets.
SFAS 142 requires that a two-step impairment test be performed on goodwill. In the first step, the Company compares the fair value of the reportable segment to its carrying value. If the fair value of the reportable segment exceeds the carrying value of the net assets of the reportable segment, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets of the reportable segment exceeds the fair value of the reportable segment, then the Company must perform the second step to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value, then the Company must record an impairment charge equal to such difference.
The Company assessed the fair value of its reportable segments considering both the market and income approaches. Under the market approach, the fair value of the reportable segment is based on quoted market prices and recent transaction values of peer companies. Under the income approach, the fair value of the reportable segment is based on the present value of estimated future cash flows. The income approach is dependent on a number of miles that will be used to redeem an award is reducedfactors including estimates of future capacity, passenger yield, traffic, operating costs, appropriate discount rates and other relevant factors.
The Company performed its annual impairment test for its goodwill and other indefinite-lived intangible assets as members elect to redeem miles for the merchandising options. Non-air redemptions have typically been immaterial in the past and we cannot accurately predict the redemption behavior and therefore are unable toof October 1, 2006. To estimate the impact on our future liability.fair value of indefinite-lived intangible assets the Company used the market and income approaches, discussed above, and the cost method, which uses the concept of replacement cost as an indicator of fair value. The Company did not identify any impairments in these assets.
PensionOther Postretirement Benefit Accounting.The Company accounts for pensionother postretirement benefits using Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” (“SFAS 106”) and Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, "Employers' Accounting for Pensions88, 106 and 132(R)” " ("(“SFAS No. 87"158”). For the year ended December 31, 2006, the Company adopted SFAS 158, which requires the Company to recognize the difference between plan assets and obligations, or the plan’s funded status, in its Statements of Consolidated Financial Position. Under SFAS No. 87, pensionthese accounting standards, other postretirement benefit expense is recognized on an accrual basis over employees'employees’ approximate service periods and is generally calculated independently of funding decisions or requirements. The Company has not been required to pre-fund its current and future plan obligations resulting in a significant net obligation, as discussed below.
The fair value of plan assets at December 31, 2006 was $54 million for the other postretirement benefit plans. The benefit obligation was $2.1 billion for the other postretirement benefit plans at December 31, 2006. The difference between the plan assets and obligations has been recorded in the Statements of Consolidated Financial Position at December 31, 2006. Detailed information regarding our pensionthe
Company’s other postretirement plans, including key assumptions, is included in Note 15, "Retirement8, “Retirement and Postretirement Plans"Plans,” in the Notes to Consolidated Financial Statements.
The following provides a summary of the methodology to determine the assumptions used in Note 8, “Retirement and Postretirement Plans,” in the Notes to Consolidated Financial Statements. The calculation of pensionother postretirement benefit expense and pension obligations requires the use of a number of assumptions, including the assumed discount rate for measuring future payment obligations and the expected return on plan assets. The fair value of plan assets decreased from $7.2 billion at December 31, 2004 to $132 million at December 31, 2005. The terminations of the domestic defined benefit pension plans reduced the difference between the plans' fair value and accumulated benefit obligations from $6.4 billion at December 31, 2004 to $109 million at December 31, 2005.
We utilized a weighted-average discount rate of 5.46% at December 31, 2005, compared to 5.84% at December 31, 2004 and 6.25% at December 31, 2003. The discount rates were based on the construction of theoretical bond portfolios, for 2005 and 2004, andMoody's Aa bond index yield model for 2003, adjusted according to the timing of expected cash flows for ourthe Company’s future pensionpostretirement obligations. Duration isA yield curve was developed based on a commonly used measuresubset of interest rate risk that either assumes that yield changes do not changethese bonds (those with yields between the expected40th and 90th percentiles). The projected cash flows ("modified duration") or assumes that expected cash flows may change given the fact that thewere matched to this yield changes ("effective duration"). Since United's pension obligations have generally not been satisfied incurve and a present value developed, which was then calibrated to develop a single lump sum distributions, management, with assistance from our actuary, used the modified duration methodology to determine an acceptableequivalent discount rate by matching the expected cash outflows of our pension obligations against available bonds with appropriate maturities.rate.
We assumed an expected rate of return on plan assets of 8.95%, 9.00% and 9.00%, respectively, at December 31, 2005, 2004 and 2003. The expected return on plan assets is based on an evaluation of the historical behavior of the broad financial markets and the Company'sCompany’s investment portfolio, taking into consideration input from the plans'plan’s investment consultant and actuary regarding expected long-term market conditions and investment management performance. We believeThe Company believes that the long-term asset allocation on average will approximate the targeted allocation and weit regularly reviewreviews the actual asset allocation to periodically rebalance the investments to the targeted allocation when appropriate. PensionOther postretirement expense is reduced by the expected return on plan assets, which is measured by assuming that the market-related value of plan assets increases at the expected rate of return. The market-related value is a calculated value that phases in differences between the expected rate of return and the actual return over a period of five years.
Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions. Under SFAS No. 87,the applicable accounting standards, those gains and losses are not required to be recognized currently as pensionother postretirement expense, but instead may be deferred. If the unrecognized net gain or loss exceeds 10%deferred as part of the greater of the projected benefit obligationsaccumulated other comprehensive income and the market-related value of plan assets, the amount outside the 10% corridor is subject to amortizationamortized into expense over the average remaining service life of the covered active employees. At December 31, 2005, we2006, the Company had unrecognized actuarial lossesgains of $38 million.$120 million for the other postretirement benefit plans recorded in Accumulated other comprehensive income.
Valuation Allowance for Deferred Tax Assets. WeThe Company initially recorded a tax valuation allowance against ourits deferred tax assets in the third quarter of 2002. In recording the valuation allowance, management considered whether it was more likely than not that some or all of the deferred tax assets would be realized. This analysis included consideration of scheduled reversals of deferred tax liabilities, projected future taxable income, carry back potential and tax planning strategies, in accordance with SFAS No. 109, "Accounting for Income Taxes."109. At December 31, 2005,2006, our valuation allowance totaled $10.6$2.2 billion. See also Note 6, "Income Taxes"“Income Taxes,” in the Notes to Consolidated Financial Statements for additional information.
Income Taxes. During the evaluation of our internal control over financial reporting as of December 31, 2006, the Company identified a deficiency in our internal control over financial reporting associated with tax accounting which constituted a material weakness. While the Company had appropriately designed control procedures, high staff turnover caused the Company to poorly execute those control procedures for evaluating and recording its current and deferred income tax provision and related deferred taxes balances. This control deficiency did not result in a material misstatement, but did result in adjustments to the deferred tax assets and liabilities, net operating losses, valuation allowance and footnote disclosures and could have resulted in a misstatement of current and deferred income taxes and related disclosures that would result in a material misstatement of annual or interim financial statements. We have and are continuing to take steps to remediate this material weakness, including the hiring of several tax professionals, as well as implementing a more rigorous review process of tax accounting and disclosure matters. Additional review, evaluation and oversight have been undertaken to ensure our
consolidated financial statements were prepared in accordance with generally accepted accounting principles and, as a result, we have concluded that the consolidated financial statements in this Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. See also Note 6, “Income Taxes,” in the Notes to Consolidated Financial Statements for additional information.
New Accounting Pronouncements.For detailed information, see Note 2(n)2(p), "Summary“Summary of Significant Accounting Policies - Policies—New Accounting Pronouncements"Pronouncements,” in the Notes to Consolidated Financial Statements.
OutlookForward-Looking Information
United expects system mainline capacity to be up approximately 1.0 percent year-over-year for the first quarter, and up approximately 2.5 to 3.0 percent for the full year 2006 over 2005, driven by improved aircraft utilization through the Company's resource optimization effort.
The Company expects mainline fuel price, including taxes and expected hedge impact, for the first quarter to average $1.95 per gallon, and for the full-year to average $1.94 per gallon. The Company has 32% of its expected mainline fuel consumption for the first quarter hedged at an average of $1.91 per gallon. Currently, the Company has no hedges in place beyond first quarter of 2006. The Company expects to be able to offset some, but not all, of increased fuel prices through higher revenues.
Forward-Looking Information
Certain statements throughout Management'sItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward-looking and thus reflect ourthe Company’s current expectations and beliefs with respect to certain current and future events and financial performance. Such forward-looking statements are and will be subject to many risks and uncertainties relating to ourUnited’s operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward-looking statements. Words such as "expects," "will," "plans," "anticipates," "indicates," "believes," "forecast," "guidance," "outlook"“expects,” “will,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook” and similar expressions are intended to identify forward-looking statements.
Additionally, forward-looking statements include statements which do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information available to usthe Company on the date of this report. We undertakeThe Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise.
OurThe Company’s actual results could differ materially from these forward-looking statements due to numerous factors including, without limitation, the following: ourits ability to comply with the terms of our senior secured revolving credit facility and term loan, as well as other financing arrangements; the costs and availability of financing; ourits ability to execute ourits business plan; ourits ability to realize benefits from its resource optimization efforts and cost reduction initiatives; its ability to utilize ourits net operating losses; ourits ability to attract, motivate and/or retain key employees; ourits ability to attract and retain customers; demand for transportation in the markets in which we operate;it operates; general economic conditions (including interest rates, foreign currency exchange rates, crude oil prices, costs of aviation fuel and refining capacity in relevant markets); ourits ability to cost-effectively hedge against increases in the price of aviation fuel; the effects of any hostilities, act of war or terrorist attack; the ability of other air carriers with whom we havethe Company has alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; the costs and availability of aircraft insurance; the costs associated with security measures and practices; labor costs; competitive pressures on pricing (particularly from lower-cost competitors) and on demand; capacity decisions of ourits competitors; U.S. or foreign governmental legislation, regulation and other actions; ourits ability to maintain satisfactory labor relations;any disruptions to operations due to any potential actions by ourits labor groups; weather conditions; and other risks and uncertainties set forth under the caption "Risk Factors" in Item 1A. Risk Factors of this Form 10-K, as well as other risks and uncertainties set forth from time to time in the reports we filethe Company files with United States Securities and Exchange Commission.the SEC. Consequently, the forward-looking statements should not be regarded as representations or warranties by the Company that such matters will be realized.
57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Foreign Currency Exchange Rate Risks - Risks—United'sUnited’s exposure to market risk associated with changes in interest rates relates primarily to its debt obligations and short-term investments. We doThe Company does not use derivative financial instruments in ourits investment portfolio. OurUnited’s policy is to manage interest rate risk through a combination of fixed and floating rate debt and by entering into swap agreements, depending upon market conditions. A portion of our borrowingsUnited’s capital lease obligations ($537 million in equivalent U.S. dollars at December 31, 2006) is denominated in foreign currencies that expose us to risks associated with changes in foreign exchange rates. To hedge against some of this risk, we haveUnited has placed foreign currency deposits (primarily for euros) to meet foreign currency lease obligations denominated in those respective currencies. Since unrealized mark-to-market gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency obligations, we reduce ourUnited reduces its overall exposure to foreign currency exchange rate volatility. The fair value of these deposits is determined based on the present value of future cash flows using an appropriate swap rate. The fair value of long-term debt is based on the quoted market prices for the same or similar issues or the present value of future cash flows using a U.S. Treasury rate that matches the remaining life of the instrument, adjusted by a credit spread.
| (In millions) | ||||||||||
| ASSETS | ||||||||||
| Cash equivalents | ||||||||||
| Fixed rate | $ 1,761 | $ - | $ - | $ - | $ - | $ - | $ 1,761 | $ 1,761 | $ 1,213 | $ 1,213 |
| Avg. interest rate | 4.26% | - | - | - | - | - | 4.26% | 2.16% | ||
| Variable rate | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ 10 | $ 10 |
| Avg. interest rate | - | - | - | - | - | - | - | - | 2.85% | |
| Short term investments | ||||||||||
| Fixed rate | $ 77 | $ - | $ - | $ - | $ - | $ - | $ 77 | $ 77 | $ 78 | $ 78 |
| Avg. interest rate | 4.20% | - | - | - | - | - | 4.20% | 2.01% | ||
| Lease deposits | ||||||||||
| Fixed rate - EUR deposits | $ 3 | $ 67 | $ 118 | $ 19 | $ 192 | $ 13 | $ 412 | $ 518 | $ 479 | $ 614 |
| Accrued interest | 2 | 10 | 20 | 4 | 13 | - | 49 | 46 | ||
| Avg. interest rate | 4.66% | 5.42% | 4.93% | 4.34% | 6.66% | 4.41% | 6.49% | 6.56% | ||
| Fixed rate- USD deposits | $ - | $ - | $ - | $ - | $ 11 | $ - | $ 11 | $ 19 | $ 11 | $ 18 |
| Accrued interest | - | - | - | - | 5 | - | 5 | 4 | ||
| Avg. interest rate | - | - | - | - | 6.49% | - | 6.49% | 6.49% | ||
| LONG-TERM DEBT | ||||||||||
| U. S. Dollar denominated | ||||||||||
| Variable rate debt | $ 1,157 | $ - | $ - | $ - | $ - | $ - | $ 1,157 | $ 1,157 | $ 863 | $ 863 |
| Avg. interest rate | 8.60% | - | - | - | - | - | 8.60% | 8.00% | ||
| Fixed rate debt | $ 13 | $ 14 | $ 15 | $ 4 | $ 8 | $ 100 | $ 154 | $ 149 | $ 166 | $ 166 |
| Avg. interest rate | 7.15% | 7.15% | 7.15% | 7.15% | 7.15% | 7.15% | 7.15% | 7.15% | ||
|
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|
| 2006 |
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| Expected Maturity Dates |
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| Fair |
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(Dollars in millions) |
|
|
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| Thereafter |
| Total |
| Value |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Fixed rate |
| $ | 3,832 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| $ | — |
|
| $ | 3,832 |
| $ | 3,832 |
| ||
Avg. interest rate |
| 5.32 | % | — |
| — |
| — |
| — |
|
| — |
|
| 5.32 | % |
|
| ||||||||||
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Fixed rate |
| $ | 312 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| $ | — |
|
| $ | 312 |
| $ | 312 |
| ||
Avg. interest rate |
| 5.32 | % | — |
| — |
| — |
| — |
|
| — |
|
| 5.32 | % |
|
| ||||||||||
Lease deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Fixed rate—EUR deposits |
| $ | 74 |
| $ | 132 |
| $ | 22 |
| $ | 215 |
| $ | 14 |
|
| $ | — |
|
| $ | 457 |
| $ | 454 |
| ||
Accrued interest |
| 13 |
| 22 |
| 2 |
| 23 |
| 4 |
|
| — |
|
| 64 |
|
|
| ||||||||||
Avg. interest rate |
| 5.42 | % | 4.93 | % | 4.34 | % | 6.66 | % | 4.41 | % |
| — |
|
| 6.56 | % |
|
| ||||||||||
Fixed rate—USD deposits |
| $ | — |
| $ | — |
| $ | — |
| $ | 11 |
| $ | — |
|
| $ | — |
|
| $ | 11 |
| $ | 19 |
| ||
Accrued interest |
| — |
| — |
| — |
| 7 |
| — |
|
| — |
|
| 7 |
|
|
| ||||||||||
Avg. interest rate |
| — |
| — |
| — |
| 6.49 | % | — |
|
| — |
|
| 6.49 | % |
|
| ||||||||||
LONG-TERM DEBT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
U. S. Dollar denominated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Variable rate debt |
| $ | 183 |
| $ | 238 |
| $ | 212 |
| $ | 281 |
| $ | 205 |
|
| $ | 3,610 |
|
| $ | 4,729 |
| $ | 4,695 |
| ||
Avg. interest rate |
| 6.69 | % | 6.19 | % | 6.61 | % | 6.05 | % | 6.74 | % |
| 8.45 | % |
| 7.97 | % |
|
| ||||||||||
Fixed rate debt |
| $ | 532 |
| $ | 446 |
| $ | 547 |
| $ | 660 |
| $ | 631 |
|
| $ | 1,842 |
|
| $ | 4,658 |
| 4,815 |
| |||
Avg. interest rate |
| 6.52 | % | 6.55 | % | 6.53 | % | 6.53 | % | 6.47 | % |
| 5.74 | % |
| 6.21 | % |
|
| ||||||||||
In addition to the cash equivalents and short-term investments included in the table above, the Company has $341 million of short-term restricted cash and $506 million of long-term restricted cash at December 31, 2006. As discussed in Note 2(d), “Summary of Significant Accounting Policies—Cash and Cash Equivalents, Short-Term Investments and Restricted Cash” in the Notes to Consolidated Financial Statements, this cash is being held in restricted accounts for workers’ compensation obligations, security deposits for airport leases and reserves with institutions that process United’s credit card ticket sales. Due to the short term nature of these cash balances, the carrying values approximate the fair values. The Company’s interest income is exposed to changes in interest rates on these cash balances.
In the first quarter of 2006, United entered into an interest rate swap whereby it fixed the rate of interest on $2.45 billion notional value of floating-rate debt at 5.14% plus a fixed credit margin. The swap will amortize accordinghad a fair value of negative $12 million at December 31, 2006. In January 2007, United terminated the swap. The termination value of the swap was negative $4 million due to an $8 million increase in fair value from December 31, 2006 to the termination date. See Note 14, “Financial Instruments and Risk Management—Interest Rate Swap,” in the Notes to Consolidated Financial Statements for additional information.
In February 2007, the Company completed a pre-established schedule startingprepayment of a portion of its Credit Facility debt. This prepayment reduces the Company’s variable rate debt maturities in November 2007 through its expected maturity datethe table above by $972 million ($10 million in each of February 2012.2008, 2009, 2010 and 2011 and $932 million thereafter). See Note 11, “Debt Obligations,” in the Notes to Consolidated Financial Statements for additional information.
�� Price Risk (Aircraft Fuel) - - —United enters into fuel option contracts and futures contracts to reduce its price risk exposure to jet fuel. The optionThese contracts are designed to provide protection against sharp increases in the price of aircraft fuel. AsThe Company may update its hedging strategy in response to changes in market conditions change, soconditions. The fair value of the Company’s fuel related derivatives was a negative $2 million at December 31, 2006. These instruments have a maturity of less than one year.
Foreign Currency—United generates revenues and incurs expenses in numerous foreign currencies. Such expenses include fuel, aircraft leases, commissions, catering, personnel expense, advertising and distribution costs, customer service expenses and aircraft maintenance. Changes in foreign currency exchange rates impact the Company’s results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses.
Despite the adverse effects a strengthening foreign currency may United's hedging program.have on demand for U.S.-originating traffic, a strengthening of foreign currencies tends to increase reported revenue and operating income because the Company’s foreign currency-denominated operating revenue generally exceeds its foreign currency-denominated operating expense for each currency. Likewise, despite the favorable effects a weakening foreign currency may have on demand for U.S.-originating traffic, a weakening of foreign currencies tends to decrease reported revenue and operating income.
The Company’s biggest net foreign currency exposures in 2006 were typically for the Canadian dollar, Chinese renminbi, Australian dollar, British pound, Korean won, European euro, Hong Kong dollar and Japanese yen. The table below sets forth the Company’s net exposure to various currencies for 2006:
(In millions) |
| Operating revenue net of operating expense |
| |||||||||
Currency |
|
|
| Foreign Currency Value |
| USD Value |
| |||||
Canadian dollar |
|
| 278 |
|
|
| $ | 245 |
|
| ||
Chinese renminbi |
|
| 1,735 |
|
|
| 218 |
|
| |||
Australian dollar |
|
| 163 |
|
|
| 122 |
|
| |||
British pound |
|
| 54 |
|
|
| 98 |
|
| |||
Korean won |
|
| 93,521 |
|
|
| 98 |
|
| |||
European euro |
|
| 77 |
|
|
| 97 |
|
| |||
Hong Kong dollar |
|
| 737 |
|
|
| 95 |
|
| |||
Japanese yen |
|
| 8,459 |
|
|
| 72 |
|
| |||
At December 31, 2006, the Company did not have any foreign currency derivative instruments.
59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
UAL Corporation
Elk Grove Township, Illinois
We have audited the accompanying statements of consolidated financial position of UAL Corporation (Debtor-In-Possession) and subsidiaries (the "Company"“Company”) as of December 31, 2006 (Successor Company balance sheet) and as of December 31, 2005 and 2004,(Predecessor Company balance sheet), and the related statements of consolidated operations, stockholders' deficit,consolidated stockholders’ equity (deficit), and consolidated cash flows for the Successor Company eleven months ended December 31, 2006 (Successor Company operations) and for the one month ended January 31, 2006 and for each of the threetwo years in the period ended December 31, 2005.2005 (Predecessor Company operations). Our audits also included the financial statement schedule of the Successor Company for the eleven months ended December 31, 2006 and the Predecessor Company for the one month January 31, 2006 and for each of the two years in the period ended December 31, 2005 as listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on January 20, 2006, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective after the close of business on February 1, 2006. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying values not comparable with prior periods as described in Note 1.
In our opinion, suchthe Successor Company consolidated financial statements present fairly, in all material respects, the financial position of UAL Corporation (Debtor-in-Possession) and subsidiaries as of December 31, 2005 and 2004,2006 and the results of their operations and their cash flows for the eleven month period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Predecessor Company as of December 31, 2005 and the results of their operations and their cash flows for the one month period ended January 31, 2006 and for each of the threetwo years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such Successor Company financial statement schedule and Predecessor Company financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 12 to the consolidated financial statements on January 20,1, 2006, the Bankruptcy Court entered an order confirmingCompany adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” which changed the planmethod of reorganization which became effective afteraccounting for share based payments and as discussed in Note 2 to the close of business
consolidated financial statements on February 1, 2006. Under the plan of reorganization,December 31, 2006, the Company is required to comply with certain termsadopted the recognition and conditions as more fully described in Note 1.related disclosure provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132R”, which changed the method of accounting for and the disclosures regarding pension and postretirement benefits.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2005,2006, based on the criteria established in Internal Control - Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 30, 2006 16, 2007, expressed an unqualified opinion on management'smanagement’s assessment of the effectiveness of the Company'sCompany’s internal control over financial reporting and an unqualifiedadverse opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting.
reporting because of a material weakness.
/s/ Deloitte & Touche LLP | ||
Chicago, Illinois | ||
March |
61
UAL Corporation and Subsidiary Companies(Debtor and Debtor-In-Possession)
Statements of Consolidated Operations
(In millions, except per share)share amounts)
| Successor |
|
|
| Predecessor |
| |||||||||||||
|
| Period from |
|
|
| Period from |
|
|
|
|
| ||||||||
|
| February 1 to |
|
|
| January 1 to |
| Year Ended |
| ||||||||||
|
| December 31, |
|
|
| January 31, |
| December 31, |
| ||||||||||
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Passenger—United Airlines |
|
| $ | 13,293 |
|
|
|
|
| $ | 1,074 |
|
| $ | 12,914 |
| $ | 12,542 |
|
Passenger—Regional Affiliates |
|
| 2,697 |
|
|
|
|
| 204 |
|
| 2,429 |
| 1,931 |
| ||||
Cargo |
|
| 694 |
|
|
|
|
| 56 |
|
| 729 |
| 704 |
| ||||
Other operating revenues |
|
| 1,198 |
|
|
|
|
| 124 |
|
| 1,307 |
| 1,214 |
| ||||
|
|
| 17,882 |
|
|
|
|
| 1,458 |
|
| 17,379 |
| 16,391 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Aircraft fuel |
|
| 4,462 |
|
|
|
|
| 362 |
|
| 4,032 |
| 2,943 |
| ||||
Salaries and related costs |
|
| 3,909 |
|
|
|
|
| 358 |
|
| 4,027 |
| 5,006 |
| ||||
Regional affiliates |
|
| 2,596 |
|
|
|
|
| 228 |
|
| 2,746 |
| 2,425 |
| ||||
Purchased services |
|
| 1,595 |
|
|
|
|
| 134 |
|
| 1,524 |
| 1,462 |
| ||||
Aircraft maintenance materials and outside repairs |
|
| 929 |
|
|
|
|
| 80 |
|
| 881 |
| 747 |
| ||||
Depreciation and amortization |
|
| 820 |
|
|
|
|
| 68 |
|
| 856 |
| 874 |
| ||||
Landing fees and other rent |
|
| 801 |
|
|
|
|
| 75 |
|
| 915 |
| 964 |
| ||||
Cost of third party sales |
|
| 614 |
|
|
|
|
| 65 |
|
| 685 |
| 709 |
| ||||
Aircraft rent |
|
| 385 |
|
|
|
|
| 30 |
|
| 402 |
| 533 |
| ||||
Commissions |
|
| 291 |
|
|
|
|
| 24 |
|
| 305 |
| 305 |
| ||||
Special operating items (Note 19) |
|
| (36 | ) |
|
|
|
| — |
|
| 18 |
| — |
| ||||
Other operating expenses |
|
| 1,017 |
|
|
|
|
| 86 |
|
| 1,207 |
| 1,277 |
| ||||
|
|
| 17,383 |
|
|
|
|
| 1,510 |
|
| 17,598 |
| 17,245 |
| ||||
Earnings (loss) from operations |
|
| 499 |
|
|
|
|
| (52 | ) |
| (219 | ) | (854 | ) | ||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
| (728 | ) |
|
|
|
| (42 | ) |
| (482 | ) | (449 | ) | ||||
Interest income |
|
| 243 |
|
|
|
|
| 6 |
|
| 38 |
| 25 |
| ||||
Interest capitalized |
|
| 15 |
|
|
|
|
| — |
|
| (3 | ) | 1 |
| ||||
Gain on sale of investments (Note 7) |
|
| — |
|
|
|
|
| — |
|
| — |
| 158 |
| ||||
Special non-operating items (Note 19) |
|
| — |
|
|
|
|
| — |
|
| — |
| 5 |
| ||||
Miscellaneous, net |
|
| 14 |
|
|
|
|
| — |
|
| 87 |
| (1 | ) | ||||
|
|
| (456 | ) |
|
|
|
| (36 | ) |
| (360 | ) | (261 | ) | ||||
Earnings (loss) before reorganization items, income taxes and equity in earnings of affiliates |
|
| 43 |
|
|
|
|
| (88 | ) |
| (579 | ) | (1,115 | ) | ||||
Reorganization items, net (Note 1) |
|
| — |
|
|
|
|
| 22,934 |
|
| (20,601 | ) | (611 | ) | ||||
Earnings (loss) before income taxes and equity in earnings of affiliates |
|
| 43 |
|
|
|
|
| 22,846 |
|
| (21,180 | ) | (1,726 | ) | ||||
Income tax expense |
|
| 21 |
|
|
|
|
| — |
|
| — |
| — |
| ||||
Earnings (loss) before equity in earnings of affiliates |
|
| 22 |
|
|
|
|
| 22,846 |
|
| (21,180 | ) | (1,726 | ) | ||||
Equity in earnings of affiliates, net of tax |
|
| 3 |
|
|
|
|
| 5 |
|
| 4 |
| 5 |
| ||||
Net income (loss) |
|
| $ | 25 |
|
|
|
|
| $ | 22,851 |
|
| $ | (21,176 | ) | $ | (1,721 | ) |
Earnings (loss) per share, basic and diluted |
|
| $ | 0.14 |
|
|
|
|
| $ | 196.61 |
|
| $ | (182.29 | ) | $ | (15.25 | ) |
| Operating revenues: | |||
| Passenger - United Airlines | $ 12,914 | $ 12,542 | $ 11,364 |
| Passenger - Regional affiliates | 2,429 | 1,931 | 1,529 |
| Cargo | 729 | 704 | 630 |
| Other operating revenues | 1,307 | 1,214 | 1,405 |
17,379 | 16,391 | 14,928 | |
| Operating expenses: | |||
| Aircraft fuel | 4,032 | 2,943 | 2,072 |
| Salaries and related costs | 4,027 | 5,006 | 5,377 |
| Regional affiliates | 2,746 | 2,425 | 1,921 |
| Purchased services | 1,524 | 1,462 | 1,301 |
| Landing fees and other rent | 915 | 964 | 930 |
| Aircraft maintenance | 881 | 747 | 572 |
| Depreciation and amortization | 856 | 874 | 968 |
| Cost of sales | 685 | 709 | 959 |
| Aircraft rent | 402 | 533 | 612 |
| Commissions | 305 | 305 | 277 |
| Other operating expenses | 1,207 | 1,277 | 1,273 |
| Special items (Note 3) | 18 | - | 26 |
17,598 | 17,245 | 16,288 | |
| Loss from operations | (219) | (854) | (1,360) |
| Other income (expense): | |||
| Interest expense | (482) | (449) | (527) |
| Interest capitalized | (3) | 1 | 3 |
| Interest income | 38 | 25 | 55 |
| Gain on sale of investments | - | 158 | 135 |
| Gain on sale of affiliate's stock | - | - | 23 |
| Non-operating special items (Note 3) | - | 5 | (251) |
| Government compensation | - | - | 300 |
| Reorganization items, net | (20,601) | (611) | (1,173) |
| Miscellaneous, net | 87 | (1) | (9) |
(20,961) | (872) | (1,444) | |
| Loss before income taxes and equity in earnings (losses) of | |||
| affiliates | (21,180) | (1,726) | (2,804) |
| Credit for income taxes | - | - | - |
| Loss before equity in earnings (losses) of affiliates | (21,180) | (1,726) | (2,804) |
| Equity in earnings (losses) of affiliates | 4 | 5 | (4) |
| Net loss | $ (21,176) | $ (1,721) | $ (2,808) |
| Per share, basic and diluted: | |||
| Net loss | $ (182.29) | $ (15.25) | $ (27.36) |
See accompanying Notes to Consolidated Financial Statements.
62
UAL Corporation and Subsidiary Companies(Debtor and Debtor-In-Possession)
Statements of Consolidated Financial Position
(In millions)millions, except shares)
| Assets | ||
| Current assets: | ||
| Cash and cash equivalents | $ 1,761 | $ 1,223 |
| Restricted cash | 643 | 877 |
| Short-term investments | 77 | 78 |
| Receivables, less allowance for doubtful | ||
| accounts (2005 - $23; 2004 - $24) | 839 | 951 |
| Prepaid fuel | 258 | 187 |
| Aircraft fuel, spare parts and supplies, less | ||
| obsolescence allowance (2005 - $66; 2004 - $42) | 193 | 234 |
| Deferred income taxes | - | 96 |
| Prepaid expenses and other | 488 | 268 |
4,259 | 3,914 | |
| Operating property and equipment: | ||
| Owned - | ||
| Flight equipment | 13,443 | 13,702 |
| Advances on flight equipment | 128 | 173 |
| Other property and equipment | 3,837 | 3,870 |
17,408 | 17,745 | |
| Less - Accumulated depreciation and amortization | (6,106) | (5,626) |
11,302 | 12,119 | |
| Capital leases - | ||
| Flight equipment | 2,581 | 2,624 |
| Other property and equipment | 84 | 84 |
2,665 | 2,708 | |
| Less - Accumulated amortization | (739) | (653) |
1,926 | 2,055 | |
13,228 | 14,174 | |
| Other assets: | ||
| Restricted cash | 314 | - |
| Investments | 20 | 24 |
| Intangibles, less accumulated amortization | ||
| (2005 - $218; 2004 - $217) | 388 | 399 |
| Pension assets | 4 | 665 |
| Aircraft lease deposits | 477 | 540 |
| Prepaid rent | 67 | 158 |
| Other | 585 | 831 |
1,855 | 2,617 | |
$ 19,342 | $ 20,705 | |
| Successor |
| Predecessor |
| |||||||
|
| At December 31, |
| ||||||||
|
| 2006 |
| 2005 |
| ||||||
Assets |
|
|
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| $ | 3,832 |
|
|
| $ | 1,761 |
|
|
Restricted cash |
|
| 341 |
|
|
| 643 |
|
| ||
Short-term investments |
|
| 312 |
|
|
| 77 |
|
| ||
Receivables, less allowance for doubtful accounts (2006—$27; 2005—$23) |
|
| 820 |
|
|
| 839 |
|
| ||
Prepaid fuel |
|
| 283 |
|
|
| 258 |
|
| ||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2006—$6; 2005—$66) |
|
| 218 |
|
|
| 193 |
|
| ||
Deferred income taxes |
|
| 122 |
|
|
| — |
|
| ||
Prepaid expenses and other |
|
| 345 |
|
|
| 488 |
|
| ||
|
|
| 6,273 |
|
|
| 4,259 |
|
| ||
Operating property and equipment: |
|
|
|
|
|
|
|
|
| ||
Owned— |
|
|
|
|
|
|
|
|
| ||
Flight equipment |
|
| 8,958 |
|
|
| 13,443 |
|
| ||
Advances on flight equipment |
|
| 103 |
|
|
| 128 |
|
| ||
Other property and equipment |
|
| 1,441 |
|
|
| 3,837 |
|
| ||
|
|
| 10,502 |
|
|
| 17,408 |
|
| ||
Less—Accumulated depreciation and amortization |
|
| (503 | ) |
|
| (6,106 | ) |
| ||
|
|
| 9,999 |
|
|
| 11,302 |
|
| ||
Capital leases— |
|
|
|
|
|
|
|
|
| ||
Flight equipment |
|
| 1,511 |
|
|
| 2,581 |
|
| ||
Other property and equipment |
|
| 34 |
|
|
| 84 |
|
| ||
|
|
| 1,545 |
|
|
| 2,665 |
|
| ||
Less—Accumulated amortization |
|
| (81 | ) |
|
| (739 | ) |
| ||
|
|
| 1,464 |
|
|
| 1,926 |
|
| ||
|
|
| 11,463 |
|
|
| 13,228 |
|
| ||
Other assets: |
|
|
|
|
|
|
|
|
| ||
Intangibles, less accumulated amortization (2006—$169; 2005—$218) |
|
| 3,028 |
|
|
| 371 |
|
| ||
Goodwill |
|
| 2,703 |
|
|
| 17 |
|
| ||
Aircraft lease deposits |
|
| 539 |
|
|
| 477 |
|
| ||
Restricted cash |
|
| 506 |
|
|
| 314 |
|
| ||
Investments |
|
| 113 |
|
|
| 20 |
|
| ||
Prepaid rent |
|
| 7 |
|
|
| 67 |
|
| ||
Other, net |
|
| 737 |
|
|
| 589 |
|
| ||
|
|
| 7,633 |
|
|
| 1,855 |
|
| ||
|
|
| $ | 25,369 |
|
|
| $ | 19,342 |
|
|
See accompanying Notes to Consolidated Financial Statements.
63
UAL Corporation and Subsidiary Companies(Debtor and Debtor-In-Possession)
Statements of Consolidated Financial Position
(In millions, except share data)shares)
| Successor |
| Predecessor |
| |||||||
|
| At December 31, |
| ||||||||
|
| 2006 |
| 2005 |
| ||||||
Liabilities and Stockholders’ Equity (Deficit) |
|
|
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||
Long-term debt maturing within one year (Note 11) |
|
| $ | 1,687 |
|
|
| $ | 13 |
|
|
Advance ticket sales |
|
| 1,669 |
|
|
| 1,575 |
|
| ||
Mileage Plus deferred revenue |
|
| 1,111 |
|
|
| 681 |
|
| ||
Accrued salaries, wages and benefits |
|
| 795 |
|
|
| 844 |
|
| ||
Advanced purchase of miles (Note 18) |
|
| 681 |
|
|
| 679 |
|
| ||
Accounts payable |
|
| 667 |
|
|
| 596 |
|
| ||
Fuel purchase commitments |
|
| 283 |
|
|
| 258 |
|
| ||
Accrued interest |
|
| 241 |
|
|
| 32 |
|
| ||
Current obligations under capital leases (Note 16) |
|
| 110 |
|
|
| 20 |
|
| ||
Other |
|
| 701 |
|
|
| 536 |
|
| ||
|
|
| 7,945 |
|
|
| 5,234 |
|
| ||
Long-term debt (Note 11) |
|
| 7,453 |
|
|
| 1,298 |
|
| ||
Long-term obligations under capital leases (Note 16) |
|
| 1,350 |
|
|
| 102 |
|
| ||
Other liabilities and deferred credits: |
|
|
|
|
|
|
|
|
| ||
Mileage Plus deferred revenue |
|
| 2,569 |
|
|
| 242 |
|
| ||
Postretirement benefit liability (Note 8) |
|
| 1,955 |
|
|
| 1,932 |
|
| ||
Deferred income taxes |
|
| 688 |
|
|
| 428 |
|
| ||
Deferred pension liability (Note 8) |
|
| 130 |
|
|
| 95 |
|
| ||
Other |
|
| 770 |
|
|
| 555 |
|
| ||
|
|
| 6,112 |
|
|
| 3,252 |
|
| ||
Liabilities subject to compromise (Note 1) |
|
| — |
|
|
| 35,016 |
|
| ||
Mandatorily convertible preferred securities (Note 13) |
|
| 361 |
|
|
| — |
|
| ||
Commitments and contingent liabilities (Note 15) |
|
|
|
|
|
|
|
|
| ||
Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
|
| ||
Predecessor Company preferred stock (Note 13) |
|
| — |
|
|
| — |
|
| ||
Successor Company preferred stock (Note 13) |
|
| — |
|
|
| — |
|
| ||
Predecessor Company ESOP preferred stock (Note 12) |
|
| — |
|
|
| — |
|
| ||
Predecessor Company common stock at par, $0.01 par value; authorized 200,000,000 shares; outstanding 116,220,959 shares at December 31, 2005 (Note 3) |
|
| — |
|
|
| 1 |
|
| ||
Successor Company common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 112,280,629 shares at December 31, 2006 (Note 3) |
|
| 1 |
|
|
| — |
|
| ||
Additional capital invested |
|
| 2,053 |
|
|
| 5,064 |
|
| ||
Retained earnings (deficit) |
|
| 16 |
|
|
| (29,122 | ) |
| ||
Predecessor Company stock held in treasury, at cost |
|
|
|
|
|
|
|
|
| ||
Preferred, 10,213,519 depositary shares (Note 13) |
|
| — |
|
|
| (305 | ) |
| ||
Common, 16,121,446 shares |
|
| — |
|
|
| (1,162 | ) |
| ||
Successor Company stock held in treasury, at cost (Note 3) |
|
| (4 | ) |
|
| — |
|
| ||
Accumulated other comprehensive income (loss) (Note 10) |
|
| 82 |
|
|
| (36 | ) |
| ||
|
|
| 2,148 |
|
|
| (25,560 | ) |
| ||
|
|
| $ | 25,369 |
|
|
| $ | 19,342 |
|
|
| Liabilities and Stockholders' Deficit | ||
| Current liabilities: | ||
| Long-term debt maturing within one year | $ 13 | $ 875 |
| Current obligations under capital leases | 20 | 28 |
| Advance ticket sales | 1,575 | 1,361 |
| Accounts payable | 596 | 601 |
| Accrued salaries, wages and benefits | 844 | 2,100 |
| Fuel purchase commitments | 258 | 187 |
| Other accrued liabilities (Note 2(g)) | 1,928 | 1,309 |
5,234 | 6,461 | |
| Long-term debt (Note 9) | 1,298 | 154 |
| Long-term obligations under capital leases | 102 | 147 |
| Other liabilities and deferred credits: | ||
| Deferred pension liability (Note 15) | 95 | 2,333 |
| Postretirement benefit liability (Note 15) | 1,932 | 1,920 |
| Deferred income taxes | 428 | 389 |
| Other | 797 | 946 |
3,252 | 5,588 | |
| Liabilities subject to compromise (Note 8) | 35,016 | 16,035 |
| Commitments and contingencies (Note 16) | ||
| Stockholders' deficit: | ||
| Serial preferred stock (Note 11) | - | - |
| ESOP preferred stock (Note 12) | - | - |
| Common stock at par, $0.01 par value; authorized 200,000,000 | ||
| shares; issued 132,342,405 shares at December 31, 2005 and | ||
| December 31, 2004 | 1 | 1 |
| Additional capital invested | 5,064 | 5,064 |
| Retained deficit | (29,122) | (7,946) |
| Stock held in treasury, at cost - - | ||
| Preferred, 10,213,519 depositary shares at December 31, | ||
| 2005 and 2004 (Note 11) | (305) | (305) |
| Common, 16,121,446 shares at December 31, 2005 and | ||
| December 31, 2004 | (1,162) | (1,162) |
| Accumulated other comprehensive loss | (36) | (3,332) |
(25,560) | (7,680) | |
$ 19,342 | $ 20,705 | |
See accompanying Notes to Consolidated Financial Statements.
64
UAL Corporation and Subsidiary Companies(Debtor and Debtor-In-Possession)
Statements of Consolidated Cash Flows
(In millions)
| Successor |
|
|
| Predecessor |
| |||||||||||||
|
| Period from |
|
|
| Period from |
|
|
|
|
| ||||||||
|
| February 1 to |
|
|
| January 1 to |
| Year Ended |
| ||||||||||
|
| December 31, |
|
|
| January 31, |
| December 31, |
| ||||||||||
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Cash flows provided (used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) before reorganization items |
|
| $ | 25 |
|
|
|
|
| $ | (83 | ) |
| $ | (575 | ) | $ | (1,110 | ) |
Adjustments to reconcile to net cash provided (used) by operating activities— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
| 820 |
|
|
|
|
| 68 |
|
| 873 |
| 874 |
| ||||
Mileage Plus deferred revenue |
|
| 269 |
|
|
|
|
| 14 |
|
| 329 |
| 141 |
| ||||
Share-based compensation |
|
| 159 |
|
|
|
|
| — |
|
| — |
| — |
| ||||
Postretirement benefit expense, net of contributions |
|
| 76 |
|
|
|
|
| (9 | ) |
| (41 | ) | (51 | ) | ||||
Special items and debt discount amortization |
|
| 47 |
|
|
|
|
| — |
|
| 18 |
| — |
| ||||
Deferred income taxes |
|
| 21 |
|
|
|
|
| — |
|
| — |
| 5 |
| ||||
Pension expense (benefit), net of contributions |
|
| (4 | ) |
|
|
|
| 8 |
|
| 143 |
| 327 |
| ||||
Gain on sale of investments |
|
| — |
|
|
|
|
| — |
|
| (2 | ) | (158 | ) | ||||
Amortization of deferred gains |
|
| — |
|
|
|
|
| (6 | ) |
| (81 | ) | (93 | ) | ||||
Other operating activities |
|
| 56 |
|
|
|
|
| (1 | ) |
| 54 |
| 86 |
| ||||
Changes in assets and liabilities— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Decrease (increase) in receivables |
|
| 131 |
|
|
|
|
| (88 | ) |
| 109 |
| (19 | ) | ||||
Decrease (increase) in other current assets |
|
| 14 |
|
|
|
|
| (24 | ) |
| (75 | ) | (25 | ) | ||||
Increase (decrease) in accounts payable |
|
| 40 |
|
|
|
|
| 19 |
|
| (40 | ) | 101 |
| ||||
Increase in advance ticket sales |
|
| 4 |
|
|
|
|
| 109 |
|
| 214 |
| 31 |
| ||||
Increase (decrease) in accrued liabilities and accrued aircraft rent |
|
| (257 | ) |
|
|
|
| 154 |
|
| 153 |
| (10 | ) | ||||
|
|
| 1,401 |
|
|
|
|
| 161 |
|
| 1,079 |
| 99 |
| ||||
Cash flows provided (used) by reorganization activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Reorganization items, net |
|
| — |
|
|
|
|
| 22,934 |
|
| (20,601 | ) | (611 | ) | ||||
Discharge of claims and liabilities |
|
| — |
|
|
|
|
| (24,628 | ) |
| — |
| — |
| ||||
Revaluation of Mileage Plus frequent flyer deferred revenue |
|
| — |
|
|
|
|
| 2,399 |
|
| — |
| — |
| ||||
Revaluation of other assets and liabilities |
|
| — |
|
|
|
|
| (2,106 | ) |
| — |
| — |
| ||||
Increase in aircraft rejection liability |
|
| — |
|
|
|
|
| — |
|
| 2,898 |
| 333 |
| ||||
Impairment on lease certificates |
|
| — |
|
|
|
|
| — |
|
| 134 |
| — |
| ||||
Increase (decrease) in other liabilities |
|
| — |
|
|
|
|
| 37 |
|
| 120 |
| (22 | ) | ||||
Increase in non-aircraft claims accrual |
|
| — |
|
|
|
|
| 429 |
|
| 1,220 |
| — |
| ||||
Pension curtailment, settlement and employee claims |
|
| — |
|
|
|
|
| 912 |
|
| 16,079 |
| 152 |
| ||||
Loss on disposition of property |
|
| — |
|
|
|
|
| — |
|
| 10 |
| — |
| ||||
|
|
| — |
|
|
|
|
| (23 | ) |
| (140 | ) | (148 | ) | ||||
Cash flows provided (used) by investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Additions to property and equipment |
|
| (332 | ) |
|
|
|
| (30 | ) |
| (470 | ) | (267 | ) | ||||
(Increase) decrease in restricted cash |
|
| 313 |
|
|
|
|
| (203 | ) |
| (80 | ) | (198 | ) | ||||
(Increase) decrease in short-term investments |
|
| (237 | ) |
|
|
|
| 2 |
|
| 1 |
| — |
| ||||
Decrease in segregated funds |
|
| 200 |
|
|
|
|
| — |
|
| — |
| — |
| ||||
Sale of MyPoints.com Inc. |
|
| 56 |
|
|
|
|
| — |
|
| — |
| — |
| ||||
Proceeds on disposition of property and equipment |
|
| 40 |
|
|
|
|
| (1 | ) |
| 330 |
| 21 |
| ||||
Proceeds on sale of investments |
|
| — |
|
|
|
|
| — |
|
| 4 |
| 218 |
| ||||
Other, net |
|
| (52 | ) |
|
|
|
| (6 | ) |
| (76 | ) | (70 | ) | ||||
|
|
| (12 | ) |
|
|
|
| (238 | ) |
| (291 | ) | (296 | ) | ||||
Cash flows provided (used) by financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from Credit Facility |
|
| 2,961 |
|
|
|
|
| — |
|
| — |
| — |
| ||||
Repayment of Credit Facility |
|
| (175 | ) |
|
|
|
| — |
|
| — |
| — |
| ||||
Proceeds from DIP financing |
|
| — |
|
|
|
|
| — |
|
| 310 |
| 513 |
| ||||
Repayment of DIP financing |
|
| (1,157 | ) |
|
|
|
| — |
|
| (16 | ) | (313 | ) | ||||
Repayment of other long-term debt |
|
| (664 | ) |
|
|
|
| (24 | ) |
| (285 | ) | (180 | ) | ||||
Principal payments under capital leases |
|
| (99 | ) |
|
|
|
| (5 | ) |
| (94 | ) | (244 | ) | ||||
Increase in deferred financing costs |
|
| (66 | ) |
|
|
|
| (1 | ) |
| (26 | ) | (27 | ) | ||||
Proceeds from exercise of stock options |
|
| 10 |
|
|
|
|
| — |
|
| — |
| — |
| ||||
Aircraft lease deposits, net |
|
| — |
|
|
|
|
| — |
|
| — |
| 173 |
| ||||
Other, net |
|
| 2 |
|
|
|
|
| — |
|
| 1 |
| 6 |
| ||||
|
|
| 812 |
|
|
|
|
| (30 | ) |
| (110 | ) | (72 | ) | ||||
Increase (decrease) in cash and cash equivalents during the period |
|
| 2,201 |
|
|
|
|
| (130 | ) |
| 538 |
| (417 | ) | ||||
Cash and cash equivalents at beginning of period |
|
| 1,631 |
|
|
|
|
| 1,761 |
|
| 1,223 |
| 1,640 |
| ||||
Cash and cash equivalents at end of period |
|
| $ | 3,832 |
|
|
|
|
| $ | 1,631 |
|
| $ | 1,761 |
| $ | 1,223 |
|
| Cash flows provided (used) by operating activities: | |||
| Net loss before reorganization items | $ (575) | $ (1,110) | $ (1,635) |
| Adj to reconcile to net cash provided (used) by operating | |||
| activities - | |||
| Frequent flyer deferred revenue | 329 | 141 | 136 |
| Gain on sale of investments | (2) | (158) | (158) |
| Pension funding less than expense | 143 | 327 | 610 |
| Postretirement benefit expense | (41) | (51) | 367 |
| Depreciation and amortization | 873 | 874 | 938 |
| Undistributed (earnings) of affiliates | (4) | (5) | (2) |
| Decrease (increase) in receivables | 109 | (19) | (133) |
| Increase in other current assets | (75) | (25) | (169) |
| Increase in advance ticket sales | 214 | 31 | 309 |
| Increase in accrued income taxes | - | 5 | 275 |
| Increase (decrease) in accounts payable | (40) | 101 | 182 |
| Increase (decrease) in accrued liabilities | 112 | (74) | (506) |
| Increase in accrued aircraft rent | 1 | 25 | 427 |
| Amortization of deferred gains | (81) | (93) | (99) |
| Other, net | 116 | 130 | 459 |
1,079 | 99 | 1,001 | |
| Cash flows provided (used) by reorganization activities: | |||
| Reorganization items, net | (20,601) | (611) | (1,173) |
| Increase in aircraft rejection liability | 2,898 | 333 | 724 |
| Impairment on lease certificates | 134 | - | 223 |
| Increase (decrease) in other liabilities | 120 | (22) | 8 |
| Increase in non-aircraft claims accrual | 1,220 | - | - |
| Pension curtailment, settlement and termination | 16,079 | 152 | - |
| Loss on disposition of property | 10 | - | 36 |
(140) | (148) | (182) | |
| Cash flows provided (used) by investing activities: | |||
| Additions to property and equipment | (470) | (267) | (150) |
| Proceeds on disposition of property and equipment | 330 | 21 | 123 |
| Proceeds on sale of investments | 4 | 218 | 150 |
| Decrease in short-term investments | 1 | - | 310 |
| Increase in restricted cash | (80) | (198) | (100) |
| Other, net | (76) | (70) | 6 |
(291) | (296) | 339 | |
| Cash flows provided (used) by financing activities: | |||
| Proceeds from DIP financing | 310 | 513 | 252 |
| Repayment of long-term debt | (285) | (180) | (257) |
| Repayment of DIP financing | (16) | (313) | (289) |
| Principal payments under capital leases | (94) | (244) | (270) |
| Aircraft lease deposits, net | - | 173 | 216 |
| Other, net | (25) | (21) | (56) |
(110) | (72) | (404) | |
| Increase (decrease) in cash and cash equivalents during the year | 538 | (417) | 754 |
| Cash and cash equivalents at beginning of year | 1,223 | 1,640 | 886 |
| Cash and cash equivalents at end of year | $ 1,761 | $ 1,223 | $ 1,640 |
See accompanying Notes to Consolidated Financial Statements.
65
UAL Corporation and Subsidiary Companies(Debtor and Debtor-In-Possession)
Statements of Consolidated Stockholders' DeficitStockholders’ Equity (Deficit)
(In millions)
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
| |||||||||||||||||||
|
|
|
| Additional |
| Retained |
|
|
| Comprehensive |
|
|
|
|
| |||||||||||||||||||
|
| Common |
| Capital |
| Earnings |
| Treasury |
| Income |
|
|
|
|
| |||||||||||||||||||
|
| Stock |
| Invested |
| (Deficit) |
| Stock |
| (Loss) |
| Other |
| Total |
| |||||||||||||||||||
Balance at December 31, 2003 (Predecessor Company) |
|
| $ | 1 |
|
|
| $ | 5,066 |
|
|
| $ | (6,225 | ) |
|
| $ | (1,469 | ) |
|
| $ | (3,288 | ) |
|
| $ | (1 | ) |
| $ | (5,916 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| (1,721 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
| (1,721 | ) | |||||||
Other comprehensive income (loss), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unrealized gains on derivatives, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
| 3 |
| |||||||
Minimum pension liability adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45 | ) |
|
| — |
|
| (45 | ) | |||||||
Total comprehensive income (loss), net |
|
| — |
|
|
| — |
|
|
| (1,721 | ) |
|
| — |
|
|
| (42 | ) |
|
| — |
|
| (1,763 | ) | |||||||
Other |
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| 2 |
|
|
| (2 | ) |
|
| 1 |
|
| (1 | ) | |||||||
Balance at December 31, 2004 (Predecessor Company) |
|
| 1 |
|
|
| 5,064 |
|
|
| (7,946 | ) |
|
| (1,467 | ) |
|
| (3,332 | ) |
|
| — |
|
| (7,680 | ) | |||||||
Net loss |
|
| — |
|
|
| — |
|
|
| (21,176 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
| (21,176 | ) | |||||||
Other comprehensive income (loss), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unrealized losses on derivatives, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| — |
|
| (3 | ) | |||||||
Minimum pension liability adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,299 |
|
|
| — |
|
| 3,299 |
| |||||||
Total comprehensive income (loss), net |
|
| — |
|
|
| — |
|
|
| (21,176 | ) |
|
| — |
|
|
| 3,296 |
|
|
| — |
|
| (17,880 | ) | |||||||
Balance at December 31, 2005 (Predecessor Company) |
|
| 1 |
|
|
| 5,064 |
|
|
| (29,122 | ) |
|
| (1,467 | ) |
|
| (36 | ) |
|
| — |
|
| (25,560 | ) | |||||||
Net loss before reorganization items—January 2006 |
|
| — |
|
|
| — |
|
|
| (83 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
| (83 | ) | |||||||
Reorganization items—January 2006 |
|
| — |
|
|
| — |
|
|
| (1,401 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
| (1,401 | ) | |||||||
Subtotal (Predecessor Company) |
|
| 1 |
|
|
| 5,064 |
|
|
| (30,606 | ) |
|
| (1,467 | ) |
|
| (36 | ) |
|
| — |
|
| (27,044 | ) | |||||||
Fresh-start adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unsecured claims and debt discharge |
|
| — |
|
|
| — |
|
|
| 24,628 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 24,628 |
| |||||||
Valuation adjustments, net |
|
| — |
|
|
| — |
|
|
| (293 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
| (293 | ) | |||||||
Balance at January 31, 2006 (Predecessor Company) |
|
| 1 |
|
|
| 5,064 |
|
|
| (6,271 | ) |
|
| (1,467 | ) |
|
| (36 | ) |
|
| — |
|
| (2,709 | ) | |||||||
Fresh-start adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Cancellation of Predecessor preferred and common stock |
|
| (1 | ) |
|
| (5,064 | ) |
|
| — |
|
|
| 1,467 |
|
|
| — |
|
|
| — |
|
| (3,598 | ) | |||||||
Elimination of Predecessor accumulated deficit and accumulated other comprehensive loss |
|
| — |
|
|
| — |
|
|
| 6,271 |
|
|
| — |
|
|
| 36 |
|
|
| — |
|
| 6,307 |
| |||||||
Issuance of new equity interests in connection with emergence from Chapter 11 |
|
| 1 |
|
|
| 1,884 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 1,885 |
| |||||||
Balance at February 1, 2006 (Successor Company) |
|
| 1 |
|
|
| 1,884 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 1,885 |
| |||||||
Net income from February 1, 2006 to December 31, 2006 |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 25 |
| |||||||
Other comprehensive income (loss), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unrealized loss on derivatives, net $3 of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
| (5 | ) | |||||||
Total comprehensive income, net |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
| 20 |
| |||||||
Adoption of SFAS 158, net $47 of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 87 |
|
|
| — |
|
| 87 |
| |||||||
Preferred stock dividends |
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
| (9 | ) | |||||||
Share-based compensation |
|
| — |
|
|
| 159 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 159 |
| |||||||
Proceeds from exercise of stock options |
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 10 |
| |||||||
Treasury stock acquisitions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
| (4 | ) | |||||||
Balance at December 31, 2006 (Successor Company) |
|
| $ | 1 |
|
|
| $ | 2,053 |
|
|
| $ | 16 |
|
|
| $ | (4 | ) |
|
| $ | 82 |
|
|
| $ | — |
|
| $ | 2,148 |
|
| Balance at December 31, 2002 | $ - | $ 1 | $ 5,070 | $ (3,417) | $(1,472) | $(2,663) | $ (2) | $ (2,483) |
| Net loss | - | - | - | (2,808) | - | - | - | (2,808) |
| Other comprehensive income, net: | ||||||||
| Unrealized losses on investments, net | - | - | - | - | - | (2) | - | (2) |
| Unrealized gains on derivatives, net | - | - | - | - | - | 7 | - | 7 |
| Minimum pension liability adj. | - | - | - | - | - | (630) | - | (630) |
| Total comprehensive income | - | - | - | (2,808) | - | (625) | - | (3,433) |
| Preferred stock committed to | ||||||||
| Supplemental ESOP | - | - | 2 | - | - | - | - | 2 |
| Other | - | - | (6) | - | 3 | - | 1 | (2) |
| Balance at December 31, 2003 | - | 1 | 5,066 | (6,225) | (1,469) | (3,288) | (1) | (5,916) |
| Net loss | - | - | - | (1,721) | - | - | - | (1,721) |
| Other comprehensive income, net: | ||||||||
| Unrealized gains on derivatives, net | - | - | - | - | - | 3 | - | 3 |
| Minimum pension liability adj. | - | - | - | - | - | (45) | - | (45) |
| Total comprehensive income | - | - | - | (1,721) | - | (42) | - | (1,763) |
| Other | - | - | (2) | - | 2 | (2) | 1 | (1) |
| Balance at December 31, 2004 | - | 1 | 5,064 | (7,946) | (1,467) | (3,332) | - | (7,680) |
| Net loss | - | - | - | (21,176) | - | - | - | (21,176) |
| Other comprehensive income, net: | ||||||||
| Unrealized losses on derivatives, net | - | - | - | - | - | (3) | - | (3) |
| Minimum pension liability adj. | - | - | - | - | - | 3,299 | - | 3,299 |
| Total comprehensive income | - | - | - | (21,176) | - | 3,296 | - | (17,880) |
| Other | - | - | - | - | - | - | - | - |
| Balance at December 31, 2005 | $ - | $ 1 | $ 5,064 | $(29,122) | $(1,467) | $ (36) | $ - | $(25,560) |
See accompanying Notes to Consolidated Financial Statements.
66
UAL Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements
UAL Corporation is a holding company and its principal, wholly-owned subsidiary is United Air Lines, Inc., a Delaware corporation (“United”). We sometimes collectively refer to UAL Corporation, together with its consolidated subsidiaries, as “we,” “our,” “us,” “UAL” or the “Company.”
As a result of the adoption of fresh-start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), the financial statements before February 1, 2006 are not comparable with the financial statements for periods on or after February 1, 2006. References to “Successor Company” refer to UAL on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to “Predecessor Company” refer to UAL before February 1, 2006. See Note 1, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,” for further details.
(1) Voluntary Reorganization Under Chapter 11
Bankruptcy ConsiderationsConsiderations.. The following discussion provides general background information regarding ourthe Company’s Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information pertaining to ourthe bankruptcy filings may be obtained at www.pd-ual.com.
On December 9, 2002 (the "Petition Date"“Petition Date”), UAL, United and 26 direct and indirect wholly-owned subsidiaries (collectively, the "Debtors"“Debtors”) filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"“Bankruptcy Court”). On October 20, 2005, the Debtors filed the Debtor's First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code and the First Amended Disclosure Statement for Reorganizing Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the "Disclosure Statement"). On October 21, 2005, the Bankruptcy Court approved the Disclosure Statement.
Commencing on October 27, 2005, the Disclosure Statement, ballots for voting to accept or reject the proposed plan of reorganization and other solicitation documents were distributed to all classes of creditors eligible to vote on the proposed plan of reorganization. On January 20, 2006, the Bankruptcy Court confirmed the Debtors'Debtors’ Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the "Plan“Plan of Reorganization"Reorganization”). The Plan of Reorganization became effective and the Debtors emerged from bankruptcy protection on February 1, 2006 (the "Effective Date"“Effective Date”). On the Effective Date, UAL implemented fresh start accounting in accordance with American Institute of Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). See Note 20, "Pro Forma Fresh Start Balance Sheet (Unaudited)".fresh-start reporting.
The Plan of Reorganization generally providesprovided for the full payment or reinstatement of allowed administrative claims, priority claims and secured claims, and the distribution of new equity and debt securities to the Debtors'Debtors’ creditors employees and othersemployees in satisfaction of allowed unsecured and deemed claims. The Plan of Reorganization contemplatescontemplated UAL issuing up to 125 million shares of common stock (out of the one billion shares of new common stock authorized under its certificate of incorporation). The new common stock was listed on the NASDAQ National Market and began trading under the symbol "UAUA"“UAUA” on February 2, 2006. TheUltimately, the distributions of common stock, subject to certain holdbacks as described in the Plan of Reorganization, will generally be made as follows:
·
- Approximately 115 million shares of common stock to unsecured creditors and
employees,employees;·
- Up to 9.825 million shares of common stock
and(or options(oror other rights to acquire shares) under the management equity incentive plan("MEIP")approved by the BankruptcyCourt,Court; and·
- Up to 175,000 shares of common stock
and(or options(oror other rights to acquire shares) under the director equity incentive plan("DEIP")approved by the Bankruptcy Court.
The Plan of Reorganization also providesprovided for the issuance of the following debt and equity securities:
·
5,000,0005 million shares of 2% mandatorily convertible preferred stockwhich wereissued to the Pension Benefit Guaranty Corporation("PBGC"(“PBGC”) shortly after the Effective Date;·
- Approximately $150 million in aggregate principal amount of 5% senior convertible
5%noteswhich wereissued to holders of certain municipal bonds shortly after the Effective Date;·
Approximately$726 million in aggregate principal amount ofadditional4.5% senior limited-subordination convertible noteswhich are issuable withinissued in July 2006 to certain irrevocable trusts established for thefirst six months after the Effective Date to employees;benefit of certain employees (the “Limited-Subordination Notes”);·
$500$500 million in aggregate principal amount of 6% seniorunsecurednoteswhich wereissued to thePBCGPBGC shortly after the Effective Date; and·
$500$500 million in aggregate principal amount of 8% seniorunsecuredcontingent notes (in up to eight equal tranches of $62.5 million) issuable to the PBGCsubject toupon the satisfaction of certain contingencies.
Pursuant to the Company’s Plan of Reorganization, the Limited-Subordination Notes were required to be issued within 180 days of the Effective Date with a conversion price equal to 125% of the average closing price for the 60 consecutive trading days following February 1, 2006, and an interest rate established so the notes would trade at par upon issuance. In July 2006, the Company reached agreement with five of the seven eligible employee groups to modify the conversion price to instead be based upon the volume-weighted average price of the common stock over the two trading days ending on July 25, 2006, the date the notes were issued to the trusts. This modification resulted in a new conversion price of $34.84, rather than $46.86 which was the conversion price under the initial terms of the notes. Because the reduction in the conversion price resulted in a benefit to noteholders, the Company was able to issue the notes at an interest rate of 4.5%, which is a lower rate of interest than would have been required under the initial terms in order for the notes to trade at par upon issuance. The Company reached agreement with the two other employee groups to pay them cash totaling approximately $0.4 million rather than issuing additional notes of similar value. See Note 11, “Debt Obligations—Successor Company Debt,” for further information.
Pursuant to the Plan of Reorganization, UAL common stock, preferred stock and Trust Originated Preferred Securities ("TOPrS") issued prior tobefore the Petition Date were canceled on the Effective Date, and no distribution will bewas made to holders of those securities.
On the Effective Date, the Company secured access to up to $3.0 billion in secured exit financing (the "Credit Facility"“Credit Facility”) which consistsconsisted of a $2.8$2.45 billion term loan, a $350 million delayed draw term loan and a $200 million revolving credit line. On the Effective Date, $2.45 billion of the $2.8$2.45 billion term loan and the entire revolving credit line, wasconsisting of $161 million in cash and $39 million of letters of credit, were drawn and used to repay the Debtor-In-Possession credit facility (the "DIP Financing"“DIP Financing”) and to make other payments required upon exit from bankruptcy, as well as to provide ongoing liquidity to conduct post-reorganization operations. Subsequently, during the first quarter of 2006, the Company repaid $161 millionthe entire outstanding balance on the revolving credit line and accessed the remaining $350 million delayed draw term loan. In February 2007, the Company prepaid $972 million of its Credit Facility debt and amended certain terms of the Credit Facility. For further details on the term loan.Credit Facility including the facility amendment and the prepayment, see Note 11, “Debt Obligations.”
Until recently,Significant Matters Resolved Since Emergence from Bankruptcy.During the course of the Chapter 11 proceedings, the Company successfully reached settlements with most of its creditor constituencies and resolved most pending claims against the Debtors. The following material matters have been resolved in the Bankruptcy Court since the Effective Date:
(a)1997 EETC Aircraft Financings. The Company had an ongoing dispute with respect to a group of mostly-public financiers (the "Public“Public Debt Group"Group”) involving 14 aircraft financed under the Series 1997-1 Enhanced Equipment Trust Certificates ("(“1997-1 EETC"EETC”). In August 2005, UnitedDuring the first quarter of 2006, the Company resolved the dispute and entered into a settlement agreement that was approved by the Bankruptcy Court. The settlement agreement resolved all pending litigation in connection with the 1997-1 EETC transaction and aircraft and provided noticefor a permanent mutual release of all related claims. The Company remitted $281 million to the 1997-1 EETC trustee of its intentionas final payment to purchasethe holders of the Tranche A certificates, which would permit it to secure long-term access to the 14 aircraft subject to that financing.certificates. The Company previously had acquired the
1997-1 EETC Tranche B and Tranche C certificates in a market transaction as a precursor to utilizing the transaction par buyout mechanism to purchase the Tranche A certificates. However, a dispute arose betweenFollowing shortly thereafter in the Company and the holdersfirst quarter of the Tranche A certificates regarding the amount necessary to pay the current certificate holders in full, and that matter was the subject of litigation. On March 17, 2006, the Bankruptcy Court entered an order approving the Company's settlement with the Public Debt Group in connection with the 1997-1 EETC transaction. The settlement resolves all pending litigation in connection with the 1997-1 EETC transaction and aircraft and provides for a permanent mutual release of all related claims. On March 20, 2006, the Company remitted $281 million to the 1997-1 EETC trustee as final payment for the Tranche A certificates. The Company refinanced the 14 aircraft with the $350 million delayed draw term loan provided under the Credit Facility. The Company recorded the 1997-1 EETC debt at fair market value upon its emergence from bankruptcy in accordance with fresh-start reporting. As a result, no gain or loss was realized on the extinguishment of debt.
(b)Significant Matters RemainingWells Fargo Appeal of Confirmation Order. Wells Fargo Bank Northwest, N.A., not individually but in its capacity as a trustee, filed a notice of appeal of the confirmation order to be Resolved in Bankruptcy Court.the United States District Court for the Northern District of Illinois (“District Court”). The parties subsequently filed a stipulation agreeing to voluntarily dismiss the appeal, and the appeal has been dismissed.
(c)Pre- and Post-1997 EETC Aircraft Financings. During the course of our Chapter 11 proceedings, the Company successfully reached settlements with most of its creditors and resolved most pending claims against the Debtors. However, the following material matters remain to be resolved in the Bankruptcy Court:
(a)In August 2005, United entered into term sheets to restructure thefinancings for all of thethree post-1997 Enhanced Equipment Trust Certificate (“EETC”) transactions, financing 80 aircraft inUnited'sUnited’s fleet that were controlled by the Public Debt Group. In May 2006, the Company reached a settlement with the Public Debt Group with respect to these financing transactions. In conjunction with the settlement, the Company and the EETC trustees agreed to cooperate and to use reasonable efforts to complete definitive documentation. The settlement was approved by the Bankruptcy Court in June 2006. The Company completed definitive documentation on the three post-1997 EETC transactions in July 2006 and met its obligations to have the transactions rated by both Standard and Poor’s and Moody’s.In addition, in August 2005, United entered into term sheets to restructure the pre-1997 transactions financing 19 aircraft that are controlled by the Public Debt
Group, excluding the 1997-1 EETC discussed above. As of the Effective Date, definitive documentation was not yet complete on the restructurings contemplated by the term sheets. With respect to the pre-1997 transactions financing 19 aircraft, we haveGroup. United has subsequently closed transactions covering18all of the19associated aircraft.We have reached agreement on all business terms associated with the last aircraft(d)Municipal Bond Litigation at DEN, JFK, SFO and
we anticipate closing shortly after other technical documentation has been executed. With respect to the three post-1997 Enhanced Equipment Trust Certificate transactions, financing 80 aircraft, thereLAX.United isa dispute with respect to interpretation of the term sheet as to the circumstances under which the Company can repay the obligations in advance of the maturity dates. This dispute has prevented United from closing these transactions. All of the Public Debt Group term sheets provide that in the event the Company and the trustees did not execute definitive documentation prior to United exiting from Chapter 11 and the parties did not extend the date by which definitive documentation had to be completed, the restructured transactions would be unwound. On January 31, 2006, the Bankruptcy Court ruled in United's favor and ordered an extension of the date by which definitive documentation must be completed to February 9, 2006 which was subsequently extended to March 24, 2006. The parties have requested an evidentiary hearing, which will take place at the end of April 2006. The parties are currently negotiating another extension of the date by which definitive documentation must be finalized. United cannot accurately predict the outcome of this litigation, and it could potentially have a material adverse impact on the Company.
(b) We area party to numerous long-term agreements to lease certain airport and maintenance facilities that are financed through tax-exempt municipal bonds that are issued by various local municipalities to build or improve airport and maintenance facilities. During 2003,wethe Company filed four complaints for declaratory judgment and corresponding motions for temporary restraining orders concerningUnited'sUnited’s municipal bond obligations for facilities at Denver International Airport("DEN"(“DEN”), John F. Kennedy International Airport("JFK"(“JFK”), San Francisco International Airport("SFO"(“SFO”),and Los Angeles International Airport("LAX"(“LAX”). In each case,weUnited sought clarification ofourits obligations to pay principal and interest under the applicable municipal bonds, and the protection ofourits rights concerning related airport lease agreements at the applicable airports.With respect toFinal non-appealable court decisions have concluded that the SFO, JFK, and LAX agreements were financings, andJFK,not true leases. Even though theBankruptcy Court ruled in United's favor. With respect to DEN, the Bankruptcy Court ruled against United. The Bankruptcy Court's rulings with respect to each of the four matters were subsequently appealed to the District Court. The District Court reversed the Bankruptcy Court's rulings with respect toSFO and LAXbut upheldobligations have been determined to be financings and not true leases, there remains an issue regarding theBankruptcy Court's rulings with respectextent toJFK and DEN. All four of the District Court's rulings in turn wereappealedwhich those financings are considered tothe United States Court of Appeals for the Seventh Circuit (the "Court of Appeals"). The Court of Appeals reversed the District Court's ruling against the Company with respect to the SFO adversary proceeding and the SFO defendants' petition forhave arehearing was denied. The defendantssecurity interest in theSFO matter petitionedunderlying leasehold or theUnited States Supreme Court for a writ of certiorari on November 18, 2005, which was denied on March 6, 2006. The Court of Appeals affirmed the District Court's rulingvalue thereof, as agreements have secured interests as discussed inour favor with respect“Significant Matters Remaining tothe JFK adversary proceeding. The defendantsbe Resolved inthe JFK matter filed a petition for rehearing with the Court of Appeals in September 2005, which was denied by the Court of Appeals. The time for filing a petition for writ of certiorari in the JFK matterChapter 11 Cases,” items (a) and (b). A final non-appealable court decision hasexpired. With respect to the DEN and LAX appeals, briefing has now been completedand the Court of Appeals heard oral argument in February 2006. The Court of Appeals, however, has not yet ruled on these matters. The outcome of theLAX and DEN appeals remains uncertain and, therefore, the ultimate treatment of theseconcluded that United’s municipal bond obligationsis uncertain.at DEN are a true lease.
(c) Similarly, in September(e)O’Hare Airport Use Agreement. In 2003,weUnited filed a complaint for declaratory judgment for allsevenof its municipal bond issues(which represent approximately $601 million in principal)relating toourits facilities atO'Hare,O’Hare International Airport (“O’Hare”), seekingamong other things,a declaration that a certain cross-default provision in theO'HareO’Hare airport leaseiswas unenforceable. InFebruary2005, the Bankruptcy Court approved an agreement("O'Hare(“O’Hare SettlementAgreement"Agreement”) resolving the disputes between United, the trustees and the bondholders. The City of Chicago, a party to these adversary proceedings,iswas not a party to theO'HareO’Hare Settlement Agreement.In August 2005,Subsequently, the Company announced that it had reached an agreement in principle with the City of Chicago, with respect to all unresolved disputes relating toour facilities at
O'Hare.O’Hare. However, the parties were unable to finalize the terms of thissettlement. Thesettlement as the City of Chicagomaintainedcontinued to maintain that it could revokeUnited'sUnited’s exclusive rights to terminals in place of"preferential"“preferential” rights if United did not meet the terms of the cross-default provision (theO'HareO’Hare Airport Use Agreement (“AUA”) did not define or provide for any usage rights, other than exclusive rights).United responded that the cross-default provision was unenforceable against a debtor in bankruptcy as provided under Section 365 of the Bankruptcy Code, and thus United should retain its exclusive rights at O'Hare. On October 5, 2005,In July 2006, the Bankruptcy Court held that the AUA is a
one day trial to determine certain evidentiary issues underlying a determinationself-contained agreement governing United’s use ofwhetherO’Hare and providing thecross-default provision was enforceable. The parties subsequently completed post-trial briefing andfull consideration for that use. To realize theCourt is set to issue a ruling on this issue at the April 2006 omnibus hearing.
(d) HSBC Bank Inc. ("HSBC"), as trustee for the 1997 special facility bonds related to SFO, filed a complaint against United asserting a security interest in United's lease for portionsfull value ofits maintenance base at SFO. Pursuant to Section 506(a) ofUnited’s estate, the Bankruptcy CodeHSBC alleges that it is entitledallows United tobe paidassume thevalueAUA free from obligations imposed under the separate bond payment agreements, notwithstanding the cross-default provisions. The time for the City ofthat security interest. United denies these allegations. HSBC and United are engaged in discovery and are preparing for trial at the end of April 2006.
(e) Despite our emergence from Chapter 11 protection, many unsecured proofs of claim remain unresolved. Since the Effective Date and in accordance with the terms of the Plan of Reorganization, UnitedChicago to appeal this ruling hascontinued to review the claims register and the Company believes that many of the filed proofs of claim are invalid, untimely, duplicative, or overstated, and therefore is in the process of objecting to such claims. Differences between claim amounts filed and our estimates of claims to be allowed are being investigated and will be resolved in connection with our claims resolution process. In this regard, it should be noted that the claims reconciliation process may result in material adjustments after the Effective Date.expired.(f)
In December 2004, the Pension Benefit Guaranty Corporation (the "PBGC") filed an Involuntary Termination Proceeding ("Involuntary Termination Proceeding") against United, as plan administrator for the United Airlines Pilot Defined Benefit Pension Plan (the "Pilot Plan"), in the District Court. In January 2005, the District Court granted a motion filed by the Company and referred the Involuntary Termination Proceeding to the Bankruptcy Court.ALPAand the United Retired Pilots Benefit Protection Association and seven retired pilots (collectively, "URPBPA") were later granted leave to intervene in the Involuntary Termination Proceeding.
After several months, the PBGC moved for summary judgment based on the administrative record which was partially granted by the Bankruptcy Court. In addition, the Bankruptcy Court ruled that if grounds existed for termination, the termination date would be December 30, 2004. However, the Bankruptcy Court denied the PBGC's motion for summary judgment as to the propriety of terminating the Pilot Plan. Later, in September 2005, the Bankruptcy Court conducted a trial and determined that the Pilot Plan should be involuntarily terminated under the Employee Retirement Income Security Act ("ERISA") Section 4042. On October 26, 2005, the Bankruptcy Court issued a memorandum opinion in the PBGC's favor finding that the Pilot Plan should be terminated. On October 28, 2005, the Bankruptcy Court entered an order authorizing termination of the Pilot Plan.
The PBGC, ALPA and URPBPA filed notices of appeal and in February 2006, the District Court reversed the Bankruptcy Court's order based on a determination that the Bankruptcy Court lacked "core" jurisdiction over the Involuntary Termination Proceeding. However, the District Court did not address the substantive merits of the Bankruptcy Court's ruling. The District Court remanded the proceedings to the Bankruptcy Court so that the Bankruptcy Court could submit proposed findings and conclusions of law to be forwarded to the District Court for review, which has since happened. The District Court's determination (and that of any court considering an appeal of the District Court's order) regarding the termination of the Pilot Plan may have a material adverse effect on the Company's financial performance.
(g) After the PBGC commenced its Involuntary Termination Proceeding and sought a December 30, 2004 termination date, the Company suspended ALPA non-qualified pension benefits pending the setting of such a termination date. On February 18, 2005, the Bankruptcy Court required the Company to continue paying non-qualified pension benefits to retired pilots pending a termination in the Involuntary Termination Proceeding, notwithstanding the possibility that the Pilot Plan might be terminated retroactive to December 30, 2004. Then, on October 6, 2005, the Bankruptcy Court required the Company to continue paying non-qualified pension benefits until entry of the Bankruptcy Court's order and accompanying memorandum opinion terminating the Pilot Plan which was appealed by the Company. On February 24, 2006, the District Court dismissed the Company's appeal of the October 6, 2005 order compelling payment of non-qualified pension benefits in light of its February 2006 decision reversing the Bankruptcy Court's Termination Order. Subsequently, on March 17, 2006, the Bankruptcy Court ruled that the Company was obligated to make payment of non-qualified pension benefits through January 31, 2006. The Bankruptcy Court also ruled that the Company's obligation to pay non-qualified pension benefits ceased as of January 31, 2006. The Company continues to review the impact of the Bankruptcy Court's latest decision.
(h)Agreement Approval. In January 2005, United filed a motion seeking approval of an agreement to restructure thenew CBA with ALPAAir Line Pilots Association (“ALPA”) collective bargaining agreement pursuant to Section 363(b) of the Bankruptcy Code. The Bankruptcy Court approved the ALPA agreement over the objections of various parties. The active pilots ratified the agreement, and the Bankruptcy Court entered an order approving the ALPA agreement (the"ALPA Order"“ALPA Order”). In February 2005,URPBPAthe United Retired Pilots Benefit Protection Association and seven retired pilots (collectively, “URPBPA”) filed its notice of appeal of the ALPA Order based principally on the allegation thatUnited wasthe ALPA Order unfairlytreatingfailed to provide for theretired pilots by not distributingdistribution of thesame unsecured notesLimited-Subordination Notes to the retired pilotsthat it was distributingas provided to the active pilots pursuant to the ALPA agreement.In June 2005,The ALPA Order was approved by the District Courtentered an orderand,memorandum opinion dismissing URPBPA's appeal of the ALPA Order as interlocutory. URPBPA appealed the District Court's judgment toin March 2006, by the Court of Appeals.The parties fully briefedIn June 2006, URPBPA filed a petition for a writ of certiorari from thematter andSupreme Court to review the Court ofAppeals heard oral argument in FebruaryAppeals’ ruling with respect to this matter. In October 2006,though it has not yet ruled onthematter. Additionally,Supreme Court denied theCompany filed with the Courtpetition for a writ ofAppeals a motion to dismiss the appeal on the ground that (i) no effective relief can be granted to the appellants and/or (ii) if relief could be granted, it would be highly inequitable to do so. The Court of Appeals has not yet ruled on the Company's motion to dismiss or indicated whether it will hear further argument on thecertiorari, which effectively concluded this matter.
(i) Two parties(g)URPBPA Appeal of Confirmation Order. In January 2006, URPBPA filednotices ofa notice and brief supporting an appeal of the order confirming the Plan of Reorganization.First, URPBPA filed its notice of appeal and its brief in support of the appeal of the confirmation order to the District Court.In February 2006, United filed a motion to dismiss the appeal based onMarch 28, 2006. At a status hearing on March 29,the substantial consummation of the Plan of Reorganization. In June 2006, the District Courtordereddismissed URPBPA’s appeal for lack of ripeness. Subsequently, URPBPA filed abriefing schedule that combines both the meritsnotice of appeal of theappeal with United's requestdecision todismisstheappeal. Pursuant to that schedule, United will have until April 19,Court of Appeals. On October 25, 2006,to file a brief that responds to URPBPA onthemeritsCourt of Appeals reversed the District Court’s order dismissing for lack of ripeness URPBPA’s appeal of theappealconfirmation order andrequestsremanded the case to the District Court with instructions todismissaffirm theappeal.confirmation order. On December 4, 2006, the District Court entered an order affirming the confirmation order. As of January 23, 2007, URPBPAwill then have until May 3, 2006 todid not file abrief that repliespetition for writ of certiorari and thus this matter is effectively concluded.Significant Matters Remaining to
United's brief onbe Resolved in Chapter 11 Cases.The following material matters remain to be resolved in themerits and respondsBankruptcy Court or another court:(a)SFO Municipal Bond Secured Interest. HSBC Bank Inc. (“HSBC”), as trustee for the 1997 municipal bonds related to
United's requestSFO, filed a complaint against United asserting a security interest in United’s leasehold fordismissal. Finally, United will have until May 17, 2006 to file a reply to URPBPA in supportportions of itsrequest for dismissal.maintenance base at SFO. Pursuant to Section 506(a) of the Bankruptcy Code, HSBC alleges that it is entitled to be paid the value of that security interest, which HSBC had claimed was as much as $257 million. HSBC and United went to trial in April 2006 and the Bankruptcy Court rejected as a matter of law HSBC’s $257 million claim. HSBC subsequently alleged that it was entitled to $154 million, or at a minimum, approximately $93 million. The parties tried the case and filed post-trial briefs which were heard by the Bankruptcy Court. In October 2006, the Bankruptcy Court issued its written opinion holding that the value of the security interest is approximately $27 million. After the Bankruptcy Court denied various post-trial motions, both parties have appealed to the District Courtset June 22, 2006 forand those appeals are pending.70
(b)LAX Municipal Bond Secured Interest. In addition, there is pending litigation before the nextBankruptcy Court regarding the extent to which the LAX municipal bond debt is entitled to secured status hearingunder Section 506(a) of the Bankruptcy Code. Trial in this matter is scheduled for the week of April 11,2007. The Company has recorded an obligation of $60 million at December 31, 2006 for this matter, which timeis the Company’s best estimate of the liability.
(c)Pilot Plan Termination Order. In December 2004, the PBGC filed an involuntary termination proceeding against United, as plan administrator for the United Airlines Pilot Defined Benefit Pension Plan (the “Pilot Plan”), in the District Court. In January 2005, the District Court granted a ruling maymotion filed by the Company and referred the involuntary termination proceeding to the Bankruptcy Court. ALPA and URPBPA were later granted leave to intervene in the involuntary termination proceeding.
After several months, the Bankruptcy Court conducted a trial and determined that the Pilot Plan should be made.involuntarily terminated under the Employee Retirement Income Security Act (“ERISA”) Section 4042 with a termination date of December 30, 2004. Subsequently, the Bankruptcy Court entered an order authorizing termination of the Pilot Plan.
The PBGC, ALPA and URPBPA filed notices of appeal with the District Court. In February 2006, the District Court reversed and remanded the Bankruptcy Court’s termination order on the grounds that the matter was not a core proceeding in which it could issue a final order, but rather, could only issue proposed findings of fact and conclusions of law for consideration by the District Court. Upon remand and after the Bankruptcy Court made proposed findings of fact and conclusions of law and, in June 2006, the District Court entered an order approving the termination of the Pilot Plan. ALPA, URPBPA and PBGC each filed an appeal with the Court of Appeals. On October 25, 2006, the Court of Appeals affirmed the District Court’s order approving the termination of the Pilot Plan effective December 30, 2004. On November 6, 2006, ALPA filed a petition for rehearing in the Court of Appeals which motion has been denied. ALPA and URPBPA have filedpetitions for writ of certiorari from the United States Supreme Court on the plan termination. The Supreme Court has yet to rule on such petitions. If the confirmationtermination order was ultimately reversed on appeal, it could have a materially adverse effect on the Company. Second, Wells Fargo Bank Northwest, N.A., not individually butCompany’s financial performance, should such determination result in the reversal of the termination of one or more defined benefit pension plans.
(d)Pilot Plan Non-Qualified Pension Benefits. After the PBGC commenced its capacity asinvoluntary termination proceeding and sought a trustee ("Wells Fargo"),December 30, 2004 termination date, the Company suspended payment of non-qualified pension benefits under the Pilot Plan pending the setting of such a termination date. In the first quarter of 2005, the Bankruptcy Court required the Company to continue paying non-qualified pension benefits to retired pilots pending the outcome of the involuntary termination proceeding, notwithstanding the possibility that the Pilot Plan might be terminated retroactively to December 30, 2004. Then, on October 6, 2005, despite its oral ruling terminating the Pilot Plan, the Bankruptcy Court entered an order requiring the Company to continue paying non-qualified pension benefits until entry of a written order. However, United appealed that order and placed approximately $6 million necessary to pay non-qualified benefits for the month of October 2005 in a segregated account. Following the entry of the Bankruptcy Court’s termination order on October 28, 2005, United ceased paying non-qualified benefits. Subsequently, during the first quarter of 2006, the District Court dismissed the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order in light of its earlier decision reversing the Bankruptcy Court’s termination order. The Company filed itsa notice of appeal of the confirmationDistrict Court’s ruling regarding the October 6, 2005 order to the Court of Appeals. On October 25, 2006, the Court of Appeals reversed the District Court’s order dismissing for lack of ripeness the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order and remanded the case with
instructions to reverse the Bankruptcy Court’s order compelling payment of non-qualified benefits for October 2005 or later months. On November 6, 2006, ALPA filed a petition for rehearing on the Court of Appeals reversal of the October 6, 2005 order, which motion has been denied. ALPA and URPBPA have filed petitions for writ of certiorari from the Supreme Court. The Supreme Court has yet to rule on such petitions.
In March 2006, the Bankruptcy Court ruled that the Company was obligated to make payment of all non-qualified pension benefits for the months of November and December 2005 and January 2006. The Bankruptcy Court also ruled that the Company’s obligation to pay non-qualified pension benefits ceased as of January 31, 2006. The Company filed a notice of appeal of the Bankruptcy Court’s ruling to the District Court. At the initial status hearing on Wells Fargo Bank Northwest, N.A.'sURPBPA and ALPA also filed notices of appeal United representedwith respect to the Bankruptcy Court’s order, which were subsequently consolidated with the Company’s appeal. United agreed with URPBPA and ALPA to pay the disputed non-qualified pension benefits for the months of November and December 2005 and January 2006, an aggregate amount totaling approximately $17 million, into an escrow account. The District Court affirmed the Bankruptcy Court’s ruling in September 2006. The Company filed a notice of appeal of the District Court’s ruling to the Court of Appeals. URPBPA and ALPA also appealed the District Court’s decision. The Company subsequently filed a motion to consolidate its appeal from the Bankruptcy Court’s October 2005 non-qualified benefits order with the three appeals from the Bankruptcy Court’s March 2006 non-qualified benefits order. The Court of Appeals denied the Company’s motion, but issued an order staying briefing on the March 2006 non-qualified benefits order until further order of the Court of Appeals. In light of the Court of Appeals’ October 25, 2006 decision described above, the Company is reasonably optimistic of a successful outcome of its appeal in this matter, although there can be no assurances that the ultimate outcome of this appeal likely wouldwill be resolved in connection with the parties' agreement to settle the 1997-1 EETC litigation. As such, the District Court continued the status hearing on Wells Fargo's appeal until April 20, 2006. United expects that the parties will file a stipulation agreeing to voluntarily dismiss the appeal on or prior to March 31, 2006 and in any event priorfavorable to the April 20, 2006 status hearing.
Claims Resolution Process.As permitted under the bankruptcy process, ourthe Debtors’ creditors filed proofs of claim with the Bankruptcy Court. Through the claims resolution process, wethe Company identified many claims which were disallowed by the Bankruptcy Court for a number of reasons, such as claims that were duplicative, amended or superseded by later filed claims, were without merit, or were otherwise overstated. Throughout the bankruptcy, we filed omnibusChapter 11 proceedings, the Company resolved many claims through settlement or objections to many of these claims andordered by the Bankruptcy Court. The Company will continue to settle claims and file additional objections. Once we determine anobjections with the Bankruptcy Court.
With respect to unsecured claims, once a claim is deemed to be valid, either through the Bankruptcy Court process or through other means, the claimant is entitled to a distribution of equity as noted above.
Thecommon stock in the Successor Company. Pursuant to the terms of the Plan of Reorganization, 115 million shares of common stock in the Successor Company have been authorized to be issued to satisfy valid unsecured claims. The Bankruptcy Court confirmed the Plan of Reorganization and established January 20, 2006 as the record date for purposes of establishing the persons that are claimholders of record to receive distributions in accordance with the termsdistributions. Approximately 108million common shares have been issued and distributed to holders of the Plan of Reorganization. Sincevalid unsecured claims between February 2, 2006, the first distribution date established in the Plan of Reorganization, and December 31, 2006. As of December 31, 2006, approximately 9345,000 valid unsecured claims aggregating to approximately $29 billion in claim value had received those common shares to partially satisfy those claims. The approximately 7 million remaining shares are being held in reserve to satisfy all of the 115 million shares authorized byremaining disputed and undisputed unsecured claim values, once the Planremaining claim disputes are resolved.
The Company’s current estimate of Reorganization with respect to such claims have been distributed to unsecured creditors. Due to the significant volume of claims filed to date, it is premature to estimate with any degree of accuracy the ultimate allowed amount of such claims under the Plan of Reorganization. The Plan of Reorganization stated a range for total unsecured claims of $22-$35 billion. The Company has more recently estimated, however, that the probable range of unsecured claims to be allowed by the Bankruptcy Court will be $28-$31is between $29 billion and $30 billion. Differences between claim amounts filed and ourthe Company’s estimates are beingcontinue to be investigated and will be resolved in connection with ourthe claims resolution process. In this regard,However, there will be no further financial impact to the Company associated with the settlement of such unsecured claims, as the holders of all allowed unsecured claims will receive under the
Plan of Reorganization no more than their pro rata share of the distribution of the 115 million shares of common stock of the Successor Company, together with the previously-agreed issuance of certain securities.
With respect to valid administrative and priority claims, pursuant to the terms of the Plan of Reorganization these claims will be satisfied with cash. Many asserted administrative and priority claims still remain unpaid, and the Company will continue to settle claims and file objections with the Bankruptcy Court to eliminate or reduce such claims. An estimate of these claims was accrued by the Successor Company on the Effective Date based upon the best available evidence of amounts to be paid. However, it should be noted that the claims reconciliationresolution process is uncertain and adjustments to claims estimates could result in material adjustments to the Successor Company’s financial statements in future periods. The most significant items included in the adjustments made to this accrual since the Effective Date are $36 million for special items associated with certain litigation, as discussed in Note 19, “Special Items.” In addition, net accruals and adjustments of $29 million have been made which relate primarily to revisions of claim estimates for aircraft financings, tax matters and professional fees as a result of the receipt of new or revised information or the finalization of these matters.
Additionally, secured claims were deemed unimpaired under the Plan of Reorganization, pursuant to which these claims were satisfied by reinstatement of the obligations in the Successor Company, surrendering the collateral to the secured party, or by making full payment in cash. However, certain disputes, the most significant of which are discussed in “Significant Matters Remaining to be Resolved in Chapter 11 Cases,” above, still remain with respect to the valuation of certain claims. Revisions to the Company’s estimates of its liability for these claims due to the receipt of new information or final court rulings on these claims may result in material adjustments.future adjustments to the Company’s financial statements.
The table below includes activity related to the administrative and priority claims and other bankruptcy-related claim reserves including reserves related to legal, professional and tax matters, among others, for the Successor Company for the eleven months ended December 31, 2006. These reserves are primarily classified in other current liabilities and other non-current liabilities in the Statements of Consolidated Financial Position based on the expected timing of resolution of these matters.
|
| (In millions) |
| |||
Balance at February 1, 2006 |
|
| $ | 583 |
|
|
Accruals |
|
| 15 |
|
| |
Accrual adjustments |
|
| (80 | ) |
| |
Payments |
|
| (193 | ) |
| |
Balance at December 31, 2006 |
|
| $ | 325 |
|
|
Financial Statement Presentation.We haveThe Company has prepared the accompanying consolidated financial statements in accordance with SOP 90-7 and on a going-concern basis, which assumes continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.
73
SOP 90-7 requires that the financial statements for periods subsequent toafter a Chapter 11 filing separate transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, all transactions (including, but not limited to, all professional fees, realized gains and losses and provisions for losses) directly associated with the reorganization and restructuring of the business are reported separately in the financial statements. As ofstatements as reorganization items, net. For the month ended January 31, 2006 and the years ended December 31, 2005 and 2004, and 2003, we hadthe Predecessor Company recognized the following primarily non-cash reorganization expensesincome (expense) in ourits financial statements: (In millions) Pension-related charges Employee-related charges Aircraft claim charges Municipal bond charges Contract rejection charges Retiree-related charges Professional fees Impairment on lease certificates Aircraft refinance adjustments Other
| Period from |
| Year Ended |
| ||||||||||||
(In millions) |
|
|
| 2006 |
| 2005 |
| 2004 |
| |||||||
Discharge of claims and liabilities |
|
| $ | 24,628 |
|
| $ | — |
| $ | — |
| (a) | |||
Revaluation of frequent flyer obligations |
|
| (2,399 | ) |
| — |
| — |
| (b) | ||||||
Revaluation of other assets and liabilities |
|
| 2,106 |
|
| — |
| — |
| (c) | ||||||
Employee-related charges |
|
| (898 | ) |
| (6,529 | ) | (13 | )(d) | |||||||
Contract rejection charges |
|
| (429 | ) |
| (523 | ) | — |
| (e) | ||||||
Professional fees |
|
| (47 | ) |
| (230 | ) | (160 | ) | |||||||
Pension-related charges |
|
| (14 | ) |
| (8,925 | ) | (152 | ) | (f) | ||||||
Aircraft claim charges |
|
| — |
|
| (3,005 | ) | (341 | )(g) | |||||||
Municipal bond charges |
|
| — |
|
| (688 | ) | — |
| (h) | ||||||
Retiree-related charges |
|
| — |
|
| (652 | ) | — |
| (i) | ||||||
Impairment on lease certificates |
|
| — |
|
| (134 | ) | — |
| (j) | ||||||
Aircraft refinance adjustments |
|
| — |
|
| 60 |
| — |
| (j) | ||||||
Other |
|
| (13 | ) |
| 25 |
| 55 |
| |||||||
|
|
| $ | 22,934 |
|
| $ | (20,601 | ) | $ | (611 | ) | ||||
(a)The Company determined in late 2004 that it would be necessarydischarge of claims and liabilities primarily relates to terminate and replace all of its domestic defined benefit pension plans. To this end, in April 2005, United andthose unsecured claims arising during the PBGC entered into a global settlement agreement which provides forbankruptcy process, such as those arising from the settlement and compromise of various disputes and controversies with respect to four defined benefit pension plans of United, including the Pilot Plan, the United Airlines Flight Attendant Defined Benefit Plan (the "Flight Attendant Plan"), the United Airlines, Inc. Ground Employees' Retirement Plan (the "Ground Plan") and the United Airlines Management, Administrative and Public Contact Defined Benefit Pension Plan (the "MAPC Plan") (collectively, the "Pension Plans"). In May 2005, the Bankruptcy Court approved the settlement agreement, including modifications requested by certain creditors.
Upon termination and settlement of the Pension Plans,Company’s U.S. defined benefit pension plans and other employee claims; aircraft-related claims, such as those arising as a result of aircraft rejections; other unsecured claims due to the rejection or modification of executory contracts, unexpired leases and regional carrier contracts; and claims associated with certain municipal bond obligations based upon their rejection, settlement or the estimated impact of the outcome of pending litigation. In accordance with the Plan of Reorganization, the Company recognized non-cash curtailment chargesdischarged its obligations to unsecured creditors in exchange for the distribution of $640115 million common shares of the Successor Company and $152 million in 2005 and 2004, respectively, and net settlement lossesthe issuance of approximately $1.1 billion in 2005 in accordance with SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS 88"). Further,certain other securities. Accordingly, the Company recognized a non-cash chargereorganization gain of $7.2 billion related to a final settlement with the PBGC$24.6 billion.
(b) The Company revalued its Mileage Plus Frequent Flyer Program (“Mileage Plus”) obligations at fair value as a result of the termination of the defined benefit pension plans.fresh-start reporting, which resulted in a $2.4 billion non-cash reorganization charge.
Under the global settlement agreement, the Company provided in its confirmed Plan of Reorganization for the distribution of the following consideration to the PBGC:
$500 million in principal amount of 6% senior unsecured notes to be issued to the PBGC no later than the Effective Date; maturing 25 years from issuance date; with interest payable in kind (notes or common stock) through 2011 (and thereafter in cash) in semi-annual installments; and being callable at any time at 100% of par value.5,000,000 shares of 2% convertible preferred stock to be issued to the PBGC no later than the Effective Date, at a liquidation value of $100 per share, convertible at any time following the second anniversary of the issuance date into common stock of the reorganized Company at a conversion price equal to 125% of the average closing price of the common stock during the first 60 trading days following exit from bankruptcy; with dividends payable in kind semi-annually; the preferred stock will rank pari passu with all current and future UAL or United preferred stock; and will be redeemable at any time at $100 par value at the option of the issuer; and will be non-transferable until two years after the issuance date.$500 million in principal amount of 8% senior unsecured notes contingently issuable to the PBGC in up to eight equal tranches of $62.5 million (with no more than two tranches issued on a single date), no later than 45 days following the end of any fiscal year starting with the fiscal year 2009 and ending with the fiscal year 2017 in which there is an issuance trigger date. An issuance trigger date occurs when, among other things, the Company's EBITDAR exceeds $3.5 billion over the prior twelve months ending June 30 or December 31 of any applicable fiscal year. However, if the issuance of a tranche would cause a default under any other securities then existing, the Company may satisfy its obligations with respect to such tranche by issuing common stock having a market value equal to $62.5 million. Each issued tranche will mature 15 years from its respective issuance date; with interest payable in cash in semi-annual installments; and will be callable at any time at 100% of par value.
The Company provided the PBGC with a single pre-petition general unsecured claim arising from the termination of the Pension Plans. The Company and the PBGC entered into a global settlement agreement, which, among other things, provided that the PBGC would assign 45% of its claim to certain other creditors.(c) In accordance with fresh-start reporting, the global settlement agreement,Company revalued its assets at their estimated fair value and liabilities at estimated fair value or the present value of amounts to be paid. This resulted in a portionnon-cash reorganization gain of $2.1 billion, primarily as a result of newly recognized intangible assets, offset partly by reductions in the sharesfair value of common stock issued in satisfaction of this assigned 45% unsecured claim were sold in ordinary trading transactions over the NASDAQ National Market,tangible property and the proceeds were distributed to satisfy certain obligations.equipment.
(d) In exchange for employees'employees’ contributions to the successful reorganization of the Company, including agreeing to reductions in pay and benefits, the Company agreed in the Plan of Reorganization to provide each employee group a deemed claim which was used to provide a distribution of a portion of the equity of the reorganized entity to those employees. Each employee group received a deemed claim amount based upon a portion of the value of cost savings provided by that group through reductions to pay and benefits as well as through certain work rule changes. The total value of this
deemed claim was approximately $7.4 billion. As of December 31, 2005, the Company recorded a non-cash reorganization charge of $6.5 billion for the deemed claim amount for all union-represented employees. The remaining $0.9 billion associated with non-represented salaried and management employees was recorded as a reorganization charge in January 2006, upon confirmation of the Plan of Reorganization.
(e) Contract rejection charges are non-cash costs that include estimated claim values resulting from the Company’s rejection or negotiated modification of certain contractual obligations such as executory contracts, unexpired leases and regional carrier contracts.
(f) Upon termination and settlement of the Pension Plans, the Company recognized non-cash curtailment charges of $640 million and $152 million in 2005 and 2004, respectively, associated with actions taken by the PBGC to involuntarily terminate United Air Lines, Inc. Ground Employees’ Retirement Plan (the “Ground Employees Plan”), United Airlines Flight Attendant Defined Benefit Pension Plan (the “Flight Attendant Plan”) and United Airlines Management, Administrative and Public Contact Defined Benefit Pension Plan (“MAPC Plan”). The PBGC was appointed trustee for the Ground Employees Plan effective May 23, 2005 and the MAPC Plan and the Flight Attendant Plan effective June 30, 2005, assuming all rights and powers over the pension assets and obligations of each plan. Upon termination and settlement of these plans, the Company recognized non-cash net settlement losses of approximately $1.1 billion in 2005 in accordance with Statement of Financial Accounting Standards No. 88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”). Further, the Company recognized a non-cash charge of $7.2 billion related to a final settlement with the PBGC as a result of the termination of the defined benefit pension plans. In addition, the Company recognized a non-cash settlement loss in the amount of $10 million during 2005 for the termination of the non-qualified supplemental retirement plan for management employees who had benefits under the tax-qualified pension plan that could not be paid under the qualified plan due to Internal Revenue Code limitations.
(g) Aircraft claim charges include the Company'sCompany’s estimate of claims incurred as a result of the rejection of certain aircraft leases and return of aircraft as part of the bankruptcy process, together with certain claims resulting from the modification of other aircraft financings in bankruptcy.
As we restructured aircraft financings as permitted by Section 1110 of the Bankruptcy Code, our policy was to reflect the revised lease rates in aircraft rent once we had signed definitive term sheets for the financings and they had been approved by the Bankruptcy Court.
(h) Municipal bond obligations include the Company'sCompany’s best estimate of unsecured claims incurred as a result of certain restructured municipal bond obligations, together with certain claims expected to result from the rejection and litigation of other municipal bond obligations. The ultimate disposition of several bond obligations, specifically SFO and LAX, remains subject to the uncertain outcome of pending litigation, and therefore the claims amounts recorded for those obligations remain subject to change.litigation. In recognition of this and other claims contingencies which remain unresolved, as of the Effective Date, the Company has withheldcontinues to withhold a portion of the equity distribution authorized by the Plan of Reorganization to unsecured creditors and other claimants. See "Claims“Claims Resolution Process"Process” and "Significant“Significant Matters Remaining to be Resolved in Bankruptcy Court"Chapter 11 Cases,” above, for further details.
Contract rejection charges are non-cash costs that include our estimate of unsecured claims resulting from the Company's rejection of certain contract obligations such as executory contracts, unexpired leases, and regional carrier contracts. A portion of these claim amounts remain subject to future adjustment arising from negotiated settlements, actions of the Bankruptcy Court, the determination as to the value of any collateral securing claims, proofs of claim or other events. See "Claims Resolution Process" above for further details.
(i) In 2004, the Company reached agreement with representatives of ourits retirees to modify medical and life insurance benefits for individuals who had retired from United prior tobefore July of 2003, as provided under Section 1114 of the Bankruptcy Code ("(“retiree welfare benefit claims"claims”). As a result, the Company proposed, as part of the approved Plan of Reorganization, a general unsecured claim for these changes to retiree benefits for each of the eligible individuals. The aggregate amount of retiree welfare benefit claims allowed by the Bankruptcy Court pursuant to these agreements and the Company'sCompany’s confirmed Plan of Reorganization was approximately $652 million.
During 2005, in(j) In accordance with the term sheets reached with the Public Debt Group, the Company agreed to treatcancel certain 2000-11997-1 EETC certificates that were held by a related party as canceled for all economic and other purposes. In addition, the Company determined that certain 1997-1 EETC Tranche D certificates were impaired.party. Accordingly, in 2005, the Company recorded a non-cash charge in the amount of $134 million for the principal and interest on
such canceled and impaired certificates. In addition, the Company recorded adjustments retroactively for aircraft rent and interest expense in the amount of $60 million to reflect other revised terms of these financings.
During 2003, we renegotiated certain off-balance sheet leases subject to Section 1110 of the Bankruptcy Code. Under the terms of the revised leases, we surrendered our investment in the junior portion of the original lease debt to the original equity participant. As a result, our investment in the corresponding lease certificates was reduced to zero, resulting in a $223 million non-cash charge to reorganization expense.aircraft financing terms.
The Statements of Consolidated Financial Position distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities subject to compromise arewere reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may bewere settled for lesser amounts.
At December 31, 2005, the Company had Liabilities subject to compromise consisting of the following:
|
| (In millions) |
| |||
Employee claims and deemed claims |
|
| $ | 18,007 |
|
|
Long-term debt, including accrued interest |
|
| 6,624 |
|
| |
Aircraft-related obligations and deferred gains |
|
| 6,104 |
|
| |
Capital lease obligations, including accrued interest |
|
| 1,631 |
|
| |
Municipal bond obligations and claims |
|
| 1,344 |
|
| |
Accounts payable |
|
| 261 |
|
| |
Early termination fees |
|
| 162 |
|
| |
Other |
|
| 883 |
|
| |
|
|
| $ | 35,016 |
|
|
DIP Financing.At January 31, 2006, the Company’s outstanding balance of its DIP Financing was $1.2 billion. On the Effective Date, the proceeds from the Credit Facility were drawn and used to repay the DIP Financing. For further details on the Credit Facility, see Note 8, "Liabilities Subject11, “Debt Obligations.”
Fresh-Start Reporting.Upon emergence from its Chapter 11 proceedings on February 1, 2006, the Company adopted fresh-start reporting in accordance with SOP 90-7. The Company’s emergence from Chapter 11 resulted in a new reporting entity with no retained earnings or accumulated deficit. Accordingly, the Company’s consolidated financial statements on or after February 1, 2006 are not comparable to Compromise".its pre-emergence consolidated financial statements because they are, in effect, those of a new entity. See the Company’s Statements of Consolidated Financial Position, below.
Fresh-start reporting reflects the value of the Company as determined in the confirmed Plan of Reorganization. Under fresh-start reporting, the Company’s asset values are remeasured using fair value, and are allocated in conformity with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). The excess of reorganization value over the fair value of net tangible and identifiable intangible assets and liabilities is recorded as goodwill in the accompanying Statements of Consolidated Financial Position. In addition, as a resultfresh-start reporting also requires that all liabilities, other than deferred taxes, should be stated at fair value or at the present values of the Chapter 11 filing,amounts to be paid using appropriate market interest rates. Deferred taxes are determined in conformity with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”).
Estimates of fair value represent the Company’s best estimates, which are based on industry data and trends and by reference to relevant market rates and transactions, and discounted cash flow valuation methods, among other factors. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. In accordance with SFAS 141, the preliminary allocation of the reorganization value was subject to additional adjustment within one year after emergence from bankruptcy to provide the Company with the time to complete the valuation of its assets and liabilities.
This adjustment allocation period ended January 31, 2007; see (c) “Revaluation of Assets and Liabilities,” below, for further information about adjustments recorded by the Company after the Effective Date.
To facilitate the calculation of the enterprise value of the Successor Company, the Company developed a set of financial projections. Based on these financial projections, the equity value was determined by the Company, using various valuation methods, including (i) a comparison of the Company and its projected performance to the market values of comparable companies; (ii) a review and analysis of several recent transactions of companies in similar industries to the Company; and (iii) a calculation of the present value of the future cash flows of the Company under its projections.
The estimated enterprise value, and corresponding equity value, is highly dependent upon achieving the future financial results set forth in the projections as well as the realization of assetscertain other assumptions. The estimated equity value of the Company was calculated to be approximately $1.9 billion. The estimates and satisfaction of liabilities, without substantial adjustments and/or changesassumptions made in ownership,this valuation are inherently subject to uncertainty. significant uncertainties and the resolution of contingencies beyond the reasonable control of the Company. Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be realized, and actual results could vary materially. Moreover, the market value of the Company’s common stock may differ materially from the equity valuation.
In accordance with SOP 90-7, the Company was required to adopt on February 1, 2006 all accounting guidance that was going to become effective within the subsequent twelve-month period. See Note 2(o), “Summary of Significant Accounting Policies—Adopted Accounting Pronouncements.”
77
The implementation of the Plan of Reorganization and the effects of the consummation of the transactions contemplated therein, which included settlement of various liabilities, issuance of certain securities, incurrence of new indebtedness, repayment of old indebtedness, and other cash payments and the adoption of fresh start accountingfresh-start reporting in the Company’s Statements of Consolidated Financial Position are as follows:
|
|
| Fresh-Start Adjustments |
|
|
| ||||||||||||||||||||||
(In millions, except shares) |
|
|
| Predecessor |
| (a) |
| (b) |
| (c) |
| Successor |
| |||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Cash and cash equivalents |
|
| $ | 1,631 |
|
|
| $ | — |
|
|
| $ | — |
|
|
| $ | — |
|
|
| $ | 1,631 |
|
| ||
Restricted cash |
|
| 847 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 848 |
|
| |||||||
Short-term investments |
|
| 75 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 75 |
|
| |||||||
Receivables, net |
|
| 935 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| 945 |
|
| |||||||
Prepaid fuel |
|
| 280 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 280 |
|
| |||||||
Aircraft fuel, spare parts and supplies, net |
|
| 195 |
|
|
| — |
|
|
| — |
|
|
| (24 | ) |
|
| 171 |
|
| |||||||
Deferred income taxes |
|
| 27 |
|
|
| — |
|
|
| — |
|
|
| 102 |
|
|
| 129 |
|
| |||||||
Prepaid expenses and other |
|
| 499 |
|
|
| — |
|
|
| — |
|
|
| 105 |
|
|
| 604 |
|
| |||||||
|
|
| 4,489 |
|
|
| — |
|
|
| — |
|
|
| 194 |
|
|
| 4,683 |
|
| |||||||
Operating property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Owned— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Flight equipment |
|
| 13,446 |
|
|
| — |
|
|
| — |
|
|
| (4,842 | ) |
|
| 8,604 |
|
| |||||||
Advances on flight equipment |
|
| 128 |
|
|
| (25 | ) |
|
| — |
|
|
| — |
|
|
| 103 |
|
| |||||||
Other property and equipment |
|
| 3,838 |
|
|
| — |
|
|
| — |
|
|
| (2,545 | ) |
|
| 1,293 |
|
| |||||||
|
|
| 17,412 |
|
|
| (25 | ) |
|
| — |
|
|
| (7,387 | ) |
|
| 10,000 |
|
| |||||||
Less—Accumulated depreciation and amortization |
|
| (6,158 | ) |
|
| — |
|
|
| — |
|
|
| 6,158 |
|
|
| — |
|
| |||||||
|
|
| 11,254 |
|
|
| (25 | ) |
|
| — |
|
|
| (1,229 | ) |
|
| 10,000 |
|
| |||||||
Capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Flight equipment |
|
| 2,581 |
|
|
| — |
|
|
| — |
|
|
| (1,145 | ) |
|
| 1,436 |
|
| |||||||
Other property and equipment |
|
| 84 |
|
|
| — |
|
|
| — |
|
|
| (69 | ) |
|
| 15 |
|
| |||||||
|
|
| 2,665 |
|
|
| — |
|
|
| — |
|
|
| (1,214 | ) |
|
| 1,451 |
|
| |||||||
Less—Accumulated amortization |
|
| (747 | ) |
|
| — |
|
|
| — |
|
|
| 747 |
|
|
| — |
|
| |||||||
|
|
| 1,918 |
|
|
| — |
|
|
| — |
|
|
| (467 | ) |
|
| 1,451 |
|
| |||||||
|
|
| 13,172 |
|
|
| (25 | ) |
|
| — |
|
|
| (1,696 | ) |
|
| 11,451 |
|
| |||||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Intangibles, net |
|
| 350 |
|
|
| — |
|
|
| — |
|
|
| 2,842 |
|
|
| 3,192 |
|
| |||||||
Goodwill |
|
| 17 |
|
|
| 14 |
|
|
| — |
|
|
| 2,734 |
|
|
| 2,765 |
|
| |||||||
Aircraft lease deposits |
|
| 492 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 492 |
|
| |||||||
Restricted cash |
|
| 315 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 315 |
|
| |||||||
Investments |
|
| 25 |
|
|
| — |
|
|
| — |
|
|
| 87 |
|
|
| 112 |
|
| |||||||
Prepaid rent |
|
| 66 |
|
|
| — |
|
|
| — |
|
|
| (58 | ) |
|
| 8 |
|
| |||||||
Pension assets |
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| 1 |
|
| |||||||
Other, net |
|
| 619 |
|
|
| — |
|
|
| — |
|
|
| 201 |
|
|
| 820 |
|
| |||||||
|
|
| 1,894 |
|
|
| 14 |
|
|
| — |
|
|
| 5,797 |
|
|
| 7,705 |
|
| |||||||
Total assets |
|
| $ | 19,555 |
|
|
| $ | (11 | ) |
|
| $— |
|
|
| $ | 4,295 |
|
|
| $ | 23,839 |
|
| |||
78
|
|
| Fresh-Start Adjustments |
|
|
| ||||||||||||||||||||||
(In millions, except shares) |
|
|
| Predecessor |
| (a) |
| (b) |
| (c) |
| Successor |
| |||||||||||||||
Liabilities & Stockholders’ Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Long-term debt maturing within one year |
|
| $ | 13 |
|
|
| $ | — |
|
|
| $ | 519 |
|
|
| $ | — |
|
|
| $ | 532 |
|
| ||
Advance ticket sales |
|
| 1,679 |
|
|
| — |
|
|
| — |
|
|
| (14 | ) |
|
| 1,665 |
|
| |||||||
Mileage Plus deferred revenue |
|
| 709 |
|
|
| — |
|
|
| — |
|
|
| 356 |
|
|
| 1,065 |
|
| |||||||
Accrued salaries, wages and benefits |
|
| 927 |
|
|
| 37 |
|
|
| — |
|
|
| — |
|
|
| 964 |
|
| |||||||
Advanced purchase of miles |
|
| 686 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 686 |
|
| |||||||
Accounts payable |
|
| 614 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| 617 |
|
| |||||||
Fuel purchase commitments |
|
| 280 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 280 |
|
| |||||||
Current obligations under capital leases |
|
| 20 |
|
|
| — |
|
|
| 77 |
|
|
| (5 | ) |
|
| 92 |
|
| |||||||
Other |
|
| 617 |
|
|
| 90 |
|
|
| 546 |
|
|
| (18 | ) |
|
| 1,235 |
|
| |||||||
|
|
| 5,545 |
|
|
| 127 |
|
|
| 1,142 |
|
|
| 322 |
|
|
| 7,136 |
|
| |||||||
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
DIP Financing |
|
| 1,157 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,157 |
|
| |||||||
Limited-Subordination Notes |
|
| — |
|
|
| 708 |
|
|
| — |
|
|
| — |
|
|
| 708 |
|
| |||||||
Other |
|
| 141 |
|
|
| 424 |
|
|
| 5,115 |
|
|
| (143 | ) |
|
| 5,537 |
|
| |||||||
|
|
| 1,298 |
|
|
| 1,132 |
|
|
| 5,115 |
|
|
| (143 | ) |
|
| 7,402 |
|
| |||||||
Long-term obligations under capital leases |
|
| 101 |
|
|
| — |
|
|
| 1,209 |
|
|
| (35 | ) |
|
| 1,275 |
|
| |||||||
Other liabilities and deferred credits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Mileage Plus deferred revenue |
|
| 276 |
|
|
| — |
|
|
| — |
|
|
| 2,065 |
|
|
| 2,341 |
|
| |||||||
Postretirement benefit liability |
|
| 1,918 |
|
|
| — |
|
|
| — |
|
|
| 66 |
|
|
| 1,984 |
|
| |||||||
Deferred income taxes |
|
| 478 |
|
|
| — |
|
|
| — |
|
|
| 218 |
|
|
| 696 |
|
| |||||||
Deferred pension liability |
|
| 95 |
|
|
| — |
|
|
| — |
|
|
| 29 |
|
|
| 124 |
|
| |||||||
Other |
|
| 552 |
|
|
| 1 |
|
|
| 79 |
|
|
| 12 |
|
|
| 644 |
|
| |||||||
|
|
| 3,319 |
|
|
| 1 |
|
|
| 79 |
|
|
| 2,390 |
|
|
| 5,789 |
|
| |||||||
Liabilities subject to compromise |
|
| 36,336 |
|
|
| (28,136 | ) |
|
| (7,545 | ) |
|
| (655 | ) |
|
| — |
|
| |||||||
Mandatorily convertible preferred stock |
|
| — |
|
|
| 352 |
|
|
| — |
|
|
| — |
|
|
| 352 |
|
| |||||||
Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| |||||||
ESOP preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| |||||||
Common stock at par |
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
| |||||||
Additional capital invested |
|
| 5,064 |
|
|
| 1,884 |
|
|
| — |
|
|
| (5,064 | ) |
|
| 1,884 |
|
| |||||||
Retained earnings (deficit) |
|
| (30,606 | ) |
|
| 24,628 |
|
|
| — |
|
|
| 5,978 |
|
|
| — |
|
| |||||||
Stock held in treasury, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Preferred, 10,213,519 depositary shares |
|
| (305 | ) |
|
| — |
|
|
| — |
|
|
| 305 |
|
|
| — |
|
| |||||||
Common, 16,121,446 shares |
|
| (1,162 | ) |
|
| — |
|
|
| — |
|
|
| 1,162 |
|
|
| — |
|
| |||||||
Accumulated other comprehensive income (loss) |
|
| (36 | ) |
|
| — |
|
|
| — |
|
|
| 36 |
|
|
| — |
|
| |||||||
|
|
| (27,044 | ) |
|
| 26,513 |
|
|
| — |
|
|
| 2,416 |
|
|
| 1,885 |
|
| |||||||
Total liabilities & stockholders’ equity (deficit) |
|
| $ | 19,555 |
|
|
| $ | (11 | ) |
|
| $ | — |
|
|
| $ | 4,295 |
|
|
| $ | 23,839 |
|
| ||
(a)Settlement of Unsecured Claims. This column reflects a discharge of $28.1 billion of liabilities subject to compromise pursuant to the terms of the Plan of Reorganization. Along with other creditor and employee claims incurred through the bankruptcy proceedings (i.e., by the rejection of aircraft, executory contracts, etc.), discharged liabilities include claims related to termination of the Debtors’ defined benefit pension plans. Pursuant to the Plan of Reorganization, the unsecured creditors will receive 115 million common shares of the Successor Company in satisfaction of such claims, together
with certain debt securities and preferred stock. The Company recorded a $24.6 billion non-cash reorganization gain on February 1, 2006 will materially change the amountsdischarge of unsecured claims net of newly-issued securities. See “Financial Statement Presentation,” above, and classificationsNote 11, “Debt Obligations,” for further details.
(b)Reinstatement of Liabilities. This column reflects the reinstatement of certain assetssecured liabilities pursuant to the terms of the Plan of Reorganization. As a result of the reinstatement of liabilities, the Company reclassified $7.5 billion of liabilities subject to compromise.
· $7.1 billion represents the reinstatement of secured debt plus accrued interest.
· $0.4 billion represents accruals for administrative and priority payments, reinstatement of certain municipal bond obligations, and other accruals of payments required under the Plan of Reorganization.
(c)Revaluation of Assets and Liabilities. Fresh-start adjustments are made to reflect asset values at their estimated fair value and liabilities as comparedat estimated fair value or the present value of amounts to amountsbe paid, including:
· Recognition of additional estimated fair value of $2.8 billion for international route authorities, airport slots, trade names and classifications shown inother separately-identifiable intangible assets,
· Recognition of additional estimated fair value of $2.4 billion for the historical consolidated financial statements. For further details on fresh start accounting, see Note 20, "Pro Forma Fresh Start Balance Sheet (Unaudited)".Mileage Plus frequent flyer obligation,
DIP Financing. In connection with the Chapter 11 filings, the Company arranged DIP Financing. On July 15, 2005, the Bankruptcy Court approved an amendment to our agreement with the DIP Financing lenders to increase the term loan from $800 million to $1.1 billion which, when combined with a $200 million revolving credit and letter of credit facility, provided for a total facility· Adjustments of $1.3 billion (subject to a $100 million reserve for collateral maintenancereduce the values of operating property and liquidation expenses). The amendment also (i) extended the maturity dateequipment, including owned assets and the effectivenessassets under capital leases, to their estimated fair market value,
· Adjustments of financial covenants$0.4 billion to December 30, 2005; (ii) gave the Company the option to further extend the maturity date until March 31, 2006 if certain conditions were satisfied; (iii) reduced the interest rate to the prime rate plus 3.25% or LIBOR plus 4.25%; (iv) required the Company to maintain a minimum unrestricted cash balance of at least $750 million; (v) waived certain events of default related to certain technical matters; and (vi) provided for a new capital expenditure basket for certain aircraft purchases, including a cash sublimit, which required financing for the balance of the aggregate purchase price of such aircraft.
On August 18, 2005 the Bankruptcy Court approved a further amendment with the DIP Financing lenders to provide for, among other things, a waiver of any event of defaultreduce recorded flight equipment net book value as a result of the Company acquiring the Tranche A, Tranche Brefinancing certain aircraft from mortgage and Tranche C certificates under the Series 1997-1 EETCcapital lease financing covering 14 of our aircraft.to operating lease financing,
· The amendment further provided for a new term loan of up to $350 million (which would mature at the same time as the remainderelimination of the DIP Financing) to be used to refinance a majorityPredecessor Company’s equity accounts, and establishment of the purchase priceopening equity of those certificates, availablethe Successor Company, and
· Net changes in deferred tax assets and liabilities, together with other miscellaneous adjustments.
Additionally, goodwill of $2.8 billion was recorded upon our exit from bankruptcy to be drawn through Marchreflect the excess of the Successor Company’s reorganization value over the estimated fair value of net tangible and identifiable intangible assets and liabilities. In addition, deferred tax assets and liabilities were adjusted based upon additional information, including adjustments to fair value estimates of underlying assets and liabilities.
Post-Emergence Items.Certain additional Successor Company material transactions occurred on or after February 2, 2006 and have been reflected in the accompanying Statements of Consolidated Financial Position as of December 31, 2006.
Release of Segregated Funds. The Company reclassified $271 million for the release of cash previously restricted by a certain credit card processor. Additionally, $200 million of cash segregated for the payment of certain tax liabilities and recorded as other current assets before the Effective Date, was released and reclassified to unrestricted cash.
Goodwill. During the eleven months ended December 31, 2006, subject to satisfaction of certain conditions. Asgoodwill was decreased by $62 million as a result of a dispute between United andnet adjustments to the holdersvaluation allowance for deferred tax assets. See Note 2(k), “Summary of Significant Accounting Policies—Intangibles,” for further information.
Credit Facility Financing Transactions. On the Tranche A certificates regarding the purchase price thereof, this matter was the subject of continuing litigation andEffective Date, the Company was unable to satisfy the conditions of the DIP agreement permitting the Company to draw on the new term loan of $350 million. However, during the first quarter of 2006, the Company was able to reach an agreement with the Tranche A certificate holders. For further information regarding the resolved litigation with respect to the 1997-1 EETCs, see "Bankruptcy Considerations."
The terms of the DIP Financing included covenants with respect to ongoing monthly financial requirements, including thresholds for minimum EBITDAR, limitations on capital expenditures and minimum unrestricted cash. Failure to comply with these covenants would have constituted an event of default under the DIP Financing and allowed the lenders to accelerate the loan. The Company complied with the EBITDAR covenantreceived $1.4 billion in the fourth quarter of 2005 and in the first quarter of 2006, up to the repayment of the DIP Facility withnet proceeds from the Credit Facility, onconsisting of borrowings of $2.6 billion under the Credit Facility
which includes $161 million borrowed under the revolving credit facility, and the simultaneous repayment of the Company’s $1.2 billion DIP Financing. For further details, see Note 11, “Debt Obligations.”
Adjustments of Preconfirmation Contingencies.The Company recorded its best estimates for certain preconfirmation contingent liabilities that were not resolved at the Effective Date.
Borrowing availability In accordance with AICPA Practice Bulletin 11, “Accounting for Preconfirmation Contingencies in Fresh-Start Reporting,” (“Practice Bulletin 11”), the Company has recorded the impact of revisions to these estimates in current results of operations. In 2006, the Company recorded a net benefit of $36 million to operating income from adjustments to its SFO and LAX municipal bond obligations and its pilot non-qualified pension plan obligations. These matters are discussed above and in Note 19, “Special Items.” The net benefit of $36 million was determined byclassified as a formula basedSpecial item on a percentagethe Company’s 2006 Statement of the value of eligible assets.Consolidated Operations. The eligible assets consisted of certain previously unencumbered aircraft, spare engines, spare parts inventory, certain flight simulators, quick engine change kits and certain route authorities. The DIP FinancingCompany also recorded an additional $29 million net benefit in 2006, which was guaranteed by UAL and all other filing subsidiaries and was secured by first priority liens on all unencumbered present and future assets and by junior liens on all other assets, other than certain specified assets, including assets which are subject to financing agreements that are entitleddue to the benefitsresolution of Section 1110, andnumerous outstanding issues related primarily to the extent such financing agreements prohibited such junior liens.
As of December 31, 2005, we had outstanding borrowings of $1.2 billion at an interest rate of 8.6%. In addition, letters of credit were issued underCompany’s aircraft, professional fees and taxes subsequent to the DIP Financing in an aggregate amount of $39 million. The DIP financing was repaid in full on the Effective Date, February 1, 2006.Company’s emergence from bankruptcy.
(2) Summary of Significant Accounting Policies
(a)(a) Basis of Presentation— - - UAL is a holding company whose principal subsidiary is United. The consolidated financial statements include the accounts of UAL Corporation and all of ourits majority-owned affiliates. We sometimes collectively refer to UAL Corporation, together with our consolidated subsidiaries, as "we," "UAL" or the "Company." All significant intercompany transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year'syear’s presentation.
InUpon emergence from its Chapter 11 proceedings, the Condensed StatementsCompany adopted fresh-start reporting in accordance with SOP 90-7 as of Consolidated Cash Flows, the classification of financing costs primarily associated with our DIP Financing has been changedFebruary 1, 2006. The Company’s emergence from an investing activity to a financing activity included in "Other, net". For 2004 and 2003, this changereorganization resulted in a $26 million and $68 million decrease, respectively,new reporting entity with no retained earnings or accumulated deficit as of February 1, 2006. Accordingly, the Company’s consolidated financial statements for periods before February 1, 2006 are not comparable to financing cash flows and a corresponding increase to investing cash flows from amounts previously reported.consolidated financial statements presented on or after February 1, 2006.
(b)(b) Use of Estimates-—The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Under fresh-start reporting, the Company’s asset values are remeasured using fair value, which is allocated using the purchase method of accounting in conformity with SFAS 141. In addition, fresh-start reporting also requires that all liabilities, other than deferred taxes, should be stated at fair value, or at the present values of the amounts to be paid using appropriate market interest rates. Deferred taxes are determined in conformity with SFAS 109.
Estimates of the fair value of assets and liabilities were determined based on the Company’s best estimates as discussed in Note 1, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,” above. These estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
(c) (c) Airline Revenues - - We record passenger fares and cargo revenues as operating revenues when the transportation is provided. -The—The value of unused passenger tickets isand miscellaneous charge orders (“MCO’s”) are included in current liabilities as advance ticket sales. We periodically evaluate the balance in advanceUnited records passenger ticket sales as operating revenues when the transportation is provided or when the ticket expires. Non-refundable tickets generally expire on the date of the intended flight, unless the date is extended by notification from the customer on or before the intended flight date. Fees charged in association with changes or extensions to nonrefundable tickets are recorded as passenger revenue at the time the fee is incurred. Change fees related to non-refundable tickets are considered a separate transaction from the air
transportation because they represent a charge for the Company’s additional service to modify a previous order. Therefore, the pricing of the change fee and record any adjustments in the initial customer order are separately determined and represent distinct earnings processes. Refundable tickets expire after one year. MCO’s are stored value documents that are either exchanged for a passenger ticket or refunded after issuance. United records an estimate of MCO’s that will not be exchanged or refunded as revenue ratably over the validity period the evaluation is completed. In addition, we have code-sharingbased on historical results. Due to complex industry pricing structures, refund and exchange policies, and interline agreements with other airlines, under which one carrier's flights can be marketed under the two-letter airline designator code of another carrier. Revenues earned under these arrangements are allocated between the code share partners based on existing contractual agreements and airline industry standard prorate formulas andcertain amounts are recognized as passenger revenue whenusing estimates both as to the transportationtiming of recognition and the amount of revenue to be recognized. These estimates are based on the evaluation of actual historical results. United recognizes cargo and mail revenue as service is provided.
(d)(d) Cash and Cash Equivalents, and Short-Term Investments and Restricted Cash—-Cash in excess of operating requirements is invested in short-term, highly liquid, income-producing investments. Investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents. Other investments are classified as short-term investments.
At December 31, 2005, the Company had $77 million of investments in debt securities that were Investments classified as available-for-sale as comparedheld-to-maturity are stated at amortized cost, which approximates market due to $10 million at December 31, 2004. In 2005, United purchased the Tranche B and Tranche C certificates under the Series 1997-1 EETC. In addition, the Company had investments in debt securities of $1.6 billion and $1.1 billion, at December 31, 2005 and 2004, respectively that were classified as held-to-maturity.their short-term maturities. Investments in debt securities classified as available-for-sale are stated at fair value, which does not differ significantly from their cost basis, based on the quoted market prices for the securities and other available evidence. Investments classified as held-to-maturity are stated at cost, which approximates market due to their short-term maturities.value. The gains or losses from sales of available-for-sale securities are included in interest income for each respective year.income.
At December 31, 2006, the Successor Company’s investments in debt securities classified as held-to-maturity included $3.8 billion recorded in cash and cash equivalents and $312 million recorded in short-term investments. At December 31, 2005, the Predecessor Company’s investments in debt securities included $1.6 billion classified as held-to-maturity and recorded in cash and cash equivalents and $77 million classified as available-for-sale and recorded in short-term investments.
The Successor Company had $643 million and $877$341 million classified as short-term restricted cash at December 31, 2006 while the Predecessor Company had $643 million in short-term restricted cash at December 31, 2005, and 2004, respectively, representing security for workerworkers’ compensation obligations, security deposits for airport leases and reserves with institutions that process our credit card ticket sales. In addition, the Successor Company had $506 million, and the Predecessor Company had $314 million, in long-term restricted cash of $314 million at December 31, 2005.2006 and 2005, respectively. Financial and other institutions with which the Company conducts its business may require additional levels of security deposits or reserve holdbacks.
(e) (e) Aircraft Fuel, Spare Parts and Supplies -— AircraftIn accordance with fresh-start reporting, aircraft fuel, and maintenance and operating supplies are stated at average cost.were revalued to estimated fair values on February 1, 2006. Flight equipment spare parts arewere also stated at averageestimated fair value at the Effective Date. The Company records fuel, maintenance, operating supplies, and aircraft spare parts at cost lesswhen acquired, and provides an obsolescence allowance.allowance for aircraft spare parts.
(f) (f) Operating Property and Equipment -—Owned operating property and equipment, areand equipment under capital leases, were stated at cost.fair value as of February 1, 2006. The Company records additions to owned operating property and equipment at cost when acquired. Property under capital leases, and the related obligation for future lease payments, is recorded at an amount equal to the initial present value of those lease payments.
Depreciation and amortization of owned depreciable assets is based on the straight-line method over the assets'assets’ estimated service lives. Leasehold improvements are amortized over the remaining term of the lease, including estimated facility renewal options when renewal is reasonably assured at key airports, or the estimated service life of the related asset, whichever is less. Aircraft are depreciated to estimated salvage values, generally over lives of 2527 to 30 years; buildings are depreciated over lives of 25 to 45 years; and other property and equipment are depreciated over lives of 34 to 15 years.
82
Properties under capital leases are amortized on the straight-line method over the life of the lease or, in the case of certain aircraft, over their estimated service lives. Lease terms are 9 to 1817 years for aircraft and 2940 years for buildings. Amortization of capital leases is included in depreciation and amortization expense.
Maintenance and repairs, including the cost of minor replacements, are charged to maintenance expense as incurred, except for costs incurred under our power by the hourpower-by-the-hour engine maintenance agreements, which are expensed based upon the number of hours flown. Costs of additions to and renewals of units of property are capitalized as property and equipment additions.
(g) (g) Mileage Plus Awards—- United'sAs a result of the adoption of fresh-start reporting, the Mileage Plus frequent flyer program awards mileage creditsobligation was revalued at the Effective Date to passengers who fly on United, Ted, United Express,reflect the Star Alliance carriers and certain other airlines that participateestimated fair value of miles to be redeemed in the program. Additionally,future. Outstanding miles earned by flying United sells mileage credits to participating airline partnersor its partner carriers were revalued using a weighted-average per-mile equivalent ticket value, taking into account such factors as differing classes of service and domestic and international ticket itineraries, which can be reflected in theawards chosen by Mileage Plus program and ULS sells mileage creditsmembers.
The Successor Company also elected to non-airline business partners. In either case,change its accounting policy as of the outstandingEffective Date from an incremental cost basis to a deferred revenue model, to measure its obligation for miles mayto be redeemed for travel on any airline that participates inbased upon the program.
When a travel award level is attained by a Mileage Plus member, we record a liability for the estimated costequivalent ticket value of such awards. Our cost includes an estimated incremental cost to United for future travel redeemedsimilar fares on United or the contractually determined amount per award for travel redeemed onamounts paid to other participating airline partners.
Members may not reach the threshold necessaryStar Alliance partners, as applicable. For customer accounts which are inactive for a free ticket award and outstandingperiod of 36 consecutive months, it is United’s policy to cancel all miles may not always be redeemed for free travel. Therefore, based on historical data and other information, we estimate how many miles will never be used for an award and excludecontained in those miles from our estimateaccounts at the end of the Company's liability. We also estimate the average number36 month period of miles that will be used per award, which can vary depending upon member choices from alternatives.
For miles earned by members through non-airline business partners, a portion ofinactivity. The Company recognizes revenue from the salebreakage of mileage ismiles in such deactivated accounts by amortizing such breakage over the 36-month expiration period.
In early 2007, the Company announced that it will reduce the expiration period from 36 months to 18 months effective December 31, 2007. Additional future changes to program rules and program redemption opportunities can significantly alter customer behavior from historical patterns, which may result in material changes to the deferred over a specified period based upon expected award usage and recognized when the transportation is provided.revenue balance, as well as passenger revenues.
At December 31, 2005,2006, the Successor Company had recorded a liability and deferred revenue for its frequent flyer program totaling $1.6of $3.7 billion (consisting of $679 million for prepaid miles and $923 million related to award travel).travel, of which $1.1 billion was current. At December 31, 2005, the Predecessor Company had recorded deferred revenue totaling $923 million, of which $681 million was current.
See Note 18, “Advanced Purchase of Miles,” for additional information related to the Mileage Plus program.
(h) (h) Deferred Gains—-Gains on aircraft sale and leaseback transactions are deferred and amortized over the terms of the related leases as a reduction of aircraft rent expense.
(i) (i) United Express-—United has capacity and prorate agreements under which independent regional carriers, flying under the United Express name, connect passengers to other United Express and/or United flights (the latter of whichwhom we also refer to as "mainline"“mainline” operations, to distinguish them from United Express regional operations.)
We payoperations). The vast majority of United Express regional carriers operatingflights are operated under capacity agreements, onwhile a fee-per-departure basis. Historically, we have classified the revenues derived from United Express flights in passenger revenues, after subtracting the associated operating expenses incurred to operate United Express flights, including the fee-per-departure, fuel, ground handing and other expense items.relatively smaller number are operated under prorate agreements.
United Express operating revenues and expenses includeare classified as “Passenger—Regional Affiliates” and “Regional affiliates,” respectively, on the attached Statements of Consolidated Operations, the latter includes both allocated as well asand direct costs. Direct costs represent expenses that are specifically and exclusively related to United Express flying activities, such as capacity agreement payments, commissions, booking fees, fuel expenses and dedicated staffing. The capacity agreement payments are based on specific rates for various operating expenses of the United Express carriers, such as crew expenses, maintenance and aircraft ownership, some of which are multiplied by specific operating statistics (e.g., block hours, departures) while others are fixed per month. Allocated costs represent
United Express'Express’s portion of shared expenses and include charges for items such as airport operating costs, reservation-related costs, credit card discount fees and facility rents. For each of these expense categories, we estimatethe Company estimates United Express'Express’s portion of total expense and allocateallocates the applicable portion of expense to the United Express carrier.
Additionally, contractual payments made to United Express regional carriers include payments for aircraft operated by them as part of the United Express agreements. UAL has the right to exclusively operate and direct the operations of these aircraft, and accordingly the minimum future lease payments for these United Express-operatedExpress - -operated aircraft are included in ourthe Company’s lease obligationsobligations. See Note 9, “Segment Information” and Note 16, “Lease Obligations,” for additional information related to United Express.
The Company recognizes revenue as described in Note 10, "Lease Obligations."flown on a net basis for the United Express prorate carriers.
United has call options on 142152 regional jet aircraft currently being operated by certain United Express carriers. TheseGenerally, these options are intended to allow United to secure control over regional jets used for United Express flying in certain circumstances.routes only when a United Express carrier contract is terminated early due to performance or safety issues, breach of codeshare limitations or is wrongfully terminated by the regional affiliate carrier. The options would allow United to have an alternative to replace capacity that was previously provided by a cancelled United Express contract. The conditions under which United can exercise these call options vary by contract, but include operational performance metrics and in some cases the financial standing of one or both of the parties. At this time,December 31, 2006, none of the call options arewere exercisable.
(j) (j) Advertising— - Advertising costs, which are included in other operating expenses, are expensed as incurred. In additionUpon adoption of fresh-start reporting, the Company changed its accounting policy to conventional advertising costs, adjustments related to changes inrecord the Mileage Plus award liability areobligation using a deferred revenue model. Before emergence from bankruptcy, the Predecessor Company recorded asboth deferred revenue and advertising expense. Advertising expense was $202 million, $250 million and $190 million for the years ended December 31, 2005, 2004 and 2003, respectively.relating to Mileage Plus activity using an incremental cost method.
(k) (k) Intangibles - - Intangibles—Goodwill represents the excess of the reorganization value of the Successor Company over the fair value of net tangible assets and identifiable intangible assets and liabilities resulting from the application of SOP 90-7. Identifiable intangible assets consist primarily of international route acquisition costsauthorities, trade-names, the Mileage Plus customer database, airport slots and gates, certain favorable contracts, hubs, patents, and other items. Most airport slots, international route authorities and trade-names are indefinite-lived and, as such, are not amortized. Instead, these indefinite-lived intangible pension assets (see Note 15, "Retirement and Postretirement Plans").
SFAS No. 142, "Goodwill and Other Intangible Assets" requires companies to test intangiblesare reviewed for impairment annually or more frequently if events or circumstances indicate that the asset may be impaired. The Mileage Plus customer database is amortized on an annualaccelerated basis or on an interim basis when a triggering event occurs. At December 31, 2005, we performed an evaluation of our intangibles and determined that their fair value remained in excessutilizing cash flows correlating to the expected attrition rate of the book value.
Mileage Plus database. The following information relatesother customer relationships, which are included in “Contracts” in the table below, are amortized in a manner consistent with the timing and amount of revenues that the Company expects to our intangibles at December 31, 2005 and 2004:
Gates are amortized on a straight-line basis over the lifeestimated lives of the related leases.assets.
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other intangibles are amortized over periodsIntangible Assets” (“SFAS 142”), the Company applies a fair value-based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs. No impairments of goodwill or indefinite-lived assets have been identified since the Effective Date.
As discussed in Note 9, “Segment Information,” in 2006 the Company determined that it has two reportable segments that reflect the management of its business: mainline and United Express. Prior to 13 years.this determination, the Company’s reportable segments under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS 131”) included four geographic segments and UAL Loyalty Services, LLC (“ULS”). At the Effective Date, the Company allocated goodwill to the Pacific, Latin America and ULS segments.
After determining the Company’s reportable segments were mainline and United Express, the Company reevaluated the goodwill allocation and determined that all goodwill was in the mainline segment. SFAS 142 requires that a two-step impairment test be performed on goodwill. In the first step, the Company compares the fair value of each reportable segment to its carrying value. If the fair value of a reportable segment exceeds the carrying value of the net assets of the reportable segment, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets of a reportable segment exceeds the fair value of the reportable segment, then the Company must perform the second step to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value, then the Company must record an impairment charge equal to such difference.
The Company assesses the fair value of the mainline segment considering both the market and income approaches. Under the market approach, the fair value of the reportable segment is based on a comparison of similar publicly traded companies. Under the income approach, the fair value of the reportable segment is based on the present value of estimated future cash flows. The income approach is dependent on a number of assumptions including estimates of future capacity, passenger yield, traffic, operating costs including jet fuel prices, appropriate discount rates and other relevant assumptions.
The following table presents information about the intangible assets of the Successor and Predecessor companies, including goodwill, at December 31, 2006 and 2005, respectively:
|
|
| Successor |
| Predecessor |
| |||||||||||||||||||
|
| Weighted |
| 2006 |
| 2005 |
| ||||||||||||||||||
(In millions) |
|
|
| Average |
| Gross Carrying |
| Accumulated |
| Gross Carrying |
| Accumulated |
| ||||||||||||
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Airport slots and gates |
| 9 years |
|
| $ | 72 |
|
|
| $ | 14 |
|
|
| $ | 32 |
|
|
| $ | 19 |
|
| ||
Hubs |
| 20 years |
|
| 145 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
| ||||||
Patents |
| 3 years |
|
| 70 |
|
|
| 21 |
|
|
| — |
|
|
| — |
|
| ||||||
Mileage Plus database |
| 7 years |
|
| 521 |
|
|
| 77 |
|
|
| — |
|
|
| — |
|
| ||||||
Contracts |
| 13 years |
|
| 216 |
|
|
| 48 |
|
|
| — |
|
|
| — |
|
| ||||||
Other |
| 7 years |
|
| 18 |
|
|
| 2 |
|
|
| 48 |
|
|
| 34 |
|
| ||||||
|
| 10 years |
|
| $ | 1,042 |
|
|
| $ | 169 |
|
|
| 80 |
|
|
| 53 |
|
| ||||
Route authorities—Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
| 509 |
|
|
| 165 |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 589 |
|
|
| $ | 218 |
|
| ||||
Unamortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Goodwill |
|
|
|
| $ | 2,703 |
|
|
|
|
|
|
| $ | 17 |
|
|
|
|
|
| ||||
Airport slots and gates |
|
|
|
| 255 |
|
|
|
|
|
|
| — |
|
|
|
|
|
| ||||||
Route authorities |
|
|
|
| 1,146 |
|
|
|
|
|
|
| — |
|
|
|
|
|
| ||||||
Trade-name |
|
|
|
| 754 |
|
|
|
|
|
|
| — |
|
|
|
|
|
| ||||||
|
|
|
|
| $ | 4,858 |
|
|
|
|
|
|
| $ | 17 |
|
|
|
|
|
| ||||
The Company initially recorded goodwill of $2,756 million upon its exit from bankruptcy. During the eleven month period ended December 31, 2006, goodwill was decreased by $62 million due to Successor Company tax activity that impacted the deferred tax asset valuation allowance, and increased by $9 million due to net adjustments to the fair values of certain assets and liabilities, resulting in goodwill of $2,703 million at December 31, 2006. Total amortization expense recognized was $8approximately $1 million in 2005, $5for the one month period ended January 31, 2006, $169 million in 2004for the eleven month period ended December 31, 2006 and $8 million in 2003. We would expectfor the year ended December 31, 2005. The Company expects to record amortization expense of $6$155 million, in 2006, $4$92 million, in each of$69 million, $64 million and $58 million for 2007, 2008, 2009, 2010 and 2009 and $1 million in 2010, with respect to amortized intangible assets recorded as of December 31, 2005. However, the adoption of fresh start accounting on the Effective Date is expected to materially change recorded amounts for intangible assets and amortization expense to be recognized thereon. See Note 20, "Pro Forma Fresh Start Balance Sheet (Unaudited)".2011, respectively.
During 2005, we removed the book value of certain airport gates that were fully-amortized in accordance with Company policy. This lowered our gross carrying amount and accumulated amortization by approximately $6 million. In addition, the Company reclassified $3 million of other intangibles.85
During 2004, we removed the book value on certain airport slots that were fully-amortized in accordance with Company policy. This lowered our gross carrying amount and accumulated amortization by approximately $145 million.
Route authorities are rights granted by governments to operate flights to and from a particular country. These authorities are very specific and limited, fixed in nature and are rarely available in the marketplace. Accordingly, route authorities are highly valued and sought-after assets by all airlines. We believe the market value of these assets continues to be in excess of recorded book value.
Gates, like routes, are often highly valued assets that do not frequently come into the marketplace. We believe that their market value continues to be in excess of recorded book value.
(l) (l) Measurement of Impairments - We recognize—In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS 142, the Company evaluates the carrying value of long-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist. An impairment charge is recognized when an asset'sthe asset’s carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset'sasset’s carrying value and fair market value.
(m) Stock Option Accounting - At December 31, 2006, the Company had assets held-for-sale of $13 million. In 2006, the Company recorded an impairment charge of $5 million to decrease the carrying value of assets held-for-sale to their estimated fair value. See Note 19, “Special Items,” for information related to the 2005 we had certain stock-basedimpairment charge.
(m)Share-Based Compensation—The Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”) effective January 1, 2006. This pronouncement requires companies to measure the cost of employee compensation plans, as describedservices received in Note 14, "Stock Options and Awards". We accountexchange for an award of equity instruments based on the grant-date fair value of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.
Before the adoption of SFAS 123R, the Company accounted for these plans under Accounting Principles Board Opinion No. 25, "“Accounting for Stock Issued to Employees,” ," ("(“APB 25"25”) and related Interpretations.disclosed the pro forma compensation expense as required under Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation,” (“SFAS 123”). No stock-based employee compensation cost for stock options is reflected in ourthe Company’s financial statements as provided under APB 25,for 2005 or 2004, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Under the Company's confirmed Plan of Reorganization, these stock options were canceled upon the Effective Date.
If compensation cost for stock-based employee compensation plans had been determined using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," wethe Company would have reported ourits 2005 and 2004 net loss and loss per share as the pro forma amounts indicated below: (In millions, except per share) Net loss, as reported Less: Total compensation expense determined under fair value method Net loss, pro forma Net loss per share: Basic and Diluted - as reported Basic and Diluted - pro forma
|
| Year Ended December 31 |
| ||||||
(In millions, except per share) |
|
|
| 2005 |
| 2004 |
| ||
Net income (loss), as reported |
| $ | (21,176 | ) | $ | (1,721 | ) | ||
Less: Total compensation expense determined under fair value method |
| (4 | ) | (10 | ) | ||||
Net loss, pro forma |
| $ | (21,180 | ) | $ | (1,731 | ) | ||
Net loss per share: |
|
|
|
|
| ||||
Basic and Diluted—as reported |
| $ | (182.29 | ) | $ | (15.25 | ) | ||
Basic and Diluted—pro forma |
| $ | (182.33 | ) | $ | (15.34 | ) | ||
See Note 5, “Share-Based Compensation Plans,” for additional information.
(n) (n) NewExcise Taxes—Certain governmental taxes are imposed on United’s ticket sales through a fee included in ticket prices. United collects these fees and remits them to the appropriate government agency. These fees are recorded on a net basis (excluded from operating revenues).
(o)Adopted Accounting PronouncementsPronouncements— -As discussed above, the Company adopted SFAS 123R effective January 1, 2006. In December 2004,addition, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Statement of Financial Accounting Standards No. 123 (Revised 2004), "158, Share-Based Payment“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” " ("(“SFAS 123R"158”) in September 2006, which establishes accounting standards for transactionsrequires companies to recognize the overfunded or underfunded status of all defined benefit postretirement plans as an asset or liability in the statement of financial position and to recognize changes in that funded status through comprehensive income in the year in which an entity obtains employee servicesthe changes occur. As part of the adoption of fresh-start reporting in exchangeaccordance
with SOP 90-7 as of February 1, 2006, the obligation for stock options or share-based payments. SFAS 123R requires that the compensation cost (as measured by theCompany’s defined benefit postretirement plans was recorded at fair value of the equity or liability instruments issued) relating to share-based payment transactions be recognized in financial statements. This statement replaces SFAS No. 123, and supersedes APB 25. Currently we account for stock options under APB 25 as permitted by SFAS 123. SFAS 123R is effective for the Company in the first quarterCompany’s Statements of 2006. The Company will recognize compensation expenseConsolidated Financial Position. See Note 8, “Retirement and Postretirement Plans,” for employee participation in stock-based compensation plans foradditional information regarding the portionimpact of outstanding awards for which the employee service has not yet been rendered, based on the grant date fair value of those awards calculated under SFAS 123R.
The Bankruptcy Court approved the MEIP and DEIP plans in January 2006, which will be accounted for after the Effective Date under the provisionsadoption of SFAS 123R. The Company distributed stock awards under the DEIP and MEIP plans in February 2006. The Company estimates the compensation expense of the MEIP and DEIP programs to be $67 million for the first quarter of158.
(p)New Accounting Pronouncements—In July 2006, and $163 million for the calendar year 2006. This is made up of stock grants, restricted stock, and stock options. Stock grants and restricted stock awards under these plans are estimated at approximately $38 million in the first quarter of 2006, and $90 million for calendar year 2006. The Company has also estimated (using a Black-Scholes fair value option pricing model) that it will recognize compensation for stock options awarded under these plans of approximately $29 million in the first quarter of 2006, and $73 million for the calendar year 2006. The Company continues to evaluate various option pricing models to determine the fair value of its options, including the potential use of lattice or binomial models. Therefore, the Company's actual compensation expense for stock options may be different from the estimates provided.
In March 2005, the FASB issued FASB Interpretation No. 47, "48, “Accounting for Conditional Asset Retirement Obligations - An InterpretationUncertainty in Income Taxes—an interpretation of FASB Statement No. 143"109 ("FIN47"” (“FIN 48”). FIN47 clarifies, which modifies the term conditional asset retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement Obligations", accounting and addresses the diverse accounting practices that have developed with respect to the timing of liability recognition for legal obligationsdisclosure associated with the retirementcertain aspects of a tangible long-lived asset when the timingrecognition and (or) method of settlement of the obligation are conditional on a future event. In addition, FIN47 clarifies that an entity is requiredmeasurement related to recognize a liabilityaccounting for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN47 is effective no later than the end of the fiscal year ending December 31, 2005. The Company has determined that the impact on its financial statements is immaterial.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). This statement, which replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements", requires that a voluntary change in accounting principle be applied retroactively to all prior period financial statements presented, unless it is impractical to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate effected by a change in accounting principle, and also provides that corrections of errors in previously issued financial statements should be termed a "restatement". SFAS 154income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2005. We do2006. The FASB proposed FASB Staff Position (“FSP”) No. 48-a, “Definition of Settlement in FASB Interpretation No. 48,” that would provide additional guidance related to FIN 48. This FSP could be issued in early 2007 after the March 28, 2007 comment deadline. In light of the significance of this new accounting interpretation and pending issuance of the FSP, the Company has not currently anticipateyet determined the impact of the adoption of FIN 48 on the Company’s financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. SFAS 157 does not require any new fair value measurements; rather it specifies valuation methods and disclosures to be applied when fair value measurements are required under existing or future accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of SFAS 157 on its results of operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), which provides guidance for the quantification and evaluation of materiality of financial statement misstatements. The Company applied the provisions of SAB No. 108 in the preparation of its financial statements for the year ended December 31, 2006. The adoption of this guidance did not impact the Company’s financial statements.
In November 2006, the FASB ratified EITF Issue No. 06-06, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments” (“EITF 06-6”). This standard amends EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and supersedes EITF Issue No. 05-07, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues.” This standard affects issuers that modify the terms of (or that exchange) convertible debt instruments that contain an embedded conversion option not accounted for as a derivative under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and the testing criteria. This EITF applies to modifications (or exchanges) in interim or annual reporting periods beginning after November 29, 2006.
In November 2006, the FASB ratified EITF Issue No. 06-07, “Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133” (“EITF 06-07”). EITF 06-07 affects convertible debt issuers with previously bifurcated conversion options that no longer require separate derivative accounting under SFAS 133. EITF 06-07 states that when a previously bifurcated conversion option no longer requires separate accounting, the issuer shall disclose (1) a description of the change causing the conversion option to no longer require bifurcation and (2) the amount of the derivative liability reclassified to shareholders’ equity. EITF 06-07 is effective for interim and annual periods beginning after December 15, 2006. The Company expects EITF 06-07 will not have a material impact fromon its consolidated financial statements.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 also established presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. This statement is effective for the Company as of January 1, 2008; however, early adoption is permitted. The Company has not determined the impact, if any, that adoption of SFAS 154this statement will have on ourits consolidated financial statements.
(q)Tax Contingencies—In accordance with SOP 90-7, we are required to adopt all new accounting pronouncements upon emergence from bankruptcy, if they have effective dates within one yearStatement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” the date of adoption of fresh start accounting. The Company adopted fresh start accounting on February 1, 2006.
(o) Tax Contingencies - We have has recorded reserves for taxes and associated interest in accordance with SFAS No. 5, "Accounting for Contingencies", that may become payable in future years as a result of audits by tax authorities. Although we believeit believes that the positions taken by the Company on previously filed tax returns are reasonable, wethe Company nevertheless havehas established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the Company, potentially resulting in additional liabilities for taxes and interest. OurThe Company’s tax contingency reserves are reviewed periodically and are adjusted as events occur that affect our estimated liability for additional taxes,its estimates, such as the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits, the measurement of additional estimated liability based on current calculations, the identification of new tax contingencies, the release of administrative tax guidance affecting ourits estimates of tax liabilities, or the rendering of relevant court decisions affecting our estimates of tax liabilities.
(3) Special Items
2005 -decisions.
Aircraft Impairment. (3) Common Stockholders’ EquityDuring the second quarter of 2005, we recognized a charge of $18 million for aircraft impairments related to the planned accelerated retirement of certain aircraft then operated by Air Wisconsin Airlines Corporation ("AWAC").
2004 -
Air Canada. During the third quarter of 2004, Air Canada successfully emerged from bankruptcy protection under the Companies' Creditors Arrangement Act ("CCAA") of the Canada Business Corporation Act. We had filed a pre-petition claim against Air Canada based on our equity interest in three Airbus A330 aircraft leased to Air Canada. As part of its plan of reorganization, Air Canada offered its unsecured creditors the opportunity to participate in their initial public offering. We subscribed to 986,986 shares in the reorganized company in August 2004 and sold them in October 2004 for a nominal gain. Separately, we sold our interest in our pre-petition claim to a third-party and recorded a non-operating gain of $18 million during the third quarter of 2004.
Aircraft Write-down. During the first quarter of 2004, we incurred a $13 million charge in non-operating expense for the write-down of certain non-operating B767 aircraft.
2003 -
Aircraft Impairment.As a result the Plan of our reviewReorganization becoming effective on February 1, 2006, the then-outstanding equity securities as well as the shares held in treasury of our operating fleetthe Predecessor Company were canceled. New shares of UAL common stock began trading on the NASDAQ market on February 2, 2006 under the symbol “UAUA”. In accordance with the Plan of Reorganization, the Successor Company established the equity structure in the table below upon emergence.
Party of Interest | Shares of | ||||||
General unsecured creditors and employees | 115,000,000 | ||||||
Management equity incentive plan (“MEIP”) | 9,825,000 | ||||||
Director equity incentive plan (“DEIP”) | 175,000 | ||||||
125,000,000 | |||||||
Pursuant to the Plan of Reorganization, on February 2, 2006 the Successor Company began distributing portions of the total 125 million shares of new common stock to certain general unsecured creditors and employees and certain management employees and non-employee directors. The remaining undistributed shares will be distributed periodically to employees and holders of previously allowed claims and disputed claims that are pending final resolution, as partwell as to certain management employees and non-employee directors of our overall restructuring, we decided to accelerate the retirementSuccessor Company who may receive awards under stock compensation plans. All treasury shares were MEIP shares acquired either for tax withholding obligations or as consideration under an employment agreement. Forfeited MEIP shares or MEIP shares that are settled for cash or stock are automatically available again for issuance under the MEIP. For further details, see Note 4, “Per Share Amounts” and Note 5, “Share-Based Compensation Plans.”
88
Changes in the number of our B767-200 aircraft from 2008 to 2005. Therefore, inshares of UAL common stock outstanding during the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the years ended December 31, 2005 and 2004 were as follows:
| Successor |
|
|
| Predecessor |
| |||||
|
| Period from |
|
|
| Period from |
|
|
|
|
|
|
| February 1 to |
|
|
| January 1 to |
| Year Ended |
| ||
|
| December 31, |
|
|
| January 31, |
| December 31, |
| ||
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
|
Shares outstanding at beginning of period |
| 116,220,959 |
|
|
| 116,220,959 |
| 116,220,959 |
| 110,415,179 |
|
Cancellation of Predecessor Company stock |
| (116,220,959 | ) |
|
| — |
| — |
| — |
|
Issuance of Successor Company stock to creditors |
| 108,347,814 |
|
|
| — |
| — |
| — |
|
Issuance of Successor Company stock to employees |
| 4,240,526 |
|
|
| — |
| — |
| — |
|
Issuance of Successor Company stock to directors |
| 100,000 |
|
|
| — |
| — |
| — |
|
Forfeiture of non-vested Successor Company stock |
| (270,934 | ) |
|
| — |
| — |
| — |
|
Shares issued from treasury under compensation arrangements |
| — |
|
|
| — |
| — |
| 21,078 |
|
Shares acquired for treasury |
| (136,777 | ) |
|
| — |
| — |
| (59,483 | ) |
Conversion of ESOP preferred stock |
| — |
|
|
| — |
| — |
| 5,844,194 |
|
Other |
| — |
|
|
| — |
| — |
| (9 | ) |
Shares outstanding at end of period |
| 112,280,629 |
|
|
| 116,220,959 |
| 116,220,959 |
| 116,220,959 |
|
(4) Per Share Amounts
In accordance with Statement of Financial Accounting Standards No. 144, "128, “Accounting for the Impairment or Disposal of Long-Lived AssetsEarnings per Share"” (“SFAS 128”), we reviewed the B767-200 fleet for impairment and adjusted the carrying value of these aircraft to their fair market values, as estimated using third-party appraisals. An impairment charge of $26 million was recorded in the third quarter of 2003.
Aircraft Write-down. During the third quarter of 2003, we also incurred a $25 million charge in non-operating expense for the write-down of certain non-operating B767 aircraft.
Curtailment Charge. Due to the ratification of new labor contracts for our major employee groups, which resulted in lower wage and benefit levels and significant levels of employee attrition (both voluntary and involuntary), we recorded a curtailment charge of $152 million in the second quarter of 2003, which is included in salaries and related costs.
Air Canada. On April 1, 2003, Air Canada filed for protection under the CCAA of the Canada Business Corporation Act. During 2003, we recorded a non-operating special charge of $226 million in connection with Air Canada's CCAA filing. The charge included $46 million for the impairment of our investment in Air Canada preferred stock, $91 million to record a liability resulting from our guarantee of Air Canada debt, and $89 million for the write-off of our equity interest in three Airbus A330 aircraft leased to Air Canada. We consider the liability for the guarantee to be a pre-petition obligation and accordingly, have classified it in liabilities subject to compromise.
Government Compensation. On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act ("Wartime Act") was signed into law. The legislation included approximately $3 billion of direct compensation for U.S. airlines. Of the total, $2.4 billion was intended to compensate air carriers for lost revenues and costs related to aviation security (including $100 million for reinforcing cockpit doors). In addition, collection of passenger security fees and payment of air carrier security fees were suspended from June 1 through September 30, 2003.
In addition, the Wartime Act required that the total compensation of the two most highly-compensated executives of certain airlines (including United) be limited, during the period between April 1, 2003 and April 1, 2004, to the salary they were paid in 2002. We executed a contract with the government agreeing to comply with these limits. Any violation of this provision would have required us to repay the government the amount of compensation we received for airline security fees described above. We believe that we complied with this provision and that the likelihood of repaying the government is remote. In May 2003, we received approximately $300 million in compensation under the Wartime Act. In September 2003, we received an additional $14 million for cockpit door reinforcement, which was accounted for as recovery of the capitalized cost of door reinforcements previously completed.
(4) Per Share Amounts
Basic lossbasic per share amounts were computed by dividing net lossearnings (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding. Approximately 7 million shares remaining to be issued to unsecured creditors and employees under the Plan of Reorganization are included in outstanding basic shares as the necessary conditions for issuance have been satisfied. The table below represents the reconciliation of the basic earnings per share to diluted earnings per share.
| Successor |
|
|
| Predecessor |
| |||||||||||||||
|
| Period from |
|
|
| Period from |
| Year Ended |
| ||||||||||||
(In millions, except per share) |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) |
|
| $ | 25 |
|
|
|
|
| $ | 22,851 |
|
| $ | (21,176 | ) | $ | (1,721 | ) | ||
Preferred stock dividend requirements |
|
| (9 | ) |
|
|
|
| (1 | ) |
| (10 | ) | (10 | ) | ||||||
Earnings (loss) available to common stockholders |
|
| $ | 16 |
|
|
|
|
| $ | 22,850 |
|
| $ | (21,186 | ) | $ | (1,731 | ) | ||
Basic weighted-average shares outstanding |
|
| 115.5 |
|
|
|
|
| 116.2 |
|
| 116.2 |
| 113.5 |
| ||||||
Earnings (loss) per share, basic |
|
| $ | 0.14 |
|
|
|
|
| $ | 196.61 |
|
| $ | (182.29 | ) | $ | (15.25 | ) | ||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Earnings (loss) available to common stockholders |
|
| $ | 16 |
|
|
|
|
| $ | 22,850 |
|
| $ | (21,186 | ) | $ | (1,731 | ) | ||
Basic weighted-average shares outstanding |
|
| 115.5 |
|
|
|
|
| 116.2 |
|
| 116.2 |
| 113.5 |
| ||||||
Effect of non-vested restricted shares |
|
| 0.7 |
|
|
|
|
| — |
|
| — |
| — |
| ||||||
Diluted weighted-average shares outstanding |
|
| 116.2 |
|
|
|
|
| 116.2 |
|
| 116.2 |
| 113.5 |
| ||||||
Earnings (loss) per share, diluted |
|
| $ | 0.14 |
|
|
|
|
| $ | 196.61 |
|
| $ | (182.29 | ) | $ | (15.25 | ) | ||
In accordance with SFAS 128, no potential common share is included in the diluted per share computation if it is antidilutive. When an entity reports a loss available for common shareholders, the effect of including potential common shares is antidilutive. Accordingly, the Company did not include any
potential common shares in the diluted earnings per share computations for the periods that resulted in a loss. For the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the years ended December 31, 2005 and 2004, the Company did not include 5 million, 9 million, 9 million and 10 million of outstanding stock options, respectively, in the diluted per share computation as they were antidilutive during those periods based on application of the year. Alltreasury stock method. In addition, for the eleven months ended December 31, 2006, the Company did not include 21 million of potential common shares of common stock that were issued and outstanding immediately priorrelated to the Effective DateLimited-Subordination Notes, 11 million of potential common shares related to the preferred securities or 3 million of potential common shares related to the 5% convertible notes in the diluted per share computation as they were determined to be antidilutive.
(5) Share-Based Compensation Plans
See Note 2(m), “Share-Based Compensation,” for information regarding the Company’s adoption of SFAS 123R effective January 1, 2006, and pro forma compensation expense for 2005 and 2004.
Predecessor Company—As of January 31, 2006, a total of 9 million stock options were outstanding. The Company did not issue any stock-based awards during 2005 or 2004. Under the Company’s Plan of Reorganization, these stock options were canceled pursuant toon the termsEffective Date. No material share-based compensation expense was incurred as a result of these outstanding options for the month of January 2006.
Successor Company—As part of the Plan of Reorganization. Reorganization and as described in more detail below, the Bankruptcy Court approved the Company’s share-based compensation plans known as the MEIP and the DEIP which became effective on February 1, 2006. The following table summarizes the number of awards authorized, issued and available for future grants under each plan as of December 31, 2006:Loss Attributable to Common Stockholders (in millions) Net loss Preferred stock dividend requirements Loss attributable to common stockholders Shares (in millions) Weighted average shares outstanding Loss Per Share
|
| MEIP |
| DEIP |
| Total |
|
Authorized |
| 9,825,000 |
| 175,000 |
| 10,000,000 |
|
Granted |
| (9,931,650 | ) | (100,000 | ) | (10,031,650 | ) |
Cancelled awards available for reissuance |
| 1,028,186 |
| — |
| 1,028,186 |
|
Available for future grants |
| 921,536 |
| 75,000 |
| 996,536 |
|
StockThe Successor Company recognized share-based compensation expense for each plan during the eleven months ended December 31, 2006 as follows:
(In millions) |
|
|
| Period from |
| |||
MEIP restricted stock |
|
| $ | 84 |
|
| ||
MEIP stock options |
|
| 72 |
|
| |||
DEIP unrestricted stock |
|
| 3 |
|
| |||
Total |
|
| $ | 159 |
|
| ||
During the second quarter of 2006, the Company revised its initial estimated award forfeiture rate of 7.5% to 15% based upon actual attrition. As a result, the share-based compensation expense was reduced by approximately $7 million for the eleven month period ended December 31, 2006.
As of December 31, 2006, approximately $80 million of total unrecognized costs related to nonvested shares are expected to be recognized over the remaining weighted-average period of 3.1 years. Approximately $45 million is expected to be recognized in 2007.
Management Equity Incentive Plan. The Human Resources Subcommittee of the UAL Board of Directors (the “HR Subcommittee”) is authorized under the plan to grant equity-based and other performance-based awards (“Award(s)”) to executive officers and other key management employees of the Company and its subsidiaries.
All executive officers and other key management employees of the Company and its subsidiaries are eligible to become participants in the MEIP. The HR Subcommittee will select from time to time, from among all eligible individuals, the persons who will be granted an Award. The MEIP authorizes the HR Subcommittee to grant any of a variety of incentive Awards to participants, including the following:
· stock options, including both tax qualified and non-qualified options,
· stock appreciation rights, which provide the participant the right to purchase approximately 9 millionreceive the excess (if any) of the fair market value of a specified number of shares of common stock at the time of exercise over the grant price of the stock appreciation right,
· stock awards to be granted at no cost to the participant, including grants in the form of (i) an immediate transfer of shares which are subject to forfeiture and certain transfer restrictions (“Restricted Stock”); and (ii) an immediate transfer of shares which are not subject to forfeiture or a deferred transfer of shares if and when the conditions specified by the HR Subcommittee are met (“Unrestricted Stock”), and
· performance-based awards, in which the HR Subcommittee may grant a stock award that will entitle the holder to receive a specified number of shares of common stock, or the cash value thereof, if certain performance goals are met.
The shares may be issued from authorized and unissued shares of common stock or from the Company’s treasury stock. The exercise price for each underlying share of common stock under all options and stock appreciation rights awarded under the MEIP will not be less than the fair market value of a share of common stock on the date of grant or as otherwise determined by the HR Subcommittee.
The table below summarizes stock option activity pursuant to the Company’s MEIP stock options for the period February 1 through December 31, 2005, 102006:
| Options |
| Weighted- |
| Weighted-Average |
| Aggregate |
| |||||||||
Outstanding at beginning of period |
| — |
|
| — |
|
|
| — |
|
|
| $ | — |
|
| |
Granted |
| 5,979,812 |
|
| $ | 35.13 |
|
|
|
|
|
|
|
|
|
| |
Exercised |
| (288,688 | ) |
| 34.94 |
|
|
|
|
|
|
|
|
|
| ||
Cancelled |
| (626,452 | ) |
| 35.25 |
|
|
|
|
|
|
|
|
|
| ||
Outstanding at end of period |
| 5,064,672 |
|
| 35.13 |
|
|
| 9.1 |
|
|
| $ | 45 |
|
| |
Vested or expected to vest at end of period |
| 4,794,152 |
|
| 35.15 |
|
|
| 9.1 |
|
|
| $ | 42 |
|
| |
Vested at end of period |
| 821,083 |
|
| 35.38 |
|
|
| 9.1 |
|
|
| 7 |
|
| ||
The weighted-average fair value of options granted for the period February 1, 2006 to December 31, 2006, was determined to be $21.37 based on the following assumptions:
Risk-free interest rate | 4.4-5.1 | % | |
Dividend yield | 0 | % | |
Expected market price volatility of our common stock | 55-57 | % | |
Expected life of options (years) | 5.0-6.2 |
91
The fair value of options was determined at the grant date using a Black-Scholes option pricing model, which requires the Company to make several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on the Company’s common stock is assumed to be zero since it does not pay dividends and has no current plans to do so in the future.
The volatility assumptions were based upon historical volatilities of comparable airlines whose shares are traded using daily stock price returns equivalent to the contractual term of the option. Due to its emergence from more than three years in bankruptcy, historical volatility data for UAL was not considered in determining expected volatility. The Company did consider implied volatility data for both UAL and comparable airlines, using current exchange-traded options.
The expected life of the options was determined based upon a simplified assumption that the option will be exercised evenly from vesting to expiration under the transitional guidance of Staff Accounting Bulletin No. 107, Topic 14, “Share-Based Payments.”
The stock options typically vest over a four year period, except for awards to retirement-eligible employees, which are considered vested at the grant date.
The table below summarizes Restricted Stock activity for the period February 1 through December 31, 2006:
|
|
|
| Weighted- |
| |||||
|
|
|
| Average |
| |||||
|
| Restricted Stock |
| Grant Price |
| |||||
Nonvested at beginning of period |
|
| — |
|
|
| — |
|
| |
Granted |
|
| 3,951,838 |
|
|
| $ | 36.78 |
|
|
Vested |
|
| (837,317 | ) |
|
| 36.95 |
|
| |
Cancelled |
|
| (401,734 | ) |
|
| 36.95 |
|
| |
Nonvested at end of period |
|
| 2,712,787 |
|
|
| 36.71 |
|
| |
Under SFAS 123R, the fair value of the Restricted Stock awards was based upon the volume weighted-average share price on the date of grant. The Restricted Stock awards typically vest over four years, except for awards to retirement-eligible employees, which are considered vested at the grant date. Approximately 2.5 million of the 2.7 million nonvested restricted stock awards at December 31, 2006 are expected to vest.
Director Equity Incentive Plan. The Nominating/Governance Committee of the Board of Directors (the “Governance Committee”) is authorized to grant equity-based awards to non-employee directors of the Company under the plan. The DEIP authorizes the Governance Committee to grant any of a variety of incentive awards to participants, including the following:
· non-qualified stock options,
· stock appreciation rights, which provide the participant the right to receive the excess (if any) of the fair market value of a specified number of shares of common stock at December 31, 2004the time of exercise over the grant price of the stock appreciation right,
· stock awards to be granted at no cost to the participant, including grants in the form of Restricted Stock and 11 millionUnrestricted Stock,
· annual compensation in the form of credits to a participant’s share account established under the DEIP, and
· shares of common stock at December 31, 2003 were outstanding but werein lieu of receipt of all or any portion of cash amounts payable by the Company to a participant including retainer fees, board attendance fees and committee fees (but excluding expense reimbursements and similar items).
The shares may be issued from authorized and unissued shares of common stock or from the Company’s treasury stock. The exercise price for each underlying share of common stock under all options and stock appreciation rights awarded under the DEIP will not includedbe less than the fair market value of a share of common stock on the date of grant. Each option granted under the DEIP will generally expire 10 years after its date of grant. The 100,000 unrestricted shares issued under the DEIP in the computation of earnings per share because the exercise price of the options in all periods was greater than the average market price of the common shares. In addition, approximately 6 million equivalent common shares of convertible ESOP preferred stock were not included in the 2003 computation, since the result would have been antidilutive.
(5) Comprehensive Loss
The Company includes in other comprehensive loss changes in minimum pension liabilities and changes in the fair value of derivative financial instruments that qualify for hedge accounting. For theeleven month period ended December 31, 2005, 2004 and 2003, total comprehensive loss amounted to $17.9 billion, $1.8 billion and $3.4 billion, respectively. Total comprehensive loss for 2005 included a $3.3 billion net adjustment relating to the termination of various pension plans, as discussed in Note 15 "Retirement and Postretirement Plans".2006 immediately vested on their respective grant dates.
(6) Income Taxes
In 2006 and 2005, UAL incurred both a regular tax loss and an alternative minimum tax ("AMT"(“AMT”) loss. The primary differences between ourits regular tax loss and AMT loss arewere certain depreciation adjustments and preferences.
In assessing the realizability of our deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax asset will be realized. During 2005, 2004 and 2003, we recorded a valuation allowance against our deferred tax assets.
The significant components of the deferred income tax provision (credit) are as follows: (In millions) Deferred tax provision (exclusive of the other components listed below) Increase in the valuation allowance for deferred tax assets
| Successor |
|
| Predecessor |
| |||||||||||||||
|
| Period from |
|
| Period from |
| Year Ended |
| ||||||||||||
(In millions) |
|
|
| 2006 |
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Deferred tax provision (exclusive of the other components listed below) |
|
| $ | 21 |
|
|
|
| $ | 8,488 |
|
| $ | (7,830 | ) | $ | (640 | ) | ||
Increase (decrease) in the valuation allowance for deferred tax assets |
|
| — |
|
|
|
| (8,488 | ) |
| 7,830 |
| 640 |
| ||||||
|
|
| $ | 21 |
|
|
|
| $ | — |
|
| $ | — |
| $ | — |
| ||
The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows: (In millions) Income tax provision at statutory rate State income taxes, net of federal income tax benefit Nondeductible employee meals Medicare Part D Subsidy Valuation allowance Other, net
| Successor |
|
| Predecessor |
| |||||||||||||||
|
| Period from |
|
| Period from |
| Year Ended |
| ||||||||||||
(In millions) |
|
|
| 2006 |
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Income tax provision at statutory rate |
|
| $ | 15 |
|
|
|
| $ | 7,998 |
|
| $ | (7,410 | ) | $ | (602 | ) | ||
State income taxes, net of federal income tax benefit |
|
| 1 |
|
|
|
| 423 |
|
| (416 | ) | (28 | ) | ||||||
Nondeductible employee meals |
|
| 9 |
|
|
|
| 1 |
|
| 11 |
| 9 |
| ||||||
Medicare Part D Subsidy |
|
| (12 | ) |
|
|
| (2 | ) |
| (17 | ) | — |
| ||||||
Valuation allowance |
|
| — |
|
|
|
| (8,488 | ) |
| 7,830 |
| 640 |
| ||||||
Share-based compensation |
|
| 5 |
|
|
|
| — |
|
| — |
| — |
| ||||||
Other, net |
|
| 3 |
|
|
|
| 68 |
|
| 2 |
| (19 | ) | ||||||
|
|
| $ | 21 |
|
|
|
| $ | — |
|
| $ | — |
| $ | — |
| ||
93
Temporary differences and carry forwards that give rise to a significant portion of deferred tax assets and liabilities forat December 31, 2006 and 2005 and 2004 arewere as follows: (In millions) Employee benefits, including postretirement medical and ESOP Depreciation, capitalized interest and transfers of tax benefits Federal and state net operating loss carry forwards Mileage Plus deferred revenue Gains on sale and leasebacks Rent expense AMT credit carry forwards Restructuring charges Other Less: Valuation allowance
| Successor |
| Predecessor |
| |||||||||||
|
| December 31, 2006 |
| December 31, 2005 |
| ||||||||||
|
| Deferred |
| Deferred |
| Deferred |
| Deferred |
| ||||||
(In millions) |
|
|
| Assets |
| Liabilities |
| Assets |
| Liabilities |
| ||||
Employee benefits, including postretirement, medical and ESOP |
| $ 1,416 |
|
| $ — |
|
| $ 5,471 |
|
| $ 29 |
|
| ||
Depreciation, capitalized interest and other |
| — |
|
| 3,139 |
|
| — |
|
| 3,434 |
|
| ||
Federal and state net operating loss carry forwards |
| 2,709 |
|
| — |
|
| 2,688 |
|
| — |
|
| ||
Mileage Plus deferred revenue |
| 1,242 |
|
| — |
|
| 47 |
|
| — |
|
| ||
Gains on sale and leasebacks |
| — |
|
| 9 |
|
| 69 |
|
| — |
|
| ||
Aircraft rent |
| — |
|
| 46 |
|
| 525 |
|
| — |
|
| ||
AMT credit carry forwards |
| 291 |
|
| — |
|
| 294 |
|
| — |
|
| ||
Intangibles |
| — |
|
| 964 |
|
| 19 |
|
| — |
|
| ||
Restructuring charges |
| 223 |
|
| — |
|
| 4,482 |
|
| — |
|
| ||
Other |
| 1,802 |
|
| 1,843 |
|
| 1,522 |
|
| 1,483 |
|
| ||
Less: Valuation allowance |
| (2,248 | ) |
| — |
|
| (10,618 | ) |
| — |
|
| ||
|
| $ 5,435 |
|
| $ 6,001 |
|
| $ 4,499 |
|
| $ 4,946 |
|
| ||
As a result of the Company’s emergence from bankruptcy, the Company has an unrealized tax benefit of $782 million at December 31, 2006, resulting from an excess tax deduction of $2.1 billion. The excess tax deduction represents the difference between the total tax deduction available, which is equal to the fair value of the common stock issued to certain unsecured creditors and employees pursuant to the Plan of Reorganization, and the amount of the deduction attributable to the amount expensed, which is the value of the stock determined in the Plan of Reorganization. The Company has accounted for the excess tax deduction by analogy to SFAS 123R and will recognize this deduction when it is realized as a reduction of taxes payable.
At December 31, 2005,2006, UAL Corporation and its subsidiaries had $294$291 million of federal AMT credits, $2.5credits. Additionally, the Company has $2.4 billion of federal tax benefits and $0.2 billion$271 million of state tax benefits, resulting from $7.0 billion ofrelating to net operating losses which may be carried forward to reduce the tax liabilities of future years. This tax benefit is mostly attributable to federal NOL carry forwards of $7.0 billion. If not utilized, the federal tax benefits of $0.2$1.1 billion expire in 2022, $1.2$0.4 billion expire in 2023, $0.5 billion expire in 2024 and $0.4 billion expire in 2024, $0.5 billion expire in 2025 and $0.2 billion expire in 2026.2025. In addition, the state tax benefit, if not utilized, expires over a five to twenty year period.
WeAt December 31, 2006, the federal and state net operating loss (“NOL”) carry forward was reduced by discharge of indebtedness income of $1.3 billion resulting from bankruptcy-related negotiations. At this time, the Company does not believe that the limitations imposed by the Internal Revenue Code on the usage of the NOL carry forward and other tax attributes following an ownership change will have determined thatan effect on the Company. Therefore, the Company does not believe its exit from bankruptcy has had any material impact on the utilization of its remaining NOL carry forward and other tax attributes.
The Company’s management assesses the realizability of its deferred tax assets, and records a valuation allowance for the deferred tax assets when it is more likely than not that our neta portion, or all of the deferred tax assetassets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible. As such, the Company has a valuation allowance against its deferred tax assets as of December 31, 2006 and 2005, to reflect management’s assessment regarding the realizability of the deferred tax assets. The Company expects to continue to maintain a valuation allowance on deferred tax assets until other positive evidence is sufficient
to justify realization. With the adoption of fresh-start reporting, a valuation allowance of $2,310 million was established which, if reversed in future periods, will be allocated to reduce goodwill and then other intangible assets.
(7) Investments
The Company had cost method investments of $91 million and $5 million at December 31, 2006 and 2005, will be realized through the reversals of existing deferred tax credits.
(7) Investments
On November 5, 2003, IAC/InterActive Corp acquired allrespectively. The Company revalued its investments to their estimated fair values as of the outstanding common stock of Hotwire, a leading discount travel website, for cash and the assumption of outstanding options and warrants. We owned approximately 14% of Hotwire, through a combination of stocks and warrants. As a result, we tendered all of our shares in Hotwire, including options and warrants, for $85 million in cash, resulting in a gain of $81 million.
In December 2003, Orbitz completed an initial public offering of its stock, which resulted in a reduction of our ownership percentage. As a result, we recognized a gain of $23 millionEffective Date in accordance with Staff Accounting Bulletin No. 51 "AccountingSOP 90-7. Since that time, there have been no triggering events that required the Company to evaluate any of these investments for Sales of Stock by a Subsidiary". In addition, we sold a portion of our investment in Orbitz for cash proceeds of $65 million and recognized a gain of $54 million.impairment.
On September 29, 2004, Cendant and Orbitz announced their planned merger. Cendant offered to acquire all of the outstanding common stock of Orbitz for cash. WeThe Company entered into a stockholder agreement to tender ourits shares. Subsequent toAfter Bankruptcy Court approval, weUnited tendered all of ourits shares in Orbitz for $185 million in cash, resulting in a gain of $158 million.
(8) Liabilities Subject to CompromiseRetirement and Postretirement Plans
Historically, the Company has maintained various retirement plans, both defined benefit (qualified and non-qualified) and defined contribution, which have covered substantially all employees. The Company also has provided certain health care benefits, primarily in the U.S., to retirees and eligible dependents, as well as certain life insurance benefits to certain retirees reflected as “Other Benefits” in the tables below. The Company has reserved the right, subject to collective bargaining agreements, to modify or terminate the health care and life insurance benefits for both current and future retirees.
Upon emergence from bankruptcy on February 1, 2006, the Company completed a revaluation of the postretirement liabilities resulting in a reduction of the net accumulated benefit obligation of approximately $28 million. In accordance with SOP 90-7 upon emergence, the Company also accelerated the recognition of net unrecognized actuarial gains and losses, prior service costs and transition obligation pertaining to its foreign pension plans and postretirement plans upon emergence, and recorded a reorganization expense thereon. The unrecognized costs as of January 31, 2006 that were recognized as part of fresh-start reporting are reported in the table below.
With the termination of the Company’s domestic defined benefit retirement plans, the Company has reached agreements with all of its employee groups to implement replacement plans, largely defined contribution plans. See “Defined Contribution Plans,” below, for further information.
On December 30, 2004, the PBGC filed a complaint against the Company in the District Court to seek the involuntary termination of the Pilot Plan, with benefit accruals terminated effective December 30, 2004. The Company recorded a $152 million curtailment charge in the fourth quarter of 2004 relating to the PBGC’s involuntary termination action and reclassified the associated pension obligations of $2.5 billion to Liabilities subject to compromise.
In April 2005, United and the PBGC entered into a global settlement agreement which provided for the settlement and compromise of various disputes and controversies with respect to these pension plans. In May 2005, the Bankruptcy Court approved the settlement agreement, including modifications requested by certain creditors.
The PBGC assumed responsibility for the assets of the Ground Plan effective May 23, 2005 (with a termination date of March 11, 2005), the Flight Attendant and the MAPC Plans effective June 30, 2005 and the Pilot Plan effective October 26, 2005, and the Company has no further duties or rights with respect to these plans. On March 17, 2006, the Bankruptcy Court ruled that the Company’s obligations regarding non-qualified benefits that were earned under the Pilot Plan ceased on January 31, 2006. See Note 1, “Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to be Resolved in Chapter 11 Cases,” items (c) and (d), for further details on Plan termination matters still pending in litigation. In 2005, the Company recorded an additional $640 million in curtailment charges related to these Pension Plans and reclassified an additional $1.9 billion of pension obligations to Liabilities subject
to compromise. The Company also recorded approximately $7.2 billion of PBGC allowable claims in Liabilities subject to compromise refers to both secured and unsecured obligations which will be accounted for under ourin accordance with the confirmed Plan of Reorganization. In addition, the Company recognized net settlement losses of approximately $1.1 billion in 2005 in accordance with SFAS 88.
As part of fresh-start reporting, the Company also adjusted its remaining retirement plan obligations to fair value. See Note 1, “Voluntary Reorganization including claims incurred priorUnder Chapter 11—Fresh-Start Reporting,” for more information.
The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in the Statements of Consolidated Financial Position for the defined benefit and other postretirement plans (“Other Benefits”) as of December 31 (utilizing a measurement date of December 31):
| Pension Benefits |
| Other Benefits |
| |||||||||||||||||||||||||||
|
| Successor |
|
|
| Predecessor |
| Successor |
|
|
| Predecessor |
| ||||||||||||||||||
(In millions) |
|
|
| Period from |
|
|
| Period from |
| Year Ended |
| Period from |
|
|
| Period from |
| Year Ended |
| ||||||||||||
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Benefit obligation at beginning of period |
|
| $ 247 |
|
|
|
|
| $ 241 |
|
|
| $ 13,618 |
|
|
| $ 2,223 |
|
|
|
|
| $ 2,256 |
|
|
| $ 2,401 |
|
| ||
Service cost |
|
| 9 |
|
|
|
|
| 1 |
|
|
| 79 |
|
|
| 33 |
|
|
|
|
| 3 |
|
|
| 42 |
|
| ||
Interest cost |
|
| 8 |
|
|
|
|
| 1 |
|
|
| 464 |
|
|
| 116 |
|
|
|
|
| 11 |
|
|
| 131 |
|
| ||
Plan participants’ contributions |
|
| 1 |
|
|
|
|
| — |
|
|
| 1 |
|
|
| 52 |
|
|
|
|
| 4 |
|
|
| 46 |
|
| ||
Amendments |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| (16 | ) |
| ||
Actuarial (gain) loss |
|
| (9 | ) |
|
|
|
| 2 |
|
|
| 706 |
|
|
| (123 | ) |
|
|
|
| (32 | ) |
|
| (136 | ) |
| ||
Curtailments |
|
| — |
|
|
|
|
| — |
|
|
| (450 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| ||
Foreign currency exchange rate changes |
|
| 8 |
|
|
|
|
| 3 |
|
|
| (26 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| ||
Termination of domestic benefit |
|
| — |
|
|
|
|
| -— |
|
|
| (13,580 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| ||
Federal subsidy |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| 9 |
|
|
|
|
| — |
|
|
| — |
|
| ||
Gross benefits paid |
|
| (13 | ) |
|
|
|
| (1 | ) |
|
| (571 | ) |
|
| (194 | ) |
|
|
|
| (19 | ) |
|
| (212 | ) |
| ||
Benefit obligation at end of period |
|
| $ 251 |
|
|
|
|
| $ 247 |
|
|
| $ 241 |
|
|
| $ 2,116 |
|
|
|
|
| $ 2,223 |
|
|
| $ 2,256 |
|
| ||
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Fair value of plan assets at beginning of period |
|
| $ 136 |
|
|
|
|
| $ 132 |
|
|
| $ 7,213 |
|
|
| $ 116 |
|
|
|
|
| $ 116 |
|
|
| $ 117 |
|
| ||
Actual return on plan assets |
|
| 12 |
|
|
|
|
| 2 |
|
|
| 168 |
|
|
| 3 |
|
|
|
|
| 1 |
|
|
| 5 |
|
| ||
Employer contributions |
|
| 11 |
|
|
|
|
| 1 |
|
|
| 61 |
|
|
| 77 |
|
|
|
|
| 14 |
|
|
| 160 |
|
| ||
Plan participants’ contributions |
|
| 1 |
|
|
|
|
| — |
|
|
| 1 |
|
|
| 52 |
|
|
|
|
| 4 |
|
|
| 46 |
|
| ||
Foreign currency exchange rate changes |
|
| 5 |
|
|
|
|
| 2 |
|
|
| (9 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| ||
Expected transfer out |
|
| — |
|
|
|
|
| — |
|
|
| (3 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| ||
Termination of domestic benefits |
|
| — |
|
|
|
|
| — |
|
|
| (6,728 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| ||
Benefits paid |
|
| (13 | ) |
|
|
|
| (1 | ) |
|
| (571 | ) |
|
| (194 | ) |
|
|
|
| (19 | ) |
|
| (212 | ) |
| ||
Fair value of plan assets at end of period |
|
| $ 152 |
|
|
|
|
| $ 136 |
|
|
| $ 132 |
|
|
| $ 54 |
|
|
|
|
| $ 116 |
|
|
| $ 116 |
|
| ||
Funded status |
|
| $ (99 | ) |
|
|
|
| $ (111 | ) |
|
| $ (109 | ) |
|
| $ (2,062 | ) |
|
|
|
| $ (2,107 | ) |
|
| $ (2,140 | ) |
| ||
Unrecognized actuarial (gains) |
|
| (a) |
|
|
|
|
| 43 |
|
|
| 38 |
|
|
| (a) |
|
|
|
|
| 1,600 |
|
|
| 1,640 |
|
| ||
Unrecognized prior service costs |
|
| (a) |
|
|
|
|
| 1 |
|
|
| 1 |
|
|
| (a) |
|
|
|
|
| (1,531 | ) |
|
| (1,544 | ) |
| ||
Unrecognized net transition |
|
| (a) |
|
|
|
|
| 3 |
|
|
| 4 |
|
|
| (a) |
|
|
|
|
| — |
|
|
| — |
|
| ||
Net amount recognized |
|
| $ (99 | ) |
|
|
|
| $ (64 | ) |
|
| $ (66 | ) |
|
| $ (2,062 | ) |
|
|
|
| $ (2,038 | ) |
|
| $ (2,044 | ) |
| ||
(a)Amounts are not applicable due to the Petition Date. They representadoption of SFAS 158, which only permits prospective adoption and eliminates the estimated amount expected to be allowed on known or potential claims to be resolved throughaccounting requirements for the Chapter 11 process,recognition of additional minimum liability and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination asintangible assets.
| Pension Benefits |
| Other Benefits |
| |||||||||||||
|
| Successor |
| Predecessor |
| Successor |
| Predecessor |
| ||||||||
|
| Year Ended |
| Year Ended |
| ||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Amounts recognized in the Statements of Consolidated Financial Position consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) benefit cost |
|
| $ — |
|
|
| $ (66 | ) |
|
| $ — |
|
|
| $ (2,044 | ) |
|
Non-current asset |
|
| 31 |
|
|
| (a) |
|
|
| — |
|
|
| (a) |
|
|
Current liability |
|
| — |
|
|
| (a) |
|
|
| (107 | ) |
|
| (a) |
|
|
Non-current liability |
|
| (130 | ) |
|
| (a) |
|
|
| (1,955 | ) |
|
| (a) |
|
|
Additional minimum liability |
|
| (a) |
|
|
| (16 | ) |
|
| (a) |
|
|
| — |
|
|
Intangible asset |
|
| (a) |
|
|
| 4 |
|
|
| (a) |
|
|
| — |
|
|
Accumulated other comprehensive income |
|
| (a) |
|
|
| 12 |
|
|
| (a) |
|
|
| — |
|
|
Net amount recognized |
|
| $ (99 | ) |
|
| $ (66 | ) |
|
| $ (2,062 | ) |
|
| $ (2,044 | ) |
|
Amounts recognized in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain |
|
| $ 13 |
|
|
| (a) |
|
|
| $ 120 |
|
|
| (a) |
|
|
Increase (decrease) in minimum liability |
|
| (a) |
|
|
| $ (3,456 | ) |
|
| (a) |
|
|
| — |
|
|
(a) Amounts are not applicable due to the valueadoption of any collateral securing claims, proofsSFAS 158, which only permits prospective adoption and eliminates the accounting requirements for the recognition of claim or other events. To date, such adjustments,additional minimum liability and intangible assets. Amounts recognized as reflected in reorganization expense, have been material and we anticipate that future adjustments will be material as well.
Differences between liability amounts we have estimated and claims filed by our creditors are being investigated and the Bankruptcy Court will make a final determination of the allowable claims. The determination of how these liabilities will ultimately be treated will not be known until the claims resolution process is complete.
At December 31, we had liabilities subject to compromise consisting of the following:
| (In millions) | |||
| Long-term debt, including accrued interest | $ 6,624 | $ 6,817 | |
| Aircraft-related accruals and deferred gains | 6,104 | 3,480 | |
| Benefit accruals | 18,007 | 2,478 | |
| Capital lease obligations, including accrued interest | 1,631 | 1,779 | |
| Municipal bond obligations and claims | 1,344 | 690 | |
| Accounts payable | 261 | 295 | |
| Early termination fees | 162 | 162 | |
| Other | 883 | 334 | |
$35,016 | $16,035 |
(9) Long-Term Debt
As of December 31, 2005 long-term debt consistedrepresent the net of current and non-current plan assets and obligations.
The following information relates to all pension plans with an accumulated benefit obligation and a projected benefit obligation in excess of plan assets:
|
| December 31 |
| ||||
(In millions) |
|
|
| 2006 |
| 2005 |
|
Projected benefit obligation |
| $ 231 |
| $ 214 |
| ||
Accumulated benefit obligation |
| 189 |
| 183 |
| ||
Fair value of plan assets |
| 100 |
| 83 |
| ||
The net periodic benefit cost included the following components:
|
| Successor |
|
|
| Predecessor |
| ||||||||||
(In millions) |
| Period from |
|
|
| Period from |
| Year Ended |
| ||||||||
Pension Benefits |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||
Service cost |
|
| $ 9 |
|
|
|
|
| $ 1 |
|
| $ 79 |
| $ 242 |
| ||
Interest cost |
|
| 8 |
|
|
|
|
| 1 |
|
| 464 |
| 789 |
| ||
Expected return on plan assets |
|
| (8 | ) |
|
|
|
| (1 | ) |
| (392 | ) | (710 | ) | ||
Amortization of prior service cost including transition obligation |
|
| — |
|
|
|
|
| — |
|
| 21 |
| 85 |
| ||
Curtailment charge |
|
| — |
|
|
|
|
| — |
|
| 640 |
| 152 |
| ||
Settlement losses, net |
|
| — |
|
|
|
|
| — |
|
| 1,067 |
| — |
| ||
Recognized actuarial loss |
|
| — |
|
|
|
|
| — |
|
| 100 |
| 93 |
| ||
Net periodic benefit costs |
|
| $ 9 |
|
|
|
|
| $ 1 |
|
| $ 1,979 |
| $ 651 |
| ||
|
| Successor |
|
|
| Predecessor |
| ||||||||||
(In millions) |
| Period from |
|
|
| Period from |
| Year Ended |
| ||||||||
Other Benefits |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||
Service cost |
|
| $ 33 |
|
|
|
|
| $ 3 |
|
| $ 42 |
| $ 42 |
| ||
Interest cost |
|
| 116 |
|
|
|
|
| 11 | �� |
| 131 |
| 151 |
| ||
Expected return on plan assets |
|
| (6 | ) |
|
|
|
| (1 | ) |
| (9 | ) | (9 | ) | ||
Amortization of prior service cost including transition obligation |
|
| — |
|
|
|
|
| (13 | ) |
| (149 | ) | (125 | ) | ||
Recognized actuarial loss |
|
| — |
|
|
|
|
| 8 |
|
| 93 |
| 89 |
| ||
Net periodic benefit costs |
|
| $ 143 |
|
|
|
|
| $ 8 |
|
| $ 108 |
| $ 148 |
| ||
The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2007 for actuarial gains are $1 million for pension plans and $8 million for other postretirement plans.
The assumptions below are based on country-specific bond yields and other economic data, which changed significantly as a result of the DIP Financingtermination of several of the Company sponsored pension plans in 2005. The weighted-average assumptions used for the benefit plans were as follows:
|
| Pension Benefits |
| Other Benefits |
| ||||||||||||||||||||
|
| At |
| At |
| At |
| At |
| ||||||||||||||||
|
| 2006 |
| 2006 |
| 2005 |
| 2006 |
| 2006 |
| 2004 |
| ||||||||||||
Weighted-average assumptions used to determine benefit obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 3.63 | % |
|
| 3.88 | % |
|
| 3.56 | % |
|
| 5.84 | % |
|
| 5.93 | % |
|
| 5.68 | % |
|
Rate of compensation increase |
|
| 2.50 | % |
|
| 3.15 | % |
|
| 3.43 | % |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| Period from |
| Period from |
| Year Ended |
| Period from |
| Period from |
| Year Ended |
| ||||||||||||
Weighted-average assumptions used to determine net expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 3.56 | % |
|
| 3.63 | % |
|
| 5.77 | % |
|
| 5.68 | % |
|
| 5.84 | % |
|
| 5.83 | % |
|
Expected return on plan assets |
|
| 6.49 | % |
|
| 6.49 | % |
|
| 8.94 | % |
|
| 8.00 | % |
|
| 8.00 | % |
|
| 8.00 | % |
|
Rate of compensation increase |
|
| 2.47 | % |
|
| 2.50 | % |
|
| 3.43 | % |
|
| — |
|
|
| — |
|
|
| — |
|
|
98
The expected return on plan assets is based on an evaluation of the historical behavior of the broad financial markets and debt associated with certain aircraft operated by Air Canada ("Air Canada debt"). For detailsthe Company’s investment portfolio, taking into consideration input from the plans’ investment consultant and actuary regarding expected long-term market conditions and investment management performance.
|
| 2006 |
| 2005 |
|
Health care cost trend rate assumed for next year |
| 8.50 | % | 9.50 | % |
Rate to which the cost trend rate is assumed to decline (ultimate trend rate in 2011) |
| 4.50 | % | 4.50 | % |
Assumed health care cost trend rates have a significant effect on the DIP Financing, see Note 1, "Voluntary Reorganization Under Chapter 11 - DIP Financing". As ofamounts reported for the health care plan. A 1% change in assumed health care trend rate for the January 2006 Predecessor period would have increased (decreased) aggregate service cost and interest cost, by $1 million and $(1) million, respectively. A 1% change in the assumed health care trend rate for the Successor Company would have the following additional effects:
(In millions) |
|
|
| 1% Increase |
| 1% Decrease |
| ||||||
Effect on total service and interest cost for the eleven months ended December 31, 2006 |
|
| $ | 16 |
|
|
| $ | (13 | ) |
| ||
Effect on postretirement benefit obligation at December 31, 2006 |
|
| $ | 202 |
|
|
| $ | (175 | ) |
| ||
The weighted-average asset allocations for the plans at December 31, 2006 and 2005, we had outstanding debt of $154 million associated with an operating lease for aircraft operated by Air Canada. asset category are as follows:
|
| Pension Assets |
| Other Benefit Assets |
| ||||||||||||||
|
| at December 31 |
| at December 31 |
| ||||||||||||||
Asset Category |
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Equity securities |
|
| 71 | % |
|
| 62 | % |
|
| — | % |
|
| — | % |
| ||
Fixed income |
|
| 28 |
|
|
| 33 |
|
|
| 100 |
|
|
| 100 |
|
| ||
Other |
|
| 1 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
| ||
Total |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
| ||
The debt has a fixed interest rate of 7.15%Company believes that the long-term asset allocations on average will approximate the targeted allocations and is scheduledregularly reviews the actual asset allocations to mature at various times through January 2016.
All of our pre-petition debt is in default dueperiodically rebalance the investments to the Chapter 11 filing. In general, we were not permitted to make payments on pre-petition debt while in Chapter 11; however, to the extent we had reached agreements with certain financiers on specific aircraft governed by Section 1110 of the Bankruptcy Code, we continued to make payments on the secured notes financing the aircrafttargeted allocations when appropriate. The target asset allocations are established with the approvalobjective of achieving the Bankruptcy Court. In addition, we had rejected certain aircraft that were originally financed under secured notesplans’ expected return on assets without undue investment risk.
Expected 2007 contributions are $14 million for the pension plans and had reclassified$173 million for the other postretirement benefit plans. The following benefit payments are expected to liabilities subject to compromise $651 millionbe made in principal amountfuture years for the Company’s retirement plans:
(In millions) |
|
|
| Pension |
| Other |
| Other Benefits— |
| |||||||||
2007 |
|
| $ | 9 |
|
|
| $ | 174 |
|
|
| $ | (13 | ) |
| ||
2008 |
|
| 10 |
|
|
| 175 |
|
|
| (15 | ) |
| |||||
2009 |
|
| 10 |
|
|
| 176 |
|
|
| (16 | ) |
| |||||
2010 |
|
| 11 |
|
|
| 175 |
|
|
| (18 | ) |
| |||||
2011 |
|
| 11 |
|
|
| 175 |
|
|
| (20 | ) |
| |||||
Years 2012-2016 |
|
| $ | 62 |
|
|
| $ | 838 |
|
|
| $ | (129 | ) |
| ||
The following table illustrates the incremental effect of these notes.
At December 31, 2005, we had recorded $434 millionapplying SFAS 158 on individual line items in municipal bonds to finance the acquisition and construction of certain facilities at Los Angeles, San Francisco, Miami and Chicago. These municipal bonds were rejected and/or settled as part of the bankruptcy process and currently are recorded in liabilities subject to compromise. For further details, see Note 1 "Voluntary Reorganization Under Chapter 11 - Bankruptcy Considerations".
We have a subsidiary trust that has TOPrS outstanding with a liquidation value of $97 million. These securities were issued in December 1996 and were previously reported on our Statements of Consolidated Financial Position as Company-Obligated Mandatorily Redeemable Preferred Securities at December 31, 2006:
(In millions) |
|
|
| Before |
| Increase/ |
| After |
| |||||||||
Non-current assets |
|
| $ | 27 |
|
|
| $ | 4 |
|
|
| $ | 31 |
|
| ||
Non-current pension benefit liability |
|
| 2,215 |
|
|
| (130 | ) |
|
| 2,085 |
|
| |||||
Deferred income taxes |
|
| — |
|
|
| 47 |
|
|
| 47 |
|
| |||||
Accumulated other comprehensive income |
|
| — |
|
|
| 87 |
|
|
| 87 |
|
| |||||
In place of the domestic defined benefit pension plans that were terminated during bankruptcy, the Company enhanced its contributions to the defined contribution plans for most employee groups. Contributions are based on matching percentages, years of service and/or eligible earnings. The Company’s contribution percentages vary from 2% to 15% of eligible earnings depending on the terms of each plan. The Company agreed to contribute to most of its defined contribution plans effective in June and July 2005, although such contributions for 2005 were not funded until shortly after the Effective Date.
Effective March 1, 2006, an International Association of Machinists (“IAM”) replacement plan was implemented. The IAM replacement plan is a Subsidiary Trust. The trust is considered a variable interest entity under FASB Interpretation No. 46R, "Consolidationmulti-employer plan whereby the assets contributed by the Company (based on hours worked) may be used to provide benefits to employees of Variable Interest Entities - Revised" ("FIN 46R") because we have a limited ability to make decisions about its activities. However, weother participating companies, since assets contributed by all participating companies are not consideredsegregated or restricted to provide benefits specifically to employees of one participating company. In accordance with the primary beneficiaryapplicable accounting for multi-employer plans, the Company would only recognize a withdrawal obligation if it becomes probable it would withdraw from the plan. The Predecessor Company recorded expense from defined contribution plans of $16 million for the month of January 2006 and $122 million and $92 million for the years ended December 31, 2005 and 2004, respectively. The Successor Company recognized $206 million of expense for the eleven months ended December 31, 2006 for all of the trust. Therefore,Company’s defined contribution employee retirement plans, of which $21 million related to the trustIAM multi-employer plan.
(9) Segment Information
Segments.The Company manages its business by two reportable segments: mainline and United Express. In 2006, in light of the Mandatorily Redeemable Preferred Securities issued byCompany’s bankruptcy-related restructuring and organizational changes, management reevaluated the trustCompany’s segment reporting. As a result, management determined that the geographic regions and ULS, which were previously reported as segments, are no longer reportedreportable segments requiring disclosure under SFAS 131. UAL now manages its business as an integrated network with assets deployed across various regions, whereas in the past United focused its business management decisions within specific geographic regions and services instead of as an integrated network. This new approach seeks to allocate resources to maximize the profitability of the overall airline network.
The accounting policies for each of these segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” except that segment financial information has been prepared using a management approach which is consistent with how the Company internally disperses financial information for the purpose of making internal operating decisions. The Company evaluates segment financial performance based on our earnings before income taxes, special items, reorganization items, and gain on sale of investments. As discussed in the notes to the tables below, the Company does not allocate corporate overhead expenses to its United Express segment. Certain selling and operational costs are allocated to United Express. See Note 2(i), “Summary of Significant Accounting Policies—United Express” for additional information related to United Express expenses.
The following table includes financial information, which has been restated from prior period presentation to conform to the Company’s new mainline and United Express segments, for the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the years ended December 31, 2005 and 2004:
|
| Successor |
|
|
| Predecessor |
| ||||||||||||||
|
| February 1 to |
|
|
| January 1 to |
| Year Ended |
| ||||||||||||
|
| December 31, |
|
|
| January 31, |
| December 31, |
| ||||||||||||
(In millions) |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mainline |
|
| $ | 15,185 |
|
|
|
|
| $ | 1,254 |
|
| $ | 14,950 |
| $ | 14,460 |
| ||
United Express |
|
| 2,697 |
|
|
|
|
| 204 |
|
| 2,429 |
| 1,931 |
| ||||||
Total |
|
| $ | 17,882 |
|
|
|
|
| $ | 1,458 |
|
| $ | 17,379 |
| $ | 16,391 |
| ||
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mainline(a) |
|
| $ | 820 |
|
|
|
|
| $ | 68 |
|
| $ | 856 |
| $ | 874 |
| ||
United Express(a) |
|
| 7 |
|
|
|
|
| 1 |
|
| 17 |
| 21 |
| ||||||
Segment earnings (loss) and reconciliation to Statements of Consolidated Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mainline |
|
| $ | (89 | ) |
|
|
|
| $ | (59 | ) |
| $ | (240 | ) | $ | (779 | ) | ||
United Express |
|
| 101 |
|
|
|
|
| (24 | ) |
| (317 | ) | (494 | ) | ||||||
Reorganization items, net |
|
| — |
|
|
|
|
| 22,934 |
|
| (20,601 | ) | (611 | ) | ||||||
Gain on sale of investments (Note 7) |
|
| — |
|
|
|
|
| — |
|
| — |
| 158 |
| ||||||
Special items (Note 19) |
|
| 36 |
|
|
|
|
| — |
|
| (18 | ) | 5 |
| ||||||
Taxes on equity earnings(b) |
|
| (2 | ) |
|
|
|
| — |
|
| — |
| — |
| ||||||
Consolidated earnings (loss) before income taxes (except on equity earnings)(b) |
|
| $ | 46 |
|
|
|
|
| $ | 22,851 |
|
| $ | (21,176 | ) | $ | (1,721 | ) | ||
(a) United Express depreciation expense relates to assets used in United Express operations. This depreciation is included in Regional affiliates expense in the Company’s Statements of Consolidated Operations.
(b) Equity earnings are part of the mainline segment. Accordingly, the pre-tax equity earnings are included in the mainline segment results. Income taxes on equity earnings are subtracted from segment earnings to reconcile the sum of pre-tax income and equity earnings, which is presented net of tax in the Statements of Consolidated Operations.
The Company does not allocate interest income or interest expense to the United Express segment in reports used to evaluate segment performance. Therefore, all amounts classified as interest income and interest expense in the Statements of Consolidated Operations relate to the mainline segment.
In accordance with SFAS 142, on the Effective Date the Company allocated goodwill upon adoption of fresh-start reporting in a manner similar to how the amount of goodwill recognized in a business combination is determined. This required the determination of the fair value of each reportable segment to calculate an estimated purchase price for such segment. This purchase price was then allocated to the individual assets and liabilities assumed to be related to that segment. Any excess purchase price is the amount of goodwill assigned to that segment. To the extent that individual assets and liabilities could be assigned directly to specific segments, those assets and liabilities were so assigned. This process was performed based on the Company’s reportable segments at the time, which consisted of the ULS, North
America, Pacific, Atlantic, and Latin America segments, and resulted in the allocation of goodwill of $2.7 billion to the Pacific, Latin America and ULS segments.
The Company performed its annual goodwill impairment test for goodwill at these segments and determined that there was no impairment of goodwill. Subsequently, after concluding that the Company’s reportable segments are mainline and United Express, a SFAS 141 goodwill allocation process was performed, as described above, and determined that all of the Company’s goodwill of $2.7 billion is within the mainline segment. Based on the timing of this analysis the Company also concluded there is no impairment of goodwill allocated to the new mainline segment. During the eleven months ended December 31, 2006, Successor Company goodwill decreased by $62 million as discussed in Note 2(k), “Summary of Significant Accounting Policies—Intangibles.”
At December 31, 2006 and 2005, the net carrying values of mainline and United Express segment assets were as follows:
(In millions) |
|
|
| 2006 |
| 2005 |
| ||
Mainline |
| $ | 25,294 |
| $ | 19,126 |
| ||
United Express |
| 75 |
| 216 |
| ||||
Total assets |
| $ | 25,369 |
| $ | 19,342 |
| ||
United Express assets include only those assets directly associated with its operations. The Company does not allocate corporate assets to the United Express segment.
Operating revenue by principal geographic region (as defined by the U.S. Department of Transportation) for the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the years ended December 31, 2005 and 2004 is presented in the table below. Prior periods have been restated to conform to the 2006 presentation as a result of the new reporting segments determined in 2006.
|
| Successor |
|
|
| Predecessor |
| ||||||||||||||
|
| February 1 to |
|
|
| January 1 to |
| Year Ended |
| ||||||||||||
|
| December 31, |
|
|
| January 31, |
| December 31, |
| ||||||||||||
(In millions) |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||
Domestic (U.S. and Canada) |
|
| $ | 11,981 |
|
|
|
|
| $ | 953 |
|
| $ | 11,411 |
| $ | 11,048 |
| ||
Pacific |
|
| 3,214 |
|
|
|
|
| 283 |
|
| 3,283 |
| 2,837 |
| ||||||
Atlantic |
|
| 2,158 |
|
|
|
|
| 167 |
|
| 2,189 |
| 2,076 |
| ||||||
Latin America |
|
| 529 |
|
|
|
|
| 55 |
|
| 496 |
| 430 |
| ||||||
Total |
|
| $ | 17,882 |
|
|
|
|
| $ | 1,458 |
|
| $ | 17,379 |
| $ | 16,391 |
| ||
The Company attributes revenue among the geographic areas based upon the origin and destination of each flight segment. United’s operations involve an insignificant level of dedicated revenue-producing assets in geographic regions as the overwhelming majority of the Company’s revenue producing assets (primarily U.S. registered aircraft) generally can be deployed in any of its geographic regions, as any given aircraft may be used in multiple geographic regions on any given day.
102
(10) Accumulated Other Comprehensive Income (Loss)
The table below presents the components of accumulated other comprehensive income (loss), net of tax. See Note 8, “Retirement and Postretirement Plans” and Note 14, “Financial Instruments and Risk Management,” for further information on these items.
|
| As of December 31, |
| |||||||||||
(In millions) |
|
|
| 2006 |
| 2005 |
| 2004 |
| |||||
Minimum pension liability, net of tax |
|
| $ | — |
|
| $ | (12 | ) | $ | (3,311 | ) | ||
Adoption of SFAS 158, net of tax |
|
| 87 |
|
| — |
| — |
| |||||
Derivative losses, net of tax |
|
| (5 | ) |
| (24 | ) | (21 | ) | |||||
Accumulated other comprehensive income (loss), net of tax |
|
| $ | 82 |
|
| $ | (36 | ) | $ | (3,332 | ) | ||
(11) Debt Obligations
During 2006, in accordance with the Plan of Reorganization, the Company issued new debt, entered into the Credit Facility, reinstated certain secured aircraft debt and entered into other debt agreements negotiated during the bankruptcy process (including aircraft financings). See the “Predecessor Company Debt” section below as certain debt was included in Liabilities subject to compromise in the Statements of Consolidated Financial Position. Instead, we report our Junior Subordinated Debentures held by the trust as long-term debt included in liabilities subject to compromise.
Our pre-petition debt, which is included in liabilities subject to compromise, consisted of the following:
| (In millions) | 2005 | 2004 | |||
| Secured notes, 3.72% to 9.52%, averaging | |||||
| 6.67%, due through 2014 | $5,756 | $ 6,019 | |||
| Debentures, 9.00% to 11.21%, averaging | |||||
| 9.89%, due through 2021 | 646 | 646 | |||
| Municipal bonds, 5.63% to 6.38%, | |||||
| averaging 5.90%, due through 2035 | 434 | 493 | |||
| Preferred securities of trust, 13.25%, due 2026 | 97 | 97 | |||
$ 6,933 | $ 7,255 | ||||
As of December 31, 2005, as a result of reaching agreements for specific aircraft under Section 1110, which have been confirmed in our Plan of Reorganization, we currently anticipate making the following principal payments under long-term debt agreements (including Air Canada debt and DIP Financing) in each of the next five calendar years: 2006 - $1.5 billion; 2007 - $453 million; 2008 - $592 million; 2009 - $649 million and 2010 - $828 million.
Various assets, principally aircraft, having an aggregate book value of $9 billion at December 31, 2005, were pledged as security under various loan agreements.
2005. The carrying amount of our borrowings underCompany also repaid the DIP Financing approximates fair value. The fair value of ourin its entirety. Long-term debt included in liabilities subject to compromise is estimated at approximately $7.0 billionamounts outstanding at December 31, 2005.2006 and 2005 are shown below:
|
| Successor |
| Predecessor |
| ||||||||
|
| At December 31, |
| ||||||||||
(In millions) |
|
|
| 2006 |
| 2005 |
| ||||||
Secured notes, 5.38% to 9.52%, due 2007 to 2019 |
|
| $ | 5,225 |
|
|
| $ | 154 |
|
| ||
DIP Financing, 8.6% |
|
| — |
|
|
| 1,157 |
|
| ||||
Credit Facility, 9.12% and 9.125%, due 2012 |
|
| 2,786 |
|
|
| — |
|
| ||||
Limited-Subordination Notes, 4.5%, due 2021 |
|
| 726 |
|
|
| — |
|
| ||||
6% senior notes, due 2031 |
|
| 500 |
|
|
| — |
|
| ||||
5% senior convertible notes, due 2021 |
|
| 150 |
|
|
| — |
|
| ||||
Total debt |
|
| 9,387 |
|
|
| 1,311 |
|
| ||||
Less: unamortized debt discount |
|
| (247 | ) |
|
| — |
|
| ||||
Less: current portion |
|
| (1,687 | ) |
|
| (13 | ) |
| ||||
Long-term debt, less current portion |
|
| $ | 7,453 |
|
|
| $ | 1,298 |
|
| ||
Successor Company Debt
Credit Facility.On the Effective Date, United entered into the Credit Facility provided by a syndicate of banks and other financial institutions led by J.P. Morgan Securities Inc. and Citicorp Global Markets Inc., as joint lead arrangers and joint book runners; JPMorgan Chase Bank, N.A. ("JPMCB"(“JPMCB”) and Citicorp USA, Inc. ("CITI"(“CITI”), as co-administrative agents and co-collateral agents; General Electric Capital Corporation, as syndication agent; and JPMCB as paying agent. The Credit Facility providesprovided for a total commitment of up to $3.0 billion that comprised of two separate tranches: (i) Tranche A consistingconsisted of up to $200 million revolving commitment available for Tranche A loans and for standby letters of credit to be issued in the ordinary course of business of United or one of its subsidiary guarantors,guarantors; and (ii) Tranche B consistingconsisted of a term loan commitment of up to $2.45 billion available at the time of closing and additional delayed draw term loan commitments of up to $350 million available upon, among other things, United'sUnited’s acquiring unencumbered title to some or all of the 14 airframes and related engines that were subject to United'sUnited’s 1997-1 EETC financing. The Credit Facility matureswould have matured on February 1, 2012.2012 but was subsequently amended in February 2007, as explained below.
Borrowings under the Credit Facility bear interestwere at a floating interest rate which can bebased on either a base rate, or at our option, a LIBOR rate, plus an applicable margin of 2.75% in the case of the base rate loans and 3.75% in the case of the LIBOR loans. The Tranche B term loan requiresrequired regularly scheduled semi-annual payments of principal equal to 0.5% of the original principal amount of the Tranche B term loan. Interest is
was payable on the last day of the applicable interest period but in no event less than quarterly. TheIn March 2006, the Company has since entered into an interest rate swap whereby it fixedto mitigate its exposure to increases in interest rates under the rate$2.45 billion term loan. In January 2007, as a result of interestchanges in the Company’s mix of 5.14% plus a fixed credit margin.fixed-rate and variable-rate debt, the Company terminated this swap. For further details, see Note 17, "Financial14, “Financial Instruments and Risk Management". At any time prior to February 1, 2007, United may use the proceeds from any lower-cost refinancing to redeem some or all of the term loans at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption.Management—Interest Rate Swap.”
TheUnited’s obligations under the Credit Facility arewere unconditionally guaranteed by the CompanyUAL and certain of the direct and indirect domestic subsidiaries of the Company, (otherother than United)certain immaterial subsidiaries (the "Guarantors"“Guarantors”), and arewere secured by a security interest in substantially all of the tangible and intangible assets of the Guarantors. The obligations under the Credit Facility arewere also secured by a pledge of the capital stock of United and the direct and indirect subsidiaries of the CompanyUAL Corporation and United, except that a pledge of any first-tier foreign subsidiary iswas limited to 65% of the stock of such subsidiary and such foreign subsidiaries arewere not required to pledge the stock of their subsidiaries.
The Credit Facility containscontained covenants that will limitlimited the ability of United and the Guarantors to, among other things, incur or guarantee additional indebtedness, create liens, pay dividends on or repurchase stock, make certain types of investments, pay dividends or other payments from United'sUnited’s direct or indirect subsidiaries, enter into transactions with affiliates, sell assets or merge with other companies, modify corporate documents or change lines of business. The Credit Facility also requiresrequired compliance with several financial covenants, includingcovenants: (i) a minimum ratio of EBITDARearnings before interest, taxes, depreciation and amortization and aircraft rent (“EBITDAR”) to the sum of cash interest expense, cash aircraft rent (other than capitalized leases) and scheduled debt payments,payments; (ii) a minimum unrestricted cash balance of $1.2 billion, to be reduced to $1.0 billion after December 31, 2006 assuming United is in compliance with the ratio calculated under (i) above,billion; and (iii) the market value of the collateral musthad to be greater than 150% of the sum of (a) the aggregate outstanding amount of the loans plus (b) the undrawn amount of outstanding letters of credit, plus (c) the unreimbursed amount of drawings under any letters of credit, and (d) the termination value of certain interest rate protection and hedging agreements with the exit lenders and their affiliates. The Credit Facility received a rating of B+ from Standard & Poor'sPoor’s and B1 from Moody'sMoody’s Investment Services.
United used $2.65all $2.45 billion of the available borrowings under Tranche B and $161 million of the $200 million available under Tranche A of the Credit Facility at the Effective Date to finance working capital needs and for other general corporate purposes, including repayment of the borrowings outstanding under the DIP Financing. Subsequently, in 2006 the Company repaid $161 million on the revolving credit line borrowings and accessed the remaining $350 million onof the delayed draw term loan. We expect
As of December 31, 2006, the Company had outstanding borrowings of $2.8 billion of which $2,438 million was subject to bean interest rate of 9.12% with the remaining balance of $348 million at 9.125%. In addition, letters of credit were issued under the Credit Facility in an aggregate amount of $63 million subject to an interest rate of 3.75%. The Company was in compliance with thesethe Credit Facility covenants at December 31, 2006.
Amended Credit Facility.On February 2, 2007, the Company prepaid $972 million of its Credit Facility debt and entered into an amended and restated revolving credit, term loan and guaranty agreement (the “Amended Credit Facility”) that, among other things, reduced the size of the facility from $3.0 billion to $2.055 billion, reduced the applicable interest rates, and provided for a more limited collateral package and a relaxation of certain restrictive covenants. There were no prepayment penalties associated with this debt retirement. In the first quarter of 2007, the Company expects to expense approximately $16 million of deferred financing costs which are related to the portion of the Credit Facility prepaid in 2007 and included in other assets on the December 31, 2006 Statements of Consolidated Financial Position.
The Amended Credit Facility was provided by a syndicate of banks and other financial institutions led by J.P. Morgan Securities Inc. and Citicorp Global Markets, Inc., as joint lead arrangers and joint bookrunners: JPMCB and CITI, as co-administrative agents and co-collateral agents, Credit Suisse Securities (USA) LLC, as syndication agent, and JPMCB, as paying agent. The Amended Credit Facility
provides for a total commitment of up to $2.055 billion, comprised of two separate tranches: (i) a Tranche A consisting of $255 million revolving commitment available for Tranche A loans and standby letters of credit and (ii) a Tranche B consisting of a term loan commitment of $1.8 billion available at the time of closing. The Tranche A loans mature on February 1, 2012, and the Tranche B loans mature on February 1, 2014.
Borrowings under the Amended Credit Facility bear interest at a floating rate, which, at the Company’s option, can be either a base rate or a LIBOR rate, plus an applicable margin of 1.0% in the case of base rate loans, and 2.0% in the case of LIBOR loans. The Tranche B term loan requires regularly scheduled semi-annual payments of principal equal to $9 million. Interest is payable at least every three months. The Company may prepay some or all of the Tranche B loans from time to time, at a price equal to 100% of the principal amount prepaid plus accrued and unpaid interest, if any, to the date of prepayment, but therewithout penalty or premium.
United’s obligations under the Amended Credit Facility are no assurances weunconditionally guaranteed by UAL Corporation and certain of its direct and indirect domestic subsidiaries, other than certain immaterial subsidiaries (the “Guarantors”); hereafter, Guarantors refers to the guarantor companies as defined by the Amended Credit Facility. On the closing date for the Amended Credit Facility, the obligations are secured by a security interest in the following tangible and intangible assets of United and the Guarantors: (i) the Pacific (Narita, China and Hong Kong) and Atlantic (Heathrow) routes (the “Primary Routes”), (ii) primary foreign slots, primary domestic slots, certain gate interests in domestic airport terminals and certain supporting route facilities, (iii) certain spare engines, (iv) certain quick engine change kits, (v) certain owned real property and related fixtures, and (vi) certain flight simulators (the “Collateral”). After the closing date, and subject to certain conditions, United and the Guarantors may grant a security interest in the following assets, in substitution for certain Collateral (which may be released from the lien in support of the Amended Credit Facility upon the satisfaction of certain conditions): (a) certain aircraft, (b) certain spare parts, (c) certain ground handling equipment, and (d) accounts receivable.
The Amended Credit Facility contains covenants that will be ablelimit the ability of United and the Guarantors to, do so.among other things, incur or guarantee additional indebtedness, create liens, pay dividends on or repurchase stock, make certain types of investments, enter into transactions with affiliates, sell assets or merge with other companies, modify corporate documents or change lines of business. The Amended Credit Facility also requires compliance with the following financial covenants: (i) a minimum ratio of EBITDAR to the sum of cash interest expense, aircraft rent and scheduled debt payments, (ii) a minimum unrestricted cash balance of $750 million, and (iii) a minimum ratio of market value of collateral to the sum of (a) the aggregate outstanding amount of the loans plus (b) the undrawn amount of outstanding letters of credit, plus (c) the unreimbursed amount of drawings under such letters of credit and (d) the termination value of certain interest rate protection and hedging agreements with the Amended Credit Facility lenders and their affiliates, of 150% at any time, or 200% at any time following the release of Primary Routes having an appraised value in excess of $1 billion (unless the Primary Routes are the only collateral then pledged). Failure to comply with ourthe Amended Credit Facility covenants could result in a default under the Amended Credit Facility unless wethe Company were to obtain a waiver of, or otherwise mitigate or cure, the default. Additionally, the Amended Credit Facility contains a cross-default provision with respect to defaults on our other credit arrangements that exceed $40$50 million. A default could result in a termination of the Amended Credit Facility and a requirement to accelerate repayment of all outstanding facility borrowings.
105
Limited-Subordination Notes.As discussed in Note 1, “Voluntary Reorganization Under Chapter 11—Bankruptcy Considerations,” after the Effective Date the Company reached an agreement with five of the seven eligible employee groups to modify certain terms of these notes.
In July 2006, the Company issued $726 million aggregate principal amount of 4.5% senior limited-subordination convertible notes to irrevocable trusts established for the benefit of certain of its employees, including employees under collective bargaining agreements. The notes are unsecured, mature on June 30, 2021 and do not require any payment of principal before maturity. Interest is payable semi-annually, in arrears. Interest for the first year may be paid in shares of common stock, at the option of the Company. These notes may be converted into common stock of the Successor Company at any time after October 23, 2006, at an initial conversion price of $34.84 which may be subject to adjustment for certain dilutive items and events. The notes are junior, in right of payment upon liquidation, to the Company’s obligations under the 5% senior convertible notes and 6% senior notes discussed below in “Newly-issued Debt.” The notes are callable in cash and/or Successor Company common stock beginning approximately five years after the issuance date, except that the Company may elect to pay in common stock only if the common stock has traded at not less than 125% of the conversion price for the 60 consecutive trading days immediately before the redemption date. In addition, on each of June 30, 2011 and June 30, 2016, holders have the option to require the Company to repurchase its notes, which the Company may elect to do through the payment of cash or Successor Company common stock, or a combination of both.
Pursuant to the Plan of Reorganization, the notes were to have been issued at a conversion price of $46.86, which was calculated as 125% of the average closing common stock price for the 60 consecutive trading days following February 1, 2006. The Plan of Reorganization also required that the notes bear interest at a rate so that the notes would trade at par upon issuance. Since the original conversion option was priced significantly out of the money as of the note issuance date of July 25, 2006, the Company agreed with employee groups to modify the conversion price to make the notes more marketable and to provide United with a more favorable interest rate. This modification did not alter or eliminate the requirement that an interest rate be selected so that the notes would trade at par upon issuance. Had the Company not modified the conversion price, the interest rate required to meet the par trading requirement would have been significantly higher than 4.5%.
The Company accounted for this modification of debt in accordance with EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and EITF Issue No. 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues.” The Company evaluated the original and modified terms of this debt instrument (including performing a fair valuation of the conversion feature before and after the modification), and determined that the modification qualified to be accounted for as an extinguishment of debt. As a result, the modified Limited-Subordination Notes were recorded at fair market value on their date of issuance, which approximated the book value of the replacementoriginal extinguished notes, and no gain or loss was realized on the extinguishment. The Company had recorded the original obligation to issue the Limited-Subordination Notes at fair market value upon its emergence from bankruptcy in accordance with fresh-start reporting.
After the issuance of the DIP Financingmodified notes in July 2006, the trusts sold the notes to third parties and remitted the majority of the proceeds to the employee beneficiaries in 2006 with the Credit Facility,remainder to be remitted in 2007.
Newly-issued Debt.In addition to the mandatorily convertible preferred securities discussed in Note 13, “Preferred Stock,” the Company issued the following new debt instruments on the Effective Date:
· 5% senior convertible notes were issued to certain holders of the O’Hare municipal bonds. The notes are unsecured, have a term of 15 years from the date of issuance and do not require any payment of principal before maturity. Interest is payable semi-annually, in arrears. Interest for the first year may be paid in kind, at the option of the Company, in Successor Company common stock.
These 5% senior convertible notes may be converted, at the holder’s option, into Successor Company common stock, at any time, at a per share price of $46.86. This conversion price is subject to adjustment for certain dilutive items and events. These notes are callable, at the Company’s option, in cash or Successor Company common stock, under certain conditions, beginning five years after the issuance date. In the case of any such redemption, the Company may only redeem these notes with shares of common stock if the Successor Company’s common stock has traded at no less than 125% of the conversion price for the 60 consecutive trading days prior to the redemption date. The holders have the option to require the Company to repurchase their notes on the 5th and 10th anniversary of the date of issuance, which the Company may elect to do through the payment of cash or Successor Company common stock, or a combination of both.
· 6% senior notes were issued to the PBGC on the Effective Date. These notes are unsecured, mature 25 years from the issuance date and do not require any payment of principal before maturity. Interest is payable semi-annually, in arrears. Interest may be paid with cash, in kind notes or Successor Company common stock through 2011 and thereafter in cash. These notes are callable at any time at 100% of par value, and can be redeemed with either cash or Successor Company common stock at the Company’s option. Upon a change in control or other event as defined in the agreement, the Company has an obligation to redeem the notes. In the case of February 1,such mandatory redemption, the Company may elect to redeem the notes in cash, in shares of Successor Company common stock or a combination thereof.
Contingent Senior Unsecured Notes. In addition to the newly-issued debt as noted above, the Company is obligated to issue to the PBGC 8% senior unsecured notes with an aggregate $500 million principal amount in up to eight equal tranches of $62.5 million (with no more than two tranches issued on a single date) upon the occurrence of certain financial triggering events. Any required tranche will be issued no later than 45 days following the end of any fiscal year in which there is an issuance trigger event, starting with the fiscal year 2009 and ending with the fiscal year 2017. An issuance trigger event occurs when, among other things, the Company’s EBITDAR exceeds $3.5 billion over the prior twelve months ending September 30 or December 31 of any applicable fiscal year, beginning with the fiscal year 2009. However, if the issuance of a tranche would cause a default under any other securities then existing, the Company may satisfy its obligations with respect to such tranche by issuing Successor Company common stock having a market value equal to $62.5 million. Each issued tranche will mature 15 years from its respective issuance date, with interest payable in cash in semi-annual installments, and will be callable at any time at 100% of par value, plus accrued and unpaid interest.
At December 31, 2006, we anticipate making the followingcontractual principal payments under then-outstanding long-term debt agreements in each of the next five calendar years: 2006 - $376years are as follows: 2007—$715 million; 2007 - $4812008—$684 million; 2008 - $6202009—$759 million; 2009 - $6772010—$941 million and 2010 - - $8562011—$836 million. After giving effect to the February 2007 prepayment of $972 million and the amendment of the Credit Facility, the Company’s prepaid and contractual principal payments in each of the next five calendar years are as follows: 2007—$1,687 million; 2008—$674 million; 2009—$749 million; 2010—$931 million and 2011—$826 million.
In addition to the Credit Facility collateral that included a security interest in substantially all of the Guarantors tangible and intangible assets, various assets, principally aircraft, having an aggregate book value of $4.4 billion at December 31, 2006, were pledged as security under various loan agreements. The amendment to the Credit Facility released certain of the Company’s assets from collateral; however, this amendment did not impact the $4.4 million of security pledged under separate loan agreements at December 31, 2006.
(10) Lease ObligationsPredecessor Company Debt
UAL leasesAs of December 31, 2005, long-term debt consisted of the DIP Financing and debt associated with certain aircraft airport passenger terminal space,operated by Air Canada (“Air Canada Debt”). The amended agreement with the DIP
financing lenders, which was approved by the Bankruptcy Court, consisted of a $1.1 billion term loan and a $200 million revolving credit and letter of credit facility and was due on March 31, 2006. The terms of the DIP Financing included covenants with respect to ongoing monthly financial requirements, including thresholds for minimum EBITDAR, limitations on capital expenditures and minimum unrestricted cash. Failure to comply with these covenants would have constituted an event of default under the DIP Financing and allowed the lenders to accelerate the loan. The Company complied with the EBITDAR covenant in the fourth quarter of 2005 and in the first quarter of 2006, up to the repayment of the DIP Facility with proceeds from the Credit Facility on the Effective Date. As of December 31, 2005, the Company had outstanding debt of $154 million associated with aircraft hangarsleased by Air Canada. The Air Canada Debt has a fixed interest rate of 7.15% and related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and computer equipment and vehicles. As allowedis scheduled to mature at various times through January 2016.
During the Company’s reorganization under Chapter 11, it was not permitted to make payments on pre-petition debt while in Chapter 11; however, to the extent it had reached agreements with certain financiers on specific aircraft governed by Section 3651110 of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property,the Company continued to make payments on the secured notes financing the aircraft and aircraft engines, subject towith the approval of the Bankruptcy CourtCourt. In addition, the Company had rejected certain aircraft that were originally financed under secured notes and certain other conditions.
had reclassified $651 million in principal amount of these secured notes to Liabilities subject to compromise.
At December 31, 2005, scheduled future minimum lease payments under capital leases (substantially allthe Company had recorded $434 million in municipal bonds to finance the acquisition and construction of which are for aircraft)certain facilities at Los Angeles, San Francisco, Miami and operating leases having initial Chicago. These municipal bonds were rejected and/or remaining noncancelable lease termssettled as part of more than one yearthe bankruptcy process, and rejected amounts were as follows: (In millions) Payable during - 2006 2007 2008 2009 2010 After 2010 Total minimum lease payments Imputed interest (at rates of 1.5% to 10.0%) Present value of minimum lease payments Current portion Long-term obligations under capital leases
As ofrecorded in Liabilities subject to compromise at December 31, 2005, we leased 230 mainline aircraft, 572005. The Company does not have any obligations for these municipal bonds as a result of which were under capital leases. These leases have initial terms of 10 to 26 years, and expiration dates ranging from 2006 through 2024. Under the terms of all leases, we have the right to purchase the aircraft at the end of the lease term, in some cases at fair market value and in others at fair market value or a percentage of cost. Additionally, the above amounts include lease paymentsits bankruptcy proceedings, except for potential obligations related to our United Express contracts for 37 aircraft under capital leasesleasehold security interests at LAX and 237 aircraft under operating leasesSFO as describeddiscussed in Note 2(i), "Summary1, “Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to be Resolved in Chapter 11 Cases.”
The Company has a subsidiary trust that had Trust Originated Preferred Securities (“TOPrS”) outstanding with a liquidation value of Significant Accounting Policies - United Express."
Certain of our aircraft lease transactions contain provisions such as put options giving the lessor the right to require us to purchase the aircraft$97 million at lease termination for a certain amount resultingDecember 31, 2005. These securities were issued in residual value guarantees. Leases containing this or similar provisions are recorded as capital leasesDecember 1996 and were previously reported on the balance sheet and, accordingly, any and all residual value guarantee amounts contained in an aircraft lease are fully reflected as capital lease obligations on the Company’s Statements of Consolidated Financial Position.
In connection with the financing as Company-Obligated Mandatorily Redeemable Preferred Securities of certain euro-denominated aircraft financings accounted for as capital leases, United had on deposit in certain banks at December 31, 2005 an aggregate 391 million euros ($461 million) and $16 million, and had pledged an irrevocable securitya Subsidiary Trust. The trust was considered a variable interest in such deposits to certain of the aircraft lessors. These deposits will be used to repay an equivalent amount of recorded capital lease obligations, and are classified as aircraft lease deposits in the accompanying Statements of Consolidated Financial Position.
Amounts charged to rent expense, net of minor amounts of sublease rentals, were $1.0 billion in 2005, $1.1 billion in 2004 and $1.2 billion in 2003.
In the first quarter of 2004, we adoptedentity under FASB Interpretation No. 46, "46R, “Consolidation of Variable Interest EntitiesEntities—Revised" ("” (“FIN 46"46R”) and FIN 46R which requires disclosure of certain informationbecause the Company had limited ability to make decisions about VIEs that are consolidated and certain other information about VIEs that are not consolidated.
We have various financing arrangements for aircraft in whichits activities. However, the lessors are trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities; however, we areCompany was not considered the primary beneficiary of the leasing entities sincetrust. Therefore, the lease terms are consistent with market termstrust and the Mandatorily Redeemable Preferred Securities issued by the trust were not reported on the Company’s Statements of Consolidated Financial Position. Instead, the Company reported its Junior Subordinated Debentures held by the trust as long-term debt included in Liabilities subject to compromise at December 31, 2005. Pursuant to the inceptionPlan of Reorganization, the TOPrS were cancelled on the Effective Date; no distribution was made to the holders of the leaseTOPrS.
The Company’s pre-petition debt, which was classified as Liabilities subject to compromise, consisted of the following at December 31, 2005:
|
| (In millions) |
| |||
Secured notes, 3.72% to 9.52%, averaging 6.67%, due through 2014 |
|
| $ | 5,756 |
|
|
Debentures, 9.00% to 11.21%, averaging 9.89%, due through 2021 |
|
| 646 |
|
| |
Municipal bonds, 5.63% to 6.38%, averaging 5.90%, due through 2035 |
|
| 434 |
|
| |
Preferred securities of trust, 13.25%, due 2026 |
|
| 97 |
|
| |
|
|
| $ | 6,933 |
|
|
Various assets, principally aircraft, having an aggregate book value of $9 billion at December 31, 2005, were pledged as security under various loan agreements.
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(12) ESOP Preferred Stock
On June 26, 2003, the ESOP was terminated following the publication of a regulation by the Internal Revenue Service that would permit the distribution of the remaining ESOP shares to plan participants without jeopardizing the Company’s ability to utilize its net operating losses. As a result of the termination of the ESOP, employees were given until August 18, 2003 to make elections for distribution of their stock in the plan. For participants who did not make an election regarding their stock before the August 18 deadline, the stock remained in the plan and dodistributions continued on a monthly basis until June of 2004, when the Company implemented a forced distribution of the remaining shares in the plan. On June 28, 2004, all remaining ESOP shares consisting of 1,181,201 Class 1 ESOP Preferred Stock, 279,706 Class 2 ESOP Preferred Stock and 1,412,361 Voting ESOP Preferred Stock were converted to common and either distributed to participants at their request or transferred to a broker account in their name.
Each share of Class 1 and Class 2 ESOP Preferred Stock was convertible into four shares of UAL common stock. Shares typically were converted to common as employees retired or otherwise left the Company. The ESOP Preferred Stock was nonvoting, with a par value of $0.01 per share and a liquidation value of $126.96 per share. The Class 1 ESOP Preferred Stock provided a fixed annual dividend of $8.8872 per share, which ceased on March 31, 2000; the Class 2 ESOP Preferred Stock did not includepay a residualfixed dividend. The Voting ESOP Preferred Stock had a par value guarantee, fixed-price purchase option or similar feature that obligates usand liquidation preference of $0.01 per share. The stock was not entitled to absorb decreasesreceive any dividends and was convertible into .0004 shares of UAL common stock.
(13) Preferred Stock
Pursuant to the Plan of Reorganization, preferred stock issued before the Petition Date was canceled on the Effective Date, and no distribution was made to holders of those securities.
Successor Company Preferred Stock
The Successor Company is authorized to issue 250 million shares of preferred stock (without par value), 5 million shares of 2% convertible preferred stock (par value $0.01 per share) and two shares of junior preferred stock (par value $0.01 per share).
The 2% convertible preferred stock was issued to the PBGC on the Effective Date. The shares were issued at a liquidation value of $100 per share, convertible at any time following the second anniversary of the issuance date into common stock of the Successor Company at a conversion price of $46.86 per common share; with dividends payable in value or entitles uskind semi-annually (in the form of increases to participate in increases in the liquidation value of the aircraft. These financing arrangements include 76 aircraft operating leases that contain a fair marketissued and outstanding shares); the preferred stock ranks pari passu with all current and future UAL or United preferred stock and is redeemable at any time at the then-current liquidation value purchase option. These leases became effective upon(plus accrued and unpaid dividends) at the confirmationoption of the Planissuer. The preferred stock is mandatorily convertible 15 years from the date of Reorganization.
The Company has 97 additionaloperating leases, for which all but 26 haveissuance. Upon a fixed pricefundamental change or fair market value purchase option. United does not guaranteea change in ownership as defined in the residualCompany’s restated certificate of incorporation, holders of shares of the preferred stock are also entitled to receive payment equal to the amount they would receive in an actual liquidation of the Company. At December 31, 2006, 5 million shares of 2% convertible preferred stock were outstanding with an aggregate liquidation value of these aircraft.$509 million, which includes $9 million in dividends that were declared in 2006. At December 31, 2006, the carrying value of the 2% convertible preferred stock was $361 million which includes $9 million in dividends that were declared in 2006. In addition, the two shares of junior preferred stock have been issued.
(11) SerialPredecessor Company Preferred Stock
At December 31, 2005, wethe Predecessor Company had outstanding 3,203,177 depositary shares, each representing 1/1000 of one share of Series B 12 ¼%1¤4% preferred stock, with a liquidation preference of $25
$25 per depositary share ($25,000 per Series B preferred share) and a stated capital of $0.01 per Series B preferred share. WeThe Predecessor Company had the option to redeem any portion of the Series B preferred stock or the depositary shares for cash after July 11, 2004, at the equivalent of $25 per depositary share, plus accrued dividends. The Series B preferred stock was not convertible into any other securities, had no stated maturity and was not subject to mandatory redemption. In accordance with the Company'sCompany’s confirmed Plan of Reorganization, the Series B preferred stock was canceled.
Prior toBefore its cancellation, the Series B preferred stock ranked senior to all other preferred and common stock outstanding, except the TOPrS, as to receipt of dividends and amounts distributed upon liquidation. The Series B preferred stock had voting rights only to the extent required by law and with respect to charter amendments that adversely affected the preferred stock or the creation or issuance of any security ranking senior to the preferred stock. Additionally, if dividends were not paid for six cumulative quarters, the Series B preferred stockholders were entitled to elect two additional members to the UAL Board of Directors until all dividends were paid in full. In accordance with ourthe Company’s restated certificate of incorporation, we wereit was authorized to issue a total of 50,000 shares of Series B preferred stock.
On September 30, 2002, wethe Company announced the suspension of the payment of dividends on the Series B preferred stock. As a result of ourstock and upon its Chapter 11 filing, we stopped accruing for unpaid dividends on the Series B preferred stock. The amount of dividends in arrears was approximately $32 million as of December 31, 2005.
At December 31, 2005, UAL was authorized to issue up to 15,986,584 additional shares of serial preferred stock.
(12) ESOP Preferred Stock(14) Financial Instruments and Risk Management
The following activity relates to outstanding sharesInstruments designated as cash flow hedges receive favorable accounting treatment under SFAS 133, as long as the hedge is effective and the underlying transaction is probable. If both factors are present, the effective portion of ESOP preferred stocks:
On June 26, 2003, the ESOP was terminated following the publicationchanges in fair value of a regulationthese contracts is recorded in accumulated other comprehensive income (loss) until earnings are affected by the Internal Revenue Servicecash flows being hedged.
Instruments classified as economic hedges do not qualify for hedge accounting under SFAS 133. Under this classification all changes in the fair value of these contracts are recorded currently in operating income, with the offset to either current assets or liabilities each reporting period.
Aircraft Fuel Hedges.
During 2004, the Company began to implement a strategy to hedge a portion of its price risk related to projected jet fuel requirements primarily through collar options. The collars (only some of which were designated as cash flow hedges) involve the purchase of fuel call options with the simultaneous sale of fuel put options with identical expiration dates. Contracts designated as cash flow hedges are recorded at fair value, with the changes in intrinsic value, to the extent they are effective, recorded in other comprehensive loss until the underlying hedged fuel is consumed. To the extent that the designated cash flow hedges are ineffective, gain or loss is recognized currently. As part of fresh-start reporting for economic hedges, the Company changed its classification to record the gains and losses currently in Aircraft fuel in the Statements of Consolidated Operations as these hedges are executed to mitigate its exposure to fuel price volatility. Previously such amounts were recorded as an element of non-operating income.
At December 31, 2005 and for the one month ended January 31, 2006, the Predecessor Company had no fuel hedges in place. In the eleven months ended December 31, 2006, the Successor Company entered into and settled aircraft fuel hedges for its mainline operations that were classified as economic hedges.
In 2005, the Predecessor Company recognized income of $40 million (which included a loss of approximately $1 million as a result of ineffective fuel hedges) in non-operating income mainly due to
non-designated hedges. In the eleven months ended December 31, 2006, the Successor Company recognized a net loss of $26 million which included a $24 million realized loss on settled contracts and $2 million of unrealized mark-to-market losses for contracts settling after December 31, 2006, all of which were classified as mainline fuel expense in the Statements of Consolidated Operations.
As of December 31, 2006, the Company had hedged 32% of forecasted first quarter 2007 fuel consumption through crude oil collars and swaps. On a weighted-average basis, hedge protection begins if crude exceeds $65 per barrel and is capped at $74 per barrel. Conversely, payment obligations begin if crude, on a weighted-average basis, drops below $59 per barrel.
As of December 31, 2006, the Company had hedged 4% of forecasted fuel consumption for the second quarter 2007 predominantly through crude oil three-way collars with upside protection, on a weighted-average basis, beginning from $64 per barrel and capped at $75 per barrel. Payment obligations, on a weighted-average basis, begin if crude drops below $60 per barrel.
Interest Rate Swap.
The Company uses interest rate swap agreements to effectively limit exposure to interest rate movements within the parameters of the Company’s interest rate hedging policy. In February 2006, the Successor Company entered into an interest rate swap with an initial notional amount of $2.45 billion that would permithave decreased to $1.8 billion over the distributionterm of the remaining ESOP sharesswap. The swap would have expired in February 2012 and required that the Company pay a fixed rate of 5.14% and receive a floating rate based on the three-month LIBOR rate.
At December 31, 2006, the Company determined that it is no longer probable that a portion of the forecasted cash flows hedged by the swap would occur, in light of the Company’s developing plans to plan participants without jeopardizing our ability to utilize our net operating losses. Asretire a portion of the Credit Facility in advance of scheduled maturities. For the eleven months ended December 31, 2006, the total unrealized pre-tax loss on the swap was $12 million, of which a $4 million loss was recorded in earnings as interest expense and $8 million was recorded as other comprehensive loss. In January 2007, as a result of the terminationCompany’s reevaluation of the ESOP, employees were given until August 18, 2003 to make electionsmix of fixed-rate and floating-rate debt in its debt portfolio, the Company terminated the swap for distributiona payment of their stock$4 million. In 2007, the $8 million gain in the plan. For participants who did not make an election regarding their stock priorswap value from December 31, 2006 to the August 18 deadline,termination date will be recognized in earnings.
Fair Value of Financial Instruments.
The following methods and assumptions were used to estimate the stock remained in the planfair value of each class of financial instruments for which such estimates can be made:
Cash and distributions continued on a monthly basis until June of 2004, when we implemented a forced distributionCash Equivalents, Restricted Cash and Short-term Investments.
The carrying amounts approximate fair value because of the remaining shares in the plan. On June 28, 2004, all remaining ESOP shares were convertedshort-term maturity of these investments.
Derivative Financial Instruments.
Market prices used to common and either distributed to participants at their request or transferred to a broker account in their name.determine fair value are primarily based on closing exchange prices.
Each share of Class 1 and Class 2 ESOP Preferred Stock was convertible into four shares of UAL common stock. Shares typically were converted to common as employees retired or otherwise left the Company. and Long-Term Debt.
The ESOP Preferred Stock was nonvoting, with a parfair value of $0.01 per share and a liquidation value of $126.96 per share. The Class 1 ESOP Preferred Stock provided a fixed annual dividend of $8.8872 per share, which ceased on March 31, 2000; the Class 2 ESOP Preferred Stock did not pay a fixed dividend.
The Voting ESOP Preferred Stock had a par value and liquidation preference of $0.01 per share. The stock was not entitled to receive any dividends and was convertible into ..0004 shares of UAL common stock.
(13) Common Stockholders' Equity
Changes in the number of shares of UAL common stock outstanding during the years ended December 31 were as follows: Shares outstanding at beginning of year Shares issued from treasury under compensation arrangements Shares acquired for treasury Forfeiture of restricted stock Conversion of ESOP preferred stock Other Shares outstanding at end of year
All shares of common stock that were issued and outstanding immediately prior to the Effective Date were canceled pursuant to the terms of the Plan of Reorganization. New UAL shares of common stock began tradingis based on the NASDAQ National Market on February 2, 2006 under the symbol "UAUA".
(14) Stock Options and Awards
As of December 31, 2005, the Company had granted options to purchase common stock to various officers and employees. The option price for all stock options was at least 100% of the fairquoted market value of UAL common stock at the date of grant. The options generally vested and became exercisable in four equal, annual installments beginning one year after the date of grant, and generally expired in ten years. We did not issue any stock options during 2005, 2004 or 2003. Under the Company's confirmed Plan of Reorganization, these stock options were canceled upon the Effective Date.
As of December 31, 2005, we had also awarded shares of restricted stock to certain officers and key employees. These shares generally vested over a five-year period and were subject to certain transfer restrictions and forfeiture under certain circumstances prior to vesting. Unearned compensation, representing the fair market value of the stock at the measurement dateprices for the award, was amortized to salaries and related costs over the vesting period. No shares were issued in 2005, 2004same or 2003. As of December 31, 2005, all restricted shares were fully vested. Under the Company's confirmed Plan of Reorganization, the existing restricted stock was canceled upon the Effective Date.
SFAS No. 123 establishes a fair value based method of accounting for stock options. As discussed in Note 2(m), "Summary of Significant Accounting Policies - Stock Option Accounting," we have elected to continuesimilar issues, discounted cash flow models using the intrinsic value method of accounting prescribed in APB 25, as permitted by SFAS No. 123, and as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
Stock option activity for the past three years was as follows: Outstanding at beginning of year Granted Terminated Outstanding at end of year Options exercisable at year-end Reserved for future grants at year-end Wtd. avg. fair value of options granted during the year
The following information relates to stock options outstanding as of December 31, 2005:
In accordance with the Plan of Reorganization, in 2006 the Company approved the distribution of the following stock awards with vesting periods of four years:
Up to 9.825 million shares of common stock and options (or rights to acquire shares) under the MEIP approved by the Bankruptcy Court, andUp to 175,000 shares of common stock and options (or rights to acquire shares) under the DEIP approved by the Bankruptcy Court.
(15) Retirement and Postretirement Plans
Historically, the Company has maintained various retirement plans, both defined benefit (qualified and non-qualified) and defined contribution, which have covered substantially all employees. We also have provided certain health care benefits, primarily in the U.S., to retirees and eligible dependents, as well as certain life insurance benefits to certain retirees. The Company has reserved the right, subject to collective bargaining agreements, to modify or terminate the health care and life insurance benefits for both current and future retirees.
In connection with the Company's restructuring in bankruptcy, the defined benefit plans for our U.S. employees were terminated and replaced with certain defined contribution plans, subject to the outcome of the matters being considered by the District Court as is more fully described in Note 1, "Voluntary Reorganization Under Chapter 11- Significant Matters Remaining to be Resolved in Bankruptcy Court". The Company has maintained unchanged other defined benefit and defined contribution plans for certain of its non-U.S. employees. During bankruptcy, we also restructured certain postretirement benefit obligations under Section 1114 of the Bankruptcy Code. For further information, see Note 1, "Voluntary Reorganization Under Chapter".
On December 30, 2004, the PBGC filed a complaint against the Company in the District Court to seek the involuntary termination of the Pilot Plan, with benefit accruals terminated effective December 30, 2004. The Company recorded a $152 million curtailment charge in the fourth quarter of 2004 relating to the PBGC's involuntary termination action and reclassified the associated pension obligations of $2.5 billion to liabilities subject to compromise.
In April 2005, Unitedappropriate market rates and the PBGC entered into a global settlement agreement which provided for the settlement and compromise of various disputes and controversies with respectBlack-Scholes model to the Pension Plans. In May 2005, the Bankruptcy Court approved the settlement agreement, including modifications requested by certain creditors.value stock options.
The PBGC assumed responsibility for the assets for the Ground Plan effective May 23, 2005 (with a termination date of March 11, 2005), the Flight Attendant and the MAPC Plans effective June 30, 2005 and the Pilot Plan effective October 26, 2005, and the Company has no further duties or rights with respect to these Pension Plans, subject to the outcome of the matters being considered by the District Court as is more fully described in Note 1, "Voluntary Reorganization Under Chapter 11 - Significant Matters Remaining to be Resolved in Bankruptcy Court". On March 17, 2006, the Bankruptcy Court ruled that the Company's obligations regarding non-qualified benefits that were earned under the Pilot Plan ceased January 31, 2006 (representing approximately $72 million of payments annually). In 2005, the Company recorded an additional $640 million in curtailment charges related to these Pension Plans and reclassified an additional $1.9 billion of pension obligations to liabilities subject to compromise. The Company also recorded approximately $7.2 billion of PBGC allowable claims in liabilities subject to compromise in accordance with the confirmed Plan of Reorganization. In addition, the Company recognized net settlement losses of approximately $1.1 billion in 2005 in accordance with SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS 88").111
On May 19, 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2") which superseded FASB Staff Position No. 106-1 ("FSP 106-1") and provided specific guidance on accounting for the federal subsidy provided to sponsors of certain retiree health care benefit plans. The issuance of FSP 106-2 did not significantly change our accounting for the federal subsidy, which reduced the accumulated postretirement benefit obligation by approximately $280 million when we adopted FSP 106-1 in late 2003. The expected federal subsidy decreased our postretirement cost in 2005 and 2004 by approximately $47 million and $37 million, respectively.
The following table sets forthpresents the reconciliationcarrying amounts and estimated fair values of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in the Statements of Consolidated Financial Position for the defined benefit and other postretirement plans as of December 31 (utilizing a measurement date of December 31): (In millions) Change in Benefit Obligation Benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Amendments Actuarial (gain) loss Curtailments Foreign currency exchange rate changes Termination of domestic benefits plans Benefits paid Benefit obligation at end of year Change in Plan Assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants' contributions Foreign currency exchange rate changes Expected transfer out Termination of domestic benefits plans Benefits paid Fair value of plan assets at end of year Funded status Unrecognized actuarial (gains) losses Unrecognized prior service costs Unrecognized net transition obligation Net amount recognized Amounts recognized in the statement of financial position consist of: Prepaid (accrued) benefit cost Additional minimum liability Intangible asset Accumulated other comprehensive income Net amount recognized Increase (decrease) in minimum liability included in other comprehensive income
The following information relates to all pension plans with an accumulated benefit obligation in excess of plan assets:
The net periodic benefit cost included the following components: (In millions) Service cost Interest cost Expected return on plan assets Amortization of prior service cost including transition obligation/(asset) Curtailment charge Settlement losses, net Special termination benefit Recognized actuarial loss Net periodic benefit costs
Total pension expense for all retirement plans (including defined contribution plans) recognized in 2005, 2004 and 2003 respectively was $2.1 billion, $743 million, and $804 million.
The weighted-average assumptions used for the pension plans were as follows:
The expected return on plan assets is based on an evaluation of the historical behavior of the broadCompany’s financial markets and the Company's investment portfolio, taking into consideration input from the plans' investment consultant and actuary regarding expected long-term market conditions and investment management performance.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed health care trend rate would have the following effects:
The weighted-average asset allocations for our pension plansinstruments at December 31, 20052006 and 2004, by asset category are as follows:
|
| 2006 |
| 2005 |
| |||||||||||||||
(In millions) |
|
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||||||
Long-tem debt (including current portion) |
|
| $ | 9,140 |
|
| $ | 9,510 |
|
| $ | 154 |
|
| $ | 149 |
|
| ||
Preferred stock |
|
| 361 |
|
| 443 |
|
| — |
|
| — |
|
| ||||||
DIP financing |
|
| — |
|
| — |
|
| 1,157 |
|
| 1,157 |
|
| ||||||
Fuel derivative contracts—losses |
|
| 2 |
|
| 2 |
|
| — |
|
| — |
|
| ||||||
Interest rate swap loss |
|
| 12 |
|
| 12 |
|
| — |
|
| — |
|
| ||||||
Our targeted allocation of assets was to the following investment types: 60% equities, 35% fixed income and 5% other, with approximate expected long-term rates of return of 10%, 7.5% and 15%, respectively.
We believe that the long-term asset allocation on average will approximate the targeted allocation and regularly review the actual asset allocation to periodically rebalance the investments to the targeted allocation when appropriate. Pension expense is reduced by the expected return on plan assets, which is measured by assuming the market-related value of plan assets increases at the expected rate of return. The market-related value is a calculated value that phases in differences between the expected rate of return and the actual return over a period of five years.
The weighted-average asset allocation for our other benefit plans at December 31, 2005 and 2004, by asset category are as follows:
With the termination of our qualified and non-qualified U.S. defined benefit pension plans, we will not make further cash contributions to these trusts.
In place of the domestic defined benefit pension plans that the PBGC terminated in 2005, the Company enhanced its defined contribution plans for most employee groups by adding a matching percentage or increasing the direct employer contribution percentages based on eligible earnings. For certain employees, the Company agreed to contribute to a multi-employer benefit plan based on hours worked beginning in March 2006. The Company agreed to accrue contributions to most of its defined contribution plans beginning in June and July 2005, although such matching contributions for 2005 were not funded until shortly after the Effective Date. The Company's contribution percentages, which continue after 2005, vary from 2.7% to 15% of eligible earnings depending on the terms of each plan. In 2005, the Company recognized $122 million in defined contribution expense. The Company intends to contribute approximately $296 million (which includes $54 million of 2005 accrued defined contributions and $24 million for pilots non-qualified contributions through January 31, 2006) and $183 million, respectively, to our defined contribution plans and other benefit plans in 2006. In addition, the following benefit payments are expected to be paid in future years:
(16)(15) Commitments, Contingent Liabilities and Uncertainties
General Guarantees and Indemnifications. In the normal course of business, we enterthe 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. In both leasing and financing transactions, wethe Company typically indemnifyindemnifies 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, we believethe 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.
FinancingsLegal and Guarantees. Environmental Contingencies.In additionUAL has certain contingencies resulting from litigation and claims (including environmental issues) incident to common commercial lease transactions, we had entered into numerous long-term agreementsthe ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel, the nature of contingencies to lease certain airportwhich the Company is subject and maintenance facilitiesprior 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 estimatable. These amounts are financed through tax-exempt municipal bondsrecorded based on the Company’s assessments of the likelihood of their eventual disposition. The amounts of these liabilities could increase or decrease in the amountnear term, based on revisions to estimates relating to the various claims.
The Company anticipates that if ultimately found liable, its damages from claims arising from the events of $1.7 billion in principal. These municipal bonds were issued by various local municipalities to build or improve airport and maintenance facilities. Under these lease agreements, we were required to make rental payments in amounts sufficient to pay the maturing principal and interest payments on the bonds. However, as a result of our bankruptcy filing, we were not permitted to make payments on unsecured pre-petition debt. We were advised that our municipal bonds maySeptember 11, 2001 could be unsecured (or in certain instances, partially secured) pre-petition debt. As of December 31, 2005,significant; however, the Company had settled approximately $1.2 billion in principalbelieves that, under the Air Transportation Safety and System Stabilization Act of such bonds through the bankruptcy process. 2001, its liability will be limited to its insurance coverage.
Commitments.At December 31, 2005, $510 million in principal2006, future commitments for the purchase of such bonds was outstanding but not recordedproperty and equipment, principally aircraft, approximated $2.5 billion, after deducting advance payments. The Company’s current commitments are primarily for the purchase of, in the Statementsaggregate, 42 A319 and A320 aircraft. In January 2006, United reached an agreement with the airframe manufacturer to delay, with the right to cancel these future orders. Such action could cause the forfeiture of Consolidated Financial Position in accordance with generally accepted accounting principles ("GAAP"). UAL guaranteed $60 million and United guaranteed $510$91 million of such bonds, including accrued interest. For further details, see Note 1 "Voluntary Reorganization Under Chapter 11 - Bankruptcy Considerations".advance payments if United does not take future delivery of these aircraft. The Company also reached an agreement with the engine manufacturer eliminating all provisions pertaining to firm commitments and support for future Airbus aircraft. While this permits future negotiations on engine pricing with any engine manufacturer, restructured aircraft manufacturer commitments have assumed that aircraft will be delivered with installed engines at list price. The Company’s current commitments would require the payment of an estimated $0.1 billion in 2007, $0.1 billion for the combined years of 2008 and 2009, $0.7 billion for the combined years of 2010 and 2011 and $1.6 billion thereafter.
Guarantees and Off-Balance Sheet Financing.
Fuel Consortia.We participateThe Company participates in numerous fuel consortia with other carriers at major airports to reduce the costs of fuel distribution and storage. Interline agreements govern the rights and responsibilities of the consortia members and provide for the allocation of the overall costs to operate the consortia based on usage. The consortium (and in limited cases, the participating carriers) have entered into long-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax-exempt bonds (either special facilities lease revenue bonds or general airport revenue bonds), issued by various local municipalities. In general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds. As of December 31, 2005,2006, approximately $449$484 million principal amount of such bonds were secured by fuel facility leases at major hubs in which we participate. United's maximumUnited participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt. United’s exposure is approximately $143$171 million principal amount of such bonds based on our pastits recent consortia participation and will only triggerparticipation. The Company’s exposure could increase if the participation of other participating carriers or consortia members default on their lease payments.decreases. The guarantees will expire when the tax-exempt bonds are paid in full, which ranges from 2010 to 2028. WeThe Company did not record a liability at the time these indirect guarantees were made.
EETC Debt.Municipal Bond Guarantees. In 1997 The Company has entered into long-term agreements to lease certain airport and 2000, wemaintenance facilities that are financed through tax-exempt municipal bonds. These bonds were issued Enhanced Equipment Trust Certificates ("EETCs")by various local municipalities to refinance certain owned aircraftbuild or improve airport and aircraft under operating leases. A portion ofmaintenance facilities. Under these proceeds are direct obligations oflease agreements, United is required to make rental payments in amounts sufficient to pay the maturing principal and were recognized in the Statements of Consolidated Financial Position while certain other proceeds were placed in trusts not owned by or affiliated with United. The proceeds placed in off-balance sheet trusts were used to refinance the remaining bank debt of the lessors in existing leveraged leases with United. As of December 31, 2005, approximately $279 million of these proceeds were placed in off-balance sheet trusts. During March 2006, the Company purchased the 1997-1 EETC Tranche A certificates which satisfied $23 million of the off-balance sheet debt. For further detailsinterest payments on the 1997-1 EETC transaction, see Note 1, "Voluntary Reorganization Under Chapter 11 - Bankruptcy Considerations".
Legal and Environmental Contingencies. UAL has certain contingencies resulting from litigation and claims (including environmental issues) incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel, the nature of contingencies to which we are 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.
We record liabilities for legal and environmental claims against us in accordance with GAAP. These amounts are recorded based on our 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. Asbonds. However, as a result of the bankruptcy filing, United was not permitted to make payments on unsecured pre-petition debt. The Company was advised that these municipal bonds may be unsecured (or in certain instances, partially secured). In 2006, as a result of the Petition Date virtually all pending litigationfinal Bankruptcy Court decisions, certain leases (SFO, JFK and LAX) were considered to be financings resulting in the Company’s guarantees being discharged in bankruptcy. The DEN lease was not rejected; therefore, the Company still has a guarantee under this lease. The Company has guaranteed interest and principal payments on $261 million of the DEN bonds, which were issued in 1992 and are due in 2032 unless the Company elects not to extend its lease in which case the bonds are due in 2023. The outstanding bonds and related guarantee are not recorded in the Company’s Statements of Consolidated Financial Position at December 31, 2006, based on proper application of GAAP. The related lease agreement is stayed,accounted for as an operating lease, and absent further orderthe related rent expense is recorded on a straight-line basis. The annual lease payments through 2023 and the final payment for the principal amount of the bonds are included in the future operating lease payments disclosed in the Non-aircraft lease payments in Note 16 “Lease Obligations.” There remains an issue as to whether the LAX and SFO bondholders have a secured interest in certain of the Company’s leasehold improvements. The Company has accrued an amount which it estimates is probable to be approved by the Bankruptcy Court no party, subjectfor these secured interests. See Note 1, “Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to certain exceptions, may take any action, again subjectbe Resolved in Chapter 11 Cases,”for a discussion of ongoing litigation with respect to certain exceptions, to recover on pre-petition claims against us. Accordingly, we have classified certain of these liabilities as liabilities subject to compromise.obligations.
The Company anticipates that if ultimately found liable, its damages from claims arising from the events of September 11, 2001 could be significant; however, we believe that, under the Air Transportation Safety and System Stabilization Act of 2001, our liability will be limited to our insurance coverage.
We have not incurred any material environmental obligations relating to the events of September 11, 2001.
Commitments. At December 31, 2005, future commitments for the purchase of property and equipment, principally aircraft, approximated $1.8 billion, after deducting advance payments. Our current commitments are primarily for the purchase of A319 and A320 aircraft. In January 2006, we reached an agreement with the airframe manufacturer to delay, with the right to cancel these future orders. We also reached an agreement with the engine manufacturer eliminating all provisions pertaining to firm commitments and support for future Airbus aircraft. While this permits future negotiations on engine pricing with any engine manufacturer, restructured aircraft manufacturer commitments have assumed that aircraft will be delivered with installed engines at list price. As a result of these subsequent changes, estimated future commitments have increased to $2.5 billion in early 2006, after deducting advanced payments. An estimated $0.1 billion will be spent in 2006, $0.1 billion for years 2007 and 2008, $0.1 billion for years 2009 and 2010 and $2.2 billion thereafter. The disposition of $91 million of advance payments made by the Company is subject to United taking future delivery of these aircraft.
Collective Bargaining Agreements.
Approximately 80%81% of United'sUnited’s employees are represented by various U.S. labor organizations. In April 2003, we reached agreements with all of our labor unions for new collective bargaining agreements which became effective on May 1, 2003. During 2005, weUnited reached new agreements with ourits labor unions for new collective bargaining agreements which became effective in January 2005. These latter agreements are not amendable until January 2010. In addition, an initial collective bargaining agreement with the International Federation of Professional and Technical Engineers was ratified on March 8, 2006, with an initial effective date of March 1, 2006; this agreement is likewise not amendable until January 2010.
113
(17) Financial Instruments(16) Lease Obligations
UAL leases aircraft, airport passenger terminal space, aircraft hangars and Risk Management
Aircraft Fuel - Aircraft fuel represented 23%, 17%related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and 13%computer equipment and vehicles. As allowed under Section 365 of our total operating expenses for 2005, 2004the Bankruptcy Code, during its reorganization the Company assumed, assumed and 2003, respectively. In 2005,assigned, or rejected certain executory contracts and unexpired leases, including leases of real property, aircraft fuel wasand aircraft engines, subject to the largest operating expense.
approval of the Bankruptcy Court and certain other conditions. During bankruptcy, the second quarter of 2004, we began to implement a strategy to hedge a portion of our price risk related to projected jet fuel requirements primarily through collar options. The collars (onlyCompany also entered into numerous aircraft financing term sheets with financiers, some of which were designatedimplemented before the Effective Date, and others of which were implemented on the Effective Date. Under fresh-start reporting, the Company was required to apply lease modification testing on these leases, which resulted in the reclassification of some financings as cash flow hedges) involvecapital leases or operating leases for the purchase of fuel call optionsSuccessor Company, which were different from classifications for the Predecessor Company.
In connection with the simultaneous sale of fuel put options with identical expiration dates. Those contracts designated as hedges are recorded atfresh-start reporting requirements, aircraft operating leases were adjusted to fair value with the changes in intrinsic value, to the extent they are effective,and a net deferred asset of $263 million was recorded in other comprehensive loss until the underlying hedged fuel is consumed. ToStatement of Consolidated Financial Position on the extent thatEffective Date, representing the designated hedges are ineffective, gain or loss is recognized currently. The fairnet present value of each designated hedge is determined by the use of standard option value models using commodity-related assumptions derived from prices observeddifferences between stated lease rates in underlying markets. For those contracts not designated as hedges,agreed term sheets and the related gain or loss is recognized currentlyfair market lease rates for similar aircraft. These deferred amounts are amortized on a straight-line basis as an element of non-operating income. In 2005,adjustment to aircraft rent expense over the Company recognized income of $40 million (which included a loss of approximately $1 million as a result of ineffective fuel hedges) in non-operating income mainly dueindividual applicable remaining lease terms, generally from one to non-designated hedges. 18 years.
At December 31, 2005, we had no fuel hedges. In February 2006, the Company entered into fuel hedges that accountscheduled future minimum lease payments under capital leases (substantially all of which are for approximately 8%aircraft) and operating leases having initial or remaining noncancelable lease terms of projected 2006 mainlinemore than one year were as follows:
|
| Operating Lease Payments |
|
|
| Capital |
| ||||||||||||||||||
|
| Mainline |
| United Express |
|
|
|
|
| Lease |
| ||||||||||||||
(In millions) |
|
|
| Aircraft |
| Aircraft |
| Non-aircraft |
|
|
| Payments(a) |
| ||||||||||||
Payable during— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2007 |
|
| $ | 358 |
|
|
| $ | 413 |
|
|
| $ | 507 |
|
|
|
|
| $ | 255 |
|
| ||
2008 |
|
| 351 |
|
|
| 409 |
|
|
| 484 |
|
|
|
|
| 321 |
|
| ||||||
2009 |
|
| 317 |
|
|
| 409 |
|
|
| 467 |
|
|
|
|
| 178 |
|
| ||||||
2010 |
|
| 307 |
|
|
| 380 |
|
|
| 453 |
|
|
|
|
| 441 |
|
| ||||||
2011 |
|
| 303 |
|
|
| 358 |
|
|
| 406 |
|
|
|
|
| 170 |
|
| ||||||
After 2011 |
|
| 1,239 |
|
|
| 1,117 |
|
|
| 3,464 |
|
|
|
|
| 698 |
|
| ||||||
Total minimum lease payments |
|
| $ | 2,875 |
|
|
| $ | 3,086 |
|
|
| $ | 5,781 |
|
|
|
|
| 2,063 |
|
| |||
Imputed interest (at rates of 1.1% to 10.0%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (603 | ) |
| ||||||
Present value of minimum lease payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,460 |
|
| ||||||
Current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (110 | ) |
| ||||||
Long-term obligations under capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,350 |
|
| |||||
(a) Includes non-aircraft capital lease payments aggregating $22 million in years 2007 through 2011, and United Express fuel requirements. We plancapital lease obligations of $15 million in both 2007 and 2008, $14 million in 2009, $13 million in 2010, $12 million in 2011 and $19 million thereafter.
At December 31, 2006, UAL leased 214 mainline aircraft, 47 of which were accounted for as capital leases. These leases have initial terms of 5 to continue26 years, with expiration dates ranging from 2007 through 2024. Under the terms of most leases, the Company has the right to hedge future fuel purchasespurchase the aircraft at the end of the lease term, in some cases at fair market value and in others, which include 167 operating leases, at fair market value or a percentage of cost. Additionally, the amounts in the above table include lease payments related to the Company’s United Express contracts for 28 aircraft under capital leases and 262 aircraft under operating leases as described in Note 2(i), “Summary of Significant Accounting Policies—United Express.”
Certain of the Company’s aircraft lease transactions contain provisions such as put options giving the lessor the right to require us to purchase the aircraft at lease termination for a certain amount resulting in residual value guarantees. Leases containing this or similar provisions are recorded as capital leases on the balance sheet and, accordingly, all residual value guarantee amounts contained in the Company’s aircraft leases are fully reflected as capital lease obligations in the Statements of Consolidated Financial Position.
In connection with certain euro-denominated aircraft financings accounted for as capital leases, United had on deposit in certain banks at December 31, 2006 an aggregate 396 million euros ($522 million) and $17 million in U.S. denominated deposits, and had pledged an irrevocable security interest in such deposits to certain of the aircraft lessors. These deposits will be used to repay an equivalent amount of recorded capital lease obligations, and are classified as aircraft lease deposits in the Statements of Consolidated Financial Position.
Amounts charged to rent expense, net of minor amounts of sublease rentals, were $833 million for the Successor Company for the eleven months ended December 31, 2006; and $76 million, $1.0 billion and $1.1 billion for the month ended January 31, 2006 and beyondthe years ended December 31, 2005 and 2004, respectively, for the Predecessor Company. Included in Regional affiliates expense in the Statements of Consolidated Operations were operating rents for United Express aircraft of $403 million for the Successor Company for the eleven months ended December 31, 2006; as circumstanceswell as $35 million and market conditions allow.$449 million for the month ended January 31, 2006 and the year ended December 31, 2005, respectively, for the Predecessor Company.
Interest Rate -In the first quarter of 2006, United entered into an interest rate swap whereby it fixed2004, the rateCompany adopted FASB Interpretation No. 46, “Consolidation of interest on $2.45 billion notional valueVariable Interest Entities” (“FIN 46”) and FIN 46R, as subsequently amended, which requires disclosure of floating-rate debt at 5.14% plus a fixed credit margin. The swap will amortize according to a pre-established schedule starting in November 2007 through its expected maturity date of February 2012.
(18) Segment Information
UAL operates its businesses through five reporting segments: North America, Pacific, Atlantic, Latin America (all of whichcertain information about VIEs that are operated by United)consolidated and UAL Loyalty Services, LLC ("ULS").
In accordance with DOT guidelines, we allocate mainline and regional affiliate passenger and cargo revenues to the North America segment based on the actual flown revenue for flights with an origin and destination wholly within the U.S. Passenger and cargo revenue is allocated to international segments based on the actual flown revenue for flights with an international origin or destination in that segment. Other revenuescertain other information about VIEs that are not directly associated withconsolidated.
The Company has various financing arrangements for 79 aircraft in which the lessors are trusts established specifically to purchase, finance and lease aircraft to United. These leasing entities meet the criteria for VIEs; however, the Company does not hold a specific flight (such as Red Carpet Club membership fees)significant variable interest in, and is not considered the primary beneficiary of the leasing entities since the lease terms are allocated based on the pro rata share of available seat miles flown in each segment.
The accounting policies for each of these segments are the same as those described in Note 2, "Summary of Significant Accounting Policies," except that segment financial information has been prepared using a management approach which is consistent with how we internally disperse financial information formarket terms at the purpose of making internal operating decisions. We evaluate segment financial performance based on earnings before income taxes, special items, reorganization items, government compensation and gain on sale of investments. (In millions) America Revenue Intersegment revenue Interest income Interest expense Equity in earnings of affiliates Depreciation and amortization Earnings (losses) before special items, gain on sale of investments and reorganization items (In millions) America Revenue Intersegment revenue Interest income Interest expense Equity in earnings of affiliates Depreciation and amortization Earnings (losses) before special items, gain on sale of investments and reorganization items (In millions) America Revenue Intersegment revenue Interest income Interest expense Equity in losses of affiliates Depreciation and amortization Earnings (losses) before special items, gain on sale of affiliate's stock, gain on sale of investments, gov't compensation and reorganization items
A reconciliationinception of the total amounts reported by reportable segmentslease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates us to absorb decreases in value, or entitles the applicable amountsCompany to participate in increases in the consolidated financial statements follows: (In millions) Total losses for reportable segments Special items (Note 3) Reorganization items Government compensation Gain on sale of investments Gain on sale of affiliate's stock Other UAL subsidiary gains/(losses) Loss before income taxes and distributions on preferred securities
UAL's operations involve an insignificant levelvalue, of dedicated revenue-producing assets by reportable segment. ULS has $1.6 billion in total assets as of December 31, 2005. The overwhelming majority of United's revenue producing assets (which are primarily U.S. registered aircraft) can be deployed in any of United's reportable operating segments, as any given aircraft may be used in multiple segments on any given day. Therefore, we allocate depreciation and amortization expense associated with those assets on the basis of available seat miles flown in each segment. In addition, we have significant intangible assets related to the acquisition of our Atlantic and Latin America route authorities.financed aircraft.
We did not have any significant customers requiring disclosure in any period presented.
(19)(17) Statement of Consolidated Cash Flows - Flows—Supplemental Disclosures
Supplemental disclosures of cash flow information and non-cash investing and financing activities were as follows: (In millions) Cash paid during the year for: Interest (net of amounts capitalized) Income taxes Non-cash transactions: Long-term debt incurred for equipment additions Capital lease obligations incurred Decrease in pension intangible assets Net unrealized gain on investments
|
| Successor |
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|
| Predecessor |
| ||||||||||||||||
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| Period from |
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|
| Period from |
| Year Ended |
| ||||||||||||||
(In millions) |
|
|
| 2006 |
|
|
| 2006 |
| 2005 |
| 2004 |
| ||||||||||
Cash paid during the period for: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest (net of amounts capitalized) |
|
| $ | 703 |
|
|
|
|
| $ | 35 |
|
|
| $ | 456 |
|
| $ | 397 |
| ||
Income taxes |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| — |
| ||||||
Non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
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|
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|
|
| ||||||
Long-term debt incurred to acquire assets |
|
| $ | 242 |
|
|
|
|
| $ | — |
|
|
| $ | — |
|
| $ | 172 |
| ||
Capital lease obligations incurred to acquire assets |
|
| 155 |
|
|
|
|
| — |
|
|
| — |
|
| — |
| ||||||
Adoption of SFAS 158, net $47 of tax, recorded in other comprehensive income |
|
| 87 |
|
|
|
|
| — |
|
|
| — |
|
| — |
| ||||||
Increase in pension intangible assets |
|
| — |
|
|
|
|
| (4 | ) |
|
| (661 | ) |
| (239 | ) | ||||||
Net unrealized gain (loss) on derivatives recorded in other comprehensive income (loss) |
|
| (5 | ) |
|
|
|
| 24 |
|
|
| — |
|
| — |
| ||||||
In addition to the above non-cash transactions, see Note 1, “Voluntary Reorganization Under Chapter 11,” Note 11, “Debt Obligations” and Note 13, “Preferred Stock.”
(20) Pro Forma Fresh Start Balance Sheet (Unaudited)(18) Advanced Purchase of Miles
In October 2005, the Company entered into an amendment to its agreement with Chase regarding the Mileage Plus Visa card under which Chase pays in advance for frequent flyer miles to be earned by Mileage Plus members for making purchases using the Mileage Plus Visa card. The existing agreement includes an annual guaranteed payment for the purchase of frequent flyer miles.
In addition to extending the agreement until 2012 and making certain other adjustments in the relationship, the agreement provided for an advance purchase of miles of $200 million in 2005. This advanced purchase of miles otherwise reduced the annual guaranteed payments for 2006 through 2009 by $75 million per year. In addition, the Company provided a junior lien upon, and security interest in, all collateral pledged or in which security interest is granted, as security in connection with emergence from Chapter 11 protection,the Credit Facility. The security interest was junior to other Credit Facility debt, and applied to no more than $850 million in total advance purchases at any time.
In February 2007, the Company adopted fresh start accountingamended the agreement with Chase whereby Chase released their junior security interest in the collateral pledged to the Amended Credit Facility. However under certain circumstances, the Company is obligated to reinstate Chase’s junior security interest in the assets pledged to the Amended Credit Facility. As of December 31, 2006 and 2005, the total advanced purchase of miles was $681 million and $679 million, respectively.
(19) Special Items
2006—Successor Company
SFO Municipal Bonds Security Interest. In October 2006, the Bankruptcy Court issued an order declaring that the owners of certain municipal bonds, issued before the Petition Date to finance construction of certain leasehold improvements at SFO, should be allowed a secured claim of approximately $27 million, based upon the court-determined fair value of UAL’s underlying leasehold.
After the denial of post-trial motions, both parties have appealed to the District Court. In accordance with SOP 90-7, as of February 1,the Effective Date, UAL had recorded $60 million as its best estimate of the probable security interest to be awarded in this unresolved litigation. In the third quarter of 2006 the Company recorded a special item of $30 million benefit to operating income, to reduce the Company’s recorded obligation for the SFO municipal bonds to the amount the Company now estimates is probable to be allowed by the Bankruptcy Court, in accordance with SOP 90-7. UponPractice Bulletin 11.
ALPA Non-Qualified Pension Plan.In the adoptionfourth quarter of fresh start accounting2006, the financial statementsCompany recorded a special item of $24 million as a benefit to operating income to reduce the Company’s recorded obligation for this matter. This adjustment was based on the receipt of a favorable court ruling in ongoing litigation and the Company’s determination that it is now probable the Company will not be comparable, in various material respects,required to anysatisfy this obligation.
LAX Municipal Bonds Obligation.In the fourth quarter of 2006, based on litigation developments, the Company's previously issued financial statements. The financial statementsCompany recorded a special item of $18 million as of February 1, 2006, anda charge to operating income to adjust the Company’s recorded obligation for periods subsequentthe LAX municipal bonds to the fresh start effective date, reflect that of a new entity. Fresh start accounting results in the creation of a new reporting entity having no retained earnings or accumulated deficit.
Fresh start accounting reflects the value ofamount the Company as determined in the confirmed Plan of Reorganization. Under fresh start accounting, the Company's asset values are remeasured using fair value, and are allocated in conformity with Statement of Financial Accounting Standards No. 141, "Business Combinations". Fresh start accounting also requires that all liabilities, other than deferred taxes, should be stated at fair value or at the present values of the amountsnow estimates is probable to be paid using appropriate market interest rates. Deferred taxes are determined in conformity with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes".
The following Pro Forma Fresh Start Balance Sheet illustrates the presently- estimated financial effects of the implementation of the Plan of Reorganization and the adoption of fresh start accounting. This Pro Forma Fresh Start Balance Sheet reflects the assumed effect of the consummation of the transactions contemplated in the Plan of Reorganization, including settlement of various liabilities and securities issuances, incurrence of new indebtedness, and cash payments. This Pro Forma Fresh Start Balance Sheet is presented as if the effectiveness of the Plan of Reorganization had occurred, and the Company had adopted fresh start accounting, as of December 31, 2005.
This pro forma data is unaudited. Asset appraisals for fresh start accounting have not yet been entirely completed, and comparable interest rate and other data required for evaluation of liability values are still being compiled and finalized. Changes in the values of assets and liabilities and changes in assumptions from those reflected in the Pro Forma Fresh Start Balance Sheet could significantly impact the reported value of goodwill. Accordingly, the amounts shown are not final, and are subject to changes and revisions, including differences between the estimates used to develop this Pro Forma Fresh Start Balance Sheet and the actual amounts ultimately determined. Balances also will differ due to the results of operations and other transactions occurring between December 31, 2005 and February 1, 2006, which is the adoption date of fresh start accounting.
The pro forma effects of the Plan of Reorganization and fresh start accounting on the Company's Pro Forma Fresh Start Balance Sheet as of December 31, 2005 are as follows (unaudited, in millions):
Release of Escrow Funds | Debt Discharge & Reclassification | New Credit Facility Financing Transactions | Fresh Start Adjustments | December 31, 2005 | ||
| Assets | ||||||
| Current assets: | ||||||
| Cash, cash equivalents, & ST investments | $ 1,838 | $ 298 | $ - | $ 1,402 | $ - | $ 3,538 |
| Restricted cash | 643 | (98) | - | - | - | 545 |
| Receivables, net | 839 | - | - | - | - | 839 |
| Prepaid and other assets | 939 | (200) | - - | - - | 78 | 817 |
| Total current assets | 4,259 | - - | - - | 1,402 | 78 | 5,739 |
| Operating property and equipment | 13,228 | - | (25) | - | (1,632) | 11,571 |
| Goodwill | - | - | - | - | 544 | 544 |
| Other intangibles | 388 | - | - | - | 2,790 | 3,178 |
| Other assets | 1,467 | - - | - - | 48 | (52) | 1,463 |
| Total other assets | 15,083 | - - | (25) | 48 | 1,650 | 16,756 |
| Total assets | $ 19,342 | $ - - | $ (25) | $ 1,450 | $ 1,728 | $ 22,495 |
| Liabilities & Stockholders' Equity | ||||||
| Current Liabilities: | ||||||
| Advance ticket sales | $ 1,575 | $ - | $ - | $ - | $ - | $ 1,575 |
| Accounts payable, accrued & other | ||||||
| current liabilities | 3,659 | - - | 1,074 | (4) | 21 | 4,750 |
| Total current liabilities | 5,234 | - - | 1,074 | (4) | 21 | 6,325 |
| Deferred pension liability | 95 | - | - | - | 30 | 125 |
| Postretirement liabilities | 1,932 | - | - | - | 60 | 1,992 |
| DIP loan facility | 1,157 | - | - | (1,157) | - | - |
| Exit financing | - | - | - | 2,611 | - | 2,611 |
| Aircraft debt | - | - | 6,578 | - | (183) | 6,395 |
| Other debt | 243 | - | 430 | - | - | 673 |
| Liabilities subject to compromise | 35,016 | - | (35,016) | - | - | - |
| Deferred tax liabilities | 428 | - | - | - | 124 | 552 |
| Other liabilities | 797 | - - | 1,056 | - - | (245) | 1,608 |
| Total liabilities | 44,902 | - - | (25,878) | 1,450 | (193) | 20,281 |
| Convertible preferred stock | - | - | 329 | - | - | 329 |
| Stockholders' equity: | ||||||
| Debtors | (25,560) | - | 25,524 | - | 36 | - |
| Reorganized entity | - - | - - | - - | - - | 1,885 | 1,885 |
| Total liabilities & stockholders' equity | $ 19,342 | $ - - | $ (25) | $ 1,450 | $ 1,728 | $ 22,495 |
(a) Release of Escrowed Funds.
Bankruptcy Court.This column reflects the discharge, reinstatement or reclassification of liabilities subject to compromise pursuant to the terms of the Plan of Reorganization. Along with other creditor claims accumulated through the bankruptcy proceedings (e.g.allowed by therejection of aircraft, etc.), discharged liabilities include claims related to the Debtor's defined pension plans.
The Debtor's liabilities subject to compromisetotal approximately $35 billion, of which:
$7.0 billion is reclassified as current and long-term reinstated secured aircraft debt.$1.1 billion represents the estimated fair value of newly-issued 5% convertible notes, additional convertible notes issuable within the first six months after the Effective Date and 6% senior unsecured notes.$0.3 billion represents the fair value of newly-issued convertible preferred stock.$1.1 billion represents accruals for administrative and priority payments, reinstatement of municipal bond obligations, and other accruals required for the implementation of the Plan of Reorganization.
2005—(c) New Credit Facility Financing Transactions.
Fresh start adjustments are made to reflect asset values at their estimated fair value and liabilities at estimated fair value or the present value of amounts to be paid, including:
$1.6 billion to reduce the values of operating property and equipment to their estimated fair market value,Recognition of additional estimated fair value of $2.8 billion for international route authorities, slots and other identified intangible assets,The elimination of the predecessor entity's equity accounts,Reclassification of certain flight equipment between those subject to mortgage financing, capital lease financing and operating lease financing,Net changes in deferred tax assets and liabilities,Additionally, goodwill of $0.5 billion is recorded to reflect the excess of the estimated fair value of identifiable assets over liabilities and equity.
| (In millions, except per share) | |||||
| 2005: | |||||
| Operating revenues | $ 3,915 | $ 4,423 | $ 4,655 | $ 4,386 | $ 17,379 |
| Earnings (loss) from operations | (250) | 48 | 165 | (182) | (219) |
| Net loss | (1,070) | (1,430) | (1,772) | (16,904) | (21,176) |
| Per share amounts, basic and diluted: | |||||
| Net loss | $ (9.23) | $ (12.33) | $ (15.26) | $ (145.47) | $ (182.29) |
| 2004: | |||||
| Operating revenues | $ 3,909 | $ 4,189 | $ 4,305 | $ 3,988 | $ 16,391 |
| Earnings (loss) from operations | (211) | 7 | (80) | (570) | (854) |
| Net loss | (459) | (247) | (274) | (741) | (1,721) |
| Per share amounts, basic and diluted: | |||||
| Net loss | $ (4.17) | $ (2.25) | $ (2.38) | $ (6.39) | $ (15.25) |
The sum of quarterly loss per share amounts for 2004 is not the same as the annual loss per share amount because of changing numbers of shares outstanding.
The quarterly results were impacted by the following significant items:
During the first quarter of 2005, we recorded $768 million in reorganization items.
Aircraft Impairment. During the second quarter of 2005, we recordedthe Company recognized a charge of $18 million in impairment charges for aircraft impairments related to the write down of aircraft operated by AWAC. Additionally, we recorded $1.4 billion in reorganization items.
During the third quarter of 2005, we recorded $1.8 billion in reorganization items.
During the fourth quarter of 2005, we recorded $16.6 billion in reorganization items.
During the first quarter of 2004, we adjusted our mainline passenger revenue and recognized an additional $60 million in passenger revenue. In addition, we incurred a $13 million charge in non-operating expense for the write-downplanned accelerated retirement of certain non-operating B767 aircraft and recorded $130 million in reorganization items.aircraft.
During the second quarter of 2004, we recorded $144 million in reorganization items.2004—Predecessor Company
Air Canada.During the third quarter of 2004, Air Canada successfully emerged from bankruptcy protection under the CCAA. WeCompanies’ Creditors Arrangement Act of the Canada Business Corporation Act. The Company had filed a pre-petition claim against Air Canada based on ourits equity interest in three Airbus A330 aircraft leased to Air Canada. As part of its plan of reorganization, Air Canada offered its unsecured creditors the opportunity to participate in their initial public offering. WeThe Company subscribed to 986,986 shares in the reorganized company in August 2004 and sold them in October 2004 for a nominal gain. Separately, wethe Company sold ourits interest in its pre-petition claim to a third-party and recorded a non-operating gain of $18 million during the third quarter of 2004. Additionally, we recorded $115 million in reorganization items.
Aircraft Write-down.During the fourthfirst quarter of 2004, we sold our investment in Orbitz and recognizedthe Company incurred a gain of $158$13 million charge in non-operating expense for the write-down of certain non-operating B767 aircraft.
(20) Severance Accrual
The Company has implemented several cost saving initiatives that have resulted in a reduction in workforce such as the outsourcing of administrative functions, the closing of certain call centers and recorded $222its announcement of the elimination of certain salaried and management positions through attrition and layoffs. The Company’s severance policy provides the affected employees salary continuation as well as certain insurance benefits for a specified period of time. Accordingly, the Company has estimated its severance obligations to be $5 million as of December 31, 2006 in accordance with Statement of Financial Accounting Standards No. 112 (As Amended), “Employers’ Accounting for Postemployment Benefits—an amendment of FASB Statements No. 5 and 43.”
117
The following is a reconciliation of activity related to the severance accrual for the year ended December 31, 2006:
|
| (In millions) |
| |||
Balance at December 31, 2005 |
|
| $ | 7 |
|
|
Accruals |
|
| 30 |
|
| |
Accrual adjustments |
|
| (5 | ) |
| |
Payments |
|
| (27 | ) |
| |
Balance at December 31, 2006 |
|
| $ | 5 |
|
|
(21) Selected Quarterly Financial Data (Unaudited)
|
| Predecessor |
| Successor |
| |||||||||||||||||||||||||
(In millions, except |
| Period from |
| Period from |
| Quarter Ended |
| |||||||||||||||||||||||
per share amounts) |
|
|
| January 31 |
| March 31 |
| March 31 |
| June 30 |
| September 30 |
| December 31 |
| |||||||||||||||
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Operating revenues |
|
| $ | 1,458 |
|
|
| $ | 3,007 |
|
|
| (a) |
|
| $ | 5,113 |
|
| $ | 5,176 |
|
|
| $ | 4,586 |
|
| ||
Earnings (loss) from operations |
|
| (52 | ) |
|
| (119 | ) |
|
| (a) |
|
| 260 |
|
| 335 |
|
|
| 23 |
|
| |||||||
Net income (loss) |
|
| 22,851 |
|
|
| (223 | ) |
|
| (a) |
|
| 119 |
|
| 190 |
|
|
| (61 | ) |
| |||||||
Basic earnings (loss) per share |
|
| $ | 196.61 |
|
|
| $ | (1.95 | ) |
|
| (a) |
|
| $ | 1.01 |
|
| $ | 1.62 |
|
|
| $ | (0.55 | ) |
| ||
Diluted earnings (loss) per share |
|
| $ | 196.61 |
|
|
| $ | (1.95 | ) |
|
| (a) |
|
| $ | 0.93 |
|
| $ | 1.30 |
|
|
| $ | (0.55 | ) |
| ||
|
| Predecessor |
| ||||||||||||||||||||||||
|
| Period from |
| Period from |
| Quarter Ended |
| ||||||||||||||||||||
| January 31 |
| March 31 |
| March 31 |
| June 30 |
| September 30 |
| December 31 |
| |||||||||||||||
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
| (a) |
|
|
| (a) |
|
|
| $ | 3,915 |
|
| $ | 4,423 |
|
| $ | 4,655 |
|
|
| $ | 4,386 |
|
|
Earnings (loss) from operations |
|
| (a) |
|
|
| (a) |
|
|
| (250 | ) |
| 48 |
|
| 165 |
|
|
| (182 | ) |
| ||||
Net loss |
|
| (a) |
|
|
| (a) |
|
|
| (1,070 | ) |
| (1,430 | ) |
| (1,772 | ) |
|
| (16,904 | ) |
| ||||
Basic and diluted loss per share |
|
| (a) |
|
|
| (a) |
|
|
| $ | (9.23 | ) |
| $ | (12.33 | ) |
| $ | (15.26 | ) |
|
| $ | (145.47 | ) |
|
(a) Not applicable
The quarterly results were impacted by the following significant items:
· In 2006, the January period includes reorganization items.income of $22.9 billion.
Certain items are described more fully· The third quarter of 2006 includes income of $30 million from a special item as discussed in Note 3, "Special Items"19, “Special Items.”
· The third quarter of 2006 was favorably impacted by the reversal of accrued interest of $30 million while the quarters ended March 31, 2006 and Note 7, "Investments."
(22) UAL Loyalty Services, LLC
June 30, 2006 were adversely affected by interest accruals related to the Chase agreement. In 2005, the Bankruptcy Court approved a corporate restructuring that (a) moved Ameniti Travel Clubs, Inc. (formerly known as Confetti, Inc.) as a subsidiarynet loss for the quarters ended March 31, June 30, September 30, and December 31 included reorganization items of ULS to a subsidiary$768 million, $1.4 billion, $1.8 billion, and $16.6 billion, respectively. In addition, the second quarter of MyPoints; (b) moved MyPoints as a subsidiary2005 included an impairment charge of ULS to a subsidiary$18 million for the write down of UAL; (c) moved ULS as a subsidiaryaircraft.
· Diluted EPS in the third quarter of UAL to a subsidiary of United; and (d) converted ULS from a corporation to a limited liability company. This restructuring2006 was completed on March 21, 2005 and resulted in asignificantly impacted by the Limited-Subordination Notes. The change in classificationthe dilutive impact of certain operating revenues that are associated with our Mileage Plus program as follows:
these notes was primarily due to the modification of the conversion price from $46.86 to $34.84 in July 2006. See Note 11, “Debt Obligations,” for further information on this debt modification.
ItemSee Note 19, “Special Items,” for further discussion of these items.
118
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTSACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISLCOSURE.DISCLOSURE.
None.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
An evaluation was carried out underThe Company maintains controls and procedures that are designed to ensure that information required to be disclosed in the supervisionreports filed or submitted by the Company to the Securities and withExchange Commission (“SEC”) is recorded, processed, summarized, and reported, within the participation oftime periods specified by the Company'sSEC’s rules and forms, and is accumulated and communicated to management including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), ofas appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the effectiveness ofChief Executive Officer and Chief Financial Officer, performed an evaluation to conclude with reasonable assurance that the Company'sCompany’s disclosure controls and procedures were designed and operating effectively to report the information it is required to disclose in the reports it files with the SEC on a timely basis. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of December 31, 2005. Based on that evaluation, the Company's management, including the CEO and CFO, has concluded that the Company's2006, our disclosure controls and procedures are effective. Duringwere not effective due to a material weakness related to the period covered byoperation of our internal control over financial reporting with respect to the accounting and disclosure for income taxes, as discussed below in Management’s Report on Internal Control over Financial Reporting. Additional review, evaluation and oversight have been undertaken to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles and, as a result, we have concluded that the consolidated financial statements in this report, there was no changeForm 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the Company'speriods presented.
The only changes to the Company’s internal control over financial reporting that hasoccurred during the quarter ended December 31, 2006 that have materially affected or isare reasonably likely to materially affect the Company'sCompany’s internal control over financial reporting.reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) are new controls implemented for the preparation of an effective tax provision that is no longer zero, and for the implementation of new tax accounting standard FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” in 2007.
119
Management Report on Internal Control Over Financial Reporting
March 30, 200616, 2007
To the Stockholders of
UAL Corporation
Elk Grove Village,Township, Illinois
The management of UAL Corporation and subsidiaries (the "Company"“Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internalreporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions of the Company;Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; andProvide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
The Company'sUnder the supervision and with the participation of management, assessedincluding our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Company'sframework in Internal Control—Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission.
Based on that evaluation, management identified a deficiency in the operation of the Company’s internal control over financial reporting related to the accounting and disclosure for income taxes, which constituted a material weakness in our internal control over financial reporting. As defined in Public Company Accounting Oversight Board Auditing Standard No. 2, a material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of a company’s annual or interim financial statements would not be prevented or detected. While the Company had the appropriate control procedures in place, high staff turnover caused the Company to poorly execute the controls for evaluating and recording its current and deferred income tax provision and related deferred taxes balances. This control deficiency did not result in a material misstatement, but did result in adjustments to the deferred tax assets and liabilities, net operating losses, valuation allowance and footnote disclosures and could have resulted in a misstatement of current and deferred income taxes and related disclosures that would result in a material misstatement of annual or interim financial statements.
Based upon management’s determination of the existence of a material weakness in accounting and disclosure for taxes, management has concluded that internal control over financial reporting was not effective as of December 31, 2006.
Management’s assessment of the ineffectiveness of internal control over financial reporting as of December 31, 2005. In making this assessment, the Company's management used the criteria2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)stated in Internal Control-Integrated Framework.their report which is included herein.
Based on their assessment, management has concluded that, as of December 31, 2005, the Company's internal control over financial reporting was effective based on those criteria.120
The Company's independent auditors have issued an audit report on management's assessment of the Company's internal control over financial reporting. This report appears in this Item 9A.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
UAL Corporation
Elk Grove Township, Illinois
We have audited management'smanagement’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that UAL Corporation (Debtor-in-Possession) and subsidiaries (the "Company"“Company”) maintaineddid not maintain effective internal control over financial reporting as of December 31, 2005,2006, because of the effect of the material weakness identified in management’s assessment based on the criteria established in Internal Control - Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management'smanagement’s assessment and an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management'smanagement’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company'scompany’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company'scompany’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment: the Company lacked effective operating controls for evaluating and recording its current and deferred income tax provision and related deferred tax balances. This control deficiency resulted in adjustments to the deferred tax assets and liabilities, net operating losses, valuation allowance and footnote disclosures and could result in a misstatement of current and deferred income taxes and related disclosures that would result in a material misstatement of annual or interim financial
statements. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of December 31, 2006 and for the eleven month period ended December 31, 2006 and for the one month ended January 31, 2006 and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, management'smanagement’s assessment that the Company maintaineddid not maintain effective internal control over financial reporting as of December 31, 2005,2006, is fairly stated, in all material respects, based on the criteria established in Internal Control - Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2006, based on the criteria established in Internal Control - Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of consolidated financial statementsposition of the Company as of December 31, 2006 and financial statement schedule asthe results of their operations and their cash flows for the eleven month period ended December 31, 2006 and for the yearone month period ended DecemberJanuary 31, 2005 of the Company2006 and our report dated March 30, 200616, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph related toparagraphs regarding the confirmation byCompany’s emergence from bankruptcy, the Bankruptcy Courtchanges in accounting for share-based payments, and the method of accounting for and the Company's plan of reorganization.
disclosures regarding pension and postretirement benefits.
/s/ Deloitte & Touche LLP | |
Chicago, Illinois | |
March | |
122
None.
None.
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANT.AND CORPORATE GOVERNANCE.
DirectorsCertain information required by this item is incorporated by reference from the Company’s definitive proxy statement for its 2007 Annual Meeting of UAL Corporation
Glenn F. Tilton. Age 57. Director since 2002. Mr. Tilton has been Chairman, President and Chief Executive OfficerStockholders. Information regarding the executive officers is included in Part I of UAL Corporation (holding company) and United Air Lines, Inc., a wholly owned subsidiary of UAL Corporation (air transportation), since September 2002. From October 2001 to August 2002, he served as Vice Chairman of ChevronTexaco Corporation (global energy). In addition, from May 2002 to September 2002 he served as Non-Executive Chairman of Dynegy, Inc. (energy). From February to October 2001 he served as Chairman and Chief Executive Officer of Texaco Inc. (global energy). He previously served as President of Texaco's Global Business Unit. He serves as a director of Lincoln National Corporation and TXU Corporation.
Richard J. Almeida. Age 63. Director since February 1, 2006. Mr. Almeida served asthis Form 10-K under the Chairman and Chief Executive Officer of Heller Financial, Inc. (commercial finance and investment company) from 1995 until his retirement in 2001. He previously served as Executive Vice President and Chief Financial Officer of Heller from 1987 until 1995. He serves as a director of Corn Products International and eFunds Corporation.
Mark A. Bathurst. Age 55. Director since January 1, 2004. Captain Bathurst has served as Chairman since January 1, 2004 of ALPA-MEC (labor union). He has been a United Airbus 320 Captain since 1996. Captain Bathurst was nominated by the ALPA-MEC and elected in 2003 by the United Airlines Pilots Master Executive Council, ALPA, and the holder of the Company's Class Pilot MEC stock.
Stephen R. Canale. Age 61. Director since 2002. Mr. Canale has served as President and Directing General Chairman since 1999 of the IAM District Lodge 141 (labor union). Mr. Canale was nominated by the IAM and elected in 2002 by the International Association of Machinists and Aerospace Workers, the holder of the Company's Class IAM stock.
W. James Farrell. Age 63. Director since 2001. Mr. Farrell has been Chairman of Illinois Tool Works Inc. (manufacturing and marketing of engineered components) for the past five years. Mr. Farrell was also Chief Executive Officer of Illinois Tool Works Inc. for the past five years until his retirement from that position in August 2005. Mr. Farrell also currently serves as a director of Abbott Laboratories, Allstate Insurance Company, Illinois Tool Works Inc. and Kraft Foods, Inc.
Walter Isaacson. Age 53. Director since February 1, 2006. Mr. Isaacson has been the President and Chief Executive Officer of The Aspen Institute (international education and leadership institute) since 2003. He previously served as the Chairman and Chief Executive Officer of CNN (cable television news network) from 2001 to 2003. He serves as a director of Readers Digest Association Inc.
Janet Langford Kelly. Age 48. Director since February 1, 2006. Ms. Kelly has been a partner with Zelle, Hofmann, Voelbel, Mason & Gette LLP (law firm) since March 2005. She previously served as the Senior Vice President - Chief Administrative Officer and Chief Compliance Officer of Kmart Corporation (mass merchandising company) from September 2003 to March 2004. Prior to that, Ms. Kelly was the Executive Vice President - Corporation Development and Administration, General Counsel and Secretary of Kellogg Company (cereal and convenience foods producer) from April 2001 to September 2003 and Executive Vice President - - Corporate Development, General Counsel and Secretary of Kellogg from September 1999 to April 2001. Since 1996, Ms. Kelly serves as a trustee of the Columbia Family of Investment Companies.
Robert D. Krebs. Age 63. Director since February 1, 2006. Mr. Krebs served as the Chairman of Burlington Northern Santa Fe Corporation (transportation) from December 2000 until his retirement in April 2002. He previously served as Chairman and Chief Executive Officer of Burlington Northern Santa Fe from June 1999 until December 2000 and as Chairman, President and Chief Executive Officer from April 1997 to May 1999. He serves as director of Phelps Dodge Corporation.
Robert S. Miller, Jr. Age 64. Director since 2003. Mr. Miller has been the Chairman and Chief Executive Officer of Delphi Corporation (global supplier of vehicle electronics, transportation components and integrated systems that filed for protection under federal bankruptcy laws on October 8, 2005) since July 1, 2005. Mr. Miller served as non-executive Chairman of the Board of Federal Mogul Corporation from 2004 to 2005. He previously served as Chairman and CEO of Bethlehem Steel Corporation (steel manufacturer that filed for protection under federal bankruptcy laws on October 15, 2001) from 2001 to 2003, Chairman and CEO of Federal Mogul Corporation (auto parts supplier that filed for protection under federal bankruptcy laws on October 1, 2001) from 1999 to 2000, and Chairman and CEO of Waste Management, Inc. (waste services) from 1997 to 1999. He serves as a director of Symantec Corporation.
James J. O'Connor. Age 68. Director since 1984. Mr. O'Connor retired as Chairman and Chief Executive Officer of Unicom Corporation (holding company of supplier of electricity) in 1998. He serves as a director of Corning Incorporated, Smurfit-Stone Container Corporation and Trizec Properties, Inc.
John H. Walker. Age 48. Director since 2002. Mr. Walker has been the Chief Executive Officer and President of the Boler Company (transportation manufacturer) since August 2003. He previously served as the Chief Executive Officer of Weirton Steel Corporation (steel manufacturer that filed for protection under federal bankruptcy laws on May 19, 2003) from 2001 to 2003 and was President and Chief Operating Officer from 2000 to 2001. From 1997 to 2000 he was President of Flat Rolled Products, a division of Kaiser Aluminum Corporation (aluminum manufacturer that filed for protection under federal bankruptcy laws on February 12, 2002). He serves as a director of Delphi Corporation.
David J. Vitale. Age 59. Director since February 1, 2006. Mr. Vitale has been the Chief Administrative Officer of the Chicago Public Schools (education) since April 2003. He was previously a private investor from November 2002 until April 2003 and the President and Chief Executive Officer of the Chicago Board of Trade (futures and options exchange) from March 2001 until November 2002. Prior to that, Mr. Vitale was the Vice Chairman and Director of Bank One Corporation (commercial banking) from 1998 until 1999. He serves as a director of DNP Select Income Fund Inc., DTF Tax-Free Income Fund and the Duff & Phelps Utility and Corporate Bond Trust.
Each director serves until the next annual meeting of stockholders and until his or her successor is elected and qualified, subject to such director's earlier death, resignation or removal.
Executivecaption “Executive Officers of the RegistrantRegistrant.”
Frederic F. Brace. ITEM 11.Age 48. Mr. Brace has been Executive Vice President and Chief Financial Officer of the Company and United Air Lines, Inc. since August 2002. From September 2001 to August 2002, Mr. Brace served as the Company and United's Senior Vice President and Chief Financial Officer. From July 1999 to September 2001, Mr. Brace had served as United's Senior Vice President - Finance and Treasurer. From February 1998 through July 1999, he served as Vice President - Finance of United. EXECUTIVE COMPENSATION.
Sara A. Fields. Age 62. Ms. Fields has been Senior Vice President - People of United Air Lines, Inc. since December 2002. From January to December 2002, Ms. Fields served as United's Senior Vice President - People Services and Engagement. Ms. Fields previously served as Senior Vice President - Onboard Service of United since 1994.
Douglas A. Hacker. Age 50. Mr. Hacker has been Executive Vice President of the Company and United Air Lines, Inc. since December 2002. From September 2001 to December 2002, Mr. Hacker served as United's Executive Vice President and President of UAL Loyalty Services, Inc., a wholly owned subsidiary of United Air Lines, Inc. (manages non-core marketing business and other strategic assets of the Company). From July 1999 to September 2001, Mr. Hacker served as the Company's Executive Vice President and Chief Financial Officer and as United's Executive Vice President Finance & Planning and Chief Financial Officer.
Paul R. Lovejoy. Age 51. Mr. Lovejoy has been Senior Vice President, General Counsel and Secretary of the Company and United Air Lines, Inc. since June 2003. From September 1999 to June 2003, he was a partner with Weil, Gotshal & Manges LLP (law firm). He previously served as Assistant General Counsel of Texaco Inc.
Peter D. McDonald. Age 54. Mr. McDonald has been Executive Vice President and Chief Operating Officer of the Company and United Air Lines, Inc. since May 2004. From September 2002 to May 2004, Mr. McDonald served as Executive Vice President - Operations. From January to September 2002, Mr. McDonald served as United's Senior Vice President - Airport Operations. From May 2001 to January 2002, he served as United's Senior Vice President - Airport Services. From July 1999 to May 2001, he served as Vice President - Operational Services.
Rosemary Moore. Age 55. Ms. Moore has been the Senior Vice President - Corporate and Government Affairs of United Air Lines, Inc. since December 2002. From November to December 2002, Ms. Moore was the Senior Vice President - Corporate Affairs of United. From October 2001 to October 2002, she was the Vice President - - Public and Government Affairs of ChevronTexaco Corporation. From June 2000 to October 2001, she was Vice President - Corporate Communications and Government Affairs of Texaco, Inc. From September 1996 to June 2000, she was an independent consultant.
John P. Tague. Age 43. Mr. Tague has been Executive Vice President - Marketing, Sales and Revenue of the Company and United Air Lines, Inc. since May 2004. From May 2003 to May 2004, Mr. Tague was Executive Vice President - Customer of the Company and United Air Lines, Inc. From 1997 to August 2002, Mr. Tague was the President and Chief Executive Officer of ATA Holdings Corp. (air transportation).
Glenn F. Tilton. See information regarding Mr. Tilton above under Directors.
There are no family relationships among the executive officers or the directors of the Company. Our executive officers are electedInformation required by the Board each year, and hold office until the organization meeting of the Board in the next subsequent year and until his or her successorthis item is chosen or until his or her earlier death, resignation or removal.
Board Independence
The Board of Directors made a determination that all of the members of the Board are "independent" other than Messrs. Bathurst, Canale and Tilton under the corporate governance rules of the NASDAQ National Market with the assistance of the categorical standards adoptedincorporated by the Board in the UAL Corporation Corporate Governance Guidelines (see below). Messrs. Bathurst, Canale and Tilton are not independent because each is an employee of United Air Lines, Inc., a wholly owned subsidiary of UAL Corporation.
The Board has established these categorical standards to assist it in determining whether a director has any direct or indirect material relationship with the Company. A director is independent if, within the three years preceding the determination:
the director was not an employee of the Company and none of the director's immediate family members was an executive officer of the Company;
the director, and each immediate family member of the director, did not receive any compensationreference from theCompany, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);
the (1) director, and each immediate family member of the director, was not a partner of a firm that is the internal or external auditor of the Company, (2) the director was not a current employee of the firm, (3) the director did not have an immediate family member who was a current employee of the firm and who participated in the firm's audit, assurance or tax compliance (but not tax planning) practice, or (4) the director, and each immediate family member, was not within the last three years a partner or employee of the firm and personally worked on the Company's audit within that time;
the director, and each immediate family member of the director, was not employed as an executive officer of another company where any of the Company's executive officers at the same time serves or served on the other company's compensation committee;
the director was not an affiliate, executive officer or employee of, and each immediate family member of the director was not an affiliate or executive officer of, another company that makes payments to, or receives payments from, the Company for property or services in an amount that, in any of the last three fiscal years accounted for at least two percent (2%) or $1 million, whichever is greater, of such other company's consolidated gross revenues;
the director, and each immediate family member of the director, was not an affiliate or executive officer of another company which was indebted to the Company, or to which the Company was indebted, where the total amount of indebtedness (to and of the Company) exceeded two percent (2%) of the total consolidated assets of such other company or the Company;
the director, and each immediate family member of the director, was not an officer, director or trustee of a charitable organization where the Company's (or an affiliated charitable foundation's) annual charitable contributions to such charitable organization exceeded the greater of $1 million or two percent (2%) of that organization's consolidated gross revenues; and
the director has not been a party to a personal services contract with the Company, the Chairman, any executive officer of the Company or any affiliate of the Company.
The Board will annually review all relationships between the Company and its outside directors and publicly disclose whether its outside directors meet the Board's determination as to the independence of the outside directors.
Executive Sessions of Non-Management Directors
The non-management directors of the Company meet regularly outside the presence of the management directors (no less frequently than semiannually). The non-management directors designate a Lead Director who is the non-management director to preside over each non-management director executive session. Mr. O'Connor has been designated the Lead Director by the Board of Directors.
Shareholders and other interested parties may contact the UAL Board of Directors as a whole, or any individual member, by one of the following means: (1) writing to the UAL Board of Directors, UAL Corporation, c/o the Corporate Secretary's Office, P.O. Box 66919 - WHQLD, Chicago, IL 60666; or (2) by emailing the UAL Board at UALBoard@united.com
Shareholders may communicate to the Board on an anonymous or confidential basis. The UAL Board has designated the General Counsel and the Corporate Secretary's Office as its agents for receipt of communications. All communications will be received, processed and initially reviewed by the Corporate Secretary's Office. The Corporate Secretary's Office maintains all communications and they are all available for review by any member of the Board at his or her request.
The Lead Director is promptly advised of any communication that alleges management misconduct or raises legal, ethical or compliance concerns about Company policies and practices. The Lead Director receives periodic updates from the Corporate Secretary's Office on other communications from shareholders and he or she determines which of these communications he or she desires to review, respond to or refer to another member of the Board.
Audit Committee
UAL Corporation has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are David J. Vitale (Chairman), Richard J. Almeida, Robert D. Krebs, Robert S. Miller, Jr. and John H. Walker.
Audit Committee Financial Expert
The Board of Directors of UAL Corporation has determined that each of David J. Vitale, Chair of the Audit Committee, and Audit Committee members Richard J. Almeida, Robert D. Krebs, Robert S. Miller, Jr. and John H. Walker is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A and Item 401(h)(1)(ii) of Regulation S-K of the Exchange Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's records, we believe that the Company complied with all SEC filing requirements applicable to our reporting persons defined under Section 16 of the Securities Exchange Act of 1934, as amended, for 2005.
Code of Ethics
The Company has adopted a code of business conduct and ethics for directors, officers (including UAL's principal executive officer, principal financial officer and principal accounting officer or controller) and employees known as "Our Code of Conduct." The Code is available on the Company's website, www.united.com, under "About United/Investor Relations/Governance/Code of Conduct."
Corporate Governance Guidelines and Committee Charters
The Company's Corporate Governance Guidelines and the charters for each of its Audit, Executive, Human Resources, Nominating/Governance and Public Responsibility Committees are available on the Company's website, www.united.com, under "About United/Investor Relations/Governance."
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation
Summary Compensation Table
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(1) Amounts for 2005 and 2004 were paid under the UAL Success Sharing Program - Performance Incentive Plan (referred to as the Success Sharing Plan) which provides awards to substantially all of the Company's employees if the Company achieves certain operating and financial goals. Amounts in 2004 for Mr. Tague were also paid under UAL Corporation Retention and Recognition Bonus Plan ("KERP"). Amounts for Messrs. McDonald and Brace in 2003 were paid under the KERP.
(2) Amounts under "Other Annual Compensation" in 2005 are payments to the named executive officers to cover their tax liabilities incurred in connection with the free transportation and cargo shipment on United that it provides to the officers, except for Mr. Tague, who also received $4,793 in 2004 to cover tax liabilities associated with relocation and temporary living expenses.
(3) As of December 31, 2005 there was no outstanding restricted stock.
(4) In 2003, the Company disclosed that Mr. Hacker had earned an award valued at $2,083,492 under the ULS long-term incentive plan ("LTIP") which was adopted in 2000 for the net value created of ULS asset portfolio during the performance period under the plan. The original award was reduced significantly from its stated dollar amount and the unvested portion was forfeited when the LTIP was amended in June 2003. This award was to have been paid upon the Company's emergence from bankruptcy and subject to Mr. Hacker's continued employment. Subsequent to the Company's exit from Chapter 11, the LTIP was amended to, among other things, eliminate awards for all current and former officers of UAL and United. Consequently, the award shown in 2003 will not be paid to Mr. Hacker under the LTIP.
(5) Amounts in 2005 and 2004 represent premiums paid by the Company for group variable life insurance. Amount in 2003 includes split dollar life insurance compensation for Messrs. Hacker, McDonald and Brace.
Pension Plan Table
Years of Participation
The Company terminated and replaced its under-funded U.S. defined benefit pension plans, including the plan affecting the officers named in the Summary Compensation Table. Thus, these officers are no longer entitled to receive any payments from the Company under the plan which was terminated on June 30, 2005. For more information, see Note 15 "Retirement and Postretirement Plans" in the Notes to Consolidated Financial Statements.
This table is based on information for a defined benefit plan that was terminated on June 30 2005 and is therefore no longer relevant. It assumes retirement at age 65 and selection of a straight life annuity (other annuity options were available, which would reduce the amounts shown). The amount of the normal retirement benefit under the since terminated plan was the product of 1.63% multiplied by years of credited participation in the plan multiplied by final average pay (highest five of last ten years of covered compensation). The retirement benefit amount was not offset by the participant's social security benefit. The compensation used in calculating benefits under the plan (since terminated) was base salary and performance incentive pay. Under the qualified plan, years of participation as of the June 30, 2005 termination of the plan for persons named in the compensation table are as follows: Mr. Hacker - 12 years; Mr. Brace - 17 years; Mr. McDonald - 34 years; Mr. Tilton - 2 years and Mr. Tague - 1 year. The amounts shown do not reflect limitations imposed by the Internal Revenue Code (the "Code") on retirement benefits that may be paid under plans qualified under the Code. The Company has historically provided under non-qualified plans the portion of the retirement benefits earned under the pension plan that would otherwise be subject to Code limitations; however, in February 2005, the Company terminated the non-qualified pension plansCompany’s definitive proxy statement for its salaried and management employees that include the officers named in the Summary Compensation Table.2007 Annual Meeting of Stockholders.
Employment Contracts and Arrangements
Mr. Tilton's Employment Agreement
Mr. Tilton was elected Chairman, President and Chief Executive Officer of the Company on September 2, 2002. The Company entered into a five-year employment agreement with Mr. Tilton in 2002, which provided a base salary of $950,000 and a $3 million signing bonus. This agreement was amended on December 8, 2002 and again on February 17, 2003 in connection with the Company's bankruptcy filing. The amended agreement provided for an annual base salary of $845,500 (which reflected an 11% reduction from the original amount of $950,000), and provided for salary increases as part of the normal salary program for the Company's senior executives. On April 4, 2003, Mr. Tilton agreed to an additional 14% reduction in his original base salary of $950,000, thereby reducing his salary from $845,500 to $712,500 effective April 1, 2003. In April 2004, the Human Resources Subcommittee of the Company's Board of Directors approved the restoration of Mr. Tilton's salary to $845,500. However, in the wake of the ATSB's rejection of our application for a federal loan guarantee, Mr. Tilton made the personal decision to reduce his salary and have it revert by $133,000 annually to its previous level of $712,500 effective August 1, 2004. Effective January 1, 2005, consistent with reductions imposed on the entire salaried and management work force, Mr. Tilton's base salary was further reduced by 15% from $712,500 to $605,625 where it remains today. The overall reduction in Mr. Tilton's salary between September 2, 2002 and January 1, 2006 was $344,375, or approximately 36% of his original salary of $950,000.
Under the terms of the agreement, Mr. Tilton also received options to purchase 1,150,000 shares of old UAL common stock. The exercise price for the options was $3.03, which was the average of the high and low sales price of the old common stock on the New York Stock Exchange on August 30 and September 3, 2002. The options were canceled as a result of the Company's exit from bankruptcy. The Company also agreed to reimburse Mr. Tilton for his and his family's relocation expenses, including a cash payment to cover his income tax liability for the relocation reimbursement.
Under his employment agreement, Mr. Tilton is eligible to receive an annual incentive bonus with a target percentage equal to 100% of his base salary. He is entitled to an additional 100% over this target bonus amount for superior performance. In lieu of this individually-oriented approach, Mr. Tilton has chosen to participate in the Company's Success Sharing Plan (at participation rates included in his contract discussed above) as his only cash-based incentive opportunity. Under this plan, all of the employees of the Company receive award pay-outs if the Company achieves certain operating and financial targets.
If Mr. Tilton's employment is terminated by UAL without "cause," or by him for "good reason," or if there is a "change in control," UAL will pay him his base salary as reduced by the December 8th amendment, any annual bonus and any earned and vested benefits he may be entitled to through the termination date. UAL will also pay Mr. Tilton a lump sum payment equal to his base salary reduced by the December 8th amendment and target bonus multiplied by the greater of (1) the remaining term of his agreement or (2) three years. Mr. Tilton's other benefits will be continued for this period. All long-term incentive awards will immediately vest on the termination date, including any unvested stock options or restricted stock awards. Under Mr. Tilton's agreement, a "change of control" is defined as: (1) a merger, consolidation or sale of substantially all the Company's assets in which the voting securities of the Company immediately before the merger, consolidation or sale represent less than 80% of the voting power after the merger, consolidation or sale; (2) the acquisition by a person or group of 25% or more of the voting securities of the Company; (3) the UAL shareholders approve any plan or proposal for the liquidation of the Company; (4) a change in the majority of the Board over a 24-month period (unless the new directors were approved by a two-thirds majority of prior directors); or (5) any other event or transaction that the Board of Directors determines is a "change of control".
As reported in the Company's prior Form 10-Ks, in consideration of projected retirement benefits foregone by Mr. Tilton as a result of his resignation from his prior employer and acceptance of the Company's employment offer, $4.5 million was paid into three secular trusts on Mr. Tilton's behalf vesting over three years beginning September 2, 2003.
Human Resources Committee Interlocks and Insider Participation
The Company has a separately designated standing Human Resources Committee. The members of the Human Resources Committee are W. James Farrell (Chairman), Richard J. Almeida, Mark A. Bathurst, Stephen R. Canale, Janet Langford Kelly, James J. O'Connor, John H. Walker and David J. Vitale. The Company also has a Human Resources Subcommittee, members of which are W. James Farrell (Chairman), Richard J. Almeida, Janet Langford Kelly, James J. O'Connor, John H. Walker and David J. Vitale.
Mr. Canale and Captain Bathurst serve on the Human Resources Committee, but not the Human Resources Subcommittee. Mr. Canale and Captain Bathurst are employees of United. Captain Bathurst is the Chairman of the ALPA-MEC and an officer of ALPA. ALPA and the Company are parties to a collective bargaining agreement for our pilots represented by ALPA. Mr. Canale is President and Directing General Chairman of the IAM District Lodge 141. The IAM and the Company are parties to collective bargaining agreements for our ramp and stores, public contact employees, food service, security officers, maintenance instructors, fleet technical instructors and Mileage Plus employees represented by the IAM.
Director Compensation
We do not pay directors who are also employees of the Company or its subsidiaries additional compensation for their service as directors. Effective February 1, 2006, compensation for non-employee directors includes the following:
annual retainer of $20,000;
$1,000 for each board and board committee meeting attended;
annual retainer of $5,000 to committee chairmen (other than chairs of the Human Resource
Subcommittee and the Audit Committee);
annual retainer of $10,000 to the chairman of the Audit Committee;
annual retainer of $10,000 to the Lead Director; and
reimbursement of expenses of attending board and committee meetings.
We consider it important for our directors to understand our business and have exposure to our operations and employees. For this reason, we provide free transportation and free cargo shipment on United to our directors and their spouses and eligible dependent children. We reimburse our directors for federal and state income taxes resulting from actual use of the travel and shipment privileges.
The cost of this policy in 2005 for each director who served as a director in 2005, including cash payments made in January 2006 for income tax liability, was as follows:
| Name | |||
7,231 | James J. O'Connor | 12,162 | |
1,163 | Hazel R. O'Leary | 1,068 | |
9,537 | Paul E. Tierney, Jr. | 22,958 | |
13,433 | Glenn F. Tilton (1) | 0 | |
12,839 | John H. Walker | 19,157 | |
5,897 | George B. Weiksner | 14,178 |
Under the Director Emeritus Travel Benefit policy, directors who retire from the Board with at least five years of UAL creditable service will receive free travel and cargo benefits for life, subject to certain exceptions. In connection with their retirement from the Board, in February 2006, the Board awarded Messrs. Ford, Jain and Weiksner free travel and cargo benefits for a five-year period, subject to certain exceptions, including reimbursement for taxes incurred as a result of the use of this travel privilege.
(1) Mr. Tilton utilizes his officer travel benefits for pleasure travel. The amount the Company reimbursed him for payment to cover his tax liability associated with this benefit is included in the "Other Annual Compensation" column of the Summary Compensation Table.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information
Plan CategoryThe following table sets forth information as of December 31, 2005 regarding the number of shares of old UAL common stock that may be issued under the Company's equity compensation plans. The shares underlying the plans were canceled upon the Company's emergence from bankruptcy on February 1, 2006.
Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A) Equity Compensation Plans approved by the Company's stockholders Equity Compensation Plans not approved by the Company's stockholders (1) (1) (2) (3) Total
(2) The weighted-average exercise price was calculated based on 650,000 options granted to Mr. Tilton at an exercise price of $3.03. These options were canceled on February 1, 2006.
(3) Includes 12,205,106 shares available for future issuance under the 2002 Share Incentive Plan and 38,172 shares available for issuance under the 1995 Directors Plan. The number of shares available for future issuance does not include any shares issuable under outstanding awards or the 2002 Share Incentive Plan that are subsequently forfeited, expired or canceled without the delivery of shares of common stock or withheld by UAL to satisfy any applicable tax withholding obligations, which are available again for issuance under the 2002 Share Incentive Plan. Upon the effective date of the Company's plan of reorganization (February 1, 2006), the 2002 Share Incentive Plan and the 1995 Directors Plan were terminated.
Under the UAL Corporation 1995 Directors Plan (which was terminated upon our exit from bankruptcy on February 1, 2006) each non-employee director was granted 400 shares of common stock and 189 deferred stock units (each unit representing the right to receive a share of common stock at a future date) during each year that he or shethis item is an outside director of the Company. If any outside director is not a director for the entire calendar year, the award of deferred stock units will be prorated. Each outside director could elect to forego the receipt of all or any portion of cash fees payable to him or her for service as a director (i.e., meeting fees and committee fees) and instead receive shares of the common stock equivalent in value to the cash fees based on the fair market value of a share of common stock on the date the cash fee is payable to the director. The outside directors could also elect to defer the receipt of cash fees payable as well as the stock award and the deferred stock units to be granted in any year, which deferral may be paid after the director leaves the Board, either as a lump sum or in ten or less annual payments. The 1995 Directors Plan authorized the issuance of up to 400,000 shares of Old Common Stock (either through use of treasury shares or open market purchases) and, as of December 31, 2005, 38,172 shares remained available for future awards. After the Company's filing for bankruptcy, the Nominating/Governance Committee determined not to issue stock to the directors under this plan. This plan was terminated upon our exit from bankruptcy.
2002 Share Incentive Plan
The 2002 Share Incentive Plan (which was terminated upon our exit from bankruptcy on February 1, 2006) permitted the award of nonqualified stock options and restricted shares to participants as well as stock appreciation rights. The exercise price of a nonqualified stock option could not be less than the fair market value of a share of UAL common stock on the date of grant and the exercise period cannot exceed ten years. Restricted shares issued under the 2002 Share Incentive Plan vested over a time period established by the applicable committee (not to exceed ten years) and were subject to certain transfer restrictions and forfeiture under certain circumstances prior to vesting. In addition, the Human Resources Subcommittee of the Company's Board of Directors could have granted to participants other awards, including dividends and dividend equivalents and other awards that are valued in whole or partincorporated by reference to, or are otherwise based on, the fair market value of shares of UAL common stock. The 2002 Share Incentive Plan authorized the issuance of 12,500,000 shares of Old Common Stock as well as 267,366 shares that were available for issuance as awards under the 1998 Restricted Stock Plan as of July 31, 2002 and, as of December 31, 2005, approximately 12,205,106 shares remained available for future awards under the 2002 Share Incentive Plan. Only treasury shares could have been issued under the 2002 Share Incentive Plan. The terms of the 2002 Share Incentive Plan also provided that any shares awarded under the 1998 Restricted Stock Plan or the 2002 Share Incentive Plan that were subsequently forfeited, expired or canceled without the delivery of shares of common stock or withheld by UAL to satisfy any applicable tax withholding obligations would be available again for issuance under the plan. There were no awards made under the 2002 Share Incentive Plan in 2005. This plan was terminated upon our exit from bankruptcy.
2006 Director Equity Incentive Plan
The UAL Corporation 2006 Director Equity Incentive Plan (the "DEIP") authorizes the Nominating/Governance Committee of the Board (the "Governance Committee") to grant equity-based awards ("DEIP Awards") to non-employee directors of the Company. The purpose of the DEIP is to attract and retain the services of experienced and knowledgeable non-employee directors by providing such directors with greater flexibility in the form of timing and receipt of compensation for their service on the Board and an opportunity to obtain greater proprietary interest in the Company's long-term success and progress through the receipt of equity-based awards, aligning such directors' interests more closely with the interests of the Company's stockholders. The DEIP became effective upon the Company's emergence from bankruptcy and will remain in effect as long as any Awards remain outstanding. The Company reserves the right to terminate the DEIP at any time, without prejudice in any adverse way to the holders of any DEIP Awards then outstanding, by delivery of a written notice by its authorized officers to the Governance Committee, adopted in the manner of an amendment. The aggregate number of shares reserved for grant under the DEIP is 175,000 shares of common stock. It is intended that the DEIP and all DEIP Awards determined to be subject to Section 409A of the Code will comply in form and operation with the requirements of Section 409A.
The DEIP will be administered by the Governance Committee. The Governance Committee has the sole discretionary power and authority to make all determinations necessary for administration of the DEIP, except as otherwise provided in the DEIP, including the power and authority to make or modify such plan rules as the Governance Committee determines to be consistent with the terms of the DEIP (the "Plan Rules") and to limit or modify application of provisions of the DEIP whenever advisable to facilitate tax deferral treatment for DEIP Awards to non-U.S. resident participants.
All non-employee directors of the Company are eligible to become participants in the DEIP. The Corporate Governance Committee of the Board will select from time to time, from among all eligible individuals, the persons who will be granted a DEIP Award. The DEIP authorizes the Governance Committee to grant any of a variety of incentive awards to participants, including the following:
non-qualified stock options,
stock appreciation rights, which provide the participant the right to receive the excess (if any) of the fair market value of a specified number of shares of common stock at the time of exercise over the grant price of the stock appreciation right,
stock awards to be granted at no cost to the participant, including grants in the form of Restricted Stock and Unrestricted Stock,
annual compensation in the form of credits to a participant's share account established under the DEIP, and
shares of common stock in lieu of receipt of all or any portion of cash amounts payable by the Company to a participant ("Director Cash Compensation") including retainer fees, board attendance fees and committee fees (but excluding expense reimbursements and similar items).
Each option granted under the DEIP will generally expire 10 years after its date of grant. If the participant ceases to serve as a director for any reason other than a "qualified retirement" (i.e., has attained age 60 and has completed five years or more of continuous service as a member of the Board), then the option will remain exercisable until the earlier of the expiration of five years after the date of separation or the remaining term of the option. If the participant ceases to serve as a director due to a "qualified retirement" then all of such participant's options will become immediately exercisable in full and will remain exercisable until the expiration of the options.
In the event a participant experiences a separation from service by reason of death or disability, all outstanding stock appreciation rights then held by a participant will become immediately exercisable in full and will remain exercisable for a period ending on the earlier of 12 months after such termination or the expiration date of the stock appreciation rights and all of such participant's restricted stock will become fully vested. In the event of a qualified retirement, all outstanding stock appreciation rights then held by the participant will become immediately exercisable in full and will remain exercisable in full until the expiration date of such stock appreciation rights and all of such participant's restricted stock will become fully vested. In the event of a separation from service for reasons other than death, disability or qualified retirement, all outstanding stock appreciation rights then held by the participant, to the extent exercisable as of the date of separation, will remain exercisable for a period ending on the earlier of three months after such termination or the expiration date of the stock appreciation rights and all of such participant's restricted stock that has not vested as of such separation from service will be forfeited. A determination by the Board that a participant's actions constitutes "cause" will result in all rights of the participant under the DEIP being terminated and forfeited.
For each participant, the Committee will establish and maintain a Cash Account and a Share Account to evidence the deferred amount credited with respect to such participant pursuant to the terms of the DEIP. Each participant may elect, in accordance with the terms of the DEIP, to defer the receipt of all or any portion of his or her Director Cash Compensation relating to services performed and Director Cash Compensation earned during each calendar year and such participant may elect, in accordance with and subject to the Plan Rules, how the deferral will be allocated among his or her Cash Account and Share Account. Participants may also elect to defer receipt of all or any portion of the Unrestricted Stock or Restricted Stock, and any such deferrals will be credited to such participant's Share Account. As of the last day of each calendar quarter, a participant's Cash Account will be credited with interest, calculated on the balance in the Cash Account as of the last day of the immediately preceding calendar quarter, at the Bloomberg Prime Rate Composite in effect on such date.
Distributions from a participant's Share Account and Cash Account will generally be made or commence as soon as administratively practicable after the first day of the calendar year after which such participant completely terminates his relationship with the Company and its affiliates (whether as a director, non-employee consultant or employee). A participant's Cash Account and Share Account will be distributed in a lump sum payment unless the participant has elected to receive his or her distribution in the form of annual installment payments for a period of not more than 10 years. Any distribution from a participant's Cash Account will be made in cash only and any distribution from a participant's Share Account will generally be made in whole Shares only. Notwithstanding any distribution election by a participant to the contrary, a distribution will be made to a participant from his or her account if the participant submits a written request to the Committee and the Committee determines that the Participant has experienced an unforeseeable emergency within the meaning of Section 409A of the Code.
Upon certain defined change of control events, (i) all options and stock appreciation rights will become immediately exercisable in full and will remain exercisable in accordance with their terms, (ii) all Restricted Stock will become immediately fully vested and non-forfeitable, (iii) all deferral accounts will become immediately fully vested and non-forfeitable, and (iv) all deferred amounts credited to a participant's Cash Account and Share Account will become immediately due and payable to the Participant. In addition, if a change of control occurs, then the Board may determine with respect to some or all participants to cash out all or any portion of the outstanding options and stock appreciation rights.
The number of shares with respect to which DEIP Awards may be granted under the DEIP, the number of shares of common stock subject to any outstanding DEIP Award, and the nature of the securities which may be issued under the DEIP or any outstanding DEIP Award in each case may be adjusted by the Board as a result of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend or any other similar change in the Company's corporate structure or the common stock.
The Company reserves the right to amend the DEIP at any time to any extent that it may deem advisable. To be effective, an amendment must be in writing and approved or ratified in advance by the Board and executed in the name of the Company by its Chief Executive Officer. No amendment will have any retroactive effect in any manner that deprives any participant of any benefit to which he or she is entitled immediately prior to the effective date of the amendment.Stockholders.
2006 Management Equity Incentive PlanITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The UAL Corporation 2006 Management Equity Incentive Plan (the "MEIP") authorizes the Human Resources Subcommittee of the Board (the "HR Subcommittee") to grant equity-based and other performance-based awards ("Awards") to executive officers and other key employees of the Company and its subsidiaries following the Company's emergence from bankruptcy. The purpose of the MEIPInformation required by this item is to attract and retain outstanding individuals as officers and key employees of the Company and its subsidiaries. The MEIP aims to align the interests of the Company's senior leadership with those of the Company's shareholders through compensation that is based on shares of the Company's common stock and to incentivize these individualsincorporated by providing them opportunities to acquire shares of common stock on advantageous terms. The MEIP is designed to give the HR Subcommittee flexibility in structuring awards to achieve these objectives. The MEIP became effective as of the effective date of the Company's confirmed plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code and will remain in effect as long as any Awards remain outstanding. The Board reserves the right to terminate the MEIP at any time without prejudice in any adverse way to the holders of any Awards then outstanding. The aggregate number of shares reserved for grant under the MEIP is 9,825,000 shares of common stock, as may be adjusted for any stock dividend, stock split, recapitalization, reorganization, merger or other subdivision or combination of the common stock. It is intended that the MEIP and all Awards determined to be subject to Section 409A of the Code will comply in form and operation with the requirements of Section 409A.
The MEIP will be administered by the HR Subcommittee. The HR Subcommittee has the power to interpret the MEIP and any Awards granted under the MEIP and to determine the terms and conditions of Awards to be granted under the MEIP and to make all other determinations necessary or advisable for the administration of the MEIP. The HR Subcommittee may not, however, without the prior approval of the Company's stockholders, seek to effect any re-pricing of any previously granted options, the exercise price of which is greater than the fair market value of the underlying common stock (the "Underwater Restriction").
All executive officers and other key employees of the Company and its subsidiaries are eligible to become participants in the MEIP. The HR Subcommittee will select from time to time, from among all eligible individuals, the persons who will be granted an Award. The MEIP authorizes the HR Subcommittee to grant any of a variety of incentive Awards to participants, including the following:
stock options, including both tax qualified and non-qualified options,
stock appreciation rights, which provide the participant the right to receive the excess (if any) of the fair market value of a specified number of shares of common stock at the time of exercise over the grant price of the stock appreciation right,
stock awards to be granted at no cost to the participant, including grants in the form of (i) an immediate transfer of shares which are subject to forfeiture and certain transfer restrictions ("Restricted Stock") and (ii) an immediate transfer of shares which are not subject to forfeiture or a deferred transfer of shares if and when the conditions specified by the HR Subcommittee are met ("Unrestricted Stock"), and
performance-based awards, in which the HR Subcommittee may grant a stock award that will entitle the holder to receive a specified number of shares of common stock, or the cash value thereof, if certain performance goals are met.
In the event of a participant's termination of employment by reason of death, disability or qualified retirement (i.e., termination of employment at or after attaining age 55 and completing 10 years of service with the Company or an affiliate or termination of employment after attaining age 65 with five years of service), (i) all outstanding options and stock appreciation rights then held by a participant will become immediately exercisable in full and will remain exercisable for a period ending on the earlier of 12 months after such event or the expiration date of the options or stock appreciation rights, except that in the case of a qualified retirement, all outstanding options and stock appreciation rights then held by a participant will remain exercisable for a period ending on the expiration date of the options or stock appreciation rights, (ii) all restricted shares then held by the participant will become fully vested, and (iii) any conditions with respect to the issuance of shares of common stock under any performance-based awards which are based on a performance period will lapse with respect to that portion equal to the ratio of the full months of the participant's service within the performance period to the total months of the performance period. In the event of a participant's termination of employment for reasons other than death, disability or retirement, all restricted shares and other Awards then held by such participant that have not vested as of such termination of employment will be forfeited and all outstanding options and stock appreciation rights then held by such participant will, to the extent exercisable at the time of such termination, remain exercisable for a period ending on the earlier of three months after such termination or the expiration date of the underlying options or stock appreciation rights and all remaining options and stock appreciation rights will be forfeited. A termination of a participant's employment for cause will result in all rights of the participant under the MEIP to be terminated and forfeited.
Upon certain defined change of control events, (i) all options and stock appreciation rights will become immediately exercisable in full and will remain exercisable in accordance with their terms, (ii) all restricted shares will become immediately fully vested and non-forfeitable and (iii) any conditions to the issuance of shares of common stock under any performance awards will lapse. In addition, if a change of control occurs, then the HR Subcommittee may determine with respect to some or all participants to cash out all or any portion of the outstanding options, stock appreciation rights or share-based performance awards.
The number of shares with respect to which Awards may be granted under the MEIP, the number of shares of common stock subject to any outstanding Award, and the nature of the securities which may be issued under the MEIP or any outstanding Award in each case may be adjusted by the HR Subcommittee as a result of stock splits, stock dividends, or other subdivisions or combinations of the common stock, or reorganizations, mergers, consolidations, split-ups, spin-offs, dividends or reclassifications affecting the Company. In addition, upon the occurrence of such events, the HR Subcommittee has the discretion to cancel or terminate outstanding Awards in exchange for cash or other securities as determined by the HR Subcommittee to be equitable.
The Board may, from time to time, in its discretion, amend the MEIP in whole or in part, but no such amendment will be made which adversely affects the rights of a participant under any outstanding Award without the consent of the affected participants, and no such amendment will be effective without the approval of the stockholders of the Company if (i) stockholder approval is required pursuant to Section 422 of the Code or the rules of any national securities exchange or the NASDAQ National Market, as applicable, or (ii) any amendments seek to modify the Underwater Restriction or the acceleration of vesting provisions with respect to a change of control.
BENEFICIAL OWNERSHIP OF SECURITIESStockholders.
The following table shows the number of shares of UAL voting securities owned by any person or group known to UAL as of March 16, 2006, to be the beneficial owner of more than 5% of any class of its voting securities.
Name and Address of Beneficial Owner | Title of Class | of Beneficial Ownership | Class |
| United Airlines Pilots Master Executive Council Air Line Pilots Association, International 6400 Shafer Court, Suite 700 Rosemont, IL 60018 | Class Pilot MEC Junior Preferred Stock | 1 | 100% |
| International Association of Machinists and Aerospace Workers District #141 9000 Machinists Place Upper Marlboro, MD 20722 | Class IAM Junior Preferred Stock | 1 | 100% |
| Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005 | Common Stock (1) 2% Convertible Preferred Stock (2) | 11,103,316 | 12% |
(1) Based on the Schedule 13D filed with the SEC on February 14, 2006 and Schedule 13D/A (Amendment No. 1) filed on February 24, 2006, the PBGC has sole power to dispose or to direct the disposition of 11,103,316 shares of the Company's common stock. The PBGC has agreed with the Company that the stock will be freely transferable by the PBGC beginning 60 days after the PBGC receives the stock. In addition, the PBGC does not have the power to vote or to direct the vote of any share of the stock as the stock may be voted only by the custodial trustees or outside money managers of the PBGC.
(2) In addition, the PBGC received 5,000,000 shares of the Company's 2% Convertible Preferred Stock, $.01 par value, which may be converted into shares of UAL Common Stock following the earlier of the second anniversary date of the issuance of the shares or the occurrence of a fundamental change or change in ownership as defined in the Company's Restated Certificate of Incorporation.
The following table sets forth the number of shares of common stock beneficially owned as of March 16, 2006, by each director, and each executive officer included in the Summary Compensation Table, and by our directors and executive officers as a group. The owner exercises sole voting and investment power over the securities (other than unissued securities which ownership we have imputed to the owner). Some of our directors and executive officers also own shares of other classes of our preferred stock as shown in the table above.
(2) The Company is in the process of negotiating Mr. Hacker's resignation from the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Director Compensation
Please see "Director Compensation" and "Human Resources Committee Interlocks and Insider Participation" in Item 11. Executive Compensation.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The aggregate fees billedInformation required by this item is incorporated by reference from the Company’s definitive proxy statement for professional services rendered by Deloitte & Touche in 2005 and 2004 are as follows: its 2007 Annual Meeting of Stockholders.Service Audit Fees Audit-Related Fees Tax Fees All Other Fees Total
124
Fees for audit services related to 2005 and 2004 consist of audits of the Company's consolidated financial statements, limited reviews of the Company's consolidated quarterly financial statements, statutory audits of the Schedule of Passenger Facility Charges and statutory audits of certain subsidiaries' financial statements. The 2005 and 2004 audit fees also include the impact of the attestation work performed by Deloitte & Touche related to Sarbanes-Oxley.
AUDIT RELATED FEES
Fees for audit-related services billed in 2005 and 2004 consisted of audits of employee benefit plans, the United Airlines Foundation, financial accounting and reporting consultations, Sarbanes-Oxley Act assistance and bankruptcy accounting consultation.
TAX FEES
Fees for tax services in 2005 and 2004 consisted of assistance with tax issues in certain foreign jurisdictions, preparation of expatriate tax returns, state tax returns and bankruptcy tax assistance.
ALL OTHER FEES
Fees for all other services billed in 2005 and 2004 consisted of the preparation of employee payroll tax filings, annual tax software license fees and expatriate tax consultations.
All of the services in 2005 and 2004 under the Audit Related, Tax and All Other Fees categories above have been approved by the Audit Committee pursuant to paragraph (c)(7)(i)(c) of Rule 2-01 of Regulation S-X of the Exchange Act.
Audit Committee Pre-Approval Policy and Procedures.
The Audit Committee of the UAL Board of Directors adopted a policy on pre-approval of services of independent accountants in October 2002. The policy provides that the Audit Committee shall pre-approve all audit and non-audit services to be provided to the Company and its subsidiaries and affiliates by its auditors. The process by which this is carried out is as follows:
For recurring services, the Audit Committee reviews and pre-approves Deloitte & Touche's annual audit services and employee benefit plan audits in conjunction with the Committee's annual appointment of the outside auditors. The materials include a description of the services along with related fees. The Committee also reviews and pre-approves other classes of recurring services along with fee thresholds for pre-approved services. In the event that the pre-approval fee thresholds are met and additional services are required prior to the next scheduled Committee meeting, pre-approvals of additional services follow the process described below.
Any requests for audit, audit-related, tax and other services not contemplated with the recurring services approval described above must be submitted to the Audit Committee for specific pre-approval and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the Chairman of the Audit Committee. The Chairman must update the Committee at the next regularly scheduled meeting of any services that were granted specific pre-approval.
On a periodic basis, the Audit Committee reviews the status of services and fees incurred year-to-date and a list of newly pre-approved services since its last regularly scheduled meeting.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
(a)(1)Financial Statements. The financial statements required by this item are listed in Item 8, "Financial“Financial Statements and Supplementary Data"Data” herein.
(2)Financial Statement Schedules. The financial statement schedule required by this item is listed below and included in this report after the signature page hereto.
Schedule II - II—Valuation and Qualifying Accounts for the month ended January 31, 2006, the eleven month period ended December 31, 2006 and the years ended December 31, 2005 2004 and 2003.2004.
All other schedules are omitted because they are not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto.
(b)Exhibits. The exhibits required by this item are listed in the Exhibit Index which immediately precedes the exhibits filed with this Form 10-K, and is incorporated herein by this reference. Each management contract or compensatory plan or arrangement is denoted with a "+"“†” in the Exhibit Index.
SIGNATURES
125
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th16th day of March, 2006.
UAL CORPORATION | |
/s/ GLENN F. TILTON | |
Glenn F. Tilton | |
Chairman of the Board, President | |
and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below on the 30th16th day of March, 20062007 by the following persons on behalf of the registrant and in the capacities indicated.
/s/ GLENN F. TILTON | ||
Glenn F. Tilton | ||
Chairman of the Board, President | ||
/s/ FREDERIC F. BRACE | /s/ WALTER ISAACSON | |
Frederic F. Brace | Walter Isaacson | |
/s/ RICHARD J. ALMEIDA | /s/ ROBERT D. KREBS | |
Richard J. Almeida | Robert D. Krebs | |
Director | Director | |
/s/ MARK A. BATHURST | /s/ ROBERT S. MILLER, JR. | |
Mark A. Bathurst | Robert S. Miller, Jr. | |
Director | Director | |
/s/ MARY K. BUSH | /s/ JAMES J. O’CONNOR | |
Mary K. Bush | James J. O’Connor | |
Director | Director | |
/s/ STEPHEN R. CANALE | /s/ DAVID J. VITALE | |
Stephen R. Canale | David J. | |
Director | Director | |
/s/ W. | /s/ | |
W. James Farrell | ||
John H. Walker | ||
Director | ||
Director |
126
UAL Corporation and Subsidiary Companies
Valuation and Qualifying Accounts
For the Month Ended January 31, 2006,
the Eleven Month Period Ended December 31, 2006 and
the Years Ended December 31, 2005 2004 and 20032004
(In millions) |
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| Balance at |
| Additions |
| Deductions(a) |
| Balance at |
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Year Ended December 31, 2004—Predecessor Company |
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Reserves deducted from assets to which they apply: |
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Allowance for doubtful accounts |
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| $ | 26 |
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| $ | 12 |
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| $ | 14 |
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| $ | 24 |
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Obsolescence allowance— |
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Flight equipment spare parts |
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| $ | 36 |
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| $ | 22 |
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| $ | 16 |
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| $ | 42 |
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Valuation allowance for deferred tax assets |
|
| $ | 2,183 |
|
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| $ | 640 |
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| $ | 4 |
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| $ | 2,819 |
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| ||
Year Ended December 31, 2005—Predecessor Company |
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Reserves deducted from assets to which they apply: |
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Allowance for doubtful accounts |
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| $ | 24 |
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| $ | 8 |
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| $ | 9 |
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| $ | 23 |
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Obsolescence allowance— |
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Flight equipment spare parts |
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| $ | 42 |
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| $ | 44 |
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| $ | 20 |
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| $ | 66 |
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Valuation allowance for deferred tax assets |
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| $ | 2,819 |
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| $ | 7,830 |
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| $ | 31 |
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| $ | 10,618 |
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Period from January 1, 2006 to January 31, 2006—Predecessor Company |
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Reserves deducted from assets to which they apply: |
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Allowance for doubtful accounts |
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| $ | 23 |
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| $ | 6 |
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| $ | 2 |
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| $ | 27 |
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Obsolescence allowance— |
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Flight equipment spare parts |
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| $ | 66 |
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| $ | — |
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| $ | 66 | (b) |
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| $ | — |
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Valuation allowance for deferred tax assets |
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| $ | 10,618 |
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| $ | 180 |
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| $ | 8,488 | (b) |
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| $ | 2,310 |
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Period from February 1, 2006 to December 31, 2006—Successor Company |
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Reserves deducted from assets to which they apply: |
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Allowance for doubtful accounts |
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| $ | 27 |
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| $ | 18 |
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| $ | 18 |
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| $ | 27 |
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Obsolescence allowance— |
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Flight equipment spare parts |
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| $ | — |
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| $ | 6 |
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| $ | — |
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| $ | 6 |
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Valuation allowance for deferred tax assets |
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| $ | 2,310 |
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| $ | — |
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| $ | 62 |
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| $ | 2,248 |
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(a) Deduction from reserve for purpose for which reserve was created.
(In millions)(b)
127
*3.1 | ||||||||
F-1
EXHIBIT INDEX
| Restated Certificate of Incorporation of UAL Corporation (filed as Exhibit 3.1 to | |
*3.2 | |
Amended and Restated Bylaws of UAL Corporation (filed as Exhibit 3.2 to | |
*4.1 | |
Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.9 to | |
*4.2 | |
First Amendment dated February 10, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.10 to | |
*4.3 | |
Second Amendment dated February 10, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.11 to | |
*4.4 | |
Third Amendment dated February 18, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.12 to | |
*4.5 | |
Fourth Amendment dated March 27, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.6 to | |
*4.6 | |
Fifth Amendment dated May 15, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.7 to |
*4.7 | |||
Sixth Amendment dated October 10, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.8 to | |||
*4.8 | |||
Seventh Amendment dated May 7, 2004 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.9 to | |||
*4.9 | |||
Eighth Amendment dated July 22, 2004 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.1 to | |||
*4.10 | |||
Ninth Amendment dated November 5, 2004 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.23 to | |||
*4.11 | |||
Tenth Amendment dated January 26, 2005 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 4.24 to | |||
*4.12 | |||
Eleventh Amendment dated April 8, 2005 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 10.2 to | |||
*4.13 | |||
Twelfth Amendment dated July 19, 2005, to the Revolving Credit, Term Loan and Guaranty Agreement, dated December 24, 2002, by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 99.1 to | |||
*4.14 | Thirteenth Amendment dated August 11, 2005, to the Revolving Credit, Term Loan and Guaranty Agreement, dated December 24, 2002, by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. (filed as Exhibit 99.1 to | |
*4.15 | ||
Revolving Credit, Term Loan and Guaranty Agreement, dated February 1, 2006 , by and among United Air | ||
4.16 | Consent and First Amendment to Revolving Credit, Term Loan and Guaranty Agreement dated August 4, 2006 by and among United Air Lines, Inc., UAL Corporation and certain subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, et al. | |
*4.17 | Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, dated as of February 2, 2007 by and among United Air Lines, Inc., UAL Corporation, certain subsidiaries of United Air Lines, Inc. and UAL Corporation, as named therein, the Lenders named therein, JPMorgan Chase Bank, et al. (filed as Exhibit 4.1 to UAL’s Form 8-K filed February 5, 2007, Commission file number 1-6033, and incorporated herein by reference) | |
*4.18 | Indenture dated as of February 1, 2006 among UAL Corporation as Issuer, United Air Lines, Inc. as Guarantor and the Bank of New York Trust Company, N.A. as Trustee, providing for issuance at 6% Senior Notes due 2031 and 8% Contingent Senior Notes (filed as Exhibit 4.2 to | |
*4.19 | ||
ORD Indenture dated as of February 1, 2006 among UAL Corporation as Issuer, United Air Lines, Inc. as Guarantor and the Bank of New York Trust Company, N.A. as Trustee, providing for issuance at 5% Senior Convertible notes due 2021 (filed as Exhibit 4.3 to | ||
*4.20 | ||
First Supplement to Indenture dated February 16, 2006 among UAL Corporation, United Air Lines, Inc. as Guarantor and the Bank of New York Trust Company, N.A. as Trustee (filed as Exhibit 99.1 to | ||
*4.21 | ||
Indenture dated as of July 25, 2006 among UAL Corporation | ||
*†10.1 | ||
UAL Corporation Success Sharing |
*†10.2 | ||
Declaration of Amendment to UAL Corporation Success Sharing Program - Performance Incentive Plan dated July 15, 2004 (filed as Exhibit 10.1 to | ||
*†10.3 | ||
Declaration of Amendment to UAL Corporation Success Sharing Program - Performance Incentive Plan dated August 24, | ||
†10.4 | UAL Corporation Success Sharing Program—Performance Incentive Plan effective January 1, 2007 | |
†10.5 | UAL Corporation Success Sharing Program—Profit Sharing Plan effective January 1, 2006 | |
*†10.6 | UAL Corporation Employees Performance Incentive Plan (filed as Exhibit 10.2 to | |
*†10.7 | ||
First Amendment of UAL Corporation Performance Incentive Plan dated February 23, 2006 (filed as Exhibit 10.1 to | ||
*†10.8 | ||
UAL Corporation Retention and Recognition Bonus Plan (filed as Exhibit 10.2 to | ||
*†10.9 | ||
UAL Corporation Executive Severance Policy (filed as Exhibit 10.3 to | ||
*†10.10 | ||
United NewVentures Long Term Incentive Plan (filed as Exhibit 10.44 to | ||
*†10.11 | ||
First Amendment to United NewVentures Long Term Incentive Plan, dated June 24, 2003 (filed as Exhibit 10.1 to | ||
*†10.12 | ||
Second Amendment of United NewVentures Long Term Incentive Plan, dated February 23, 2006 (filed as Exhibit 10.2 to | ||
*†10.13 | ||
Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton (filed as Exhibit 10.3 to | ||
*†10.14 | ||
Amendment No. 1 dated December 8, 2002 to the Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton (filed as Exhibit 10.44 to |
*†10.15 | ||
Amendment No. 2 dated February 17, 2003 to the Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton (filed as Exhibit 10.45 to | ||
*†10.16 | Amendment No. 3 dated September 29, 2006 to the Employment Agreement dated September 5, 2002, among UAL Corporation, United Air Lines, Inc. and Glenn F. Tilton (filed as Exhibit 99.2 to UAL’s Form 8-K filed on September 29, 2006, Commission file number 1-6033, and incorporated herein by reference) | |
* | Letter Agreement dated April 4, 2003 between Glenn F. Tilton, UAL Corporation and United Air Lines, Inc. (filed as Exhibit 10.50 to | |
*†10.18 | ||
Letter Agreement dated May 13, 2004 between Glenn F. Tilton, UAL Corporation and United Air Lines, Inc. (filed as Exhibit 10.1 to | ||
*†10.19 | ||
Letter Agreement dated July 29, 2004 between Glenn F. Tilton, UAL Corporation and United Air Lines, Inc. (filed as Exhibit 10.2 to | ||
*†10.20 | ||
Letter Agreement dated March 11, 2005 between Glenn F. Tilton, UAL Corporation and United Air Lines, Inc. (filed as Exhibit 10.43 to | ||
*†10.21 | ||
Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and the Northern Trust Company (filed as Exhibit C to Exhibit 10.3 to | ||
*†10.22 | ||
Amendment No. 1 dated February 17, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.47 to | ||
*†10.23 | ||
Amendment No. 2 dated February 28, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.48 to | ||
*†10.24 | ||
Amendment No. 3 dated December 31, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.54 to | ||
*†10.25 | ||
Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and the Northern Trust Company (filed as Exhibit D to Exhibit 10.3 to |
*†10.26 | ||
Amendment No. 1 dated February 17, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.50 to | ||
*†10.27 | ||
Amendment No. 2 dated February 28, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.51 to | ||
*†10.28 | ||
Amendment No. 3 dated December 31, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.58 to | ||
*†10.29 | ||
Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and the Northern Trust Company (filed as Exhibit E to Exhibit 10.3 to | ||
*†10.30 | ||
Amendment No. 1 dated February 17, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.53 to | ||
*†10.31 | ||
Amendment No. 2 dated February 28, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.54 to | ||
*†10.32 | ||
Amendment No. 3 dated December 31, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company (filed as Exhibit 10.62 to | ||
*†10.33 | ||
Restricted Stock Agreement dated September 2, 2002 between Glenn F. Tilton and UAL Corporation (filed as Exhibit B to Exhibit 10.3 to | ||
*†10.34 | ||
Agreement between UAL Corporation, United Air Lines, Inc. and Douglas A. Hacker (filed as Exhibit 10.1 to | ||
*†10.35 | Letter Agreement dated May 1, 2006 between UAL Corporation, United Air Lines, Inc. and Douglas A. Hacker (filed as Exhibit 10.1 to UAL’s Form 8-K filed April 11, 2006, Commission file number 1-6033, and incorporated herein by reference) |
* | Addendum to Restricted Stock Agreement dated October 24, 2002 between UAL Corporation and Peter D. | |
*†10.37 | Addendum to Non-qualified Stock Option Agreement dated February 27, 2002 between UAL Corporation and Peter D. McDonald (filed as Exhibit 10.67 to UAL’s Form 10-K for the year ended December 31, 2003, Commission file number 1-6033, and incorporated herein by reference) | |
* | Employment Agreement dated September 29, 2006, among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (as filed as Exhibit 99.3 to UAL’s Form 8-K filed on September 29, 2006, Commission file number 1-6033, and incorporated herein by reference) | |
*†10.39 | Addendum to Non-qualified Stock Option Agreement dated March 1, 2002 between UAL Corporation and Frederic F. Brace (filed as Exhibit 10.66 to | |
†10.40 | ||
Description of Officer Benefits | ||
*†10.41 | ||
UAL Corporation 2006 Management Equity Incentive Plan (filed as Exhibit 10.1 to | ||
†10.42 | ||
Description of Benefits for Directors | ||
*†10.43 | ||
UAL Corporation 1995 Directors Plan (filed as Exhibit 10.37 to | ||
*†10.44 | ||
Amendment and Termination of the 1995 UAL Corporation Directors Plan dated as of October 27, 2005 (as filed as Exhibit 10.1 to | ||
*†10.45 | ||
UAL Corporation 2006 Directors Equity Incentive Plan (filed as Exhibit 99.2 to | ||
*†10.46 | ||
Letter Agreement dated April 28, 1994 between UAL Corporation and Paul E. Tierney (filed as Exhibit 10.43 to UAL’s Form 10-K for the year ended December 31, 2005, Commission file number 1-6033, and incorporated herein as reference) | ||
*†10.47 | ||
Letter Agreement dated April 28, 1994 between UAL Corporation and James J. | ||
†10.48 | Amendment No. 1 dated March 12, 2007 to the Peter D. McDonald Secular Trust Agreement dated September 29, 2006 | |
12 | Computation of Ratio of Earnings to Fixed Charges | |
21 | ||
List of |
23 | |
Consent of Independent Registered Public | |
31.1 | |
Certification of the Principal Executive Officer Pursuant to 15 U.S.C. 78m(a) or 78o(d) | |
31.2 | |
Certification of the Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or 78o(d) | |
32.1 | |
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) | |
32.2 | |
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) | |
With respect to the documents incorporated by reference to this Form 10-K, UAL's Commission File Number is 001-06033.
* As Previously Filed
+† Indicates managementManagement contract or compensatory plan or arrangement
135