UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission | Exact Name of Registrant as Specified in its Charter, Principal Office Address | State of | I.R.S. Employer | |||||||||||||
File Number | and Telephone Number | Incorporation | Identification No | |||||||||||||
001-06033 | UAL Corporation | Delaware | 36-2675207 | |||||||||||||
001-11355 | United Air Lines, Inc. | Delaware | 36-2675206 | |||||||||||||
77 W. Wacker Drive | ||||||||||||||||
Chicago, Illinois 60601 | ||||||||||||||||
(312) 997-8000 |
Title of Each Class | Name of Each Exchange on Which Registered | ||||||
UAL Corporation | Common Stock, $.01 par value | NASDAQ Global Select Market | |||||
United Air Lines, Inc. | None | None |
20, 2009.
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ITEM 1. | BUSINESS. |
Most of UAL'sUAL’s revenue and expenses in 20072008 were from United'sUnited’s airline operations. United transports people and cargo through its Mainlinemainline operations, which utilize full-sized jet aircraft exceeding 70 seats in size, and its regional operations, which utilize smaller aircraft not exceeding 70 seats in size that are operated under contract by United Express®Express® carriers.
• | United Mainline, including United First®, United Business® and Economy Plus®, the last providing three to five inches of extra legroom on all United Mainline and explussm United Express flights; | |
• | A new international premium travel experience featuring180-degree, lie-flat beds in business class. As of December 31, 2008, the Company has completed first and business class equipment upgrades on 25 international aircraft that have been refitted with new premium seats, entertainment systems and other product enhancements. The Company expects to complete the refurbishment of a majority of the 66 remaining aircraft in 2009 and 2010, with the remaining aircraft upgrades to be completed in 2011; | |
• | p.s.sm—a premium transcontinental service connecting New York with both Los Angeles and San Francisco; and | |
• | United Express, with a total fleet of 280 aircraft operated by regional airline partners, including over 100 aircraft that offer explus, United’s premium regional service providing both first class and Economy Plus seating. |
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and mail revenue in 2007.2008. United Services generated $183$167 million in revenue in 20072008 by utilizing downtime of otherwise under-utilized aircraft maintenance resources through third-party maintenance services. In 2007, revenues from aircraft ground handling and flight crew training services are not classified as part of United Services revenues, as discussed below.
We believe our restructuring has made United competitive with its network airline peers. The Company seeks to achieve its goal of further improving profit margins through continuous improvements to its core business across its operations by focusing on superior customer service, controlling unit costs and improving unit revenues. With the bankruptcy reorganization completed in early 2006 and the creation of a solid platform, the Company is now building on its core competitive advantages, including strong brand recognition, its leading loyalty program and its broad global airline network.
During 2007, UAL's management and its Board of Directors completed a strategic planning session to discuss the future of United. The Company has developed a five-year plan, the ambition of which is to position United as the airline of choice for premium customers, employees and investors, while maintaining our fundamental commitment to safety and balancing the needs of all of our stakeholders. The Company's main focus continues to be strengthening our core business, and the plan includes a detailed roadmap of more than 250 initiatives and significant capital investments for the Company over the next five years. These investments are targeted to support improvements for customers and employees, and drive revenue and efficiency improvements. In addition to strengthening the performance of the airline, our plan also includes unlocking the value of business units such as United Services and Mileage Plus. Our goal is to generate returns to stockholders that are competitive with U.S. industry in general. To achieve these goals, we are focused on consistently delivering superior service, delivering differentiated products and services, building employees' connection and commitment to United, developing new sources of revenue and controlling costs.
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 the Company on the date of the filing of thisForm 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 Item 1A, Risk Factors and in Item 7, Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations. 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
The following discussion provides general background information regardingDirectors were active in adjusting the Company's Chapter 11 cases,Company’s operational plans in response to difficult industry conditions and is not intended to be an exhaustive summary. Detailed information pertaining to its bankruptcy filings may be obtained atwww.pd-ual.comthe weakening global economy. Unprecedented increases in jet fuel prices during 2008 had a significant negative impact on our results of operations and were one of the leading factors that prompted the development of the Company’s operational plans, as described in the Annual Reports on Form 10-K for both UAL Corporation and United Air Lines, Inc. for the year ended December 31, 2006 (the "2006 Annual Reports"). See also Note 1, "Voluntary Reorganization Under Chapter 11,"2, “Company Operational Plans,” in theCombined Notes to Consolidated Financial Statements.
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including Aruba and seasonal service to Montego Bay, Punta Cana, and St. Maarten; and Central America including "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 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, the Company implemented fresh-start reporting in accordance with American Institute of Certified Public Accountants'Accountants’ Statement of Position90-7,Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("(“SOP 90-7"90-7”)., The Plan of Reorganization generally provided for the full payment or reinstatement of allowed administrative claims, priority claims and secured claims, and the distribution of new UAL equity and debt securities resulting in significant changes as compared to the Debtors' creditors and employees in satisfaction of allowed unsecured and deemed claims. UAL common and preferred securities outstanding at January 31, 2006 were canceled. The Plan of Reorganization contemplated UAL issuing up to 125 million shares of new UAL common stock consisting of 115 million shares to be issued to unsecured creditors and employees and 10 million shares to be issued pursuant to UAL's share-based management and director compensation plans. The new UAL common stock was listed on a NASDAQ market and began trading under the symbol "UAUA" on February 2, 2006. Significant Matters Remaining to be Resolved in Bankruptcy Court.historical financial statements.1, "Voluntary4, “Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to be Resolved in Chapter 11 Cases,"” in theCombined Notes to Consolidated Financial Statements.Company'sCompany’s reporting segments and operating revenues by geographic regions, as reported to the U.S. Department of Transportation ("DOT"),DOT, can be found in Note 10, "Segment“Segment Information,"” in theCombined Notes to Consolidated Financial Statements. Mainline The Company’s mainline operating revenues were $17.1 billion, $17.0 billion in 2007,and $16.4 billion in 2008, 2007 and 2006, and $15.0 billion and $14.9 billion for UAL and United, respectively, in 2005.respectively. As of December 31, 2007,2008, mainline domestic operations served approximately 90over 80 destinations primarily throughout the U.S. and Canada and operated hubs at Chicago O'HareO’Hare International Airport ("O'Hare"(“O’Hare”), Denver International Airport (“Denver”), Los Angeles International Airport ("LAX"(“LAX”), San Francisco International Airport ("SFO"(“SFO”) and Washington Dulles International Airport ("(“Washington Dulles"Dulles”). Mainline international operations serve the Pacific, Atlantic and Latin America regions. The Pacific region includes non-stop service to Beijing, Hong Kong, Nagoya, Osaka, Seoul, Shanghai, Sydney and Tokyo and Taipei (with service to Guangzhou, China scheduled to commence in June 2008); direct service to Bangkok, Seoul, Singapore and SingaporeTaipei via Tokyo; direct service to Ho Chi Minh City and Singapore via Hong Kong and to Melbourne via Sydney. The Atlantic region includes non-stop service to Amsterdam, Brussels, Dubai, Frankfurt, Kuwait City, London, Munich, Paris, Rome and Zurich. The Latin American region offers non-stop service to Buenos Aires, Sao Paulo and direct service to Rio de Janeiro.Janeiro (seasonal non-stop) and Sao Paulo. The Latin American region also serves various Mexico destinations including Cancun, Cozumel (seasonal), Ixtapa/Zihuatanejo (seasonal), Mexico City, Puerto Vallarta and San Jose del Cabo, and Ixtapa/Zihuatanejo (seasonal);Cabo; various Caribbean pointsGuatemala City, Liberia, and Costa Rica (seasonal). UAL's2006 and $9.0 billion in 2005.2006. Operating revenues attributed to mainline international operations were $7.4 billion in 2008, $6.1 billion in 2007 and $6.4 billion in 2006 and $6.0 billion in 2005.2006. For purposes of the Company'sCompany’s geographic revenue reporting, the Company considers destinations in Mexico and the Caribbean to be part of the Latin America region as opposed to the North America region.
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2007.
Caribbean. As of December 31, 2007, Ted provided service from all of United's hubs to 11 destinations in the U.S., including its territories, and five in Mexico.
United Cargo. United Cargo offers both domestic and international shipping through a variety of services including United Small Package Delivery, Express and General cargo services. Freight shipments comprise approximately 90%85% of United Cargo'sCargo’s volumes, with mail comprising the remainder. During 2007,2008, United Cargo accounted for approximately 4% of the Company'sCompany’s operating revenues by generating $770$854 million in freight and mail revenue, a 3%an 11% increase versus 2006.
2007.
revenue.
| 2007 | 2006 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mainline | United Express | Mainline | United Express | ||||||||
Gallons consumed (in millions) | 2,292 | 377 | 2,290 | 373 | ||||||||
Average price per gallon, including tax and hedge impact | $ | 2.18 | $ | 2.43 | $ | 2.11 | $ | 2.23 | ||||
Cost (in millions) | $ | 5,003 | $ | 915 | $ | 4,824 | $ | 834 |
United Express fuel expense is classified as Regional affiliates expense in theStatements of Consolidated Operations.
The price and availability of jet fuel significantly affectaffects the Company'sCompany’s results of operations. Fuel has been the Company’s largest operating expense for the last several years. The Company has a risk management strategy to hedge a portion of its price risk related to projected jet fuel requirements. The Company utilizes various types of hedging instruments including purchased calls, collars, 3-way collars and 4-way collars. A significantcollar involves the purchase of fuel call options with the simultaneous sale of
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expense.
Average price per gallon | ||||||||||||||||||||||||
$ | (in cents) | |||||||||||||||||||||||
(In millions, except per gallon) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||
Mainline fuel purchase cost | $ | 7,114 | $ | 5,086 | $ | 4,798 | 326.0 | 221.9 | 209.5 | |||||||||||||||
Non-cash fuel hedge (gains) losses in mainline fuel | 568 | (20 | ) | 2 | 26.0 | (0.9 | ) | 0.1 | ||||||||||||||||
Cash fuel hedge (gains) losses in mainline fuel | 40 | (63 | ) | 24 | 1.9 | (2.7 | ) | 1.1 | ||||||||||||||||
Total mainline fuel expense | 7,722 | 5,003 | 4,824 | 353.9 | 218.3 | 210.7 | ||||||||||||||||||
United Express fuel expense(a) | 1,257 | 915 | 834 | 338.8 | 242.7 | 223.2 | ||||||||||||||||||
UAL system operating fuel expense | $ | 8,979 | $ | 5,918 | $ | 5,658 | 351.7 | 221.7 | 212.5 | |||||||||||||||
Non-cash fuel hedge losses in nonoperating income (loss) | $ | 279 | $ | — | $ | — | ||||||||||||||||||
Cash fuel hedge losses in nonoperating income (loss) | 249 | — | — | |||||||||||||||||||||
Mainline fuel consumption (gallons) | 2,182 | 2,292 | 2,290 | |||||||||||||||||||||
Regional affiliates fuel consumption (gallons) | 371 | 377 | 373 | |||||||||||||||||||||
Total fuel consumption (gallons) | 2,553 | 2,669 | 2,663 |
(a) | United Express fuel costs are classified as part of Regional affiliate expense. |
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Alliance.
termination of certain contractual relationships, including Continental’s existing agreements with SkyTeam members that restrict its participation in another global alliance.
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The Company expanded its offering of merchandise available for awards in 2009, which may increase the amount of non-travel awards.
lower-cost channels and capitalize on these cost-saving opportunities, the Company will continue to expand the capabilities of its website.
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Mainline | ||||||
Consolidated | Domestic | International | ||||
Fourth Quarter 2008 | (10.6)% | (14.4)% | (8.1)% | |||
Full-year 2008 | (3.9)% | (7.8)% | 0.9% | |||
First Quarter 2009 | (12.5)% to (11.5)% | (14.0)% to (13.0)% | (15.0)% to (14.0)% | |||
Full-year 2009 | (8.0)% to (7.0)% | (12.5)% to (11.5)% | (6.0)% to (5.0)% |
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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 and has renewed this coverage on a periodic basis. The current war-risk policy is effective until AugustMarch 31, 2008 covering2009 and covers losses to employees, passengers, third parties and aircraft. The Secretary of Transportation may extend this coverage until DecemberMay 31, 2008.2009. If the U.S. government does not extend this coverage beyond AugustMarch 31, 2008,2009, 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 the Company'sCompany’s operations and financial results"results” in Item 1A,Risk Factors, below.
Notwithstanding the formal elimination of slotNew Jersey. Slot restrictions at O'Hare in July 2002, the FAA imposed temporary restrictions on flight operations there beginning in 2004O’Hare ceased to address air traffic congestion concerns.apply as of November 2008. In August 2006,2008, the FAA issued new rules related to slots at the three New York City-area airports named above. These rules provide for
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At LaGuardia,United will likely lose a small number of slots at each of the FAA has proposed an interim rule that would impose caps and restrictions on flight operations similar to those in effect at O'Hare. The interim rule took effect in January 2007 whenthree New York City-area airports, however the High Density Rule expired. The FAA has also proposed a longer-term rule at LaGuardia thatexact number is designed to control air traffic congestion there indefinitely. The longer-term proposal contains several
elements that could impact United's schedule and operational performance at LaGuardia.not yet known. It is not possibleyet clear what impact this might have on United’s operations at those airports.
In addition, in reaction to substantial flight delays and congestion inhave on United.
carriers fail to meet certain service performance criteria.
There also exists the possibility that Congress may pass other legislation that could increase labor and operating costs. Legislation is expected to focus on outsourced maintenance, Family and Medical Leave Act changes and other work rules. Climate change legislation, which would regulate green-house gas emissions, is also likely to be a significant area of legislative and regulatory focus and could adversely impact fuel costs. Customer service issues have been a significant focus ofremained active areas for both Congress and DOT regulators during 2007. It is likely that2008. In addition to DOT-proposed customer service regulations discussed above, legislation imposing more specific customer service requirements willis likely to be approved by Congress in 2008,2009, though what those requirements might be is unclear at this time. The DOT has also initiated processes to considerproceeded with regulatory changes in this area, including proposals regarding treatment of and payments to passengers involuntarily denied boarding, anddomestic baggage liability, proposals regarding flight delay reporting requirements and airline scheduling practices.
On January 1, 2008, the State of New York implemented legislation requiring air carriers operating within the state to offer certain enumerated services to passengers experiencing extended on-board ground delays of greater than three hours. The New York law authorizes the state Consumer Protection Board to impose civil penalties for non-compliance. Although the Air Transport Association has filed a lawsuit challenging the New York statute on the grounds that federal law prohibits state regulation of airline services, several other states are considering similar legislation. The New York legislation and any other similar legislation if adopted in other states could have an impact on the Company's results of operations or financial condition.
Additionally, since September 11, 2001, aviation security has been and continues to be a subject of frequent legislative and regulatory action, requiring changes to ourthe Company’s security processes and frequently increasing the cost of its security procedures for the Company. The Aviation and Transportation Security Act (the "Aviation Security 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"), 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. A DHS/U.S. Customs and Border Protection ("CBP") regulation effective in early 2008 will give CBP a greater role in airline customer processing, and potentially a greater operational role, as CBP will forbid boarding international passengers until it has cleared passenger names against watch lists. A proposed TSA regulation regarding domestic passengers, "Secure Flight," currently in the rulemaking
process, is likely to expand TSA's role in similar ways when that rule becomes effective. Congress is expected to continue to focus on changes to aviation security law and requirements in 2008. Particular areas of attention that could result in increased costs for air carriers will likely include new requirements on cargo screening, possible deployment of antimissile technology on passenger aircraft and potential for increased passenger and carrier security fees.
United'sUnited’s international services, the Company is regulated by both the U.S. government and the governments of the foreign countries 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 DOTand/or the relevant foreign governments.
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Further, United's
On April 30, 2007,
The agreement is basedBased on the U.S. open skies model, it provides U.S. and authorizesEU carriers with expansive rights that have increased competition in transatlantic markets. For example, U.S. airlinesand EU carriers now have the right to operate between the United States and 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./EU markets. The agreement also authorizes all U.S. and EU carriers to operate services between the United States and London Heathrow, thereby potentially adding new competition to United's Heathrow operation, although Heathrow is currently subject to bothEU. The Agreement has no direct impact on airport slot and facility constraints which may practically limit the growth of new competition in the near term. This agreementrights nor does notit provide for a reallocation of existing slots, among carriers.
Underincluding those at London Heathrow. London Heathrow currently remains subject to both slot and facility constraints.
The agreement would confer a number of additional rights to 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 future legislation restricting U.S. 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.
The EU/U.S. open skies agreement will likely directly impactwith the future valueU.K. and expected lives of route authorities to Heathrow; however, there is no direct impact from the open skies agreement on airport slot rights, including those at Heathrow. The open skies agreement is also expected to provide United and other carriers with access to new markets in EU countries. In September 2007, the DOT granted United antitrust immunity with bmi. The immunity goes into effect at the same time as the open skies agreement between the U.S. and /EU at the end of March 2008.agreement satisfies this condition. Because of the diverse nature of potential impacts on United'sUnited’s business, from the EU transatlantic aviation agreement,however, the overall future impact of the U.S./EU agreement on United'sUnited’s business in the EU region cannot be predicted with certainty.
The European Commission (the "Commission") is expected to propose important new legislation or to adopt
Pursuant to an agreement reached in December 2005, a full open skies agreement between the United States and Canada came into force in 2007. The DOT also approved the 9-party antitrust immunity application (including United, Air Canada, Lufthansa, SAS, Austrian, Swiss, LOT, TAP and bmi), allowing United and Air Canada to expand their existing antitrust immunity beyond the currently allowed transborder region.
withstand legal challenge.
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The Company also conducts 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 the Company'sCompany’s business.
Number of | Contract Open | |||||||||||||
Employee Group | Employees | Union(a) | for Amendment | |||||||||||
Public Contact/Ramp & Stores/Food Service Employees/Security Officers/Maintenance | ||||||||||||||
Instructors/Fleet Technical Instructors | 15,801 | IAM | January 1, 2010 | |||||||||||
Flight Attendants | 13,238 | AFA | January 8, 2010 | |||||||||||
Pilots | 6,366 | ALPA | January 1, 2010 | |||||||||||
Mechanics & Related | 5,240 | Teamsters(b) | January 1, 2010 | |||||||||||
Engineers | 220 | IFPTE | January 1, 2010 | |||||||||||
Dispatchers | 173 | PAFCA | January 1, 2010 |
(a) | International Association of Machinists and Aerospace Workers (“IAM”), Association of Flight Attendants—Communication Workers of America (“AFA”), Air Line Pilots Association (“ALPA”), International Brotherhood of Teamsters (“Teamsters”), International Federation of Professional and Technical Engineers (“IFPTE”) and Professional Airline Flight Control Association (“PAFCA”). | |
(b) | During 2008, United’s mechanics and related employees elected to change their union representation from the Aircraft Mechanics Fraternal Association to the Teamsters. The Teamsters assumed the existing collective bargaining agreement between United and this employee group on April 1, 2008. |
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On December 4, 2007, the International Brotherhood of Teamsters ("Teamsters") filed an application with the National Mediation Board ("NMB") seeking the right to represent United's mechanics and related employees, who are currently represented by AMFA. On January 24, 2008 the NMB found that the Teamsters had submitted sufficient valid signed authorization cards from a majority of the eligible employees and ordered that a representation election be conducted. Voting will take place from February 26, 2008 through March 31, 2008. AMFA and Teamsters will appear on the ballot. Write-in votes are permitted. If a majority of eligible employees (active and furloughed) vote in favor of union representation, the union receiving a majority of the votes would be declared the representative. If a majority of the employees vote for representation, but no single organization receives a majority of the votes cast, there would be a runoff election between the two organizations receiving the most votes. If less than a majority of eligible employees cast ballots in the initial election, the employees will become unrepresented.
ITEM 1A. | RISK FACTORS. |
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Required % of | ||||
Total Unrestricted Cash Balance(a) | Relevant Advance Ticket Sales | |||
Less than $2.5 billion | 15 | % | ||
Less than $2.0 billion | 25 | % | ||
Less than $1.0 billion | 50 | % |
(a) | Includes unrestricted cash, cash equivalents and short-term investments at month-end, including certain cash amounts already held in reserve, as defined by the agreement. |
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Required % of | ||||
Total Unrestricted Cash Balance(a) | Net Current Exposure(b) | |||
Less than $2.4 billion | 15 | % | ||
Less than $2.0 billion | 25 | % | ||
Less than $1.35 billion | 50 | % | ||
Less than $1.2 billion | 100 | % |
(a) | Includes unrestricted cash, cash equivalents and short-term investments at month-end, including certain cash amounts already held in reserve, as defined by the agreement. | |
(b) | Net current exposure equals relevant advance ticket sales less certain exclusions, and as adjusted for specified amounts payable between United and the processor, as further defined by the agreement. |
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See Note 13, “Fair Value Measurements and Derivative Instruments,” inCombined Notes to Consolidated Financial Statementsfor additional information on the Company’s hedging programs.
In addition, Northwest
From time to time
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modernized ATC system that may be imposed on carriers like United, may have an adverse impact on the Company'sCompany’s financial condition or results of operations.
operations.
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Despite the Company's exit from bankruptcy on February 1, 2006, several significant matters remain to be resolved in connection with its reorganization under Chapter 11 of the United States Bankruptcy Code. Unfavorable resolution of these matters
Company'sCompany’s initiatives to improve the delivery of its products and services to its customers, reduce costs, increase its revenues and increase shareholder value, including the operational plans recently initiated by the Company, may not be adequate or successful.continuous improvement programs to improveenhance the delivery of its products and services to its customers, reduce its costs and increase its revenues. Some of theseIn response to the unprecedented increase in fuel prices during 2008 and the weakening U.S. and global economies, the Company began implementing certain operational plans. The Company’s efforts are focused on cost savings in areas such areas as telecommunications, airport services, catering, maintenance materials, aircraft ground handling and regional affiliates expenses, among others. In addition, the Company is significantly reducing mainline domestic and consolidated capacity and is removing 100 aircraft from its mainline fleet, including its entire B737 fleet of 94 aircraft and six B747 aircraft. United is also eliminating its Ted product and reconfiguring that fleet’s 56 A320s to include United First class seats. See Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operationsfor further information regarding the Company’s capacity reductions. The Company will continue to review the deployment of all of our aircraft in various markets and the overall composition of our fleet to ensure that we are using our assets appropriately to provide the best available return. In connection with the capacity reductions, the Company is further streamlining its operations and corporate functions in order to match the size of its workforce to the size of its operations. The Company currently estimates a reduction of approximately 9,000 positions during 2008 and 2009, through a combination of furloughs and furlough-mitigation plans, such as early-out options. There can be no assurance that the Company’s initiatives to reduce costs and increase revenues will be successful.MROassets and Mileage Plusits businesses, which may include a possible sale of all, or part of, these assets or operations. There can be no assurance that any transactions with respect to these assets or operations will occur, nor are there any assurances with respect to the form or timing of any such transactions or their actual effect on shareholder value. A number of the Company'sCompany’s ongoing initiatives involve significant changes to the Company'sCompany’s business that it may be unable to implement successfully. In addition, revenue and other initiatives may not be successful due to the competitive landscape of the industry and the reaction of our competitors to certain of our initiatives. The adequacy and ultimate success of the Company'sCompany’s programs and initiatives to improve the delivery of its products and services to its customers, reduce its costs and increase both its revenues and shareholder value cannot be assured. There can be no assurance that any transactions with respect to the Company's MRO and Mileage Plus business will occur, nor are there any assurances with respect to the form or timing of any such transactions or their actual effect on shareholder value.Company'sCompany’s operations and impair its financial performance.81%83% of the employees of UAL are represented for collective bargaining purposes by U.S. labor unions. These employees are organized into six labor groups represented by six different unions.NMB.National Mediation Board (“NMB”). This process continues until either the parties have reached agreement on a new CBAcollective bargaining agreement or the parties are released to "self-help"“self-help” by the NMB. Although in most circumstances the RLA prohibits strikes, shortly after release by the NMB, carriers and unions are free to engage in self-help measures such as strikes and lock-outs. All six of the Company's
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inadequate. If the Company'sCompany’s insurance is not adequate, it may be forced to bear substantial losses from an accident.
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The Company'sCompany’s high level of fixed obligations, a downgrade in the Company'sCompany’s credit ratings or poor credit market conditions could impair its ability to obtain additional financing, if needed, and reduce its flexibility to conduct its business. Certain of the Company'sCompany’s existing indebtedness also requires it to meet covenants and financial tests to maintain ongoing access to those borrowings. See Note 12, "Debt“Debt Obligations" and Card Processing Agreements,” in theCombined Notes to Consolidated Financial Statementsfor further details.details related to the Company’s credit agreements and assets pledged as collateral. A failure to timely pay its debts or other material uncured breach of its contractual obligations could result in a variety of adverse consequences, including the acceleration of the Company'sCompany’s indebtedness, the withholding of credit card sale proceeds by its credit card service providers and the exercise of other remedies by its creditors and equipment lessors that could result in material adverse effects on the Company'sCompany’s operations and financial condition. In such a situation, it is unlikely that the
Company would be able to fulfill its obligations to repay the accelerated indebtedness, make required lease payments, or otherwise cover its fixed costs.
The
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The Company believes that its future success will depend in large part on its ability to attract and retain highly qualified management, operational, technical and other personnel. The 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 its business.
The Company could be adversely affected by an outbreak of a disease that affects travel behavior.
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Because UAL'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 UAL's control.
The issuance of additional shares of UAL'sUAL’s common stock, including upon conversion of its convertible preferred stock and its convertible notes, could cause dilution to the interests of its existing stockholders.
UAL'sfor further information regarding these instruments.
UAL's
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. | PROPERTIES. |
Aircraft Type | Average No. of Seats | Owned(a) | Leased | Total | Average Age (Years) | |||||
---|---|---|---|---|---|---|---|---|---|---|
A319-100 | 120 | 36 | 19 | 55 | 8 | |||||
A320-200 | 148 | 42 | 55 | 97 | 10 | |||||
B737-300 | 123 | 17 | 47 | 64 | 19 | |||||
B737-500 | 108 | 30 | — | 30 | 16 | |||||
B747-400 | 347 | 21 | 9 | 30 | 12 | |||||
B757-200 | 172 | 46 | 51 | 97 | 16 | |||||
B767-300 | 213 | 17 | 18 | 35 | 13 | |||||
B777-200 | 267 | 46 | 6 | 52 | 9 | |||||
Total Operating Fleet—UAL | 255 | 205 | 460 | 13 | ||||||
Total Operating Fleet—United(b) | 254 | 206 | 460 | 13 | ||||||
Average | Average | |||||||||||||||||||
Aircraft Type | Number of Seats | Owned(c) | Leased | Total | Age (Years) | |||||||||||||||
UAL total operating fleet at December 31, 2007(a) | 255 | 205 | 460 | 13 | ||||||||||||||||
A319-100 | 120 | 37 | 18 | 55 | 9 | |||||||||||||||
A320-200 | 148 | 42 | 55 | 97 | 11 | |||||||||||||||
B737-300 | 123 | 2 | 28 | 30 | 20 | |||||||||||||||
B737-500 | 108 | 16 | — | 16 | 17 | |||||||||||||||
B747-400 | 350 | 18 | 9 | 27 | 13 | |||||||||||||||
B757-200 | 172 | 32 | 65 | 97 | 17 | |||||||||||||||
B767-300 | 212 | 17 | 18 | 35 | 14 | |||||||||||||||
B777-200 | 267 | 45 | 7 | 52 | 10 | |||||||||||||||
Total operating fleet at December 31, 2008—UAL and United(a) | 209 | 200 | 409 | 13 | ||||||||||||||||
UAL nonoperating B737s at December 31, 2008(a)(b) | 24 | 12 | 36 | 19 | ||||||||||||||||
UAL nonoperating B747s at December 31, 2008(b) | 3 | — | 3 | 12 | ||||||||||||||||
(a) | At December 31, 2008, United’s operating fleet was the same as UAL’s fleet. In 2007, United leased one aircraft from UAL and therefore had one less owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet. This particular aircraft became nonoperational in 2008. | |
(b) | As of December 31, 2008, B737 and B747 owned, nonoperating aircraft have a combined net book value of $198 million and are classified as Other noncurrent assets in the Company’sStatements of Consolidated Financial Position. | |
(c) | As of December 31, 2008 and 2007, 62 and 113 aircraft were unencumbered, respectively. See Note 12, “Debt Obligations and Card Processing Agreements,” inCombined Notes to Consolidated Financial Statementsfor further information related to assets pledged as collateral. |
Aircraft Type | Average No. of Seats | Total | ||
---|---|---|---|---|
Bombardier CRJ200 | 50 | 98 | ||
Bombardier CRJ700 | 66 | 87 | ||
De Havilland Dash 8 | 37 | 10 | ||
Embraer EMB120 | 30 | 28 | ||
Embraer ERJ145 | 50 | 28 | ||
Embraer EMB170 | 70 | 28 | ||
Total Operating Fleet | 279 | |||
Average No. of Seats Total Bombardier CRJ200 50 93 Bombardier CRJ700 66 89 De Havilland Dash 8 37 10 Embraer EMB 120 30 24 Embraer ERJ 145 50 31 Embraer EMB170 70 33 Total Operating Fleet 280 financingsleases, see Note 12, "Debt Obligations" and Note 16, "Lease15, “Lease Obligations,"” in theCombined Notes to Consolidated Financial Statements.O'HareO’Hare in 2018, LAX in 2021
28
The Company also leases approximately 250,000 square feet of office space through 2022 for its corporate headquarters in downtown Chicago.
The Company is continuing the process of relocating employees from several of its other suburban Chicago facilities into either the new headquarters or the Operations Center consistent with the Company'sCompany’s goals of achieving additional cost savings and operational efficiencies.
United's The Company has options to renew the lease through 2023.
29
ITEM 3. | LEGAL PROCEEDINGS. |
Commencing on October 27, 2005, all eligible classes of creditors had the opportunity to vote to accept or reject the Debtors 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.
these proceedings.
30
agreement to cooperate with the plaintiffs' factual investigation. The settlement agreement is subject to review and approval by the Federal Court.
Penalties for violatingviolation of competition laws can be severe, involving both criminalsubstantial and civil liability. We are cooperating with the grand jury investigations while carrying out our own internal review of our pricing practices, and are not in a position to predict the potential financial impact of this litigation at this time. However, aan ultimate finding that we violated either U.S. antitrust laws or the competition laws of some other jurisdictionCompany engaged in improper activity could have a material adverse impact on our consolidated financial position and results of operations or financial condition.
operations.
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 SFO, has been investigating potential environmental contamination at the airport (geographically including United's SFO maintenance center) and conducting monitoring and/or remediation when needed. United's projected costs associated with this order were significantly reduced in 2006; therefore, the Company does not consider this to be a material proceeding.
Other Legal Proceedings
31
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
32
None.
Jane Allen. Age 56. 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 56. Mr. Atkinson has been Executive Vice President—Chief Customer Officer for UAL and 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 50. Mr. Brace has been Executive Vice President and Chief Financial Officer of UAL and United since August 2002. From September 2001 to August 2002, Mr. Brace served as UAL and United's Senior Vice President and Chief Financial Officer.
Sara A. Fields. Age 64. Ms. Fields has been Senior 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.
Rosemary Moore. Age 57. Ms. Moore has been the Senior Vice President—Corporate and Government AffairsPresident of United since December 2002. From November to December 2002, Ms. Moore was the Senior Vice President—Corporate AffairsInvestor Relations of United. From October 2001August 2006 to October 2002,July 2007 she served as Vice President of Financial Planning and Analysis of United and from January 2005 to August 2006, Ms. Moore was theMikells served as Vice President—PublicPresident and Government AffairsTreasurer of ChevronTexaco Corporation (global energy).
United. Prior to that, Ms. Mikells served as Vice President Corporate Real Estate of United from November 2003 to January 2005.
33
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Pursuant to the Plan of Reorganization, UAL issued or reserved for issuance up to 125,000,000 shares of common stock (the "New UAL Common Stock") comprised of: (a) 115,000,000 shares to be distributed to unsecured creditors and employees in accordance with the terms of the Plan of Reorganization; and (b) up to 10,000,000 shares and options (or other rights to acquire shares) pursuant to UAL's share-based management and director compensation plans. On February 1, 2006, the Predecessor UAL Common Stock ceased trading and was canceled pursuant to the terms of the Plan of Reorganization and UAL has no continuing obligations for this stock. Beginning February 2, 2006, the New UAL Common Stock has traded on a NASDAQ market under the symbol UAUA.
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
| 2007 | 2006 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| High | Low | High | Low | ||||||||
1st quarter(a) | $ | 51.57 | $ | 36.64 | $ | 43.00 | $ | 29.51 | ||||
2nd quarter | 44.32 | 31.62 | 40.05 | 26.02 | ||||||||
3rd quarter | 50.00 | 35.90 | 32.17 | 21.90 | ||||||||
4th quarter | 51.60 | 33.48 | 46.54 | 26.77 |
2008 2007 High Low High Low 1st quarter $ 41.47 $ 19.71 $ 51.57 $ 36.64 2nd quarter 24.87 5.22 44.32 31.62 3rd quarter 15.84 2.80 50.00 35.90 4th quarter 16.73 4.55 51.60 33.48 during 2006in either 2008 or 2007. In December 2007, UAL'sUAL’s Board of Directors approved a special distribution of $2.15 per common share, or approximately $257 million, which was paid on January 23, 2008 to holders of record of New UAL Common Stockcommon stock as of January 9, 2008. As discussed in Note 22, "Distribution Payable" inCombined Notes to Consolidated Financial Statements, the2008 and is characterized as a return of capital for tax treatment of the special distribution will not be determined until January 2009.purposes. Under the provisions of the Amended Credit Facility the Company'sCompany’s ability to pay distributions on or repurchase New UAL Common Stockcommon stock is restricted. However, the December 2007 prepayment of $500 million and further amendment of the Amended Credit Facility allows the Company tomay undertake an additional $243 million in shareholder initiatives without any additional prepayment of the Amended Credit Facility, provided that all covenants within the agreementAmended Credit Facility are met. In addition, the amendmentagreement provides that the Company can carry out further shareholder initiatives in an amount equal to future term loan prepayments, provided the facility covenants are met. See Note 12, "Debt“Debt Obligations" and Card Processing Agreements,” in theCombined Notes to Consolidated Financial Statementsfor more information related to dividend restrictions under the Amended Credit Facility. Any future determination regarding dividend or distribution payments will be at the discretion of the Board of Directors, subject to applicable limitations under Delaware law.Company'sCompany’s transfer agent for the New UAL Common Stock,common stock, there were approximately 1,8901,774 record holders of its New UAL Common Stockcommon stock as of February 22, 2008.20, 2009.New UAL Common Stockcommon stock during the period from February 2, 2006 to December 31, 2007.2008. Five year historical data is not presented as a result of the significant period UAL was in bankruptcy and since the financial results of the Successor UAL are not comparable with the results of the Predecessor UAL, as discussed in Item 6,Selected Financial Data. The graph also shows the cumulative returns of the S&P 500 Index and the AMEX Airline Index ("AAI"(“AAI”) of fourteen13 investor-owned airlines. The comparison assumes $100 was invested on February 2, 2006 (the date UAUA began trading on NASDAQ) in New UAL Common Stock and in each of the indices shown and assumes that all dividends paid, including UAL’s January 2008 $2.15 per share distribution, were reinvested.
34
PERFORMANCE CHART
and is therefore filing thisForm 10-K with the reduced disclosure format allowed under that general instruction. 2007. asset impairments. The table below also highlights that the Company, through its past and on-going cost reduction initiatives, was able to effectively manage costs in non-fuel and other areas, although the benefits of these cost savings initiatives and higher revenues were not sufficient to offset the dramatic increase in fuel cost. Consolidated Financial Statements. See Note 4, “Voluntary Reorganization Under Chapter 11,” inCombined Notes to Consolidated Financial Statementsfor further information on this matter and the resolution of the separate SFO municipal bond matter in 2008. 3% resulting in the 6% increase in revenue. Overall, passenger revenues increased due to a better revenue environment for the industry which was partly due to industry-wide capacity constraint. The million. Company’s ongoing financial performance. See2007 compared to 2006, below, for a discussion of these bankruptcy-related special items and Note 4, “Voluntary Reorganization Under Chapter 11 of the United States Bankruptcy Code,” inCombined Notes to Consolidated Financial Statementsfor further information on pending matters related to the Company’s bankruptcy. in 2006 to $779 million in 2007. This decrease was due to cost savings realized as the Company continues to drive reductions across the full spectrum of costs of sale. Impact areas included renegotiation of contracts with various channel providers, rationalization of commission plans and programs, and continued emphasis on movement of customer purchases toward lower cost channels including online channels. Such efforts resulted in a 9%year-over-year reduction in GDS fees and commissions. 2008. 2007 compared to 2006 additional information. Liquidity and Capital Resources additional unrestricted cash. 2008. 64 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, Other Information Riskfor further information on the Company’s emergence from bankruptcy. The deferred revenue measurement method used to record fair value of the frequent flyer obligation on and after the Effective Date participating carriers in the Mileage Plus program and by estimating the relative proportions of awards to be redeemed by class of service within broad geographic regions of the the outstanding miles at December 31, Goodwill and Intangible Assets. Upon the implementation of fresh-start reporting (see Note resulted from the Company’s annual impairment test performed as of October 1, 2008. intended to reduce volatility of amounts recorded in pension expense each year. Since the Company has elected not to apply the corridor approach, all gains and losses in accumulated other comprehensive income are amortized and included in pension expense each year. At December 31, 102 Significant Bankruptcy Matters Resolved in amount due to HSBC in 2009. 102 future periods. 102 are not included in the diluted earnings per share calculation, as it is 110 102 110 the adoption of FIN 48. further decrease mainline domestic and consolidated capacity in 2009. 102 110 115 119 (10) (11) 2007. Fair Value of similar EETC instruments issued by other airlines. The Company uses internal models and observable and unobservable inputs to corroborate third party quotes. Because certain inputs are unobservable, the Company categorized the EETCs as Level 3. The (14) (15) Consolidated Financial Position. accrued rent related to the Company’s fleet reductions. United, respectively, for the years ended December 31, 2008 and 2007, respectively; $833 million and $834 million for UAL and United, respectively, for the eleven months ended December 31, 2006; $76 million for both UAL and United for the month ended January 31, 2006. Included in Regional affiliates expense in the 15, “Lease Obligations.” partner (the “Amendment”). In connection with the 2017. Between 2008 and 2012, our co-branded credit card partner’s annual guaranteed payment is satisfied through the purchase of a specified minimum amount of miles. Afterwards, our co-branded credit card partner’s annual guaranteed payment is satisfied through awarding pre-purchased miles, purchasing miles and through other contractual payments. Between 2008 and 2012, our co-branded credit card partner is allowed to carry forward those miles purchased subject to the annual guarantee that have not been awarded to its cardholders. Any miles carried forward subject to this provision will result in a net increase to our “Advance purchase of miles” obligation in our and is being recognized as revenue over the period the fees are earned. SFO Municipal Bonds Security Interest. In the first quarter of 2007, the Company recorded a $3 million benefit to operating income as a special item to reduce the 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 the LAX Municipal Bonds Security Interest. In the fourth quarter of 2006, based on litigation developments, the Company recorded a special item of $18 million as a charge to operating income to adjust the additional information. 2008. NewCommon Stock repurchasescommon stock made in the fourth quarter of fiscal year 2007 were as follows:2008: Maximum number of Total number of shares (or approximate shares purchased as dollar value) of shares Total number Average price part of publicly that may yet be of shares paid announced plans purchased under the purchased(a) per share or programs plans or programs 10/01/08-10/31/08 36,111 $ 14.79 — (b ) 11/01/08-11/30/08 4,000 14.33 — (b ) 12/01/08-12/31/08 — — — (b ) Total 40,111 14.74 — (b ) (a) Shares withheld from employees to satisfy certain tax obligations due upon the vesting of restricted stock. (b) Withholding of shares to satisfy tax obligations due upon the vesting of restricted stock in accordance with the Company’s share-based compensation plan. The plan does not specify a maximum number of shares that may be repurchased.
35Period Total number
of shares
purchased(a) Average
price paid
per share Total number of
shares purchased as
part of publicly
announced
plans or programs Maximum number of
shares (or approximate
dollar value) of shares
that may yet be
purchased under the
plans or programs 10/01/07-10/31/07 892 $ 47.79 — (b ) 11/01/07-11/30/07 — — — — 12/01/07-12/31/07 — — — — Total 892 $ 47.79 — (b ) (a)Shares withheld from employees to satisfy certain tax obligations due upon the vesting of restricted stock.(b)Withholding of shares to satisfy tax obligations due upon the vesting of restricted stock in accordance with the Company's share-based compensation plan. The plan does not specify a maximum number of shares that may be repurchased. ITEM 6. SELECTED FINANCIAL DATA.ITEM 6. SELECTED FINANCIAL DATA. the CompanyUAL adopted fresh-start reporting in accordance withSOP 90-7 and in conformity with accounting principles generally accepted in the United States of America ("GAAP"(“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"“Successor Company” refer to UAL and United on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to "Predecessor Company"“Predecessor Company” refer to UAL and United prior to February 1, 2006. Successor Predecessor Period from Period from February 1 to January 1 Year Ended December 31, December 31, to January 31, Year Ended December 31, 2008 2007 2006 2006 2005 2004 Operating revenues $ 20,194 $ 20,143 $ 17,882 $ 1,458 $ 17,379 $ 16,391 Operating expenses 24,632 19,106 17,383 1,510 17,598 17,245 Mainline fuel purchase cost 7,114 5,086 4,436 362 4,032 2,943 Non-cash fuel hedge (gains) losses 568 (20 ) 2 — — — Cash fuel hedge (gains) losses 40 (63 ) 24 — — — Total Mainline fuel expense 7,722 5,003 4,462 362 4,032 2,943 Nonoperating non-cash fuel hedge (gains) losses 279 — — — — — Nonoperating cash fuel hedge (gains) losses 249 — — — — — Goodwill impairment 2,277 — — — — — Other impairments and special operating items 339 (44 ) (36 ) — 18 — Reorganization (income) expense — — — (22,934 ) 20,601 611 Net income (loss)(a) (5,348 ) 403 25 22,851 (21,176 ) (1,721 ) Basic earnings (loss) per share (42.21 ) 3.34 0.14 196.61 (182.29 ) (15.25 ) Diluted earnings (loss) per share (42.21 ) 2.79 0.14 196.61 (182.29 ) (15.25 ) Cash distribution declared per common share(b) — 2.15 — — — — Total assets $ 19,461 $ 24,220 $ 25,369 $ 19,555 $ 19,342 $ 20,705 Long-term debt and capital lease obligations, including current portion 8,149 8,449 10,600 1,432 1,433 1,204 Liabilities subject to compromise — — — 36,336 35,016 16,035 Revenue passengers 63 68 69 (c) 67 71 Revenue passenger miles (“RPMs”)(d) 110,061 117,399 117,470 (c) 114,272 115,198 Available seat miles (“ASMs”)(e) 135,861 141,890 143,095 (c) 140,300 145,361 Passenger load factor(f) 81.0 % 82.7 % 82.1 % (c) 81.4% 79.2% Yield(g) 13.89 ¢ 12.99 ¢ 12.19 ¢ (c) 11.25¢ 10.83¢ Passenger revenue per ASM (“PRASM”)(h) 11.29 ¢ 10.78 ¢ 10.04 ¢ (c) 9.20¢ 8.63¢ Operating revenue per ASM (“RASM”)(i) 12.58 ¢ 12.03 ¢ 11.49 ¢ (c) 10.66¢ 9.95¢ Operating expense per ASM (“CASM”)(j) 15.74 ¢ 11.39 ¢ 11.23 ¢ (c) 10.59¢ 10.20¢ Fuel gallons consumed 2,182 2,292 2,290 (c) 2,250 2,349 Average price per gallon of jet fuel, including tax and hedge impact 353.9 ¢ 218.3 ¢ 210.7 ¢ (c) 179.2¢ 125.3¢ (a) Net income (loss) was significantly impacted in the Predecessor periods due to reorganization items related to the bankruptcy restructuring. (b) Paid in January 2008. (c) Mainline operations exclude the operations of independent regional carriers operating as United Express. Statistics included in the 2006 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. (d) RPMs are the number of miles flown by revenue passengers. (e) ASMs are the number of seats available for passengers multiplied by the number of miles those seats are flown. (f) Passenger load factor is derived by dividing RPMs by ASMs. (g) Yield is mainline passenger revenue excluding industry and employee discounted fares per RPM. (h) PRASM is mainline passenger revenue per ASM. (i) RASM is operating revenues excluding United Express passenger revenue per ASM. (j) CASM is operating expenses excluding United Express operating expenses per ASM.
36 Successor Predecessor Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended December 31, Year Ended
December 31,
2007 (In millions, except rates) 2005 2004 2003 Income Statement Data: UAL Operating revenues $ 20,143 $ 17,882 $ 1,458 $ 17,379 $ 16,391 $ 14,928 Operating expenses 19,106 17,383 1,510 17,598 17,245 16,288 Fuel expenses—Mainline 5,003 4,462 362 4,032 2,943 2,072 Reorganization (income) expense — — (22,934 ) 20,601 611 1,173 Net income (loss)(a) 403 25 22,851 (21,176 ) (1,721 ) (2,808 ) Basic earnings (loss) per share 3.34 0.14 196.61 (182.29 ) (15.25 ) (27.36 ) Diluted earnings (loss) per share 2.79 0.14 196.61 (182.29 ) (15.25 ) (27.36 ) Cash distribution declared per common
share(b) 2.15 — — — — —
United
Operating revenues $ 20,131 $ 17,880 $ 1,454 $ 17,304 $ 16,413 $ 14,933 Operating expenses 19,099 17,369 1,506 17,529 17,217 16,246 Fuel expenses—Mainline 5,003 4,462 362 4,032 2,943 2,072 Reorganization (income) expense — — (22,709 ) 20,432 611 1,174 Net income (loss)(a) 402 32 22,626 (21,036 ) (1,679 ) (2,777 )
Balance Sheet Data at period-end:
UAL Total assets $ 24,220 $ 25,369 $ 19,555 $ 19,342 $ 20,705 $ 21,979 Long-term debt and capital lease obligations,
including current portion 8,449 10,600 1,432 1,433 1,204 852 Liabilities subject to compromise — — 36,336 35,016 16,035 13,964
United
Total assets $ 24,236 $ 25,581 $ 19,595 $ 19,396 $ 20,719 $ 21,959 Long-term debt and capital lease obligations,
including current portion 8,446 10,596 1,432 1,433 1,204 852 Liabilities subject to compromise — — 36,379 35,060 16,161 14,090
Mainline Operating Statistics(c):
UAL and United Revenue passengers 68 69 (c ) 67 71 66 RPMs 117,399 117,470 (c ) 114,272 115,198 104,464 ASMs 141,890 143,095 (c ) 140,300 145,361 136,630 Passenger load factor 82.7 % 82.1 % (c ) 81.4 % 79.2 % 76.5 % Yield(d) 12.99 ¢ 12.19 ¢ (c ) 11.25 ¢ 10.83 ¢ 10.79 ¢ Passenger revenue per ASM ("PRASM")(e) 10.78 ¢ 10.04 ¢ (c ) 9.20 ¢ 8.63 ¢ 8.32 ¢ Operating revenue per ASM ("RASM")(f) 12.03 ¢ 11.49 ¢ (c ) 10.66 ¢ 9.95 ¢ 9.81 ¢ Operating expense per ASM ("CASM")(g) 11.39 ¢ 11.23 ¢ (c ) 10.59 ¢ 10.20 ¢ 10.52 ¢ Fuel gallons consumed 2,292 2,290 (c ) 2,250 2,349 2,202 Average price per gallon of jet fuel, including
tax and hedge impact 218.3 ¢ 210.7 ¢ (c ) 179.2 ¢ 125.3 ¢ 94.1 ¢ (a)Net income (loss) was significantly impacted in the Predecessor periods due to the reorganization items related to the bankruptcy restructuring.(b)Paid in January 2008.(c)Mainline operations exclude the operations of independent regional carriers operating as United Express. Statistics included in the 2006 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.(d)Yield is Mainline passenger revenue excluding industry and employee discounted fares per RPM.(e)PRASM is Mainline passenger revenue per ASM.(f)RASM is operating revenues excluding United Express passenger revenue per ASM.(g)CASM is operating expenses excluding United Express operating expenses per ASM. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. further inabove under Item 1,Business, the Company 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 significantmajor sources of operating revenues. The airline industry is highly competitive and is characterized by intense price competition. Fare discounting by United'sUnited’s competitors has historically had a negative effect on the Company'sCompany’s financial results because United has generally been required to match competitors'competitors’ fares to maintain passenger traffic. Future competitive fare adjustments may negatively impact the Company'sCompany’s future financial results. The Company'sCompany’s most significant operating expense is jet fuel. Jet fuel prices are extremely volatile and are largely uncontrollable by the Company. UAL 'sThe Company’s historical and future earnings have been and will continue to be significantly impacted by jet fuel prices. The impactrecent jet fuel price increasesUAL and United. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United’s operating revenues and operating expenses comprise nearly 100% of UAL’s revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL’s assets, liabilities and operating cash flows. Therefore, the following qualitative discussion is discussed below.applicable to both UAL and United, unless otherwise noted. Any significant differences between UAL and United results are separately disclosed and explained. United meets the conditions set forth in General Instruction I(1)(a) and (b) ofForm 10-KCompany'sCompany’s historical financial statements. See the "Financial Results"“Financial Results” section below for further discussion. See Note 1, "Voluntary4, “Voluntary Reorganization Under Chapter 11,"” in theCombined Notes to Consolidated Financial Statements for further information regarding bankruptcy matters.Company believes its restructuring has made the Company competitive with other U.S. carriers. The Company's financial performance has continued to improve despite significant increasesunprecedented increase in fuel prices as noted below. Average Mainline price per gallon has increased 22% from 2005 to 2007, which has negatively impactedand a worsening global recession have created an extremely challenging environment for the Company's unit costs and operating margins. However, between 2005airline industry. While the Company significantly improved its financial performance in 2006 and 2007, the Company has beenwas not able to mitigatefinancially compensate for the substantial increase in fuel prices during 2008. The Company’s average consolidated fuel price per gallon, including net hedge losses that are classified in fuel expense, increased 59% from 2007 to 2008. The increased cost of fuel purchases and hedging losses drove the $3.1 billion increase in the Company’s consolidated fuel costs. The Company’s fuel hedge losses that are classified in nonoperating expense also had a significant negative impact on its 2008 liquidity and results of operations.
37 2008 expense 2007 expense per ASM per ASM % change 2008 (in cents) 2007 (in cents) per ASM Mainline ASMs 135,861 141,890 (4.2 ) Mainline fuel expense $ 7,722 5.68 $ 5,003 3.53 60.9 United Aviation Fuel Corporation (“UAFC”) 4 — 36 0.02 (100.0 ) Impairments, special items and other charges(a) 2,807 2.07 (44 ) (0.03 ) — Other operating expenses 10,851 7.99 11,170 7.87 1.5 Total mainline operating expense 21,384 15.74 16,165 11.39 38.2 Regional affiliate expense 3,248 2,941 Consolidated operating expense $ 24,632 $ 19,106 (a) These amounts are summarized in the Summary Results of Operations table inFinancial Results, below. risinghigher fuel costs and the weakening economy through cost reductions, fleet optimization, generation of higher revenues, executing on initiatives to enhance liquidity and other strategies as discussed below. Overall, the Company has characterized its restructuring accomplishments, improvedbusiness approach as “Focus on Five,” which refers to a comprehensive set of priorities that focus on the fundamentals of running a good airline: one that runs on time, with clean planes and courteous employees, that delivers industry-leading revenues and other means, which have all contributed to UAL operating income of $1.0 billion in 2007, as compared to operating income (losses) of $447 million and $(219) million in 2006 and 2005, respectively. In addition, the Company's operating cash flow improved significantly to $2.1 billion, or 37%, in 2007 as compared to 2006. United seeks to continuously improve the delivery of its products and services to its customers, reduce unitcompetitive costs, and increase unit revenues. does so safely. Building on this foundation, United aims to regain its industry-leading position in key metrics reported by the DOT as well as industry-leading revenue driven by products, services, schedules and routes that are valued by the Company’s customers. The goal of this approach is intended to enable United to achievebest-in-class safety performance, exceptional customer satisfaction and experience and industry-leading margin and cash flow. Although results of operations in 2008 were disappointing and economic conditions continue to present a challenge for the Company, we believe we are taking the necessary steps to position the Company for improved financial and operational performance in 2009.the Company's more significant recent developmentsthese actions include the following:• The Company significantly reduced its mainline domestic and international capacity in response to high fuel costs and the weakening global economy. Mainline domestic and international capacity decreased 14% and 8%, respectively, during the fourth quarter of 2008 as compared to the year-ago period. Mainline domestic capacity decreased 8% while international capacity increased 1% for the full year of 2008, as compared to 2007. Consolidated capacity was approximately 11% and 4% lower in the fourth quarter and the full year of 2008, respectively, as compared to the year-ago periods. The Company will implement additional capacity reductions in 2009 as it completes the removal of 100 aircraft, as discussed below, of which 51 aircraft had been removed from service as of December 31, 2008. • The Company is permanently removing 100 aircraft from its fleet, including its entire fleet of 94 B737 aircraft and six B747 aircraft. These aircraft are some of the oldest and least fuel efficient in the Company’s fleet. This reduction reflects the Company’s efforts to eliminate unprofitable capacity and divest the Company of assets that currently do not provide an acceptable return, particularly in the current economic environment with volatile fuel prices and a global economy in recession. The Company continues to review the deployment of all of its aircraft in various markets and the overall composition of its fleet to ensure that we are using our assets appropriately to provide the best available return.
38•In 2007, UAL 's management and its Board of Directors completed a strategic planning session to discuss the future of United. • The Company continues to refit its wide body international aircraft with new first and business class premium seats, entertainment systems and other product enhancements. As of December 31, 2008, the Company has completed upgrades on 25 international aircraft with new premium travel equipment featuring , among other improvements,180-degree, lie-flat beds in business class. The Company expects its remaining 66 wide body international aircraft to be upgraded by 2011. The upgrade of this equipment is expected to allow the Company to generate revenue premiums from its first and business class international cabins. This new product will reduce premium seat counts by more than 20%. • In 2008, the Company ceased operations to Ft. Lauderdale and West Palm Beach, Florida, two markets served by Ted, which uses an all-economy seating configuration to serve primarily leisure markets. In addition, during 2008, as part of its operational plans the Company ceased operations in certain non-Ted markets and also reduced frequencies in several Ted and non-Ted markets. In light of these planned capacity reductions and other factors, the Company also determined that it would eliminate its entire B737 fleet by the end of 2009. With the reduced need for Ted aircraft in leisure markets and an increased need for narrow body aircraft in non-Ted markets due to the elimination of the B737 fleet, the Company decided to reconfigure the entire Ted fleet ofall-economy Airbus aircraft to include first class, as well as Economy Plus and economy seats. The reconfigured Airbus aircraft will provide United a consistent product offering for our customers and employees, and increases our fleet flexibility to redeploy aircraft onto former Ted and other narrow body routes as market conditions change. The reconfiguration of the Ted aircraft will occur in stages with expected completion by the end of 2009. • The Company was able to pass some of the higher fuel costs in 2008 to customers through passenger and cargo fuel surcharges, among other means. The Company created new revenue streams through unbundling products, offering new a la carte services and expanding choices for customers. The Company’s existing Travel Options, such as Economy Plus and Premium Cabin upsell have been extremely successful and the Company continues to implement new revenue initiatives such as a $15 fee for the first checked bag, as well as a $25 fee to check a second bag on domestic flights. Additional new Travel Options offered by United include Mileage Plus Award Accelerator, which allows customers to multiply their earned miles for each trip by purchasing accelerator miles upon ticket purchase, andDoor-to-Door Baggage, which allows customers to avoid the hassle of taking their luggage to the airport by arranging for the luggage to be picked up from their home and shipped to their final destination. In addition, various ticket change fees have increased, including Mileage Plus close-in fees. • The Company reduced its capital expenditures in 2008 as compared to 2007 by more than $200 million as discussed inLiquidity,below. In addition, the Company further plans to limit capital spending to $450 million during 2009. • The Company is streamlining its operations and corporate functions in order to match the size of its workforce to the size of its reduced capacity. The Company expects a total workforce reduction of approximately 9,000 positions by the end of 2009, of which approximately 6,000 positions were eliminated as of December 31, 2008. The total expected reduction will consist of approximately 2,500 salaried and management positions and approximately 6,500 represented positions. The Company has offered furlough-mitigation programs such as voluntary early-out options, primarily to certain union groups, to reduce the required involuntary furloughs. Of the total expected represented workforce reduction, approximately 40% have been through voluntary furloughs through January 2009. • A transatlantic aviation agreement to replace the existing bilateral arrangements between the U.S. government and the 27 European Union (“EU”) member states became effective in 2008. The future effects of this agreement on our financial position and results of operations cannot be predicted with certainty due to the diverse nature of its potential impacts, including increased competition at London’s Heathrow Airport as well as throughout the EU member states.
39However, we have already taken actions to capitalize on opportunities under the new agreement. Upon the effective date of the transatlantic aviation agreement, the DOT’s approval of United’s application for antitrust immunity with bmi also became effective, allowing the two airlines to deepen their commercial relationship and adding bmi to the multilateral group of Star Alliance carriers that had already been granted antitrust immunity by the DOT. • United and Continental Airlines announced their plan to form a new partnership that will link the airlines’ networks and services worldwide to the benefit of customers, employees and shareholders, creating new revenue opportunities, cost savings and other efficiencies. has developed a five-year plan, the ambition of which isalso took certain actions to position United as the airline of choice for premium customers, employeesmaintain adequate liquidity and investors, while maintaining our fundamental commitment to safety and balancing the needs of all of our stakeholders. The Company's main focus continues to be strengthening our core business, and the plan includes a detailed roadmap of more than 250 initiatives and significant capital investment over the next five years. These investments are targeted to support improvements for customers and employees, and drive revenue growth and efficiency improvements. In addition to strengthening the performance of the airline, our plan also contemplates unlocking the value of business units such as United Services and Mileage Plus. Our goal is to generate returns to stockholders that are competitive with the U.S. industry in general.•The Company is currently evaluating strategic alternatives to maximize the value ofminimize its MRO business.financing costs during this challenging economic environment. During 2007, the Company met with various third parties and permitted such third parties to conduct due diligence with respect to a potential transaction involving the Company's MRO business (excluding the Company's line maintenance activities). The Company has received proposals and is in the process of evaluating these proposals. As discussed in Item 1A,Risk Factors, there can be no assurance any such transaction will occur, nor can there be any assurances with respect to the form or timing of any such transaction.•The Company is currently evaluating strategic alternatives to maximize the value of its Mileage Plus business. In early 2008, the Company began the processgenerated unrestricted cash of preparing Mileage Plus/ULS financial reports and analysis as part ofapproximately $1.9 billion through new financing agreements, amendments to our evaluation process that could eventually result in a possible disposition of part or all of a company that owns and operates the Mileage Plus program. As discussed in Item 1A,Risk Factors, there can be no assurance that any such transaction will occur.•Effective May 5, 2008, United will charge certain customers a $25 service fee to check a second bag. Customers that have a certain status in Mileage Plus or Star Alliance will not be charged to check a second bag. United estimates that thisco-branded credit card agreement and our largest credit card processing agreement and other means. Some of these agreements are summarized below. SeeLiquidity and Capital Resources—Financing Activities, below, for additional information related to these agreements.• During the fourth quarter of 2008, UAL began a public offering of up to $200 million of UAL common stock, generating gross proceeds of $172 million in 2008 and January 2009. UAL may issue additional shares during 2009 until it reaches $200 million in proceeds. • United completed a $241 million credit agreement secured by 26 of the Company’s currently owned and mortgaged A319 and A320 aircraft. Borrowings under the agreement were at a variable interest rate based on LIBOR plus a margin. The credit agreement requires periodic principal and interest payments through its final maturity in June 2019. The Company may not prepay the loan prior to July 2012. This agreement did not change the number of the Company’s unencumbered aircraft as the Company used available equity in these previously owned and mortgaged aircraft as collateral for this financing. • United entered into an $84 million loan agreement secured by three aircraft, including two Airbus A320 and one Boeing B777 aircraft. Borrowings under the agreement were at a variable interest rate based on LIBOR plus a margin. The loan requires principal and interest payments every three months and has a final maturity in June 2015. • During 2008 and January 2009, United also entered into three aircraft sale-leaseback agreements. The Company sold these aircraft for approximately $370 million and has leased them back. • The Company completed an amendment of its marketing services agreement with its Mileage Plus co-branded bankcard partner and its largest credit card processor to amend the terms of their existing agreements to, among other things, extend the terms of the agreements. These amendments resulted in an immediate increase in the Company’s cash position by approximately $1.0 billion, which included a total of $600 million for the advanced purchase of miles and the licensing extension payment, as well as the release of approximately $357 million in previously restricted cash for reserves required under the credit card processing agreement. Approximately $100 million of additional cash receipts are expected over the next two years based on the amended terms of the co-brand agreement as compared to cash that would have been generated under the terms of the previous co-brand agreement. This amount is less than the Company’s initial estimate primarily due to the severe weakening of the global economy. As part of the transaction, United granted a first lien of specified intangible Mileage Plus assets and a second lien on certain other assets. The term of the amended co-branded agreement is through December 31, 2017. See the discussion below inLiquidityfor additional terms of this agreement. baggage policy will generate more than $100 million annually in cost savings and new revenue.•The Company's employees earned approximately $170 million in cash payments related to 2007 business performance, comprised of approximately $110 million in profit sharing, $40 million in success sharing awards and $20 million as part of the special distribution to UAL common stockholders. The majority of these payments will be made in the first four months of 2008.•The Company has announced a $200 million cost reduction program for fiscal year 2008 following successful completion of its $400 million cost reduction program in 2007.•In 2007, United entered into an agreement to sell its interest in Aeronautical Radio, Inc. ("ARINC"), to Radio Acquisition Corp., an affiliate of The Carlyle Group. ARINC is a provider of transportation communications and systems engineering. The transaction closed on October 25, 2007 and generated proceeds of $128 million and a pre-tax net gain of $41 million.•In November 2007, the Company showcased the first of 97 international aircraft to be refitted with new first and business class premium seats, entertainment systems and other product enhancements with an inaugural flight from Washington Dulles to Frankfurt. With this flight, United earned the distinction of becoming the first U.S. carrier to offer 180-degree, lie-flat beds in business class on overseas flights. Upgrading of all 97 international aircraft is expected to be completed between late 2007 and early 2010.•During 2007, the U.S. government and the European Union ("EU") signed a transatlantic aviation agreement to replace the existing bilateral arrangements between the U.S. Government and the 27 EU member states. The agreement will become effective at the end of March 2008. The future effects of this agreement on UAL cannot be predicted with certainty due to the variety of provisions affecting the competitive position of United and other U.S. and EU carriers subject to its terms; however, we have already taken actions to capitalize on opportunities under the new agreement. In September 2007, the DOT granted authority to effectuate antitrust immunity between United and bmi, and to include bmi in the multilateral group of Star Alliance carriers that had already been granted antitrust immunity by the DOT. This immunity goes into effect at the same time as the Open Skies treaty between the U.S. and the EU in March 2008. The Company strengthened its balance sheet by reducing on- and off-balance sheet debt by $2.3 billion during 2007. These significant debt reductions and refinancings, which are expected to reduce annual net financing costs by approximately $120 million, included:•In the second quarter of 2007, United completed the issuance of $694 million of Enhanced Equipment Trust Certificates ("EETC") secured debt financing that included thirteen aircraft, three of which were previously unencumbered. In the third quarter of 2007, in order to refinance certain aircraft at a lower cost United purchased three 747-400 aircraft that had previously been financed by United through operating leases. The lease agreements were simultaneously terminated upon the closing of the acquisition. The Company purchased these aircraft at a total price in excess of $150 million, largely with the proceeds of the EETC transaction executed by the Company in the second quarter of 2007. These two transactions combined did not change the total number of encumbered aircraft.•In June 2007, the original $261 million principal amount of City and County of Denver, Colorado Special Facilities Airport Revenue Bonds Series 1992A was refinanced with $270 million in new Series 2007A bonds.•In February 2007, United prepaid $972 million of its February 2006 $3.0 billion credit facility and amended certain terms of this facility creating a new $2.055 billion credit facility (the "Amended Credit Facility"). In December 2007, United prepaid $500 million of the term loan under the Amended Credit Facility. A December 2007 amendment of the Amended Credit Facility allows certain amounts of shareholder initiatives. In addition, in December 2007 UAL's Board of Directors approved a special distribution of $2.15 per common share, or approximately $257 million, that was paid on January 23, 2008. The Company improved its passenger and cargo route network throughout 2007 and has announced new services to begin in 2008, including:network:• United commenced daily, non-stop service between Washington Dulles and Dubai in October 2008.
40•United commenced non-stop daily service between Washington Dulles and Beijing, China in March 2007.•United commenced daily, non-stop service between LAX and Hong Kong and between Washington Dulles and Rio de Janeiro in October 2007.•United increased its thrice-weekly Washington Dulles-Kuwait service to daily frequency in December 2007 and a code-sharing agreement with Qatar Airways was also consummated.•United commenced new daily service between LAX and Frankfurt, Germany in December 2007.•The Company has announced new daily service from Denver to London Heathrow commencing in March 2008.•The Company received DOT approval to become the first U.S. carrier to operate daily non-stop service from SFO to Guangzhou, China. This new service will commence in June 2008.• The Company announced new daily service from Washington Dulles to Moscow and Geneva, commencing in March and April 2009, respectively. • The Company will reinstate daily seasonal service from Denver to London Heathrow effective March 2009. "Successor Company"“Successor Company” refer to UALand/or United on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to "Predecessor Company"“Predecessor Company” refer to UALand/or United before their exit from bankruptcy on February 1, 2006.providing management's year-over-year discussionsthe discussion of financial results, management utilizes the combined results of operations, management has compared the Successor Company and Predecessor Company for the twelve months ended December 31, 2006. The combined results for the year ended December 31, 2007 to the combined 2006 annual results, consisting of the Successor Company's results for the eleventwelve months ended December 31, 2006 and the Predecessor Company's January 2006 results, and to the Predecessor Company's annual 2005 results. The presentation of results for the combined twelve month period of 2006 are non-GAAP measures. However,measures; however, management believes that these year-over-year comparisons of the combined results of operations provide management and investors a useful basis ofmore meaningful comparison to the full years of 2007ended December 31, 2008 and 2005. The discussion of financial results below includes a discussion of certain bankruptcy related matters that the Company has classified as special items in itsStatements of Consolidated Operations. These items have been classified as special because they are directly related to the resolution of bankruptcy administrative claims and are not indicative of the Company's ongoing financial performance.Company'sCompany’s results of operations are better in the second and third quarters as compared to the first and fourth quarters of each year, since our first and fourth quarter results normally reflect weaker travel demand. The Company'sCompany’s results of operations can be impacted by adverse weather, air traffic control delays, fuel price volatility and other factors in any period.
41UAL 's and United'sthe Company’s financial performance for the three years ended December 31, 2007. Successor Combined Successor Predecessor Predecessor (In millions) Year Ended
December 31,
2007 Twelve Months
Ended
December 31,
2006(a) Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 Earnings (loss) before reorganization
items, income taxes and equity
earnings in affiliates $ 695 $ (45 ) $ 43 $ (88 ) $ (579 ) Reorganization items, net — 22,934 — 22,934 (20,601 ) Income taxes (297 ) (21 ) (21 ) — — Equity in earnings of affiliates 5 8 3 5 4 UAL net income (loss) $ 403 $ 22,876 $ 25 $ 22,851 $ (21,176 ) United net income (loss) $ 402 $ 22,658 $ 32 $ 22,626 $ (21,036 ) (a)combined period includesmost significant contributors to the results for one month ended January 31, 2006 (Predecessor Company)Company’s net loss in 2008 were increased fuel prices and eleven months ended December 31, 2006 (Successor Company).UALSUMMARY RESULTS OF OPERATIONS Successor Combined Predecessor Period from Period from February 1 to January 1 (In millions) December 31, to January 31, 2008 2007 2006(e) 2006 2006 Revenues $ 20,194 $ 19,852 $ 19,340 $ 17,882 $ 1,458 Special revenue items(a) — 45 — — — Revenues due to Mileage Plus policy change(a) — 246 — — — Total revenues 20,194 20,143 19,340 17,882 1,458 Mainline fuel purchase cost 7,114 5,086 4,798 4,436 362 Operating non-cash fuel hedge (gain)/loss 568 (20 ) 2 2 — Operating cash fuel hedge (gain)/loss 40 (63 ) 24 24 — Regional affiliate fuel expense(b) 1,257 915 834 772 62 Reorganization gain — — (22,934 ) — (22,934 ) Goodwill impairment(c) 2,277 — — — — Other impairments and special items(c) 339 (44 ) (36 ) (36 ) — Other charges (see table below) 191 — — — — Total impairments, special items and other charges 2,807 (44 ) (36 ) (36 ) — Other operating expenses 12,846 13,232 13,271 12,185 1,086 Nonoperating non-cash fuel hedge (gain)/loss 279 — — — — Nonoperating cash fuel hedge (gain)/loss 249 — — — — Other nonoperating expense(d) 407 337 484 453 31 Income tax expense (benefit) (25 ) 297 21 21 — Net income (loss) $ (5,348 ) $ 403 $ 22,876 $ 25 $ 22,851 United net income (loss) $ (5,306 ) $ 402 $ 22,658 $ 32 $ 22,626 (a) These significant items affecting the Company’s results of operations are discussed inResults of Operations, below. (b) Regional affiliates’ fuel expense is classified as part of Regional affiliates expense in the Company’sStatements of Consolidated Operations. (c) As described inResults of Operationsbelow, impairment charges were recorded as a result of interim asset impairment testing performed as of May 31, 2008 and December 31, 2008. (d) Includes equity in earnings of affiliates. (e) The combined period includes the results for one month ended January 31, 2006 (Predecessor Company) and eleven months ended December 31, 2006 (Successor Company).
42 UAL 's 2007 income before reorganization items, income taxes and equityearnings of affiliates improved by $740 million and $1.3 billion2008 as compared to 2006 and 2005, respectively.2007 results, as presented in the table above, include the following:• UAL recorded the following impairment and other charges, as further discussed below, during the year ended December 31, 2008: Year Ended December 31, 2008 Income statement classification Goodwill impairment $ 2,277 Goodwill impairment Intangible asset impairments 64 Aircraft and related deposit impairments 250 Total other impairments 314 Lease termination and other charges 25 Total other impairments and special items 339 Other impairments and special items Severance 106 Salaries and related costs Employee benefit obligation adjustment 57 Salaries and related costs Litigation-related settlement gain (29 ) Other operating expenses Charges related to terminated/deferred projects 26 Purchased services Net gain on asset sales (3 ) Depreciation and amortization Accelerated depreciation 34 Depreciation and amortization Total other charges 191 Operating non-cash fuel hedge loss 568 Aircraft fuel Nonoperating non-cash fuel hedge loss 279 Miscellaneous, net Tax benefit on intangible asset impairments and asset sales (31 ) Income tax benefit Total impairments and other charges $ 3,623 • The relatively small income tax benefit in 2008 is related to the impairment and sale of certain indefinite-lived intangible assets, partially offset by the impact of an increase in state tax rates. In 2007, UAL recognized income tax expense of $297 million. items highlight sometable provides a summary of the more significant variances in the 2007 period as compared to 2006 and 2005. For a more detailed discussion of these items and additional factors impacting our financial performance seeResults of Operations, below.•The Company increased its annual mainline passenger unit revenue ("PRASM") by 7% between 2007 and 2006, and by 9% between 2006 and 2005, through continued capacity discipline and revenue execution. Including special items, 2007 passenger revenues increased by $1.1 billion and $3.0 billion as compared to 2006 and 2005, respectively. In 2007, the change in the Mileage Plus expiration period had a significant impact on passenger revenues, as discussed below.•United Express contributed $122 million to operating income in 2007, as compared to $77 million in 2006 and $317 million of operating losses in 2005. This improvement is due to an improved regional operations cost structure resulting from the bankruptcy reorganization, network optimization similar to that achieved for the mainline operation, and the replacement of some 50-seat regional jets with larger regional jets that are equipped with explus and offer both first class and Economy Plus service, among other factors.•Mainline fuel costs have significantly increased since 2005, increasing by $179 million from 2006 to 2007, in addition to the $792 million increase from 2005 to 2006. These increases are primarily due to significant increases in market prices for jet fuel. The Company's average cost per gallon for jet fuel, including taxes and hedge impacts, increased from approximately $1.79 in 2005 to $2.11 in 2006 and $2.18 in 2007. Similar increases were experienced in United Express' average cost per gallon of jet fuel, which is classified as Regional affiliates expense in theStatements of Consolidated Operations.•In 2007 and 2006, the Company recorded approximately $119 million and $9 million, respectively, of employee profit sharing, including related employee taxes, based on annual pre-tax earnings. The rate of profit sharing was increased from 7.5% to 15% between periods, and pre-tax income was significantly higher in 2007. A $110 million decrease in share-based compensation expense offset the increase in the Company's profit sharing plan expense.•Aircraft maintenance materials and outside repairs expense increased $157 million, or 16%, in 2007 as compared to 2006, and by $128 million, or 15%, in 2006 as compared to 2005. As further discussed in the "Results of Operations" section below, these increases are due to several factors, including higher volumes of heavy maintenance visits, increased rates under certain long-term maintenance contracts and a higher cost of parts.•Interest expense decreased $109 million in 2007 as compared to 2006 primarily due to $2.2 billion of decreased balance sheet debt outstanding and a credit facility amendment in February 2007 that significantly lowered our interest rate under the credit facility. Interest expense increased $288 million in 2006 as compared to 2005 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.•In 2007 and 2006, UAL recognized income tax expense of $297 million and $21 million, respectively. Income taxes were not recorded in the 2005 period. The following items describe the significant and largely non-cash fresh-start reporting impacts effective February 1, 2006 that affect the comparison of 2006 to 2005.•As part of fresh-start reporting the Company changed its accounting for Mileage Plus from the incremental cost model to the deferred revenue model. 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 operating 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.•The Company recorded non-cash share-based compensation expense of $159 million in 2006 in association with its share-based compensation plans. This expense was not recognized in 2005, 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."•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.•The January 2006 reorganization income of approximately $22.9 billion and $22.7 billion for UAL and United, respectively, primarily relates to the discharge of liabilities and other fresh-start adjustments recorded in connection with the Company's emergence from bankruptcy. In 2005, reorganization charges of approximately $20.6 billion and $20.4 billion for UAL and United, respectively, were primarily for pension, employee-related, and aircraft claim charges of $8.9 billion, $6.5 billion and $3.0 billion, respectively. For additional information, see Note 1, "Voluntary Reorganization Under Chapter 11—Financial Statement Presentation," in theCombined Notes to Consolidated Financial Statements.•At the Company's emergence from bankruptcy, there were certain unresolved matters which are considered to be preconfirmation contingencies. The Company initially recorded on the Effective Date 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. See Note 1, "Voluntary Reorganization Under Chapter 11—Claims Resolution Process," in theCombined Notes to Consolidated Financial Statements for additional information related to these adjustments.United From 2006 to 2007, the improvement in United's results was largely consistent with that of UAL with United's 2007 net income improving to $402 million as compared to UAL 's 2007 net income of $403 million. The primary difference between United's and UAL 's net income for the combined twelve months of 2006 was a $225 million variance in reorganization income that was primarily due to $239 million of additional UAL income from the discharge of certain bankruptcy claims and liabilities that existed at UAL, but not at United. In 2005, UAL 's net loss was approximately $140 million greater than United's loss due to a $131 million larger bankruptcy-related impairment charge on lease certificates. Liquidity. As of December 31, 2007, UAL had totalCompany’s cash, including restricted cash and short-term investments of $4.3 billion. at December 31, 2008 and 2007. As of December 31, 2008 2007 Cash and cash equivalents $ 2,039 $ 1,259 Short-term investments — 2,295 Restricted cash 272 756 Cash, short-term investments & restricted cash $ 2,311 $ 4,310 Company's strongdecrease in the Company’s cash, position resultedrestricted cash and short-term investments balances was primarily due to a $3.4 billion unfavorable reduction in cash flows from its recapitalization upon emergence from bankruptcy, together with strongoperations in 2008 as compared to 2007. The operating cash flowsdecrease was primarily due to increased cash expenses, mainly fuel and fuel hedge cash settlements, as discussed below underResults of $2.1 billion in 2007, ascompared to $1.6 billion in 2006 and $1.1 billion in 2005. UALOperations. Fuel hedge collateral requirements also used operating cash of approximately $257$965 million in the year ended December 31, 2008. This unfavorable variance was partly offset by approximately $600 million of proceeds received from the amendment of the co-brand credit card agreement, as discussed above. Restricted cash
43its balance sheet debt during 2007the scope of this project by approximately $2.2 billion. Mostsix aircraft, from the originally disclosed number of 97 aircraft. As of December 31, 2008, the debt reduction related to the Company's credit facility, which was reduced by $1.5 billion in 2007. The Company amended its credit facility twice during 2007 and prepaid debt following its February 2007 and December 2007 amendments. Total debt consisting of on-balance sheet debt, the Denver municipal bonds, estimated off-balance sheet debt related to operating leases and open market debt repurchases decreased by $2.3 billion. The Company has significant noncancelable contractual cash payment obligations associated with debt andhad completed upgrades on 25 aircraft and facility leases, among others. In addition, the Company has aircraft purchase commitments; however, thehad remaining capital commitments are generally cancelable. However, the cancellations could resultto complete enhancements on an additional 66 aircraft. For further details, see Note 14, “Commitments, Contingent Liabilities and Uncertainties,” in forfeiture of the Company's deposits. See the "Liquidity and Capital Resources" section, below, for further information relatedCombined Notes to the credit facility amendments and the Company's contractual obligations. The following discussion provides a summary of the material matters yet to be resolved in the Bankruptcy Court, as well as other contingencies. For further information on these matters, see Note 1, "Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to be Resolved in Chapter 11 Cases" and Note 15, "Commitments, Contingent Liabilities and Uncertainties," in theCombined Notes to Consolidated Financial Statements. Municipal Bond Obligation & Off-Balance Sheet Financing. We are a party to numerous long-term agreements to lease certain airport and maintenance facilities that are financed through tax-exempt municipal bonds issued by various local municipalities to build or improve airport and maintenance facilities. United had beenwas advised during its restructuring that these municipal bonds may have been unsecured (or in certain instances, partially secured) pre-petition debt. In 2006, certain of United'sUnited’s LAX municipal bond obligations relating to LAX and SFO were conclusively adjudicated through the Bankruptcy Court as financings and not true leases; however, there remains pending litigation to determine the value of the security interests, if any, that the bondholders at LAX and SFO have in our underlying leaseholds."Denver Bonds"“Denver Bonds”). This guarantee replaces our prior guarantee of $261 million of bonds issued by the City and County of Denver, Colorado in 1992. These bonds are callable by United. The outstanding bonds and related guarantee are not recorded in the Company'sCompany’sStatements of Consolidated Financial Position. However, the related lease
44Company'sCompany’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.is also currently analyzingcontinues to analyze whether any potential liability may result from air cargo/passenger surcharge cartel investigations following the receipt of a Statement of Objections that the European Commission (the "Commission"“Commission”) issued to 26 carrierscompanies on December 18, 2007. The Statement of Objections sets out evidence related to the utilization of fuel and security surcharges and exchange of pricing information that the Commission views as supporting the conclusion that an illegal price-fixing cartel had been in operation in the air cargo transportation industry. United received a copy of the Statement of Objections and ishas provided written and oral responses vigorously disputing the Commission’s allegations against the Company. Nevertheless, United will continue to cooperate with the Commission’s ongoing investigation. Based on its evaluation of all information currently evaluating the Commission's evidence related toavailable, the Company and its personnel. United is cooperating with the Commission's investigation. United intends to defend itself vigorously against these charges in its formal response to the Commission and in the European Court of Justice if necessary. The Company's evaluation of this matter is still in the early stages, and based upon the information currently availablehas determined that no reserve for potential liability has been recorded asis required and will continue to defend itself against all allegations that it was aware of December 31, 2007.or participated in cartel activities. However, penalties for violation of European competition laws can be substantial and a finding that the Company engaged in improper activity could have a material adverse impact on our consolidated financial position and results of operations.United'sUnited’s operations are subject to increasingly stringent federal, state and local laws protecting the environment. Future environmental regulatory developments, such as in regard to climate change, in the U.S. and abroad could adversely affect operations and increase operating costs in the airline industry. For example, potentialThere are a few climate change laws and regulations that have gone into effect that apply to United, including environmental taxes for certain international flights, some limited greenhouse gas reporting requirements and some land-based planning laws which could apply to airports and ultimately impact airlines depending upon the circumstances. In addition, the EU has adopted legislation to include aviation within the EU’s existing greenhouse gas emission trading scheme effective in 2012. There are significant questions that remain as to the legality of applying the scheme to non-EU airlines and the U.S. and other governments are considering filing a legal challenge to the EU’s unilateral inclusion of non-EU carriers. While such a measure could significantly increase the costs of carriers operating in the EU, the precise cost to United is difficult to calculate with certainty due to a number of variables, and it is not clear whether the scheme will withstand legal challenge. There may be future regulatory actions that may be taken by the U.S. government, state governments within the U.S., foreign governments, or the International Civil Aviation Organization, or through a new climate change treaty to limitregulate the emission of greenhouse gases by the aviation industryindustry. Such future regulatory actions are uncertain at this time (in terms of either the regulatory requirements or their applicability to United), but the impact to the Company and its industry would likely be adverse and could be significant, including the potential for increased fuel costs, carbon taxes or fees, or a requirement to purchase carbon credits.Results of Operations 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 2007 and 2005. United's operating revenues and operating expenses comprise nearly 100% of UAL 's revenues and operating expenses. Therefore, the following qualitative discussion is applicable to both UAL and United, unless otherwise noted. Any significant differences between UAL and United results are separately disclosed and explained. UAL 's earnings from operations of $1.0 billion in 2007 improved by $590 million as compared to earnings from operations of $447 million in 2006. The significant increase in operating earnings was due to increased revenues, cost control and special items as discussed below. UAL 's net income was $403 million in 2007 as compared to $22.9 billion in 2006. The most significant variance is reorganization income of $22.9 billion that was recorded in the 2006 period. Lower interest expense due to debt reductions and refinancings and a gain on the sale of an investment, as discussed below, also benefited 2007 net income as compared to 2006. United's improvement in earnings from operations of $573 million was consistent with UAL 's results. United's net income was $402 million in 2007 as compared to net income of $22.7 billion in 2006, with the difference in net income primarily due to reorganization income that was recorded in the 2006 period. 1, "Voluntary Reorganization Under Chapter 11—Financial Statement Presentation"14, “Commitments, Contingent Liabilities and Uncertainties,” inCombined Notes to Consolidated Financial Statementsfor further information on reorganization items.
discussion of the above contingencies.20072008 compared to 20062007 Year Ended December 31, $ % 2008 2007 Change Change Passenger—United Airlines $ 15,337 $ 15,254 $ 83 0.5 Passenger—Regional Affiliates 3,098 3,063 35 1.1 Cargo 854 770 84 10.9 Special operating items — 45 (45 ) (100.0 ) Other operating revenues 905 1,011 (106 ) (10.5 ) UAL total $ 20,194 $ 20,143 $ 51 0.3 United total $ 20,237 $ 20,131 $ 106 0.5 United Domestic Pacific Atlantic Latin Mainline Express Consolidated Increase (decrease) from 2007: Passenger revenues (in millions) $ (156) $ (91) $ 263 $ 30 $ 46 $ 27 $ 73 Passenger revenues (1.7)% (2.8)% 11.1% 6.0% 0.3% 0.9% 0.4% Available seat miles (“ASMs”) (7.8)% (4.8)% 11.0% (2.8)% (4.2)% (0.8)% (3.9)% Revenue passenger miles (“RPMs”) (8.5)% (9.4)% 7.9% (5.5)% (6.3)% (3.9)% (6.0)% Passenger revenues per ASM (“PRASM”) 6.7% 2.1% 0.1% 9.0% 4.7% 1.8% 4.5% Yield(a) 7.4% 7.2% 2.2% 12.7% 6.9% 5.0% 6.8% Passenger load factor (points) (0.6) pts. (3.9) pts. (2.3) pts. (2.2) pts. (1.7) pts. (2.4) pts. (1.8) pts. a) Yield is a measure of average price paid per passenger mile, which is calculated by dividing passenger revenues by RPMs. Yields for geographic regions exclude charter revenue and RPMs.
46 Successor Combined Successor Predecessor Period Period Period from Period from Ended Ended February 1 to January 1 to December 31, December 31, December 31, January 31, $ % 2007 2006(a) 2006 2006 Change Change Passenger—United Airlines $ 15,254 $ 14,367 $ 13,293 $ 1,074 $ 887 6.2 Passenger—Regional Affiliates 3,063 2,901 2,697 204 162 5.6 Cargo 770 750 694 56 20 2.7 Special operating items 45 — — — 45 — Other operating revenues 1,011 1,322 1,198 124 (311 ) (23.5 ) UAL total $ 20,143 $ 19,340 $ 17,882 $ 1,458 $ 803 4.2 United total $ 20,131 $ 19,334 $ 17,880 $ 1,454 $ 797 4.1 (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).
47 Successor Combined Successor Predecessor (Dollars in millions) Year Ended
December 31,
2007 Period
Ended
December 31,
2006(a) Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 $
Change %
Change Operating revenues: Passenger—United Airlines $ 15,254 $ 14,367 $ 13,293 $ 1,074 $ 887 6 Passenger—Regional
Affiliates 3,063 2,901 2,697 204 162 6 Cargo 770 750 694 56 20 3 Special operating items 45 — — — 45 — Other operating revenues 1,011 1,322 1,198 124 (311 ) (24 ) UAL total $ 20,143 $ 19,340 $ 17,882 $ 1,458 $ 803 4 United total $ 20,131 $ 19,334 $ 17,880 $ 1,454 $ 797 4 (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).Mainlinemainline segment, broken out by geographic region, and from our United Express segment, expressed asyear-over-year changes. Passenger revenues presented below include the effects of the $45 million special revenue items on Mainlinemainline ($37 million) and United Express ($8 million) revenue, which resulted directly from the Company'sCompany’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies.2007 North
America Pacific Atlantic Latin Mainline United
Express Consolidated Increase (decrease) from
2006(a): Passenger revenues
(in millions) $ 121 $ 374 $ 423 $ 6 $ 924 $ 170 $ 1,094 Passenger revenues 1 % 13 % 22 % 1 % 6 % 6 % 6 % ASMs (3 )% 3 % 7 % (10 )% (1 )% 4 % — % RPMs (1 )% 1 % 8 % (11 )% — % 3 % — % Load factor (points) 1.5 pts (1.5 ) pts 0.6 pts (0.7 ) pts 0.6 pts (0.3 ) pts 0.5 pts Yield(b) 3 % 12 % 14 % 14 % 7 % 3 % 6 % (a)Variances are from the combined 2006 period that includes the results for the one month period ended January 31, 2006 (Predecessor) and the eleven month period ended December 31, 2006 (Successor).(b)Yield is a measure of average price paid per passenger mile, which is calculated by dividing passenger revenues by RPMs. Yields for geographic regions exclude charter revenue and RPMs. United Domestic Pacific Atlantic Latin Mainline Express Consolidated Increase (decrease) from 2006(a): Passenger revenues (in millions) $ 121 $ 374 $ 423 $ 6 $ 924 $ 170 $ 1,094 Passenger revenues 1.3% 12.9% 21.8% 1.3% 6.4% 5.9% 6.3% ASMs (3.3)% 2.9% 6.8% (10.2)% (0.8)% 3.6% (0.4)% RPMs (1.5)% 1.1% 7.6% (11.0)% (0.1)% 3.2% 0.2% Yield 3.0% 11.8% 14.0% 13.9% 6.6% 2.6% 6.2% Passenger load factor (points) 1.5 pts (1.5) pts 0.6 pts (0.7) pts 0.6 pts (0.3) pts 0.5 pts (a) Variances are from the combined 2006 period that includes the results for the one month period ended January 31, 2006 (Predecessor) and the eleven month period ended December 31, 2006 (Successor). Mainlinemainline and United Express passenger revenues increased by $924 million and $170 million, respectively, in 2007 as compared to 2006. In 2007, Mainlinemainline revenues benefited from a 0.6 point increase in load factor and a 7% increase in yield as compared to 2006. In the same periods, United Express load factor was relatively flat while yield and traffic both increasedCompany'sCompany’s shift of some capacity and traffic from domestic to higher yielding international flights also benefited revenues in 2007. In addition, the change in the Mileage Plus expiration period policy also contributed to the increase in revenues in 2007. Mileage Plus revenue, included in passenger revenues, was approximately $169 million higher in 2007. This impact was largely due to a change in the Mileage Plus expiration period policy from 36 months to 18 months, as discussed inCritical Accounting Policies, below. Mileage Plus customer accounts are deactivated after 18 months of inactivity, effective December 31, 2007. Severe winter storms in December 2007 at the Chicago and Denver hubs resulted in the cancellation of approximately 6,400 United and United Express flights at these locations and had the estimated impact of reducing revenue by $25 million and reducing total expenses by $2 million. Similarly winter storms in December 2006 the Chicago and Denver hubs canceled approximately 3,900 United and United Express flights withhad an estimated impact of reducing revenue and total expenses by $40 million and $11 million, respectively.$20��$20 million, or 3%, in the year ended December 31, 2007 as compared to the same period in 2006. Freight revenue increased due to both higher yields and higher volume. This increase was partially offset by a reduction in mail revenue due to lower 2007 volume as a result of the termination of the U.S. Postal Service ("USPS"(“USPS”) contract on June 30, 2006. United signed a new USPS contract effective April, 2007.United Aviation Fuels Corporation ("UAFC")UAFC accounted for $307 million of the other revenue decrease. This decrease in jet fuel sales was due to several factors, including decreased UAFC sales to our regional affiliates, our decision not to renew various low margin supply agreements to other carriers and decreased sales of excess inventory. This decrease had no material impact on the Company'sCompany’s operating margin, because UAFC cost of sales decreased by $306 million in the year ended December 31, 2007 as compared to the prior year.
4820062008 compared to 20052007following table illustrates the year-over-year dollarbelow includes data related to UAL and percentage changes in major categories of UAL 's and United'sUnited operating revenues. Predecessor Successor Combined Predecessor (Dollars in millions) Period from
January 1 to
January 31,
2006 Period from
February 1 to
December 31,
2006 Period
Ended
December 31,
2006(a) Year
Ended
December 31,
2005 $
Change %
ChangeOperating 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 UAL total $ 1,458 $ 17,882 $ 19,340 $ 17,379 $ 1,961 11 United total $ 1,454 $ 17,880 $ 19,334 $ 17,304 $ 2,030 12 (a) Year Ended December 31, $ % 2008 2007 Change Change Aircraft fuel $ 7,722 $ 5,003 $ 2,719 54.3 Salaries and related costs 4,311 4,261 50 1.2 Regional affiliates 3,248 2,941 307 10.4 Purchased services 1,375 1,346 29 2.2 Aircraft maintenance materials and outside repairs 1,096 1,166 (70 ) (6.0 ) Depreciation and amortization 932 925 7 0.8 Landing fees and other rent 862 876 (14 ) (1.6 ) Distribution expenses 710 779 (69 ) (8.9 ) Aircraft rent 409 406 3 0.7 Cost of third party sales 272 316 (44 ) (13.9 ) Goodwill impairment 2,277 — 2,277 — Other impairment and special items 339 (44 ) 383 — Other operating expenses 1,079 1,131 (52 ) (4.6 ) UAL total $ 24,632 $ 19,106 $ 5,526 28.9 United total $ 24,630 $ 19,099 $ 5,531 29.0 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 totaloperating revenueaircraft fuel expense and regional affiliates expense was primarily attributable to $19.3 billionincreased market prices for crude oil and related fuel products as highlighted in 2006.table below, which presents several key variances for mainline and regional affiliate aircraft fuel expense in the 2008 period as compared to the year-ago period. $ Average price per gallon (in cents) Year Ended December 31, % % (In millions, except per gallon) 2008 2007 Change 2008 2007 Change Mainline fuel purchase cost $ 7,114 $ 5,086 39.9 326.0 221.9 46.9 Non-cash fuel hedge (gains) losses in mainline fuel 568 (20 ) — 26.0 (0.9 ) — Cash fuel hedge (gains) losses in mainline fuel 40 (63 ) — 1.9 (2.7 ) — Total mainline fuel expense 7,722 5,003 54.3 353.9 218.3 62.1 Regional affiliates fuel expense(a) 1,257 915 37.4 338.8 242.7 39.6 UAL system operating fuel expense $ 8,979 $ 5,918 51.7 351.7 221.7 58.6 Non-cash fuel hedge (gains) losses in nonoperating income (loss) $ 279 $ — — Cash fuel hedge (gains) losses in nonoperating income (loss) 249 — — Mainline fuel consumption (gallons) 2,182 2,292 (4.8 ) Regional affiliates fuel consumption (gallons) 371 377 (1.6 ) Total fuel consumption (gallons) 2,553 2,669 (4.3 ) (a) Regional affiliate fuel costs are classified as part of Regional affiliate expense. 11% mainline passenger revenue increase wasCompany’s costs in 2008 include the negative impact of average wage increases and higher benefits expense, as well as severance expense of $106 million due to both increased trafficthe implementation of the Company’s operating plans, as more fully explained in Note 2, “Company Operational Plans,” inCombined Notes to Consolidated Financial Statements.In addition, the Company recorded $87 million of expense in 2008 from certain benefit obligation
49higher 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 resultedsuccess sharing expense in the cancellation of approximately 3,900 United2008 period as compared to theyear-ago period due to the unfavorable financial results in 2008 as compared to 2007. In addition, 2008 salaries and United Express flights at these locations, hadrelated costs benefited from the estimated impact of reducing revenue by $40workforce reductions completed during the year as discussed inOverviewabove.and reducing total expenses by $11 million. As discussedor 10%, in "Critical Accounting Policies," below,2008 as compared to 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 insame period last year. Regional affiliate expense increased deferred revenueprimarily due to a net$342 million, or 37%, increase in miles earnedRegional Affiliate fuel that was driven by Mileage Plus customers that willan increase in market price for fuel as highlighted in the fuel table above. The regional affiliate operating loss was $150 million in 2008 period, as compared to income of $122 million in 2007, due to the aforementioned fuel impacts, which could not be redeemed in future years. In 2005, UAL 's otherfully offset by higher ticket prices, as Regional Affiliate revenues were $75only 1% higher in 2008.more than United'sor 2%, in 2008 as compared to 2007. In 2008, purchased services included a charge of $26 million related to certain projects and transactions being terminated or indefinitely postponed. In 2008, other revenuesareas of purchased services did not change significantly as compared to 2007.generated by UAL 's direct subsidiary MyPoints,due to its capacity reductions in 2008 also contributed to the decrease in related distribution expenses.sold by UALrecorded in 2006. The 19% increaseother operating expenses, and decreases in regional affiliate revenues was alsoseveral other expense categories which resulted from the Company’s cost reduction program.trafficevents and yield improvementschanges in circumstances during the first five months of 2008 that indicated an impairment might have occurred. In addition, the Company also performed an impairment test of certain aircraft fleet types as of December 31, 2008, because unfavorable market conditions for aircraft indicated potential impairment of value. The Company also performed annual indefinite-lived intangible asset impairment testing at October 1, 2008. As a result of all of its impairment testing, the Company recorded asset impairment charges of $2.6 billion as summarized in the table below. All of these impairment charges are within the mainline segment. All of
50increaselease termination and other charges of $25 million primarily relate to the accrual of future rents for the B737 leased aircraft that have been removed from service and charges associated with the return of certain of these aircraft to their lessors. Goodwill impairment $ 2,277 Indefinite-lived intangible assets 64 Tangible assets 250 Total impairments 2,591 Lease termination and other charges 25 Total impairments and special items $ 2,616 cargo revenue was primarily due2007. These items have been classified as special because they are directly related to improved yield, which was partially due to higher fuel surcharges between periods. The table below presents selected passenger revenuesthe resolution of bankruptcy administrative claims and operating data by geographic region andare not indicative of the Company's mainline and United Express segments expressed as period-to-period changes:2006 North
America Pacific Atlantic Latin Mainline United
Express 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 (points) 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).(b)Yields for geographic regions exclude charter revenue and revenue passenger miles.Operating Expenses. Successor Combined Successor Predecessor Year Period Period from Period from Ended Ended February 1 to January 1 to December 31, December 31, December 31, January 31, $ % 2007 2006(a) 2006 2006 Change Change Operating expenses: Aircraft fuel $ 5,003 $ 4,824 $ 4,462 $ 362 $ 179 3.7 Salaries and related costs 4,261 4,267 3,909 358 (6 ) (0.1 ) Regional affiliates 2,941 2,824 2,596 228 117 4.1 Purchased services 1,346 1,246 1,148 98 100 8.0 Aircraft maintenance materials and outside repairs 1,166 1,009 929 80 157 15.6 Depreciation and amortization 925 888 820 68 37 4.2 Landing fees and other rent 876 876 801 75 — — Distribution expenses 779 798 738 60 (19 ) (2.4 ) Aircraft rent 406 415 385 30 (9 ) (2.2 ) Cost of third party sales 316 679 614 65 (363 ) (53.5 ) Special operating items (44 ) (36 ) (36 ) — (8 ) 22.2 Other operating expenses 1,131 1,103 1,017 86 28 2.5 UAL total $ 19,106 $ 18,893 $ 17,383 $ 1,510 $ 213 1.1 United total $ 19,099 $ 18,875 $ 17,369 $ 1,506 $ 224 1.2 (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).
51 Successor Combined Successor Predecessor (Dollars in millions) Year
Ended
December 31,
2007 Period Ended
December 31,
2006(a) Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 $
Change %
Change UAL Operating expenses: Aircraft fuel $ 5,003 $ 4,824 $ 4,462 $ 362 $ 179 4 Salaries and related costs 4,261 4,267 3,909 358 (6 ) — Regional affiliates 2,941 2,824 2,596 228 117 4 Purchased services 1,346 1,246 1,148 98 100 8 Aircraft maintenance
materials and outside
repairs 1,166 1,009 929 80 157 16 Depreciation and
amortization 925 888 820 68 37 4 Landing fees and other rent 876 876 801 75 — — Distribution expenses 779 798 738 60 (19 ) (2 ) Aircraft rent 406 415 385 30 (9 ) (2 ) Cost of third party sales 316 679 614 65 (363 ) (53 ) Special operating items (44 ) (36 ) (36 ) — (8 ) 22 Other operating expenses 1,131 1,103 1,017 86 28 3 $ 19,106 $ 18,893 $ 17,383 $ 1,510 $ 213 1
United
Operating expenses: Aircraft fuel $ 5,003 $ 4,824 $ 4,462 $ 362 $ 179 4 Salaries and related costs 4,257 4,265 3,907 358 (8 ) — Regional affiliates 2,941 2,824 2,596 228 117 4 Purchased services 1,346 1,243 1,146 97 103 8 Aircraft maintenance
materials and outside
repairs 1,166 1,009 929 80 157 16 Depreciation and
amortization 925 888 820 68 37 4 Landing fees and other rent 876 875 800 75 1 — Distribution expenses 779 798 738 60 (19 ) (2 ) Aircraft rent 409 416 386 30 (7 ) (2 ) Cost of third party sales 312 667 604 63 (355 ) (53 ) Special operating items (44 ) (36 ) (36 ) — (8 ) 22 Other operating expenses 1,129 1,102 1,017 85 27 2 $ 19,099 $ 18,875 $ 17,369 $ 1,506 $ 224 1 (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). As discussed in Note 2, "Summary of Significant Accounting Policies" inCombined Notes to Consolidated Financial Statements, distribution expenses include commissions, GDS fees and credit card transaction fees. Prior period information has been reclassified to conform to the current periodpresentation. Previously, GDS and credit card transaction fees were classified as components of purchased services and commissions were reported as a separate expense item in the UAL and United 2006 Annual Reports.Company'sCompany’s emergence from bankruptcy. Additionally, immediate recognition of 100% of the cost of awards granted to retirement-eligible employees on the grant date, together with accelerated vesting of grants within the first twelve months after the grant date, accounted for most of the decrease in share-based compensation expense. Also benefiting the 2007 period was the absence of the $22 million severance charge incurred in 2006. Offsetting the decreased share-based compensation and severance expense was a slight increase in salaries and related costs as a result of certain wage increases as well as a $110 million increase in profit sharing, including related employee taxes, which is based on annual pre-tax earnings. As noted above, this increase is due to increased pre-tax earnings and an increase in the payout percentage from 7.5% in 2006 to 15% in 2007.were upincreased 8% in 2007 as compared to 2006, primarily due to increased information technology and other costs incurred in support of the Company'sCompany’s customer and employee initiatives. Information technology expenses increased due to an increase in non-capitalizable information technology related expenditures, generally occurring during the planning and scoping phases, for new applications in 2007. In addition, airport operations handling and security costs increased due to the new USPS contract and new international routes, among other factors.United'sUnited’s mainline revenues increased by 6%. During the same period of time, distribution expenses, which include commissions, GDS fees and credit card fees decreased 2% from $798 million
52Company'sCompany’s ongoing efforts to resolve certain other bankruptcy pre-confirmation contingencies. In the eleven months ended December 31, 2006, special items of $36 million included a $12 million benefit to adjust the Company'sCompany’s recorded obligation for the SFO and LAX municipal bonds and a $24 million benefit related to pre-confirmation pension matters. The 2007 and 2006 special items resulted from revised estimates of the probable amount to be allowed by the Bankruptcy Court and were recorded in accordance with AICPA Practice Bulletin Bulletin��11,Accounting for Preconfirmation Contingencies in Fresh-Start Reporting. See Note 1, "Voluntary4, “Voluntary Reorganization Under Chapter 11"11” and Note 20, "Special Items"19, “Special Items” in theCombined Notes to Consolidated Financial Statementsfor further information on these special items and pending bankruptcy matters.20062008 compared to 20052007below includesillustrates theyear-over-year dollar and percentage changes in operating expenses. Significant fluctuations are discussed below. Predecessor Successor Combined Predecessor (Dollars in millions) Period from
January 1 to
January 31,
2006 Period from
February 1 to
December 31,
2006 Period
Ended
December 31,
2006(a) Year
Ended
December 31,
2005 $
Change %
Change UAL 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 98 1,148 1,246 1,054 192 18 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 ) Distribution expenses 60 738 798 775 23 3 Cost of third party sales 65 614 679 685 (6 ) (1 ) Aircraft rent 30 385 415 402 13 3 Special operating items — (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 Predecessor Successor Combined Predecessor (Dollars in millions) Period from
January 1 to
January 31,
2006 Period from
February 1 to
December 31,
2006 Period
Ended
December 31,
2006(a) Year
Ended
December 31,
2005 $
Change %
Change United Aircraft fuel $ 362 $ 4,462 $ 4,824 $ 4,032 $ 792 20 Salaries and related costs 358 3,907 4,265 4,014 251 6 Regional affiliates 228 2,596 2,824 2,746 78 3 Purchased services 97 1,146 1,243 1,049 194 18 Aircraft maintenance materials
and outside repairs 80 929 1,009 881 128 15 Depreciation and amortization 68 820 888 854 34 4 Landing fees and other rent 75 800 875 915 (40 ) (4 ) Distribution expenses 60 738 798 775 23 3 Cost of third party sales 63 604 667 656 11 2 Aircraft rent 30 386 416 404 12 3 Special operating items — (36 ) (36 ) 5 (41 ) — Other operating expenses 85 1,017 1,102 1,198 (96 ) (8 ) $ 1,506 $ 17,369 $ 18,875 $ 17,529 $ 1,346 8 (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%UAL and United Express ASMs by 3%, for a consolidated ASM growth 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 income (expense). Favorable/ Year Ended (Unfavorable) December 31, Change 2008 2007 $ % Interest expense $ (523 ) $ (661 ) $ 138 20.9 Interest income 112 257 (145 ) (56.4 ) Interest capitalized 20 19 1 5.3 Gain on sale of investment — 41 (41 ) (100.0 ) Non-cash fuel hedge gain (loss) (279 ) — (279 ) — Cash fuel hedge gain (loss) (249 ) — (249 ) — Miscellaneous, net (22 ) 2 (24 ) — UAL total $ (941 ) $ (342 ) $ (599 ) (175.1 ) United total $ (941 ) $ (339 ) $ (602 ) (177.6 ) items. 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. UAL 's salaries and related costs increased $240decreased $138 million, or 6%21%, in 20062008 as compared to 2007. The 2008 period was favorably impacted by $1.5 billion of total credit facility prepayments and the prior year. In 2006 the Company recorded $159 million ofFebruary 2007 credit facility amendment, which lowered United’s interest rate on these obligations. Scheduled debt obligation repayments throughout 2008 and 2007 also reduced interest expense representing 4% of the increase in salaries and related costs, for Successor UAL '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 20062008 as compared to 2005.2007. The Company has a significant amount of variable-rate debt. Lower benchmark interest rates on these variable-rate borrowings also recorded $64reduced the Company’s interest expense in 2008 as compared to 2007. Interest expense in 2007 included the write-off of $17 million of previously capitalized debt issuance costs associated with the February 2007 Amended Credit Facility partial prepayment, $6 million of financing costs associated with the February 2007 amendment and a gain of $22 million from a debt extinguishment. The benefit of lower interest expense 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 partially2008 was offset by a 6% year-over-year improvement$145 million decrease in labor productivity resulting frominterest income due to lower average cash and short-term investment balances and lower investment yields. SeeLiquidity and Capital Resourcesbelow, for further details related to financing activities.Company's continuous improvement efforts, together with selective outsourcingtable above for purposes of certain non-core functions. In 2006, the Company achieved its goaladditional analysis. These hedging gains (losses) are due to reduce 1,000 management and administrative positions. The Company's most significant regional affiliate expenses are capacity paymentsfavorable (unfavorable) movements in crude oil prices relative to the regional carriersfuel hedge instrument terms. See Item 7A,Quantitative and fuel expense. Fuel accounted for 30% of the Company's regional affiliate expenseQualitative Disclosures about Market Riskand Note 13, “Fair Value Measurements and Derivative Instruments,” 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 affiliateexpense increased only 3% despite a 9% increase in capacity due to the benefits of restructured 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(j), "Summary of Significant Accounting Policies—United Express," in theCombined Notes to Consolidated Financial Statementsfor further discussion of the Regional affiliates expense.these hedges.
53 The Company's purchased services increased 18%2006,2008 as compared to 2005,2007 during which the Company recorded a $41 million gain on sale of investment, as discussed below under2007 compared to 2006.an increase of approximately $120 millionunfavorable foreign exchange rate fluctuations in outsourcing costs for various non-core work activities; as well as a $31 million increase in certain professional fees, which were classified as reorganization expenses by the Predecessor Company. 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 repair volume. As discussed in Note 1, "Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting," in theCombined Notes to Consolidated Financial Statements, the Company revalued its assets and liabilities to estimated fair values. In 2006, UAL 's 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. The fresh-start impacts on United's depreciation and amortization expense were not materially different than the UAL impacts. The Company's distribution expenses, which include commissions, GDS fees and credit card fees, increased $23 million, or 3%, year-over-year primarily due to a $24 million increase in credit card fees due to higher passenger revenues. UAL 's and United's other operating expenses decreased $104 million and $96 million in 2006, as compared to 2005, respectively. 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 an estimated $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 $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, UAL and United recognized charges of $18 million and $5 million, respectively, for aircraft impairments related to the planned accelerated retirement of certain aircraft.Other Income (Expense). Successor Combined Successor Predecessor (Dollars in millions) Year Ended
December 31,
2007 Period
Ended
December 31,
2006(a) Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Favorable
(Unfavorable) %
Change UAL Other income (expense): Interest expense $ (661 ) $ (770 ) $ (728 ) $ (42 ) $ 109 14 Interest income 257 249 243 6 8 3 Interest capitalized 19 15 15 — 4 27 Gain on sale of investment 41 — — — 41 — Miscellaneous, net 2 14 14 — (12 ) (86 ) $ (342 ) $ (492 ) $ (456 ) $ (36 ) $ 150 30
United
Other income (expense): Interest expense $ (660 ) $ (771 ) $ (729 ) $ (42 ) $ 111 14 Interest income 260 256 250 6 4 2 Interest capitalized 19 15 15 — 4 27 Gain on sale of investment 41 — — — 41 — Miscellaneous, net 1 11 11 — (10 ) (91 ) $ (339 ) $ (489 ) $ (453 ) $ (36 ) $ 150 31 (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). Successor Combined Successor Predecessor Year Period Period from Period from Ended Ended February 1 to January 1 to December 31, December 31, December 31, January 31, Favorable % 2007 2006(a) 2006 2006 (Unfavorable) Change Other income (expense): Interest expense $ (661 ) $ (770 ) $ (728 ) $ (42 ) $ 109 14.2 Interest income 257 249 243 6 8 3.2 Interest capitalized 19 15 15 — 4 26.7 Gain on sale of investment 41 — — — 41 — Miscellaneous, net 2 14 14 — (12 ) (85.7 ) UAL total $ (342 ) $ (492 ) $ (456 ) $ (36 ) $ 150 30.5 United total $ (339 ) $ (489 ) $ (453 ) $ (36 ) $ 150 30.7 (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). credit facility,Amended Credit Facility, which lowered United'sUnited’s interest rate on these obligations and reduced the total obligations outstanding by approximately $1.5 billion. Repayments of scheduled maturities of debt obligations and other debt refinancings, which are discussed in "Liquidity“Liquidity and Capital Resources,"” below, also reduced interest expense. The 2007 period also included a $22 million reduction in interest expense due to the recognition of a gain on debt extinguishment. These benefits were offset by interest expense of $17 million for expensing previously capitalized debt issuance costs that were associated with the February 2007 prepayment of the credit facility,Amended Credit Facility and $6 million for financing costs incurred in connection with the February amendment of the credit facility.Amended Credit Facility. The $500 million Amended Credit Facility prepayment in December 2007 increased interest expense by a net of $4 million from expensing $6 million of previously capitalized credit facility costs and recording a gain of $2 million to recognize previously deferred interest rate swap gains.Company'sCompany’s sale of its 21.1% interest in ARINC.Aeronautical Radio, Inc. (“ARINC”).
54 UAL and United and $296 million (an effective tax rate of 43%), respectively, for the year ended December 31, 2007 as compared to $21 million and $29 million (anbased an estimated effective tax rate of 49% and 50%) for UAL and United, respectively, for the eleven month period ended December 31, 2006. The increase in income tax expense in 2007 was primarily due to a significant increase in pre-tax income in 2007 as compared to the 2006 Successor period. Due to the Company's significant net operating losses in prior periods, cash paid for taxes in 2007 was only $10 million.43%. See Note 6, "Income Taxes"8, “Income Taxes,” in theCombined Notes to Consolidated Financial Statementsfor further discussion of permanent items impacting the effective tax rates.2006 compared to 2005 The following table illustrates the year-over-year dollar and percentage changes in consolidated other income (expense). Predecessor Successor Combined Predecessor (Dollars in millions) Period from
January 1 to
January 31,
2006 Period from
February 1 to
December 31,
2006 Period
Ended
December 31,
2006(a) Year
Ended
December 31,
2005 Favorable
(Unfavorable) %
Change UAL Other 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 )
United
Other income (expense): Interest expense $ (42 ) $ (729 ) $ (771 ) $ (492 ) $ (279 ) (57 ) Interest income 6 250 256 36 220 611 Interest capitalized — 15 15 (3 ) 18 — Miscellaneous, net — 11 11 76 (65 ) (86 ) $ (36 ) $ (453 ) $ (489 ) $ (383 ) $ (106 ) (28 ) (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). UAL and United incurred $288 million and $279 million, respectively, of increases in interest expense partly due to the higher outstanding principal balance of the credit facility for the Successor Company, as compared to the lower debtor-in-possession credit facility (the "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. UAL 's and United's 2006 interest income increased $211million and $220 million, respectively, reflecting a higher cash balance in 2006, as well as higher rates of return on certain investments. Interest income also increased due to theclassification of most interest income in 2005 as a component of reorganization expense in accordance with SOP 90-7. In 2005, the Company recorded $40 million of fuel hedge gains which did not qualify for hedge accounting in non-operating income, while in 2006 the $26 million net realized and unrealized loss from economic fuel hedges was recognized in aircraft fuel expense. See Note 1, "Voluntary Reorganization Under Chapter 11—Financial Statement Presentation," in theCombined Notes to Consolidated Financial Statements for information on Reorganization items, net recognized in January 2006 and during the year ended December 31, 2005.• Volatile fuel prices and the cost and effectiveness of hedging fuel prices, as described above in theOverviewandResults of Operationssections, may require the use of significant liquidity in future periods. Crude oil prices have been extremely volatile and unpredictable in recent years and may become more volatile in future periods due to the current severe dislocations in world financial markets. • In late 2008, the price of crude oil dramatically fell from its record high in July 2008. Earlier in 2008, the Company entered into derivative contracts (including collar strategies) to hedge the risk of future price increases. As fuel prices have fallen below the floor of the collars, the Company has had, and could continue to have, significant future payment obligations at the settlement dates of these contracts. In addition, the Company has been and may in the future be further required to provide counterparties with additional cash collateral prior to such settlement dates. While the Company’s results of operations should benefit significantly from lower fuel prices on its unhedged fuel consumption, in the near term lower fuel prices could also significantly and negatively impact liquidity based on the amount of cash settlements and collateral that may be required. However, at December 31, 2008 the Company partially mitigated its exposure to further price declines by purchasing put options to effectively cover approximately 55% of its short put positions. In addition, over the longer term, lower crude oil prices will further benefit the Company as the unfavorable hedge contracts terminate and the Company realizes the benefit of lower jet fuel costs on a larger percentage of its fuel consumption. See Note 13, “Fair Value Measurements and Derivative Instruments” inCombined Notes to Consolidated Financial Statements, as well as Item 7A,Quantitative and Qualitative Disclosures Above Market Risk,for further information regarding the Company’s fuel derivative instruments. • The Company’s current operational plans to address the severe condition of the global economy may not be successful in improving its results of operations and liquidity: • The Company may not achieve expected increases in unit revenue from the capacity reductions announced by the Company and certain of its competitors. Further, certain of the Company’s competitors may not reduce capacity or may increase capacity; thereby diminishing our expected benefit from capacity reductions. The Company may also not achieve expected revenue improvements from merchandising and fee enhancement initiatives. • Poor general economic conditions have had, and may in the future continue to have, a significant adverse impact on travel demand, which may result in a negative impact to revenues. • The Company is using cash to implement its operational plans for such items as severance payments, lease termination payments, conversion of Ted aircraft and facility closure costs, among others. These cash requirements will reduce the Company’s cash available for its ongoing operations and commitments.
55• While fuel prices decreased significantly from their record high prices, fuel prices remain volatile and could increase significantly. • Our level of indebtedness, our non-investment grade credit rating, and general credit market conditions may make it difficult, or impossible, for us to raise capital to meet liquidity needsand/or may increase our cost of borrowing. • Due to the factors above, and other factors, we may be unable to comply with our Amended Credit Facility covenant that currently requires the Company to maintain an unrestricted cash balance of $1.0 billion and will also require the Company, beginning in the second quarter of 2009, to maintain a minimum ratio of EBITDAR to fixed charges. If the Company does not comply with these covenants, the lenders may accelerate repayment of these debt obligations, which would have a material adverse impact on the Company’s financial position and liquidity. • If a default occurs under our Amended Credit Facility or other debt obligations, the cost to cure any such default may materially and adversely impact our financial position and liquidity, and no assurance can be provided that such a default will be mitigated or cured. • During 2008, the Company completed several initiatives that generated unrestricted cash of more than $1.9 billion. These initiatives are described below. • The Company has significant additional unencumbered aircraft and other assets that may be used as collateral to obtain additional financing, as discussed below. At December 31, 2008, the Company had 62 unencumbered aircraft. As discussed in Note 23, “Subsequent Events,” inCombined Notes to Consolidated Financial Statements, in January 2009, the Company completed several financing-related transactions which generated approximately $315 million of proceeds. • The Company is taking aggressive actions to right-size its business including significant capacity reductions, disposition of underperforming assets and a workforce reduction, among others. UAL'sUAL’s net cash provided (used)
56United's cash position atreorganization activities for the years ended December 31, 2008, 2007 and 2006 and nettotal cash provided (used) by operating, financing and investing activities for the year endedposition as of December 31, 2007, the eleven month period ended December 31, 20062008 and the one month period ended January 31, 2006. UAL United December 31, December 31, (In millions) 2007 2006 2007 2006 Cash, short-term investments & restricted cash $ 4,310 $ 4,991 $ 4,220 $ 4,896 Restricted cash included in total cash 756 847 722 809 Successor Combined Successor Predecessor Year Ended
December 31,
2007 Twelve Months
Ended
December 31,
2006(a) Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 UAL Net cash provided by operating activities $ 2,134 $ 1,562 $ 1,401 $ 161 Net cash provided (used) by investing activities (2,560 ) (250 ) (12 ) (238 ) Net cash provided (used) by financing activities (2,147 ) 782 812 (30 )
United
Net cash provided by operating activities $ 2,127 $ 1,588 $ 1,425 $ 163 Net cash provided (used) by investing activities (2,533 ) (293 ) (55 ) (238 ) Net cash provided (used) by financing activities (2,134 ) 783 813 (30 ) (a) Year Ended December 31, 2008 2007 2006 Net cash provided (used) by operating activities $ (1,239 ) $ 2,134 $ 1,562 Net cash provided (used) by investing activities 2,721 (2,560 ) (250 ) Net cash provided (used) by financing activities (702 ) (2,147 ) 782 Net cash used by reorganization activities — — (23 ) As of December 31, 2008 2007 Cash and cash equivalents $ 2,039 $ 1,259 Short-term investments — 2,295 Restricted cash 272 756 Cash, short-term investments & restricted cash $ 2,311 $ 4,310 combined period includes the results for the one month period ended January 31, 2006 (Predecessor) and the eleven month period ended December 31, 2006 (Successor). The Company's significantCompany’s cash and short-term investment position represents aan important source of liquidity. The Company believes that it should have sufficient liquidity to fund its operating and capital cash requirements for 2008 through cash and cash equivalents, short-term investments, cash generated from operations, and general corporate financings. The change in cash from 20052006 to 20072008 is explained below. Restricted cash primarily represents cash collateral to secure workers'workers’ compensation obligations, security deposits for airport leases and reserves with institutions that process our credit card ticket sales. We may be required to post significant additional cash collateral to meet such obligations in the future. Liquidity. UAL 's total of cash and cash equivalents, restricted cash and short-term investments was $4.3 billion and $5.0 billion at December 31, 2007 and 2006, respectively, including restricted cash of $756 million and $847 million, respectively. The Company used its strong operating cash flows to reduce its debt balances by approximately $1.5 billion through its credit facility prepayments of $972 million in February 2007 and $500 million in December 2007. The Amended Credit Facilityconsists of an initial $1.8 billion term loan in February 2007, which was paid down to $1.3 billion at December 31, 2007, andhas a $255 million revolving commitment of which $153 million was available at December 31, 2007. Certain terms of the credit facility were amended in February 2007 thereby creating the Amended Credit Facility. A further amendment in December 2007 authorizes certain shareholder initiatives. This enabled UAL to pay a $2.15 per common share special distribution of approximately $257 million on January 23, 2008. At the Company's option, interest payments on theunder its Amended Credit Facility, 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 terms of the credit facility. The February 2007 amendment released a significant amount of assets that had been pledged as collateral under the credit facility. See the "Capital Commitmentswhich $254 million and Off-Balance Sheet Arrangements" section, below, for information related to scheduled maturities on the credit facility. In January 2007, the Company decided to terminate the interest rate swap that$102 million had been used for letters of credit as of December 31, 2008 and 2007, respectively. In addition, under a separate agreement, the Company had $27 million of letters of credit issued as of December 31, 2008. The increase of letters of credit issued in 2008 was primarily due to hedge the future interest payments underproviding of alternative collateral in place of restricted cash deposits, thereby providing the original credit facility term loan of $2.45 billion. Restricted cash primarily represents cash collateral to secure workers' compensation obligations, security deposits for airport leases and reservesCompany with institutions that process United's credit card ticket sales. Certain of the credit card processing arrangements are based on the aggregate then-outstanding bank card air traffic liability, the Company's credit rating and its compliance with certain debt covenants. Credit rating downgrades or debt covenant noncompliance could materially increase the Company's reserve requirements.Company'sCompany’s cash from operations improved by more than $500 millionyear-over-year. The Company'sCompany’s improvement in net income excluding primarily non-cash reorganization items, which are primarily non-cash, was a significant factor contributing to the increase in operating cash flows. Operating cash flows for 2007 also include the favorable impact of an increase in non-cash income tax expense of nearly $300 million as compared to 2006. Cash from operations improved due to the Company's improved performance in 2007, as discussed above in the "Results of Operations" section, above. In addition, cash from operations improved due to a reduction of $124 million in cash interest payments in 2007 as compared to 2006 as a result of the financing activities completed in
572006 compared to 2005 The Company generated cash 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 "Results of Operation" section, together with differences in the timing and amount of working capital items, and other smaller changes. As discussed in the "Results of Operations" section, above, the Company'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 its defined contribution plans and non-U.S. pension plans, respectively, in the eleven months ended December 31, 2006. UAL 's, below.United'sslots. Certain previously existing agreements in principle to sell additional aircraft in 2008 have been terminated.and $87 million, respectively, in 2007 as compared to $310 million and $319$357 million that was provided by a decrease in the segregated and restricted funds for UAL and United, respectively, in 2006. The significant cash generated from restricted accounts in 2006 was due to our improved financial position upon our emergence from bankruptcy. Net purchases of short-term investments used cash of $2.0 billion for both UAL and United in 2007 as compared to cash used for net purchases of short-term investments of $0.2 billion in 2006. This change was due to investing additional excess cash in longer-term commercial paper in 2007 to increase investment yields. Investing activities in 2007 also includesincluded the Company'sCompany’s use of $96 million of cash to acquire certain of the Company'sCompany’s previously issued and outstanding debt instruments. The debt instruments repurchased by the Company remain outstanding. See Note 12, "Debt“Debt Obligations" and Card Processing Agreements,” inCombined Notes to Consolidated Financial Statementsfor further information related to the $96 million of purchased debt securities.Company'sCompany’s capital expenditures were $658 million and $362 million in 2007 and 2006, respectively, including the purchase of six aircraft during 2007. In the third quarter of 2007, the
58Company'sCompany’s fleet count of 460 mainline aircraft, or in the amount of aircraft encumbered by debt or lease agreements.Company'sCompany’s fleet count of 460 mainline aircraft, but did unencumber three aircraft.2006 compared to 2005 Cash released from segregated funds after exit from bankruptcy in 2006 provided $200 million in cash proceeds. UAL 's sale of the subsidiary MyPoints.com, Inc. generated an additional $56 million in cash proceeds in 2006 as compared to 2005. UAL 's and United's cash used for increases in short-term investments in 2006 was $235 million and $231 million, respectively, as compared to no material purchases or sales of short-term investments in 2005. A reduction in restricted cash balances provided $110 million and $119 million of cash proceeds in 2006 for UAL and United, respectively, as comparedto cash used to increase restricted cash of $80 million and $72 million in 2005 for UAL and United, respectively. The $39 million of cash provided during 2006 from the disposition of property and equipment included $19 million of cash proceeds from the sale of nine non-operating B767-200 aircraft. The Company used $362 million in cash for the acquisition of property and equipment in 2006, as compared to approximately $470 million in 2005.2007 compared2006 Cash used by financing activitiescommon stockholders (United issued a $257 million dividend to UAL for both UALthis distribution) and United was $2.1 billion in 2007, as compared to $0.8 billion of cash provided by financing activities during 2006. In 2007, cash of approximately $2.9 billion was used to prepay approximately $1.5 billion of credit facility obligations, refinance certain aircraft as discussed below and to make other$919 million for scheduled long-term debt and capital lease payments. United used cash of $109 million in connection with an amendment to its Amended Credit Facility, as further discussed below. In 2008, the Company acquired ten aircraft that were being operated under existing leases. These aircraft were acquired pursuant to existing lease terms. Aircraft lease deposits of $155 million provided financing cash that was primarily utilized by the Company to make the final payments due under these lease obligations. Nine of these aircraft were previously recorded as capital leased assets and are now owned assets.
59payoffrepay $590 million of debt obligations that were secured by ten previously mortgaged, owned aircraft and to finance three previously unencumbered owned aircraft. The proceeds of the Denver Airport bonds were used to refinance the former $261 million of Denver Series 1992A bonds. In both February and December 2007, United amended certain terms of its credit facility. The February 2007 amendment resulted in a reduction in the amount of the Amended Credit Facility from $3.0 billion to $2.055 billion, consisting of a $1.8 billion term loan commitment and a $255 million revolving commitment. The December 2007 amendment allowed the Company to pay the January 2008 special distribution of $257 million and provides the Company the ability to undertake an additional $243 million in future shareholder initiatives without any additional prepayment. At December 31, 2007, $153 million was available for loans or standby letters of credit under the Amended Credit Facility. See Note 12, "Debt Obligations" inCombined Notes to Consolidated Financial Statements for further information related to the financing transactions discussed above. "CashCash Flows from Investing Activities."Activities. This was reported as a financing cash inflow as the prepayment of the initial deposits were recorded as a financing cash outflow.United'sUnited’s new credit facility, but used approximately $2.1 billion of these proceeds to repay the $1.2 billion DIP Financing and make other scheduled and revolving payments under long-term debt and capital lease agreements.2006 compared to 2005Other 2008 and 2009 Financing Matters Cash generated through financing activities was $782 million in 2006 compared to cash used of $110 million in 2005. 2006,January 2009, the Company made principal payments under long-term debt and capital lease obligations totaling $2.1 billion, which included $1.2 billionentered into a sale-leaseback agreement of nine aircraft 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 delayed 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 conductpost-reorganization operations. Subsequently, the Company repaid borrowings under the revolving credit line and accessed the remaining $350 million on the delayed draw term loan. At December 31, 2006, the Company had a total of $2.8 billion of debt and $63 million in letters of credit outstanding under this 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 1997-1 EETC trustee on behalf of the 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 additional aircraft assets and debt obligations of $242approximately $95 million. In addition, in January 2009, the Company generated net proceeds of $62 million from the issuance of 4.0 million shares and settlement of unsettled trades at December 31, 2008 under its $200 million common stock distribution agreement. After issuance of these shares, the Company had issued shares for gross proceeds of $172 million of the $200 million available under this stock offering, leaving $28 million available for future issuance under this program.
6020062009 and thereafter is determined as set forth below:Number of Required Period Ending Coverage Ratio Three June 30, 2009 1.0 to 1.0 Six September 30, 2009 1.1 to 1.0 Nine December 31, 2009 1.2 to 1.0 Twelve March 31, 2010 1.3 to 1.0 Twelve June 30, 2010 1.4 to 1.0 Twelve September 30, 2010 and each quarter ending thereafter 1.5 to 1.0 Successor Company completedwas in compliance with all required financial covenants as of December 31, 2008, and the Company is not required to comply with a transactionfixed charge coverage ratio until the three month period ending June 30, 2009, continued compliance depends on many factors, some of which are beyond the Company’s control, including the overall industry revenue environment and the level of fuel costs. There are no assurances that convertedthe Company will continue to comply with its debt covenants. Failure to comply with applicable covenants in any reporting period would result in a default under the Amended Credit Facility, which could have a material adverse impact
61mortgagedof the Company’s card processing agreements, the financial institutions either require, or have the right to require, that United maintain a reserve equal to a portion of advance ticket sales that have been processed by that financial institution, but for which the Company has not yet provided the air transportation (referred to as “relevant advance ticket sales”). As of December 31, 2008, the Company had advance ticket sales of approximately $1.5 billion of which approximately $1.3 billion relates to credit card sales.capital leases for $155 million. See Note 17, "Statement of Consolidated Cash Flows—Supplemental Disclosures,"terminate the Amendment prior to January 20, 2010, in which event the parties’ prior credit card processing reserve arrangements under the processing agreement will go back into effect.Combined Notes event United terminates the Amendment, and in addition to Consolidated Financial Statements.certain other risk protections provided to the processor, the amount of any such reserve will be determined based on the amount of unrestricted cash held by the Company as defined under the Amended Credit Facility. If the Company’s unrestricted cash balance is more than $2.5 billion as of any calendar month-end measurement date, its required reserve will remain at $25 million. However, if the Company’s unrestricted cash is less than $2.5 billion, its required reserve will increase to a percentage of relevant advance ticket sales as summarized in the following table:Required % of Relevant Advance Ticket Sales Less than $2.5 billion 15 % Less than $2.0 billion 25 % Less than $1.0 billion 50 % (a) Includes unrestricted cash, cash equivalents and short-term investments at month-end, including certain cash amounts already held in reserve, as defined by the agreement.
62Required % of Net Current Exposure(b) Less than $2.4 billion 15 % Less than $2.0 billion 25 % Less than $1.35 billion 50 % Less than $1.2 billion 100 % (a) Includes unrestricted cash, cash equivalents and short-term investments at month-end, including certain cash amounts already held in reserve, as defined by the agreement. (b) Net current exposure equals relevant advance ticket sales less certain exclusions, and as adjusted for specified amounts payable between United and the processor, as further defined by the agreement. Company'sCompany’s business is very capital intensive, requiring significant amounts of capital to fund the acquisition of assets, particularly aircraft. In the past, 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. The Company also often enters into long-term lease commitments with airports to ensure access to terminal, cargo, maintenance and other required facilities.the Company'sUAL’s material contractual obligations as of December 31, 2007. Amounts presented are for both UAL and United, except as noted below.(In millions) One year
or less Years
2 and 3 Years
4 and 5 After
5 years Total UAL long-term debt, including current portion(a) $ 678 $ 1,655 $ 1,209 $ 3,802 $ 7,344 Interest payments(b) 456 778 561 1,421 3,216 Capital lease obligations Mainline(c) 328 629 278 587 1,822 United Express(c) 13 16 9 5 43 UAL aircraft operating lease obligations Mainline(a) 346 630 604 936 2,516 United Express(d) 410 868 789 1,380 3,447 Other operating lease obligations 558 1,051 883 3,284 5,776 Postretirement obligations(e) 159 315 307 726 1,507 Capital spending commitments(f) 433 251 700 1,550 2,934 FIN 48 liability(g) — — — 10 10 UAL Total $ 3,381 $ 6,193 $ 5,340 $ 13,701 $ 28,615 United Total(a) $ 3,381 $ 6,194 $ 5,343 $ 13,701 $ 28,619
2008.(a)United's debt obligations are approximately $3 million lower than UAL 's due to $3 million of debt obligations of a direct subsidiary of UAL. Long-term debt includes $127 million of non-cash obligations as these debt payments are made directly to the creditor by a third party lessee of the aircraft and the creditor's only recourse to United is repossession of the aircraft. United's aircraft lease payments are $7 million higher than UAL's because United leases one aircraft from a direct subsidiary of UAL.(b)Future interest payments on variable rate debt are estimated using estimated future variable rates based on a yield curve.(c)Mainline includes non-aircraft capital lease payments of $5 million in each of the years 2008 through 2011. United Express payments are all for aircraft. United has lease deposits of $516 million in separate accounts to meet certain of its future capital lease obligations.(d)Amounts represent lease payments that are made by United under capacity agreements with the regional carriers who operate these aircraft on United's behalf.(e)Amounts represent postretirement benefit payments, net of subsidy receipts, through 2017. Benefit payments approximate plan contributions as plans are substantially unfunded. Not included in the table above are 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 2008 are $29 million.(f)Amounts are principally for aircraft and exclude advance payments. The Company has the right to cancel its commitments for the purchase of 42 A319 and A320 aircraft; however, such action could cause the forfeiture of $91 million of advance payments.(g)Represents estimated uncertain income tax position liabilities in accordance with FIN 48. The settlement period is undeterminable. One year Years Years After or less 2 and 3 4 and 5 5 years Total Long-term debt, including current portion(a) $ 782 $ 1,821 $ 682 $ 3,743 $ 7,028 Interest payments(b) 336 511 368 1,228 2,443 Capital lease obligations Mainline(c) 231 789 280 520 1,820 United Express(c) 6 10 10 — 26 Aircraft operating lease obligations Mainline 351 646 603 655 2,255 United Express(d) 441 869 750 1,090 3,150 Other operating lease obligations 553 975 801 2,798 5,127 Postretirement obligations(e) 146 295 281 701 1,423 Legally binding capital purchase commitments(f) 229 332 28 — 589 Total $ 3,075 $ 6,248 $ 3,803 $ 10,735 $ 23,861 (a) Long-term debt includes $113 million of non-cash obligations as these debt payments are made directly to the creditor by a company that leases three aircraft from United. The creditor’s only recourse to United is repossession of the aircraft. (b) Future interest payments on variable rate debt are estimated using estimated future variable rates based on a yield curve. (c) Mainline includes non-aircraft capital lease payments of approximately $6 million in each of the years 2009 through 2011. United Express payments are all for aircraft. United has lease deposits of $326 million in separate accounts to meet certain of its future lease obligations. (d) Amounts represent lease payments that are made by United under capacity agreements with the regional carriers who operate these aircraft on United’s behalf. (e) Amounts represent postretirement benefit payments, net of subsidy receipts, through 2018. Benefit payments approximate plan contributions as plans are substantially unfunded. Not included in the table above are 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 2009 are $10 million. (f) Amounts exclude nonbinding aircraft orders of $2.4 billion. Amounts are excluded because, as discussed further inOverviewabove, these orders are not legally binding purchase orders. The Company may cancel its orders, which would result in forfeiture of its deposits. Amounts include commitments to upgrade international aircraft with our premium travel experience product. These aircraft commitments were not significantly impacted by the Company’s recently announced capacity reductions as the international aircraft are only a small portion of the fleet reductions. 2(j)1(i), "Summary“Summary of Significant Accounting Policies—United Express,"” Note 9, "Retirement“Retirement and Postretirement Plans,"” Note 12, "Debt“Debt Obligations" and Card Processing Agreements,” and Note 16, "Lease15, “Lease Obligations,"” in theCombined Notes to Consolidated Financial Statementsfor additional discussion of these items.Company'sCompany’s off-balance sheet arrangements include operating leases, which are summarized in the contractual obligations table, above, and certain municipal bond obligations, as discussed below, and letters of credit, of which $102$281 million waswere outstanding at December 31, 2007.2007,2008, the Company guaranteed interest and principal payments on $270 million in principal of such bonds that were originally issued in 1992, subsequently refinanced in 2007, and are due in 2032 unlessCompany'sCompany’sStatements of Consolidated Financial Positionin accordance with GAAP. The related lease agreement is accounted for as an operating lease andwith the relatedassociated 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 operating lease payments in the contractual obligations table above. For further details, see Note 15, "Commitments,14, “Commitments, Contingent Liabilities and Uncertainties—Guarantees and Off-Balance Sheet Financing,"” in theCombined Notes to Consolidated Financial Statements.2007,2008, approximately $890 million$1.2 billion principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines have provided indirect guarantees of the debt. United'sUnited’s exposure is approximately $195$226 million principal amount of such bonds based on its recent consortia participation. The Company'sCompany’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 in compliance with the Amended Credit Facility covenants as of December 31, 2007. 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 may limit 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'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 the Company were to obtain a waiver of, or otherwise mitigate or cure, any such default. Additionally, the Amended Credit Facility contains a cross-default provision with respect to other credit arrangements that exceed $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. For further details about the Amended Credit Facility and the associated covenants, see Note 12, "Debt Obligations," in the Combined Notes to Consolidated Financial Statements. Future Financing. Subject to the restrictions of its 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. General economic conditions, poor credit market conditions and any adverse changes in the Company's credit ratings could adversely impact the Company's ability to raise capital, if needed, and could increase the Company's cost of capital. Credit Ratings. As of December 31, 2007, the Company had a corporate credit rating of B (outlook stable) from Standard & Poor's and a corporate family rating of B2 (outlook stable) from Moody's Investors Services. These ratings are unchanged from the ratings received upon the Company's exit from bankruptcy. 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.Company'sCompany’sStatements of Consolidated Financial Positionreflect material amounts of intangible assets related to the Company'sCompany’s Pacific and Latin American route authorities and its operations at London'sLondon’s Heathrow Airport. 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.authorities and other assets. Significant changes in such policies could also have a material impact on the Company'sCompany’s operating revenues and expenses and results of operations. For further information, see Note 8, "Intangibles"3, “Asset Impairments and Intangible Assets” in theCombined Notes to Consolidated Financial Statements,Item 1,Business—International Regulationand Item 7A,Quantitative and Qualitative Disclosures above MarketCompany'sCompany’s foreign currency risks associated with its foreign operations.("MCO's"(“MCOs”) is included in current liabilities as advance ticket sales. United records passenger ticket sales and tickets sold by other airlines for use on United as operating revenues when the transportation is provided or when the ticket expires. Tickets sold by other airlines are recorded at the estimated values
65incurred.collected. Change fees related to non-refundable tickets are considered a separate transaction from the air transportation because they represent a charge for the Company'sCompany’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'sMCOs can be either exchanged for a passenger ticket or refunded after issuance. United records an estimate of tickets that have been used, but not recorded as revenue due to system processing errors, as revenue in the month of sale based on historical results. United also records an estimate of MCO'sMCOs that will not be exchanged or refunded as revenue ratably over the validityredemption 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 historical results.Accounting.Program Miles Sold to Third Parties and the Advanced Purchase of Miles. In accordance The Company has an agreement with fresh-start reporting,its co-branded credit card partner that requires our partner to purchase miles in advance of when miles are awarded to the co-branded partner’s cardholders (referred to as “pre-purchased miles”). The pre-purchased miles are deferred when received by United in ourStatements of Consolidated Financial Positionas “Advanced purchase of miles.” The Company revaluedamended its agreement with its co-branded credit card partner in 2008. See Note 17, “Advanced Purchase of Miles,” inCombined Notes to Consolidated Financial Statementsfor a description of this agreement and its 2008 amendment. Subsequently, when our credit card partner awards pre-purchased miles to its cardholders, we transfer the related air transportation element for the awarded miles from “Advanced purchase of miles” to “Mileage Plus deferred revenue” at estimated fair value and record the residual marketing element as “Other operating revenue”. The deferred revenue portion is then subsequently recognized as passenger revenue when transportation is provided in exchange for the miles awarded. Accounting for the Company’s air transportation element and marketing elements are described below:to estimatedwas recorded at fair value at February 1, 2006, the Effective Date, which resulted in a $2.4 billion increase to the frequent flyer obligation. The Successor Company elected to change its accounting policy for its Mileage Plus frequent flyer program to a 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 used the historical industry practice of accounting for frequent flyer miles earned on United 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. Aseffective date of the Effective Date, the deferred revenue value of all frequent flyer miles are measured using equivalent ticket fair value as described below, and all associated adjustments are made to passenger revenues.wasis 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 wasis estimated assuming redemptions on both United and otherCompany'sCompany’s operations, including North America, Atlantic, Pacific and Latin America.
66 Under the new method of accounting adopted for this program at the Effective Date, the Company reduced operating revenue by approximately $158 million in the eleven months ended December 31, 2006 to account for the effects of the program as compared to the 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, 2006, the Company estimates that it would have recorded approximately $27 million of additional advertising expense.United'sUnited’s and other participating carriers' flightcarriers’ route networks. Customer redemption patterns may also be influenced by program changes, which occur from time 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'sas of the fresh-start date, and for recognition of expiration post-emergence, also requires significant management judgment. For customer accounts which are inactive for a period of 36 consecutive months, it had 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 it was reducing the expiration period for inactive accounts from 36 months to 18 months effective December 31, 2007. Under its deferred revenue accounting policy effective in 2006, the Company recognized revenue from expiration of miles by amortizing such estimated expiration over the 36 month expiration period. In 2007, the Company began to amortize revenue from the expiration of miles over an 18 month expiration period. Current and future changes to program rules and program redemption opportunities can significantly alter customer behavior from historical patterns with respect to inactive accounts. The change in the expiration period increased revenues by $246 million in 2007. ChangesCurrent and future changes to expiration assumptions or to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred revenue balance, as well as recognized revenues from the program. A hypothetical 1%In 2008, the Company updated certain of its assumptions related to the recognition of revenue for expiration of miles. Based on additional analysis of mileage redemption and expiration patterns, the Company revised the estimated number of miles that are expected to expire from 15% to 24% of earned miles, including miles that will expire or go unredeemed for reasons other than account deactivation. In 2008, the Company also extended the total time period over which revenue from its expiration of miles is recognized based upon the estimated period of miles redemption. This change did not materially impact the Company’s Mileage Plus revenue recognition in the Company's estimated expiration rate as2008.would have approximately a $21 million effect on the liability. At December 31, 2007 and 2006, the Company'sCompany’s outstanding number of miles was approximately 488.4478.2 billion and 508.8488.4 billion, respectively. The Company estimates that approximately 416.6362.0 billion of20072008 will ultimately be redeemed based on assumptions as of December 31, 2007 and, accordingly, has recorded deferred revenue of $3.8 billion.2008. At December 31, 2007,2008, a hypothetical 1% change in the Company'sCompany’s outstanding number of miles or the weighted-average ticket value has approximately a $43$50 million effect on the liability.
67 Year Ended December 31, 2008 Goodwill impairment $ 2,277 Indefinite-lived intangible assets: Codeshare agreements 44 Tradenames 20 Intangible asset impairments 64 Tangible assets: Pre-delivery advance deposits including related capitalized interest 105 B737 aircraft, B737 spare parts and other 145 Aircraft and related deposit impairments 250 Total impairments $ 2,591 UAL's and United's The net book value of operating property and equipment for UAL was $11.4 billion and $11.3 billion, respectively, at December 31, 2007 and $11.5$10.3 billion and $11.4 billion respectively, at December 31, 2006.2008 and 2007, respectively. In addition to the original cost of these assets, as adjusted by fresh-start reporting atas of 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.
68Company'sCompany’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 the Company has generally estimated the lives of those aircraft to be 30 years. Residual values are estimated based on historical experience with regard 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 the Company'sCompany’s fleet plan and other relevant information. A one year increase in the average depreciable life of our flight equipment would reduce annual depreciation expense on flight equipment by approximately $20$18 million. In accordance with Statement of Financial Accounting Standards No. 144, 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'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's book value and fair market value. The Company estimates the undiscounted future cash flows for its various aircraft with output from 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, many of which require the exercise of significant judgment on the part of management. Changes in these projections may expose the Company to future impairment charges by raising the threshold which future cash flows need to meet. If a triggering event requiring impairment testing occurs, the Company also evaluates the remaining useful lives of these assets to determine whether the lives are still appropriate. Typically, the Company utilizes knowledge from personnel in its fleet planning and maintenance departments, along with other external factors, to determine whether the remaining useful lives are appropriate. See Note 2(g), "Summary of Significant Accounting Policies—Operating Property and Equipment," in theCombined Notes to Consolidated Financial Statements for additional information regarding the Company's policies on accounting for long-lived 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 an impairment loss may have been incurred, on an interim basis. An impairment charge could have a material adverse effect on the Company's financial position and results of operations in the period of recognition. The Company performed its annualimpairment test for its goodwill and other indefinite-lived intangible assets as of October 1, 2007 and 2006. These tests did not indicate any material impairment of these assets.1, "Voluntary4, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,"” in theCombined Notes to Consolidated Financial Statements) the Company'sCompany’s assets, liabilities and equity were generally valued at their respective fair values. The excess of reorganization value over the fair value of net tangible and identifiable intangible assets and liabilities was recorded as goodwill in the accompanyingStatements of Consolidated Financial Positionon the Effective Date. As discussed in Note 10, "Segment Information," in theCombined Notes to Consolidated Financial Statements, theThe entire goodwill amount of $2.3 billion and $2.7 billion at December 31, 2007 and 2006, respectively, has beenwas allocated to the mainline reporting segment. In addition, the adoption offresh-start reporting resulted in the recognition of $2.2 billion of indefinite-lived intangible assets.requires thatthe Company applies a two-stepfair value-based impairment test beto the book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or
69on goodwill. In the first step,its annual interim test of indefinite-lived intangible assets as of October 1, 2008.comparesperformed Step One of the SFAS 142 test by estimating the fair value of the mainline reporting unit (to which all goodwill is allocated) utilizing several fair value measurement techniques, including two market estimates and one income estimate, and using relevant data available through and as of May 31, 2008. The market approach is a valuation technique in which fair value is estimated based on observed prices in actual transactions and on asking prices for similar assets. The valuation process is essentially that of comparison and correlation between the subject asset and other similar assets. The income approach is a technique in which fair value is estimated based on the cash flows that an asset could be expected to generate over its carrying value. Ifuseful life, including residual value cash flows. These cash flows are discounted to their present value equivalents using a rate of return that accounts for the relative risk of not realizing the estimated annual cash flows and for the time value of money. Certain variations of the income approach were used to determine certain of the intangible asset fair values.exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets of the reporting unit exceedswas estimated based upon the fair value of invested capital for UAL, as well as a separate comparison to revenue and EBITDAR multiples for similar publicly traded companies in the reporting unit, then the Company must perform the second step to determine the impliedairline industry. The 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 reporting units consideringestimates using both the market and income approaches. Fair value is estimated under each approach andapproaches included a weighted-average fair value is determined by applying an equal weighting to both approaches. The market approach utilizes quoted market prices, adjusted for control premium similar to those observed for historical airline and other factors, and recent transaction values of peer companies to estimate fair value. transportation company market transactions.iswas estimated based onupon the present value of estimated future cash flows.flows for UAL. The income approach is dependent on a number of factorscritical management assumptions including estimates of future capacity, passenger yield, traffic, operating costs (including fuel prices), appropriate discount rates and other relevant factors. Toassumptions. The Company estimated its future fuel-related cash flows for the income approach based on thefive-year forward curve for crude oil as of May 31, 2008. The impacts of the Company’s aircraft and other tangible and intangible asset impairments, discussed below, were considered in the fair value estimation of the mainline reporting unit.indefinite-livedthe reporting unit determined in Step One to all the assets and liabilities of the mainline reporting unit, including any recognized and unrecognized intangible assets, as if the Company used the marketmainline reporting unit had been acquired in a business combination and income approaches, discussed above, and the cost method, which uses the concept of replacement cost as an indicator of fair value. At December 31, 2007 and 2006, United recorded an indefinite-lived intangible asset of $255 million for its London Heathrow slots, based upon its estimation of the fair value for those slots as of the adoption of fresh-start reporting on February 1, 2006. United, however, determined at fresh-start that its rights relating to its actual route authorities to Heathrow had a fair value of zero. The EU/U.S. open skies agreement is expected to directly impact the future value and expected lives of route authorities to Heathrow; however, there is no direct impact from the open skies agreement on airport slot rights, including those at Heathrow. The open skies agreement is also expected to provide United an opportunity to secure antitrust immunity for certain of its Star Alliance carrier relationships, and to provide United and other carriers with access to new markets in EU countries. In September 2007, the DOT granted United and bmi antitrust immunity. The immunity goes into effect at the same time as the open skies agreement between the U.S. and the EU in March of 2008. Because of the diverse nature of these potential impacts on United's business, the overall future impact of the EU agreement on United's business in the EU region cannot be predicted with certainty. United has concluded that, in certain circumstances, the open skies agreement could indirectly and adversely affect the fair value of its slot rights at Heathrow,the mainline reporting unit was the acquisition price. As a result of the Step Two testing, the Company determined that goodwill was completely impaired and therefore has further concluded thatrecorded an impairment charge to write-off the signingfull value of goodwill.open skies agreementfair values of all of its indefinite-lived intangible assets as of May 31, 2008 and compared those estimates to related carrying values. Tested assets included tradenames, international route authorities, London Heathrow
70April 30, 2007 constituted an indicatorthe preliminary results of this testing, the Company recorded $80 million of impairment with respect to United's Heathrow slots intangible asset. In addition to the impairment tests discussed above,charges during the second quarter of 2007 United performed an2008 and in the third quarter of 2008 reduced the impairment reviewcharge by $16 million as a result of the Heathrow slots intangible asset and concluded that no impairment was indicated. Furthermore, no change was determined to be required to the fresh-start assignment of an indefinite life to this intangible asset. This interim test was performed due to a potential impairment indicator, as discussed above. The implementationfinalization of the EU/U.S. open skies agreement, however, may result in a future determination that the Heathrow slots are impaired in whole or in part, or in a future determination that they should be reclassified as definite-livedimpairment testing. No impairments of indefinite-lived intangible assets with amortization expense recognized thereon. Such future determination could result in material charges to earnings in those future periods.Employers'Employers’ Accounting for Postretirement Benefits Other than Pensions ("(“SFAS 106"106”) and Statement of Financial Accounting Standards No. 158,Employers'Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("(“SFAS 158"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'splan’s funded status, in itsStatements of Consolidated Financial Position. Under these 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, which hadhas resulted in a significant net obligation, as discussed below.and 2006 was $56$57 million and $54$56 million, respectively, for the other postretirement benefit plans. The benefit obligation was $2.0 billion and $2.1 billion for the other postretirement benefit plans at both December 31, 20072008 and 2006, respectively.2007. The difference between the plan assets and obligations has been recorded in theStatements of Consolidated Financial Position. Detailed information regarding the Company'sCompany’s other postretirement plans, including key assumptions, is included in Note 9, "Retirement“Retirement and Postretirement Plans,"” in theCombined Notes to Consolidated Financial Statements."Retirement“Retirement and Postretirement Plans,"” in theCombined Notes to Consolidated Financial Statements. The calculation of other postretirement benefit expense and 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 discount rates were based on the construction of theoretical corporate bond portfolios, adjusted according to the timing of expected cash flows for the Company'spayment of the Company’s future postretirement obligations. A yield curve was developed based on a subset of these bonds (those with yields between the 40th10th and 90th percentiles). The projected cash flows were matched to this yield curve and a present value developed, which was then calibrated to develop a single equivalent risk-adjusted discount rate.Company'sCompany’s accounting policy is to not apply the corridor approach available under SFAS 106 with respect to amortization of amounts included in accumulated other comprehensive income. Under the corridor approach, amortization of any gain or loss in accumulated other comprehensive income is only required if, at the beginning of the year, the accumulated gain or loss exceeds 10% of the greater of the benefit obligation or the fair value of assets. If amortization is required, the minimum amount outside the corridor divided by the average remaining service period of active employees is recognized as expense. The corridor approach is20072008 and 2006,2007, the Company had unrecognized actuarial gains of $254$286 million and $120$254 million, respectively, recorded in accumulated other comprehensive income for its other postretirement benefit plans.
712007, United and UAL each2008, the Company had valuation allowances against theirits deferred tax assets of approximately $1.8$2.9 billion. In accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, a valuation allowance is required to be recorded when it is more likely than not that deferred tax assets will not be realized. Future realization depends on the existence of sufficient taxable income within the carry forward period available under the tax law. Sources of future taxable income include future reversals of taxable temporary differences, future taxable income exclusive of reversing taxable differences, taxable income in carry back years and tax planning strategies. These sources of positive evidence of realizability must be weighed against negative evidence, such as cumulative losses in recent years. A recent history of losses would make difficult a determination that a valuation allowance is not needed.Currently,Through December 31, 2008, any reversals of valuation allowance would first reducehave reduced goodwill, andif any, then reduce intangible assets. See Note 2(p)1(p), "Summary“Summary of Significant Accounting Policies—New Accounting Pronouncements,"” for information regarding the effect of changes to this method of accounting for valuation allowance reversals, if any, on the Company'sCompany’s results of operations and financial condition after it is required to adopt SFAS 141R adopts Statement of Financial Accounting Standards No. 141 (revised 2007),Business Combinations,on January 1, 2009. See Note 6, "Income8, “Income Taxes,"” in theCombined Notes to Consolidated Financial Statementsfor additional information.2(p)1(p), "Summary“Summary of Significant Accounting Policies—New Accounting Pronouncements,"” in theCombined Notes to Consolidated Financial Statements.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operationsand elsewhere in this report are forward-looking and thus reflect the Company'sCompany’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 United'sUnited’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.Company'sCompany’s actual results could differ materially from these forward-looking statements due to numerous factors including, without limitation, the following: its ability to comply with the terms of financing arrangements; the costs and availability of financing; its ability to execute its business plan; its ability to realize benefits from its resource optimization efforts and cost reduction initiatives; its ability to utilize its net operating losses; its ability to attract, motivateand/or retain key employees; its ability to attract and retain customers; demand for transportation in the markets in which it operates; general economic conditions (including interest rates, foreign currency exchange rates, crude oil prices, costs of
72fuel;fuel, including its ability to meet the liquidity requirements of cash deposits which may be required from time to time under hedge agreements; the effects of any hostilities, act of war or terrorist attack; the ability of other air carriers with whom the 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; industry consolidation; competitive pressures on pricing and on demand; capacity decisions of Unitedand/or its competitors; U.S. or foreign governmental legislation, regulation and other actions, including open skies agreements; its ability to maintain satisfactory labor relations; any disruptions to operations due to any potential actions by its labor groups; weather conditions; and other risks and uncertainties set forth under Item 1A,Risk Factorsof thisForm 10-K, as well as other risks and uncertainties set forth from time to time in the reports the Company files with the SEC. Consequently, the forward-looking statements should not be regarded as representations or warranties by the Company that such matters will be realized. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK United's United’s exposure to market risk associated with changes in interest rates relates primarily to its debt obligations and short-term investments. The Company does not use derivative financial instruments in its investment portfolio. United'sUnited’s policy is to manage interest rate risk through a combination of fixed and variable rate debt and by entering into swap agreements, depending upon market conditions. A portion of United'sUnited’s aircraft lease obligations and related accrued interest ($497306 million in equivalent U.S. dollars at December 31, 2007)2008) is denominated in foreign currencies that expose the Company to risks associated with changes in foreign exchange rates. To hedge against some of this risk, United has placed foreign currency deposits (primarily($306 million in equivalent U.S. dollars at December 31, 2008), primarily for euros)euros, to meet foreign currency lease obligations denominated in thosethat respective currencies.currency. Since unrealizedmark-to-market gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency obligations, United has hedged its overall exposure to foreign currency exchange rate volatility with respect to its foreign lease deposits and obligations. 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 predominantly based on 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 and, to a lesser extent, on the quoted market prices for the same or similar issues.instruments. The table below presents information as of December 31, 20072008 about certain of the Company'sCompany’s financial instruments that are sensitive to changes in interest and exchange rates. Amounts shown below are the same for both UAL and United, except as noted. 2007 Expected Maturity Dates (In millions) Fair
Value 2008 2009 2010 2011 2012 Thereafter Total UAL ASSETS(a) Cash equivalents Fixed rate $ 1,259 $ — $ — $ — $ — $ — $ 1,259 $ 1,259 Avg. interest rate 5.12 % — — — — — 5.12 % Short term investments Fixed rate $ 2,295 $ — $ — $ — $ — $ — $ 2,295 $ 2,295 Avg. interest rate 5.04 % — — — — — 5.04 %
Lease deposits
Fixed rate—EUR deposits $ 147 $ 24 $ 241 $ 16 $ — $ — $ 428 $ 511 Accrued interest 23 10 29 7 — — 69 Avg. interest rate 4.93 % 4.34 % 6.66 % 4.41 % — — 6.54 % Fixed rate—USD deposits $ — $ — $ 11 $ — $ — $ — $ 11 $ 20 Accrued interest — — 8 — — — 8 Avg. interest rate — — 6.49 % — — — 6.49 %
UAL LONG-TERM
DEBT(a)
U. S. Dollar denominated Variable rate debt $ 189 $ 162 $ 229 $ 152 $ 156 $ 1,622 $ 2,510 $ 2,405 Avg. interest rate 6.09 % 6.12 % 6.15 % 6.22 % 6.26 % 6.31 % 6.18 % Fixed rate debt(a) $ 489 $ 576 $ 689 $ 672 $ 228 $ 2,180 $ 4,834 $ 4,391 Avg. interest rate 6.54 % 6.56 % 6.44 % 6.34 % 6.17 % 6.07 % 6.40 % (a)Amounts also represent United except that United's carrying value and fair value of variable rate debt is approximately $3 million lower than the reported UAL amounts and United's cash equivalents and short-term investments are approximately $56 million lower than the reported UAL amounts. 2008 2007 Expected Maturity Date Fair Fair 2009 2010 2011 2012 2013 Thereafter Total Value Total Value Cash equivalents Fixed rate(a) $ 2,039 $ — $ — $ — $ — $ — $ 2,039 $ 2,039 $ 3,554 $ 3,554 Avg. interest rate 1.02 % — — — — — 1.02 % 5.08 % Lease deposits Fixed rate—EUR deposits $ 21 $ 228 $ 15 $ — $ — $ — $ 264 $ 330 $ 428 $ 511 Accrued interest 7 28 7 — — — 42 69 Avg. interest rate 3.95 % 6.86 % 4.41 % — — — 6.45 % 6.54 % Fixed rate—USD deposits $ — $ 11 $ — $ — $ — $ — $ 11 $ 21 $ 11 $ 20 Accrued interest — 9 — — — — 9 8 Avg. interest rate — 6.49 % — — — — 6.49 % 6.49 % U. S. Dollar denominated Variable rate debt $ 205 $ 262 $ 186 $ 186 $ 207 $ 1,594 $ 2,640 $ 1,524 $ 2,510 $ 2,405 Avg. interest rate 3.40 % 3.34 % 3.26 % 3.19 % 3.11 % 3.02 % 3.24 % 6.18 % Fixed rate debt $ 577 $ 690 $ 683 $ 228 $ 61 $ 2,149 $ 4,388 $ 2,668 $ 4,834 $ 4,391 Avg. interest rate 6.38 % 6.24 % 6.11 % 5.89 % 5.78 % 5.73 % 6.09 % 6.40 % (a) Amounts also represent United except that in 2008, United’s carrying value and fair value of its cash equivalents and debt obligations are approximately $6 million and $2 million, respectively, lower than the reported UAL amounts. The reported 2007 cash equivalents balance includes cash of $1.3 billion with a weighted average rate of 5.12% and short-term investments of $2.3 billion with a weighted average rate of 5.04%. United’s 2007 cash equivalents and debt obligations were approximately $56 million and $3 million, respectively, lower than the amounts reported for UAL. and short-term investments included in the table above, UAL and United have $325$54 million and $291$50 million of short-term restricted cash, respectively, and each has $431$218 million and $217 million, respectively, of long-term restricted cash. As discussed in Note 2(e)1(d), "Summary“Summary of Significant Accounting Policies—Cash and Cash Equivalents, Short-Term Investments and Restricted Cash"Cash” in theCombined Notes to Consolidated Financial Statements, this cash is being held in restricted accounts primarily for workers'workers’ compensation obligations, security deposits for airport leases and reserves with institutions that process United'sUnited’s credit card ticket sales. Due to the short term nature of these cash balances, thetheir carrying values approximate thetheir fair values. The Company'sCompany’s interest income is exposed to changes in interest rates on these cash balances. During 2007, the Company also repurchased certain of its own debt instruments, which remain outstanding at December 31, 2007, withand have a fair value and carrying value of $91 million.$46 million at
74Company'sCompany’s related debt obligations.(Aircraft(Jet Fuel). Our results of operations and liquidity have been, and may continue to be, materially impacted by changes in the price of aircraft fuel and other oil-related commodities and related derivative instruments. When market conditions indicate risk reduction is achievable, United enters into fuelmay use commodity option contracts and futures contractsor other derivative instruments to reduce its price risk exposure to jet fuel. These contractsThe Company’s derivative positions are typically comprised of crude oil, heating oil and jet fuel derivatives. The derivative instruments are designed to provide protection against sharp increases in the price of aircraft fuel. TheSome derivative instruments may result in hedging losses if the underlying commodity prices drop below specified floors; however, the negative impact of these losses may be offset by the benefit of lower jet fuel acquisition cost since the Company typically does not hedge all of its fuel consumption. United may updateadjust its hedging strategy in response toprogram based on changes in market conditions. TheAt December 31, 2008, the fair value of the Company's fuel relatedUnited’s fuel-related derivatives was a payable of $867 million, as compared to a receivable of $20 million at December 31, 2007. These instrumentsThe primary reason for this change was due to the dramatic spike in fuel prices through July 2008 and the subsequent fuel price decreases in the latter part of 2008. At December 31, 2008, the fuel derivative payables includes $140 million related to pending settlements for purchased options and expired contracts. Percentage of Projected Barrels hedged (in 000s) Weighted-average price per barrel Fuel Payment Payment Hedge Hedge Requirements Purchased Sold Purchased Sold Obligations Obligations Protection Protection Hedged(a) Puts Puts(a) Calls Calls Stop Begin Begins Ends First Quarter 2009: % $ $ $ $ Calls 14 — — 1,975 — NA NA 83 (b) NA Collars 9 (10) — 1,425 1,275 — NA 109 118 NA 3-way collars 25 (29) — 4,125 3,525 3,525 NA 104 118 143 4-way collars 2 225 225 225 225 63 78 95 135 Total 50 225 5,775 7,000 3,750 Purchased puts 35 4,925 — — — 57 NA NA NA Full Year 2009: Calls 9 — — 5,350 — NA NA 81 (c) NA Collars 5 (6) — 3,450 2,775 — NA 111 123 NA 3-way collars 18 (22) — 12,525 10,350 10,350 NA 102 118 147 4-way collars 2 900 900 900 900 63 78 95 135 Total 34 900 16,875 19,375 11,250 Purchased puts 17 9,500 — — — 54 NA NA NA Calls purchased from January 1, 2009 to January 16, 2009: First Quarter 2009 4 — — 525 — NA NA 54 NA Full Year 2009 2 — — 1,350 — NA NA 59 NA
75(a) Percent of expected consumption represents the notional amount of the purchased calls in the hedge structures. Certain3-way collars and collars included in the table above have sold puts with twice the notional amount of the purchased calls. The percentages in parentheses represent the notional amount of sold puts in these hedge structures. (b) Call position average includes the following two groupings of positions: 6% of consumption with protection beginning at $47 per barrel and 8% of consumption beginning at $106 per barrel. (c) Call position average includes the following two groupings of positions: 4% of consumption with protection beginning at $50 per barrel and 5% of consumption beginning at $106 per barrel. a maturitysold puts with twice the notional amount of the purchased calls. The Company’s exposure to losses, should the positions settle below the put exercise price, exceeds its potential benefit from price increases above the purchased call exercise price. The Company classifies gains (losses) resulting from these collar structures as nonoperating income (expense). As of December 31, 2008, the Company had hedged less than one year.1% of its 2010 forecasted fuel consumption. Actual Projected January 19, March 31, June 30, September 30, December 31, 2009 2009 2009 2009 2009 $ 780 $ 615 $ 315 $ 110 $ 25 2009 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year Unhedged fuel cost(a) $ 1.73 $ 1.79 $ 1.89 $ 1.91 $ 1.83 Cash hedge losses(b) 0.49 0.39 0.26 0.09 0.31 Cash hedge losses classified in nonoperating expense(c) $ 81 $ 111 $ 53 $ 52 $ 297 (a) Per gallon amount based on assumed cash requirements for fuel purchases, including related taxes and transportation costs (b) Per gallon amount based on assumed cash requirements for settlement of economic hedge contracts that have gains or losses classified within mainline fuel expense. (c) Assumed cash requirements for settlement of hedge contracts that are classified in nonoperating expense.
76Approximate Change in Cash Collateral for each $5 per Barrel Change in the Price of Crude Oil Above $105 No collateral required At or above $85, but below $105 $45 million At or above $25, but below $85 $60 million Below $25 $40 million Company'sCompany’s results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses.Company'sCompany’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 forU.S.-originating traffic, a weakening of foreign currencies tends to decrease reported revenue and operating income.Company'sCompany’s most significant net foreign currency exposures in 2007,2008, based on exchange rates in effect at December 31, 2007,2008, are presented in the table below: Operating revenue net of operating expense (In millions)
Currency Foreign
Currency
Value USD Value Canadian dollar 323 $ 324 Chinese renminbi 2,178 298 Australian dollar 158 138 European euro 94 137 Japanese yen 14,040 126 In 2007, the (In millions) Operating revenue net of operating expense Foreign Currency Value USD Value Chinese renminbi 2,440 $ 357 Canadian dollar 263 216 European euro 71 99 Hong Kong dollar 714 92 Australian dollar 106 74 began usinguses foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates. As of December 31, 2007,2008, the Company hedged a portion of its expected foreign currency cash flows in the Australian dollar, Canadian dollar British pound,and European EuroEuro. As of December 31, 2008, the notional amount of these foreign currencies hedged with the forward contracts in U.S. dollars was approximately $62 million, based on contractual forward rates. These contracts had a fair value of $10 million at December 31, 2008 and Japanese yen.expire at various dates through March 2009. As of December 31, 2007, the notional amount of these foreign currencies hedged with the forward contracts in U.S. dollars terms was approximately $346 million. These contracts hadmillion, with a fair value of $1 million at December 31, 2007 and expire at various dates through December 2008. The Company did not have any outstanding foreign currency derivatives at December 31, 2006.
million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA "Company"“Company”) as of December 31, 20072008 and 2006 (Successor Company balance sheets),2007, and the related statements of consolidated operations, consolidated stockholders'stockholders’ equity (deficit), and consolidated cash flows for the yearyears ended December 31, 2008 and 2007 and eleven months ended December 31, 2006 (Successor Company operations) and for the one month ended January 31, 2006 and for the year ended December 31, 2005 (Predecessor Company operations). Our audits also included the financial statement schedule of the Successor Company for the yearyears ended December 31, 2008 and 2007 and eleven months ended December 31, 2006 and the Predecessor Company for the one month ended January 31, 2006 and for the year 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. "Financial “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 1.20072008 and 2006,2007, and the results of their operations and their cash flows for the yearyears ended December 31, 2008 and 2007 and 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 present fairly, in all material respects, the results of operations and cash flows of the Predecessor Company for the one month ended January 31, 2006, and the year 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, present fairly in all material respects the information set forth therein.21 to the consolidated financial statements on January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"“Share-Based Payment” which changed the method of accounting for share based payments and as discussed in Note 2 to the consolidated financial statements on December 31, 2006, the Company adopted the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, "Employers'payments.
78Accounting 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.Company'sCompany’s internal control over financial reporting as of December 31, 2007,2008, based on the criteria established in "Internal“Internal Control—Integrated Framework"Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2008March 2, 2009 expressed an unqualified opinion on the Company'sCompany’s internal control over financial reporting.
79/s/ Deloitte & Touche LLPChicago, IllinoisFebruary 27, 2008"Company"“Company”) as of December 31, 20072008 and 2006 (Successor Company balance sheets),2007, and the related statements of consolidated operations, consolidated stockholder'sstockholder’s equity (deficit), and consolidated cash flows for the yearyears ended December 31, 2008 and 2007 and eleven months ended December 31, 2006 (Successor Company operations) and for the one month ended January 31, 2006 and for the year ended December 31, 2005 (Predecessor Company operations). Our audits also included the financial statement schedule of the Successor Company for the yearyears ended December 31, 2008 and 2007 and eleven months ended December 31, 2006 and the Predecessor Company for the one month ended January 31, 2006 and for the year 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.Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. "Financial “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 1.20072008 and 2006,2007, and the results of their operations and their cash flows for the yearyears ended December 31, 2008 and 2007 and 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 present fairly, in all material respects, the results of operations and cash flows of the Predecessor Company for the one month ended January 31, 2006, and the year 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, present fairly in all material respects the information set forth therein.21 to the consolidated financial statements on January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"“Share-Based Payment” which changed the method of accounting for share based payments and as discussed in Notepayments.to the consolidated financial statements on December 31, 2006, the Company adopted the recognition and 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./s/ Deloitte & Touche LLPChicago, IllinoisFebruary 27, 2008
2009 Successor Predecessor Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2007 Year Ended
December 31,
2005 Operating revenues: Passenger—United Airlines $ 15,254 $ 13,293 $ 1,074 $ 12,914 Passenger—Regional Affiliates 3,063 2,697 204 2,429 Cargo 770 694 56 729 Special operating items (Note 20) 45 — — — Other operating revenues 1,011 1,198 124 1,307 20,143 17,882 1,458 17,379 Operating expenses: Aircraft fuel 5,003 4,462 362 4,032 Salaries and related costs 4,261 3,909 358 4,027 Regional affiliates 2,941 2,596 228 2,746 Purchased services 1,346 1,148 98 1,054 Aircraft maintenance materials and
outside repairs 1,166 929 80 881 Depreciation and amortization 925 820 68 856 Landing fees and other rent 876 801 75 915 Distribution expenses (Note 2) 779 738 60 775 Aircraft rent 406 385 30 402 Cost of third party sales 316 614 65 685 Special operating items (Note 20) (44 ) (36 ) — 18 Other operating expenses 1,131 1,017 86 1,207 19,106 17,383 1,510 17,598 Earnings (loss) from operations 1,037 499 (52 ) (219 ) Other income (expense): Interest expense (661 ) (728 ) (42 ) (482 ) Interest income 257 243 6 38 Interest capitalized 19 15 — (3 ) Gain on sale of investment (Note 7) 41 — — — Miscellaneous, net 2 14 — 87 (342 ) (456 ) (36 ) (360 ) Earnings (loss) before reorganization items,
income taxes and equity in earnings of
affiliates 695 43 (88 ) (579 ) Reorganization items, net (Note 1) — — 22,934 (20,601 ) Earnings (loss) before income taxes and
equity in earnings of affiliates 695 43 22,846 (21,180 ) Income tax expense 297 21 — — Earnings (loss) before equity in earnings of
affiliates 398 22 22,846 (21,180 ) Equity in earnings of affiliates, net of tax 5 3 5 4 Net income (loss) $ 403 $ 25 $ 22,851 $ (21,176 ) Earnings (loss) per share, basic $ 3.34 $ 0.14 $ 196.61 $ (182.29 ) Earnings (loss) per share, diluted $ 2.79 $ 0.14 $ 196.61 $ (182.29 ) Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Operating revenues: Passenger—United Airlines $ 15,337 $ 15,254 $ 13,293 $ 1,074 Passenger—Regional affiliates 3,098 3,063 2,697 204 Cargo 854 770 694 56 Special operating items (Note 19) — 45 — — Other operating revenues 905 1,011 1,198 124 20,194 20,143 17,882 1,458 Operating expenses: Aircraft fuel 7,722 5,003 4,462 362 Salaries and related costs 4,311 4,261 3,909 358 Regional affiliates 3,248 2,941 2,596 228 Purchased services 1,375 1,346 1,148 98 Aircraft maintenance materials and outside repairs 1,096 1,166 929 80 Depreciation and amortization 932 925 820 68 Landing fees and other rent 862 876 801 75 Distribution expenses 710 779 738 60 Aircraft rent 409 406 385 30 Cost of third party sales 272 316 614 65 Goodwill impairment (Note 3) 2,277 — — — Other impairments and special items (Notes 3 and 19) 339 (44 ) (36 ) — Other operating expenses 1,079 1,131 1,017 86 24,632 19,106 17,383 1,510 Earnings (loss) from operations (4,438 ) 1,037 499 (52 ) Other income (expense): Interest expense (523 ) (661 ) (728 ) (42 ) Interest income 112 257 243 6 Interest capitalized 20 19 15 — Gain on sale of investment (Note 20) — 41 — — Miscellaneous, net (Note 13) (550 ) 2 14 — (941 ) (342 ) (456 ) (36 ) Earnings (loss) before reorganization items, income taxes and equity in earnings of affiliates (5,379 ) 695 43 (88 ) Reorganization items, net (Note 4) — — — 22,934 Earnings (loss) before income taxes and equity in earnings of affiliates (5,379 ) 695 43 22,846 Income tax expense (benefit) (25 ) 297 21 — Earnings (loss) before equity in earnings of affiliates (5,354 ) 398 22 22,846 Equity in earnings of affiliates, net of tax 6 5 3 5 Net income (loss) $ (5,348 ) $ 403 $ 25 $ 22,851 Earnings (loss) per share, basic $ (42.21 ) $ 3.34 $ 0.14 $ 196.61 Earnings (loss) per share, diluted $ (42.21 ) $ 2.79 $ 0.14 $ 196.61 At December 31, 2007 2006 Assets Current assets: Cash and cash equivalents $ 1,259 $ 3,832 Short-term investments 2,295 312 Restricted cash 325 341 Receivables, less allowance for doubtful accounts (2007—$27; 2006—$27) 888 820 Prepaid fuel 493 283 Aircraft fuel, spare parts and supplies, less obsolescence allowance (2007—$25;
2006—$6) 242 218 Deferred income taxes 78 122 Prepaid expenses and other 515 345 6,095 6,273 Operating property and equipment: Owned— Flight equipment 9,335 8,958 Advances on flight equipment 102 103 Other property and equipment 1,669 1,441 11,106 10,502 Less—Accumulated depreciation and amortization (1,062 ) (503 ) 10,044 9,999 Capital leases— Flight equipment 1,449 1,511 Other property and equipment 34 34 1,483 1,545 Less—Accumulated amortization (168 ) (81 ) 1,315 1,464 11,359 11,463 Other assets: Intangibles, less accumulated amortization (Note 8) (2007—$324; 2006—$169) 2,871 3,028 Goodwill (Note 8) 2,280 2,703 Restricted cash 431 506 Aircraft lease deposits 340 539 Investments (Note 7) 122 113 Other, net 722 744 6,766 7,633 $ 24,220 $ 25,369 At December 31, 2008 2007 Current assets: Cash and cash equivalents $ 2,039 $ 1,259 Short-term investments — 2,295 Restricted cash 54 325 Fuel hedge collateral deposits 953 — Receivables, less allowance for doubtful accounts (2008—$24; 2007—$27) 714 888 Deferred income taxes 263 78 Prepaid fuel 219 493 Aircraft fuel, spare parts and supplies, less obsolescence allowance (2008—$48;
2007—$25) 237 242 Prepaid expenses and other 382 515 4,861 6,095 Operating property and equipment: Owned— Flight equipment 8,766 9,335 Advances on flight equipment — 102 Other property and equipment 1,751 1,669 10,517 11,106 Less—Accumulated depreciation and amortization (1,598 ) (1,062 ) 8,919 10,044 Capital leases— Flight equipment 1,578 1,449 Other property and equipment 39 34 1,617 1,483 Less—Accumulated amortization (224 ) (168 ) 1,393 1,315 10,312 11,359 Other assets: Intangibles, less accumulated amortization (Note 3) (2008—$339; 2007—$324) 2,693 2,871 Goodwill (Note 3) — 2,280 Aircraft lease deposits 297 340 Restricted cash 218 431 Investments (Note 20) 81 122 Other, net (Note 3) 999 722 4,288 6,766 $ 19,461 $ 24,220 StatementsStatements..
82 At December 31, 2007 2006 Liabilities and Stockholders' Equity Current liabilities: Advance ticket sales $ 1,918 $ 1,669 Mileage Plus deferred revenue 1,268 1,111 Accrued salaries, wages and benefits 896 795 Accounts payable 877 667 Advanced purchase of miles (Note 18) 694 681 Long-term debt maturing within one year (Note 12) 678 1,687 Fuel purchase commitments 493 283 Distribution payable (Note 22) 257 — Current obligations under capital leases (Note 16) 250 110 Accrued interest 141 241 Other 507 701 7,979 7,945
Long-term debt (Note 12)
6,415
7,453
Long-term obligations under capital leases (Note 16) 1,106 1,350
Other liabilities and deferred credits:
Mileage Plus deferred revenue 2,569 2,569 Postretirement benefit liability (Note 9) 1,829 1,955 Deferred income taxes 638 688 Other 895 900 5,931 6,112
Commitments and contingent liabilities (Note 15)
Mandatorily convertible preferred securities (Note 13) 371 361
Stockholders' equity:
Preferred stock (Note 13) — — Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding
116,921,049 shares at December 31, 2007 (Note 3) 1 1 Additional capital invested 2,139 2,053 Retained earnings 152 16 Stock held in treasury, at cost (Note 3) (15 ) (4 ) Accumulated other comprehensive income (Note 11) 141 82 2,418 2,148 $ 24,220 $ 25,369 At December 31, 2008 2007 Current liabilities: Advance ticket sales $ 1,530 $ 1,918 Mileage Plus deferred revenue 1,414 1,268 Accounts payable 829 877 Long-term debt maturing within one year (Note 12) 782 678 Accrued salaries, wages and benefits 756 896 Fuel derivative payable (Note 13) 858 — Fuel purchase commitments 219 493 Current obligations under capital leases (Note 15) 168 250 Accrued interest 112 141 Distribution payable (Note 21) 4 257 Advanced purchase of miles (Note 17) — 694 Other 609 507 7,281 7,979 Long-term debt (Note 12) 6,007 6,415 Long-term obligations under capital leases (Note 15) 1,192 1,106 Other liabilities and deferred credits: Mileage Plus deferred revenue 2,768 2,569 Postretirement benefit liability (Note 9) 1,812 1,829 Advanced purchase of miles (Note 17) 1,087 — Deferred income taxes 799 638 Other 980 895 7,446 5,931 Commitments and contingent liabilities (Note 14) Mandatorily convertible preferred securities (Note 5) — 371 Stockholders’ equity (deficit): Preferred stock (Note 5) — — Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 140,037,928 and 116,921,049 shares at December 31, 2008 and 2007, respectively (Note 5) 1 1 Additional capital invested 2,666 2,139 Retained earnings (deficit) (5,199 ) 152 Stock held in treasury, at cost (Note 5) (26 ) (15 ) Accumulated other comprehensive income (Note 11) 93 141 (2,465 ) 2,418 $ 19,461 $ 24,220
(In millions) Successor Predecessor Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2007 Year Ended
December 31,
2005 Cash flows provided (used) by operating activities: Net income (Successor Company) $ 403 $ 25 $ — $ — Loss before reorganization items (Predecessor Company) — — (83 ) (575 ) Adjustments to reconcile to net cash provided (used) by operating
activities— Depreciation and amortization 925 820 68 873 Deferred income taxes 310 21 — — Mileage Plus deferred revenue and advanced purchase of miles 170 269 14 329 Share-based compensation 49 159 — — Special items and debt discount amortization (48 ) 47 — 18 Gain on sale of investments (41 ) — — (2 ) Postretirement benefit expense, net of contributions 7 76 (9 ) (41 ) Pension expense (benefit), net of contributions (5 ) (4 ) 8 143 Amortization of deferred gains — — (6 ) (81 ) Other operating activities 54 56 (1 ) 54 Changes in assets and liabilities— Decrease (increase) in other current assets (269 ) 14 (24 ) (75 ) Increase in advance ticket sales 249 4 109 214 Increase (decrease) in accounts payable 200 40 19 (40 ) Increase (decrease) in accrued liabilities 189 (257 ) 154 153 Decrease (increase) in receivables (59 ) 131 (88 ) 109 2,134 1,401 161 1,079 Cash flows provided (used) by reorganization activities: Reorganization items, net — — 22,934 (20,601 ) 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 Impairment on lease certificates — — — 134 Increase (decrease) in other liabilities — — 37 120 Increase in non-aircraft claims accrual — — 429 1,220 Pension curtailment, settlement and employee claims — — 912 16,079 Loss on disposition of property — — — 10 — — (23 ) (140 ) Cash flows provided (used) by investing activities: Net (purchases) sales of short-term investments (1,983 ) (237 ) 2 1 Additions to property and equipment (658 ) (332 ) (30 ) (470 ) Proceeds on sale of investments 128 56 — 4 Purchases of EETC securities (96 ) — — — (Increase) decrease in restricted cash 91 313 (203 ) (80 ) Proceeds on disposition of property and equipment 19 40 (1 ) 330 Decrease in segregated funds — 200 — — Other, net (61 ) (52 ) (6 ) (76 ) (2,560 ) (12 ) (238 ) (291 ) Cash flows provided (used) by financing activities: Proceeds from Credit Facility — 2,961 — — Repayment of Credit Facility (1,495 ) (175 ) — — Proceeds from DIP financing — — — 310 Repayment of DIP financing — (1,157 ) — (16 ) Repayment of other long-term debt (1,257 ) (664 ) (24 ) (285 ) Proceeds from issuance of long-term debt 694 — — — Principal payments under capital leases (177 ) (99 ) (5 ) (94 ) Decrease in aircraft lease deposits 80 — — — Proceeds from exercise of stock options 35 10 — — Payment of deferred financing costs (18 ) (66 ) (1 ) (26 ) Purchases of treasury stock (11 ) (4 ) — — Other, net 2 6 — 1 (2,147 ) 812 (30 ) (110 ) Increase (decrease) in cash and cash equivalents during the period (2,573 ) 2,201 (130 ) 538 Cash and cash equivalents at beginning of period 3,832 1,631 1,761 1,223 Cash and cash equivalents at end of period $ 1,259 $ 3,832 $ 1,631 $ 1,761 Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Cash flows provided (used) by operating activities: Net income (loss) before reorganization items $ (5,348 ) $ 403 $ 25 $ (83 ) Adjustments to reconcile to net cash provided (used) by operating activities— Goodwill impairment 2,277 — — — Other impairments and special items 339 (89 ) (36 ) — Depreciation and amortization 932 925 820 68 Mileage Plus deferred revenue and advanced purchase of miles 738 170 269 14 Debt and lease discount amortization 49 41 83 — Share-based compensation 31 49 159 — Deferred income taxes (26 ) 310 21 — Pension expense (benefit), net of contributions (13 ) (5 ) (4 ) 8 Postretirement benefit expense, net of contributions 1 7 76 (9 ) Gain on sale of investments — (41 ) — — Other operating activities 27 54 56 (7 ) Changes in assets and liabilities— Increase in fuel hedge collateral (965 ) — — — Increase in fuel derivative payables 858 — — — Increase (decrease) in accrued liabilities (155 ) 189 (257 ) 154 Increase (decrease) in advance ticket sales (388 ) 249 4 109 Decrease (increase) in other current assets 257 (269 ) 14 (24 ) Decrease (increase) in receivables 195 (59 ) 131 (88 ) Increase (decrease) in accounts payable (48 ) 200 40 19 (1,239 ) 2,134 1,401 161 Cash flows provided (used) by reorganization activities: Reorganization items, net — — — 22,934 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 (decrease) in other liabilities — — — 37 Increase in non-aircraft claims accrual — — — 429 Pension curtailment, settlement and employee claims — — — 912 — — — (23 ) Cash flows provided (used) by investing activities: Net (purchases) sales of short-term investments 2,295 (1,983 ) (237 ) 2 (Increase) decrease in restricted cash 484 91 313 (203 ) Additions to property and equipment (415 ) (658 ) (332 ) (30 ) Additions to deferred software costs (60 ) (65 ) (46 ) — Proceeds from asset sale-leasebacks 274 — — — Proceeds on disposition of property and equipment 94 19 40 (1 ) Proceeds on litigation of advanced deposits 41 — — — Proceeds on sale of investments — 128 56 — Purchases of EETC securities — (96 ) — — Decrease in segregated funds — — 200 — Other, net 8 4 (6 ) (6 ) 2,721 (2,560 ) (12 ) (238 ) Cash flows provided (used) by financing activities: Proceeds from Credit Facility — — 2,961 — Repayment of Credit Facility (18 ) (1,495 ) (175 ) — Repayment of other long-term debt (666 ) (1,257 ) (664 ) (24 ) Proceeds from issuance of long-term debt 337 694 — — Special distribution to common shareholders (253 ) — — — Principal payments under capital leases (235 ) (177 ) (99 ) (5 ) Decrease in aircraft lease deposits 155 80 — — Payment of deferred financing costs (120 ) (18 ) (66 ) (1 ) Proceeds from sale of common stock 107 — — — Purchases of treasury stock (11 ) (11 ) (4 ) — Repayment of DIP financing — — (1,157 ) — Proceeds from exercise of stock options — 35 10 — Other, net 2 2 6 — (702 ) (2,147 ) 812 (30 ) Increase (decrease) in cash and cash equivalents during the period 780 (2,573 ) 2,201 (130 ) Cash and cash equivalents at beginning of period 1,259 3,832 1,631 1,761 Cash and cash equivalents at end of period $ 2,039 $ 1,259 $ 3,832 $ 1,631 Stockholders'Stockholders’ Equity (Deficit)
(In millions) Common
Stock Additional
Capital
Invested Retained
Earnings
(Deficit) Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss) Total Predecessor Company 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 (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 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 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 1 5,064 (6,271 ) (1,467 ) (36 ) (2,709 ) Fresh-start adjustments: Cancellation of preferred and common stock (1 ) (5,064 ) — 1,467 — (3,598 ) Elimination of 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 Successor Company Balance at February 1, 2006 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 — — — — (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 1 2,053 16 (4 ) 82 2,148 Net income — — 403 — — 403 Other comprehensive income, net: Unrealized gains on financial instruments, net — — — — 5 5 Pension and other postretirement plans
(Note 9) Net gain arising during period, net $63 of
tax — — — — 102 102 Less: amortization of prior period gains, net — — — — (8 ) (8 ) Total pension and other postretirement
plans — — — — 94 94 Total comprehensive income, net — — 403 — 99 502 Common stock distribution declared — — (257 ) — — (257 ) Preferred stock dividends — — (10 ) — — (10 ) Tax adjustment on SFAS 158 adoption (Note 11) — — — — (40 ) (40 ) Share-based compensation — 49 — — — 49 Proceeds from exercise of stock options — 35 — — — 35 Adoption of FIN 48 — 2 — — — 2 Treasury stock acquisitions — — — (11 ) — (11 ) Balance at December 31, 2007 $ 1 $ 2,139 $ 152 $ (15 ) $ 141 $ 2,418 Accumulated Other Additional Retained Comprehensive Common Capital Earnings Treasury Income Stock Invested (Deficit) Stock (Loss) Total Balance at December 31, 2005 $ 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 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 1 5,064 (6,271 ) (1,467 ) (36 ) (2,709 ) Fresh-start adjustments: Cancellation of preferred and common stock (1 ) (5,064 ) — 1,467 — (3,598 ) Elimination of 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 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 — — — — (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 1 2,053 16 (4 ) 82 2,148 Net income — — 403 — — 403 Other comprehensive income, net: Unrealized gains on financial instruments, net — — — — 5 5 Pension and other postretirement plans (Note 9) Net gain arising during period, net $63 of tax — — — — 102 102 Less: amortization of prior period gains, net — — — — (8 ) (8 ) Total pension and other postretirement plans — — — — 94 94 Total comprehensive income, net — — 403 — 99 502 Common stock distribution declared — — (257 ) — (257 ) Preferred stock dividends — — (10 ) — — (10 ) Tax adjustment on SFAS 158 adoption (Note 11) — — — — (40 ) (40 ) Share-based compensation — 49 — — — 49 Proceeds from exercise of stock options — 35 — — — 35 Adoption of FIN 48 — 2 — — — 2 Treasury stock acquisitions — — — (11 ) — (11 ) Balance at December 31, 2007 1 2,139 152 (15 ) 141 2,418 Net loss — — (5,348 ) — — (5,348 ) Other comprehensive income (loss): Unrealized losses on financial instruments — — — — (37 ) (37 ) Pension and other postretirement plans (Note 9) Net gain arising during period — — — — 8 8 Less: amortization of prior period gains — — — — (19 ) (19 ) Total pension and other postretirement plans — — — — (11 ) (11 ) Total comprehensive loss, net — — (5,348 ) — (48 ) (5,396 ) Preferred stock dividends — — (3 ) — — (3 ) Conversion of preferred stock — 374 — — — 374 Sale of common stock — 122 — — — 122 Share-based compensation — 31 — — — 31 Treasury stock acquisitions — — — (11 ) — (11 ) Balance at December 31, 2008 $ 1 $ 2,666 $ (5,199 ) $ (26 ) $ 93 $ (2,465 )
(In millions) Successor Predecessor Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2007 Year Ended
December 31,
2005 Operating revenues: Passenger—United Airlines $ 15,254 $ 13,293 $ 1,074 $ 12,914 Passenger—Regional affiliates 3,063 2,697 204 2,429 Cargo 770 694 56 729 Special operating items (Note 20) 45 — — — Other operating revenues 999 1,196 120 1,232 20,131 17,880 1,454 17,304 Operating expenses: Aircraft fuel 5,003 4,462 362 4,032 Salaries and related costs 4,257 3,907 358 4,014 Regional affiliates 2,941 2,596 228 2,746 Purchased services 1,346 1,146 97 1,049 Aircraft maintenance materials and
outside repairs 1,166 929 80 881 Depreciation and amortization 925 820 68 854 Landing fees and other rent 876 800 75 915 Distribution expenses (Note 2) 779 738 60 775 Aircraft rent 409 386 30 404 Cost of third party sales 312 604 63 656 Special operating items (Note 20) (44 ) (36 ) — 5 Other operating expenses 1,129 1,017 85 1,198 19,099 17,369 1,506 17,529 Earnings (loss) from operations 1,032 511 (52 ) (225 )
Other income (expense):
Interest expense (660 ) (729 ) (42 ) (492 ) Interest income 260 250 6 36 Interest capitalized 19 15 — (3 ) Gain on sale of investment (Note 7) 41 — — — Miscellaneous, net 1 11 — 76 (339 ) (453 ) (36 ) (383 )
Earnings (loss) before reorganization items,
income taxes and equity in earnings of
affiliates
693
58
(88
)
(608
) Reorganization items, net (Note 1) — — 22,709 (20,432 ) Earnings (loss) before income taxes and
equity in earnings of affiliates 693 58 22,621 (21,040 ) Income tax expense 296 29 — — Earnings (loss) before equity in earnings of
affiliates 397 29 22,621 (21,040 ) Equity in earnings of affiliates, net of tax 5 3 5 4 Net income (loss) $ 402 $ 32 $ 22,626 $ (21,036 ) Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Operating revenues: Passenger—United Airlines $ 15,337 $ 15,254 $ 13,293 $ 1,074 Passenger—Regional affiliates 3,098 3,063 2,697 204 Cargo 854 770 694 56 Special operating items (Note 19) — 45 — — Other operating revenues 948 999 1,196 120 20,237 20,131 17,880 1,454 Operating expenses: Aircraft fuel 7,722 5,003 4,462 362 Salaries and related costs 4,312 4,257 3,907 358 Regional affiliates 3,248 2,941 2,596 228 Purchased services 1,375 1,346 1,146 97 Aircraft maintenance materials and outside repairs 1,096 1,166 929 80 Depreciation and amortization 932 925 820 68 Landing fees and other rent 862 876 800 75 Distribution expenses 710 779 738 60 Aircraft rent 411 409 386 30 Cost of third party sales 269 312 604 63 Goodwill impairment (Note 3) 2,277 — — — Other impairments and special items (Notes 3 and 19) 339 (44 ) (36 ) — Other operating expenses 1,077 1,129 1,017 85 24,630 19,099 17,369 1,506 Earnings (loss) from operations (4,393 ) 1,032 511 (52 ) Other income (expense): Interest expense (523 ) (660 ) (729 ) (42 ) Interest income 112 260 250 6 Interest capitalized 20 19 15 — Gain on sale of investment (Note 20) — 41 — — Miscellaneous, net (Note 13) (550 ) 1 11 — (941 ) (339 ) (453 ) (36 ) Earnings (loss) before reorganization items, income taxes and equity in earnings of affiliates (5,334 ) 693 58 (88 ) Reorganization items, net (Note 4) — — — 22,709 Earnings (loss) before income taxes and equity in earnings of affiliates (5,334 ) 693 58 22,621 Income tax expense (benefit) (22 ) 296 29 — Earnings (loss) before equity in earnings of affiliates (5,312 ) 397 29 22,621 Equity in earnings of affiliates, net of tax 6 5 3 5 Net income (loss) $ (5,306 ) $ 402 $ 32 $ 22,626 December 31, 2007 2006 Assets Current assets: Cash and cash equivalents $ 1,239 $ 3,779 Short-term investments 2,259 308 Restricted cash 291 303 Receivables, less allowance for doubtful accounts (2007—$27; 2006—$27) 880 814 Prepaid fuel 493 283 Aircraft fuel, spare parts and supplies, less obsolescence allowance (2007—$25;
2006—$6) 242 218 Receivables from related parties 151 154 Deferred income taxes 72 114 Prepaid expenses and other 513 348 6,140 6,321 Operating property and equipment: Owned— Flight equipment 9,329 8,952 Advances on flight equipment 91 91 Other property and equipment 1,669 1,441 11,089 10,484 Less—accumulated depreciation and amortization (1,062 ) (502 ) 10,027 9,982 Capital leases— Flight equipment 1,449 1,511 Other property and equipment 34 34 1,483 1,545 Less—accumulated amortization (168 ) (81 ) 1,315 1,464 11,342 11,446 Other assets: Intangibles, less accumulated amortization (Note 8) (2007—$324; 2006—$169) 2,871 3,028 Goodwill (Note 8) 2,280 2,703 Restricted cash 431 506 Aircraft lease deposits 340 539 Investments (Note 7) 122 113 Note receivable from affiliates (Note 19) — 201 Other, net 710 724 6,754 7,814 $ 24,236 $ 25,581 December 31, 2008 2007 Current assets: Cash and cash equivalents $ 2,033 $ 1,239 Short-term investments — 2,259 Restricted cash 50 291 Fuel hedge collateral deposits 953 — Receivables, less allowance for doubtful accounts (2008—$24; 2007—$27) 704 880 Prepaid fuel 219 493 Deferred income taxes 260 72 Receivables from related parties 214 151 Aircraft fuel, spare parts and supplies, less obsolescence allowance (2008—$48; 2007—$25) 237 242 Prepaid expenses and other 376 513 5,046 6,140 Operating property and equipment: Owned— Flight equipment 8,766 9,329 Advances on flight equipment — 91 Other property and equipment 1,751 1,669 10,517 11,089 Less—accumulated depreciation and amortization (1,598 ) (1,062 ) 8,919 10,027 Capital leases— Flight equipment 1,578 1,449 Other property and equipment 39 34 1,617 1,483 Less—accumulated amortization (224 ) (168 ) 1,393 1,315 10,312 11,342 Other assets: Intangibles, less accumulated amortization (Note 3) (2008—$339; 2007—$324) 2,693 2,871 Goodwill (Note 3) — 2,280 Aircraft lease deposits 297 340 Restricted cash 217 431 Investments (Note 20) 81 122 Other, net (Note 3) 986 710 4,274 6,754 $ 19,632 $ 24,236 StatementsStatements..
87 December 31, 2007 2006 Liabilities and Stockholder's Equity Current liabilities: Advance ticket sales $ 1,918 $ 1,669 Mileage Plus deferred revenue 1,268 1,111 Accounts payable 882 671 Accrued salaries, wages and benefits 896 795 Advanced purchase of miles (Note 18) 694 681 Long-term debt maturing within one year (Note 12) 678 1,687 Fuel purchase commitments 493 283 Current obligations under capital leases (Note 16) 250 110 Accrued interest 141 241 Other 723 922 7,943 8,170
Long-term debt (Note 12)
6,412
7,449Long-term obligations under capital leases (Note 16) 1,106 1,350
Other liabilities and deferred credits:
Mileage Plus deferred revenue 2,569 2,569 Postretirement benefit liability (Note 9) 1,829 1,955 Deferred income taxes 555 596 Other 895 899 5,848 6,019
Commitments and contingent liabilities (Note 15)
Parent company mandatorily convertible preferred securities (Note 13) 371 361
Stockholder's equity:
Common stock at par, $5 par value; authorized 1,000 shares; issued 205 shares at
December 31, 2007 — — Additional capital invested 2,000 2,127 Retained earnings 415 23 Accumulated other comprehensive income 141 82 2,556 2,232 $ 24,236 $ 25,581 December 31, 2008 2007 Current liabilities: Advance ticket sales $ 1,530 $ 1,918 Mileage Plus deferred revenue 1,414 1,268 Accounts payable 833 882 Long-term debt maturing within one year (Note 12) 780 678 Accrued salaries, wages and benefits 756 896 Fuel derivative payable (Note 13) 858 — Fuel purchase commitments 219 493 Current obligations under capital leases (Note 15) 168 250 Accrued interest 112 141 Advanced purchase of miles (Note 17) — 694 Other 876 723 7,546 7,943 Long-term debt (Note 12) 6,007 6,412 Long-term obligations under capital leases (Note 15) 1,192 1,106 Other liabilities and deferred credits: Mileage Plus deferred revenue 2,768 2,569 Postretirement benefit liability (Note 9) 1,812 1,829 Advanced purchase of miles (Note 17) 1,087 — Deferred income taxes 719 555 Other 981 895 7,367 5,848 Commitments and contingent liabilities (Note 14) Parent company mandatorily convertible preferred securities (Note 5) — 371 Stockholder’s equity (deficit): Common stock at par, $5 par value; authorized 1,000 shares; issued 205 shares at December 31, 2008 and 2007 — — Additional capital invested 2,578 2,000 Retained earnings (deficit) (5,151 ) 415 Accumulated other comprehensive income 93 141 (2,480 ) 2,556 $ 19,632 $ 24,236
(In millions) Successor Predecessor Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2007 Year Ended
December 31,
2005 Cash flows provided (used) by operating activities: Net income (Successor Company) $ 402 $ 32 $ — $ — Loss before reorganization items (Predecessor Company) — — (83 ) (604 ) Adjustments to reconcile to net cash provided (used) by
operating activities— Depreciation and amortization 925 820 68 871 Deferred income taxes 318 29 — (12 ) Mileage Plus deferred revenue and advanced purchase of
miles 170 269 14 329 Share-based compensation 49 159 — — Special items and debt discount amortization (48 ) 47 — 5 Gain on sale of investment (41 ) — — — Postretirement benefit expense, net of contributions 7 76 (9 ) (41 ) Pension expense (benefit), net of contributions (5 ) (4 ) 8 143 Amortization of deferred gains — — (6 ) (81 ) Other operating activities 46 62 9 49 Changes in assets and liabilities— Decrease (increase) in other current assets (269 ) 13 (26 ) (83 ) Increase in advance ticket sales 249 4 109 214 Increase (decrease) in accounts payable 210 50 25 (39 ) Increase (decrease) in accrued liabilities 172 (263 ) 152 154 Decrease (increase) in receivables (58 ) 131 (98 ) 145 2,127 1,425 163 1,050 Cash flows provided (used) by reorganization activities: Reorganization items, net — — 22,709 (20,432 ) Discharge of claims and liabilities — — (24,389 ) — Revaluation of Mileage Plus frequent flyer deferred
revenue — — 2,399 — Revaluation of other assets and liabilities — — (2,111 ) — Increase in aircraft rejection liability — — — 2,860 Increase (decrease) in other liabilities — — 38 124 Increase in non-aircraft claims accrual — — 421 1,220 Pension curtailment, settlement and termination — — 912 16,079 Loss on disposition of property — — — 10 — — (21 ) (139 ) Cash flows provided (used) by investing activities: Net (purchases) sales of short-term investments (1,951 ) (233 ) 2 — Additions to property and equipment (658 ) (332 ) (30 ) (469 ) Proceeds on sale of investments 128 — — — Purchases of EETC securities (96 ) — — — (Increase) decrease in restricted cash 87 322 (203 ) (72 ) Proceeds on disposition of property and equipment 18 40 (1 ) 331 Decrease in segregated funds — 200 — — Other, net (61 ) (52 ) (6 ) (77 ) (2,533 ) (55 ) (238 ) (287 ) Cash flows provided (used) by financing activities: Proceeds from Credit Facility — 2,961 — — Repayment of Credit Facility (1,495 ) (175 ) — — Proceeds from DIP financing — — — 310 Repayment of DIP financing — (1,157 ) — (16 ) Repayment of other long-term debt (1,255 ) (663 ) (24 ) (285 ) Proceeds from issuance of long-term debt 694 — — — Principal payments under capital leases (177 ) (99 ) (5 ) (94 ) Decrease in aircraft lease deposits 80 — — — Proceeds from exercise of stock options 35 10 — — Payment of deferred financing costs (18 ) (66 ) (1 ) (26 ) Other, net 2 2 — 6 (2,134 ) 813 (30 ) (105 ) Increase (decrease) in cash and cash equivalents during the
period (2,540 ) 2,183 (126 ) 519 Cash and cash equivalents at beginning of period 3,779 1,596 1,722 1,203 Cash and cash equivalents at end of period $ 1,239 $ 3,779 $ 1,596 $ 1,722 Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Cash flows provided (used) by operating activities: Net income (loss) before reorganization items $ (5,306 ) $ 402 $ 32 $ (83 ) Adjustments to reconcile to net cash provided (used) by operating activities— Goodwill impairment 2,277 — — — Other impairments and special items 339 (89 ) (36 ) — Depreciation and amortization 932 925 820 68 Mileage Plus deferred revenue and advanced purchase of miles 738 170 269 14 Debt and lease discount amortization 49 41 83 — Share-based compensation 31 49 159 — Deferred income taxes (26 ) 318 29 — Pension expense (benefit), net of contributions (13 ) (5 ) (4 ) 8 Postretirement benefit expense, net of contributions 1 7 76 (9 ) Gain on sale of investment — (41 ) — — Other operating activities (27 ) 46 62 3 Changes in assets and liabilities— Increase in fuel hedge collateral (965 ) — — — Increase in fuel derivative payables 858 — — — Increase (decrease) in accrued liabilities (128 ) 172 (263 ) 152 Increase (decrease) in advance ticket sales (388 ) 249 4 109 Decrease (increase) in other current assets 257 (269 ) 13 (26 ) Decrease (increase) in receivables 197 (58 ) 131 (98 ) Increase (decrease) in accounts payable (49 ) 210 50 25 (1,223 ) 2,127 1,425 163 Cash flows provided (used) by reorganization activities: Reorganization items, net — — — 22,709 Discharge of claims and liabilities — — — (24,389 ) Revaluation of Mileage Plus frequent flyer deferred revenue — — — 2,399 Revaluation of other assets and liabilities — — — (2,111 ) Increase (decrease) in other liabilities — — — 38 Increase in non-aircraft claims accrual — — — 421 Pension curtailment, settlement and termination — — — 912 — — — (21 ) Cash flows provided (used) by investing activities: Net (purchases) sales of short-term investments 2,259 (1,951 ) (233 ) 2 (Increase) decrease in restricted cash 455 87 322 (203 ) Additions to property and equipment (415 ) (658 ) (332 ) (30 ) Additions to deferred software costs (60 ) (65 ) (46 ) — Proceeds from asset sale-leasebacks 274 — — — Proceeds on disposition of property and equipment 93 18 40 (1 ) Proceeds from litigation on advanced deposits 41 — — — Proceeds on sale of investments — 128 — — Purchases of EETC securities — (96 ) — — Decrease in segregated funds — — 200 — Other, net 9 4 (6 ) (6 ) 2,656 (2,533 ) (55 ) (238 ) Cash flows provided (used) by financing activities: Proceeds from Credit Facility — — 2,961 — Repayment of Credit Facility (18 ) (1,495 ) (175 ) — Repayment of other long-term debt (664 ) (1,255 ) (663 ) (24 ) Proceeds from issuance of long-term debt 337 694 — — Dividend to parent (257 ) — — — Capital contributions from parent 163 — — — Principal payments under capital leases (235 ) (177 ) (99 ) (5 ) Decrease in aircraft lease deposits 155 80 — — Payment of deferred financing costs (120 ) (18 ) (66 ) (1 ) Repayment of DIP financing — — (1,157 ) — Proceeds from exercise of stock options — 35 10 — Other, net — 2 2 — (639 ) (2,134 ) 813 (30 ) Increase (decrease) in cash and cash equivalents during the period 794 (2,540 ) 2,183 (126 ) Cash and cash equivalents at beginning of period 1,239 3,779 1,596 1,722 Cash and cash equivalents at end of period $ 2,033 $ 1,239 $ 3,779 $ 1,596 Stockholder'sStockholder’s Equity (Deficit)
(In millions) Receivable
from
Affiliates Common
Stock Additional
Capital
Invested Retained
Earnings
(Deficit) Accumulated
Other
Comprehensive
Income (Loss) Total Predecessor Company Balance at December 31, 2004 $ (1,237 ) $ — $ 4,213 $ (7,773 ) $ (3,331 ) $ (8,128 ) Net loss — — — (21,036 ) — (21,036 ) Other comprehensive income (loss), net: Other — — — — (1 ) (1 ) Unrealized losses on derivatives, net — — — — (3 ) (3 ) Minimum pension liability adjustment — — — — 3,299 3,299 Total comprehensive income (loss), net — — — (21,036 ) 3,295 (17,741 ) Balance at December 31, 2005 (1,237 ) — 4,213 (28,809 ) (36 ) (25,869 ) Net loss before reorganization
items—January 2006 — — — (83 ) — (83 ) Reorganization items—January 2006 — — — (1,392 ) — (1,392 ) Subtotal (1,237 ) — 4,213 (30,284 ) (36 ) (27,344 ) Fresh start adjustments: Unsecured claims and debt discharge — — — 24,389 — 24,389 Valuation adjustments, net — — — (288 ) — (288 ) Balance at January 31, 2006 (1,237 ) — 4,213 (6,183 ) (36 ) (3,243 ) Fresh start adjustments: Elimination of accumulated deficit and
accumulated other comprehensive loss — — — 6,183 36 6,219 Cancellation of receivable from affiliates and
additional capital invested 1,237 — (4,213 ) — — (2,976 ) Issuance of new equity interests in connection
with emergence from Chapter 11 — — 1,952 — — 1,952 Successor Company Balance at February 1, 2006 — — 1,952 — — 1,952 Net income from February 1 to December 31,
2006 — — — 32 — 32 Other comprehensive income (loss), net: Unrealized loss on derivatives, net — — — — (5 ) (5 ) Total comprehensive income, net — — — 32 (5 ) 27 Adoption of SFAS 158, net $47 of tax — — — — 87 87 Preferred stock dividends (Note 13) — — — (9 ) — (9 ) Asset contribution from parent — — 6 — — 6 Share-based compensation — — 159 — — 159 Proceeds from exercise of stock options — — 10 — — 10 Balance at December 31, 2006 — — 2,127 23 82 2,232 Net income — — — 402 — 402 Other comprehensive income, net: Unrealized gains on financial instruments, net — — — — 5 5 Pension and other postretirement plans
(Note 9) Net gain arising during period, net $63 of
tax — — — — 102 102 Less: amortization of prior period gains,
net — — — — (8 ) (8 ) Total pension and other postretirement
plans — — — — 94 94 Total comprehensive income, net — — — 402 99 501 Preferred stock dividends (Note 13) — — — (10 ) — (10 ) Adoption of FIN 48 — — 2 — — 2 Tax adjustment on SFAS 158 adoption (Note 11) — — — — (40 ) (40 ) MPI Note forgiveness (Note 19) — — (213 ) — — (213 ) Share-based compensation — — 49 — — 49 Proceeds from exercise of stock options — — 35 — — 35 Balance at December 31, 2007 $ — $ — $ 2,000 $ 415 $ 141 $ 2,556 Accumulated Receivable Additional Retained Other from Common Capital Earnings Comprehensive Affiliates Stock Invested (Deficit) Income (Loss) Total Balance at December 31, 2005 $ (1,237 ) $ — $ 4,213 $ (28,809 ) $ (36 ) $ (25,869 ) Net loss before reorganization items—January 2006 — — — (83 ) — (83 ) Reorganization items—January 2006 — — — (1,392 ) — (1,392 ) Subtotal (1,237 ) — 4,213 (30,284 ) (36 ) (27,344 ) Fresh start adjustments: Unsecured claims and debt discharge — — — 24,389 — 24,389 Valuation adjustments, net — — — (288 ) — (288 ) Balance at January 31, 2006 (1,237 ) — 4,213 (6,183 ) (36 ) (3,243 ) Fresh start adjustments: Elimination of accumulated deficit and accumulated other comprehensive loss — — — 6,183 36 6,219 Cancellation of receivable from affiliates and additional capital invested 1,237 — (4,213 ) — — (2,976 ) Issuance of new equity interests in connection with emergence from Chapter 11 — — 1,952 — — 1,952 Balance at February 1, 2006 — — 1,952 — — 1,952 Net income from February 1 to December 31, 2006 — — — 32 — 32 Other comprehensive income (loss), net: Unrealized loss on derivatives, net — — — — (5 ) (5 ) Total comprehensive income, net — — — 32 (5 ) 27 Adoption of SFAS 158, net $47 of tax — — — — 87 87 Preferred stock dividends (Note 5) — — — (9 ) — (9 ) Asset contribution from parent — — 6 — — 6 Share-based compensation — — 159 — — 159 Proceeds from exercise of stock options — — 10 — — 10 Balance at December 31, 2006 — — 2,127 23 82 2,232 Net income — — — 402 — 402 Other comprehensive income, net: Unrealized gains on financial instruments, net — — — — 5 5 Pension and other postretirement plans (Note 9) Net gain arising during period, net $63 of tax — — — — 102 102 Less: amortization of prior period gains, net — — — — (8 ) (8 ) Total pension and other postretirement plans — — — — 94 94 Total comprehensive income, net — — — 402 99 501 Preferred stock dividends (Note 5) — — — (10 ) — (10 ) Adoption of FIN 48 — — 2 — — 2 Tax adjustment on SFAS 158 adoption (Note 11) — — — — (40 ) (40 ) MPI note forgiveness (Note 18) — — (213 ) — — (213 ) Share-based compensation — — 49 — — 49 Proceeds from exercise of stock options — — 35 — — 35 Balance at December 31, 2007 — — 2,000 415 141 2,556 Net loss — — — (5,306 ) — (5,306 ) Other comprehensive income (loss): Unrealized losses on financial instruments — — — — (37 ) (37 ) Pension and other postretirement plans (Note 9) Net gain arising during period — — — — 8 8 Less: amortization of prior period gains — — — — (19 ) (19 ) Total pension and other postretirement plans — — — — (11 ) (11 ) Total comprehensive loss, net — — — (5,306 ) (48 ) (5,354 ) Dividend to parent — — — (257 ) — (257 ) Preferred stock dividends (Note 5) — — — (3 ) — (3 ) Conversion of preferred stock — — 374 — — 374 Capital contributions from parent (Note 18) — — 173 — — 173 Share-based compensation — — 31 — — 31 Balance at December 31, 2008 $ — $ — $ 2,578 $ (5,151 ) $ 93 $ (2,480 ) StatementsStatements..
90"UAL"“UAL”) is a holding company whose principal, wholly-owned subsidiary is United Air Lines, Inc. (together with its consolidated subsidiaries, "United"“United”). We sometimes use the words "we," "our," "us"“we,” “our,” “us” and the "Company"“Company” in this Annual Report onForm 10-K for disclosures that relate to both UAL and United. As a result(1) Summary of Significant Accounting Policies (a) Basis of Presentation—UAL is a holding company whose principal subsidiary is United. The Company’s consolidated financial statements include the accounts of its majority-owned affiliates. All significant intercompany transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Reclassifications in theStatements of Consolidated Cash Flowsinclude reclassifications of “Other impairments and special items” and “Additions to deferred software costs” which are currently classified as a separate line items and were historically classified within “Other operating activities” and “Other investing activities,” respectively. adoption ofCompany adopted fresh-start reporting in accordance with American Institute of Certified Public Accountants'Accountants’ Statement of Position90-7,Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("(“SOP 90-7"90-7”), as of February 1, 2006. The Company’s emergence from reorganization resulted in a new reporting entity with no retained earnings or accumulated deficit as of February 1, 2006 (the “Effective Date”). Accordingly, the Company’s consolidated financial statements for periods before February 1, 2006 are not comparable with theto consolidated financial statements for periodspresented on or after February 1, 2006. References to "Successor Company"“Successor Company” refer to UAL and United on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to "Predecessor Company"“Predecessor Company” refer to UAL and United before February 1, 2006. See Note 1, "Voluntary4, “Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting,"” for further details.(b) Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in 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. (c) Airline Revenues—The value of unused passenger tickets and miscellaneous charge orders (“MCOs”) are included in current liabilities as advance ticket sales. United records passenger ticket sales and tickets sold by other airlines for use on United as operating revenues when the transportation is provided or when the ticket expires. Tickets sold by other airlines are recorded at the estimated values to be billed to the other airlines. Non-refundable tickets generally expire on the date of the intended flight, unless the date is extended by notification from the customer
91on or before the intended flight date. Fees charged in association with changes or extensions to non-refundable 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 the initial customer order are separately determined and represent distinct earnings processes. Refundable tickets expire after one year. (d) Cash and Cash Equivalents, Short-Term Investments, Restricted Cash—Cash in excess of operating requirements is invested in short-term, highly liquid 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. Investments classified asheld-to-maturity are stated at amortized cost, which approximates market due to their short-term maturities. Investments in debt securities classified asavailable-for-sale are stated at fair value. The gains or losses from sales ofavailable-for-sale securities are included in other comprehensive income. (1) Voluntary Reorganization held-to-maturity included $1.3 billion and $1.2 billion, respectively, recorded in cash and cash equivalents and $2.3 billion recorded in short-term investments for both UAL and United.
92 Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Cash flows provided (used) from operating activities $ (1,239 ) $ 2,134 $ 1,401 $ 161 Adjustment for (increase) decrease in restricted cash 484 91 313 (203 ) Pro-forma cash flows provided (used) from operating activities $ (755 ) $ 2,225 $ 1,714 $ (42 ) Cash flows provided (used) from investing activities $ 2,721 $ (2,560 ) $ (12 ) $ (238 ) Adjustment for increase (decrease) in restricted cash (484 ) (91 ) (313 ) 203 Pro-forma cash flows provided (used) from investing activities $ 2,237 $ (2,651 ) $ (325 ) $ (35 ) (e) Aircraft Fuel, Spare Parts and Supplies—The Company records fuel, maintenance, operating supplies and aircraft spare parts at cost when acquired and provides an obsolescence allowance for aircraft spare parts. (f) Operating Property and Equipment—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 are recorded at an amount equal to the initial present value of those lease payments. Owned operating property and equipment, and equipment under capital leases, were stated at fair value as of February 1, 2006 upon the adoption of fresh-start reporting. Estimated Useful Life (in years) Aircraft 27 to 30 Buildings 25 to 45 Other property and equipment 4 to 15 Software (a) 5 Aircraft lease terms 3 to 17 Building lease terms 40 (a) The carrying amount of computer software, which is classified as noncurrent other assets in ourStatements of Consolidated Financial Position,was $182 million and $157 million at December 31, 2008 and 2007, respectively.
93(g) Mileage Plus Awards—The Company has an agreement with its co-branded credit card partner that requires our partner to purchase miles in advance of when miles are awarded to theco-branded partner’s cardholders (referred to as “pre-purchased miles”). These sales are deferred when received by United in ourStatements of Consolidated Financial Positionas “Advanced purchase of miles.” Subsequently, when our credit card partner awardspre-purchased miles to its cardholders, we transfer the related air transportation element for the awarded miles from “Advanced purchase of miles” to “Mileage Plus deferred revenue” at estimated fair value and record the residual marketing element as “Other operating revenue.” The deferred revenue portion is then subsequently recognized as passenger revenue when transportation is provided in exchange for the miles awarded. Additional information on accounting for each of these elements is as follows:
94(h) Deferred Gains (Losses)—Gains and losses on aircraft sale and leaseback transactions are deferred and amortized over the terms of the related leases as an adjustment to aircraft rent expense. (i) United Express—United has agreements under which independent regional carriers, flying under the United Express name, connect passengers to other United Expressand/or United flights (the latter of which we also refer to as “mainline” operations, to distinguish them from United Express regional operations). The vast majority of United Express flights are operated under capacity agreements, while a relatively smaller number are operated under prorate agreements.
95(j) Advertising—Advertising costs, which are included in other operating expenses, are expensed as incurred. (k) Intangibles—Goodwill was determined to be completely impaired in 2008. Goodwill represented 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 ofSOP 90-7. Indefinite-lived intangible assets are not amortized but are 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 accelerated basis utilizing cash flows correlating to the expected attrition rate of the Mileage Plus database. The other customer relationships, which are included in “Contracts,” are amortized in a manner consistent with the timing and amount of revenues that the Company expects to generate from these customer relationships. All other definite-lived intangible assets are amortized on a straight-line basis over the estimated lives of the related assets. (l) Measurement of Impairments—In accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“SFAS 144”) 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 the 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’s carrying value and fair market value. See Note 3, “Asset Impairments and Intangible Assets,” for information related to asset impairments recognized in 2008. (m) Share-Based Compensation—Stock-based compensation is accounted for in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment(“SFAS 123R”) effective January 1, 2006. SFAS 123R requires companies to measure the cost of employee services received in exchange 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
96an employee is required to provide service in exchange for the award, usually the vesting period. See Note 7, “Share-Based Compensation Plans,” for additional information. (n) Ticket 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) Early Retirement of Leased Aircraft—The Company accrues for the present value of future minimum lease payments, net of estimated sublease rentals (if any) in the period aircraft are removed from service. When reasonably estimable and probable, the Company estimates maintenance lease return condition obligations for items such as minimum aircraft and engine conditions specified in leases and accrues these amounts as contingent rent ratably over the lease term while the aircraft are operating, and any remaining unrecognized estimated obligations are accrued in the period an aircraft is removed from service. In addition, the Company accrues for an early termination lease penalty in the period that the Company executes an early return agreement with a lessor. (p) New Accounting Pronouncements—In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(“APB14-1”). APB14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. APB14-1, which is applied retrospectively, is effective for the Company beginning January 1, 2009. The Company estimates that the fair value of the equity component of its two convertible debt instruments that may be cash settled was approximately $250 million at the time of issuance of these instruments. This discount will be applied retrospectively to the Company’s financial statements from the date of adoption of fresh-start reporting and amortized over the expected five-year life of the notes resulting in increased interest expense in historical and future periods.
97(q) Income Tax Contingencies—The Company has recorded reserves for income taxes and associated interest that may become payable in future years. Certain of these reserves are for uncertain income tax positions which are accounted for in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), effective January 1, 2007. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has 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. The Company’s tax contingency reserves are reviewed periodically and are adjusted as events occur that affect 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, the identification of new tax contingencies, the release of administrative tax guidance affecting its estimates of tax liabilities,
98or the rendering of relevant court decisions. See Note 8, “Income Taxes,” for further information related to uncertain income tax positions and the adoption of FIN 48. (2) Company Operational Plans • The Company is significantly reducing mainline domestic and consolidated capacity. Fourth quarter 2008 mainline domestic and consolidated capacity were down approximately 14% and 11%year-over-year, respectively. The Company is planning to further decrease mainline domestic and consolidated capacity in 2009. • The capacity reductions are being made through reductions in frequencies of routes and the elimination of unprofitable routes. These actions have resulted in the closure of a small number of airport operations where United cannot operate profitably in the current economic environment. Additional airport operations may be closed in future periods. • The Company has announced plans to permanently remove 100 aircraft from its mainline fleet, including its entire B737 fleet and six B747 aircraft, by the end of 2009. The B737 aircraft being retired are some of the oldest and least fuel efficient in the Company’s fleet. This planned reduction reflects the Company’s efforts to eliminate unprofitable capacity and divest the Company of assets that currently do not provide an acceptable return. • United is eliminating its Ted product for leisure markets and will reconfigure that fleet’s 56 A320s to include United First seating. The reconfiguration of the Ted aircraft will occur in stages, with expected completion by year-end 2009. We will continue to review the deployment of all of our aircraft in various markets and the overall composition of our fleet to ensure that we are using our assets appropriately to provide the best available return. • In connection with the capacity reductions, the Company is further streamlining its operations and corporate functions in order to reduce the size of its workforce to match the size of its operations. • The Company also recently entered into an alliance partnership with Continental Airlines that is expected to create revenue enhancements, costs savings and operational efficiencies. • The Company is managing its liquidity by investing only in those projects that are considered high-value, such as the international premium product. The Company has $0.2 billion of binding commitments for the purchase of property in 2009 and $0.8 billion of long-term debt obligations in 2009. • As of December 31, 2008, the Company has 62 unencumbered aircraft and other assets that may be used as collateral to obtain additional financing. The Company could also sell certain of these assets to generate liquidity.
99• As discussed in Note 23, “Subsequent Events,” in January 2009, the Company completed several financing-related transactions which generated approximately $315 million of proceeds. Balance at January 1, 2008 $ — Accruals 106 Payments (25 ) Balance at December 31, 2008 $ 81 B737s (Mainline) All Other Mainline Total Regional Owned Leased Total Owned Leased Total Mainline Affiliates Total Operating: Aircraft at December 31, 2007 (a) 47 47 94 208 158 366 460 279 739 Added (removed) from operating fleet (29 ) (19 ) (48 ) (3 ) — (3 ) (51 ) 1 (50 ) Converted from owned to leased (b) — — — (24 ) 24 — — — — Converted from leased to owned (c) — — — 10 (10 ) — — — — Aircraft at December 31, 2008 (d) 18 28 46 191 172 363 409 280 689 Removed from operating fleet in 2008 (e) 29 19 48 3 — 3 51 — 51 Sold/returned to lessor during 2008 (5 ) (7 ) (12 ) — — — (12 ) — (12 ) Nonoperating at December 31, 2008 (a) (e) 24 12 36 3 — 3 39 — 39 (a) At December 31, 2007, the Company had 113 unencumbered aircraft. In 2007, United leased one operating aircraft from UAL and therefore had one less owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet. This particular aircraft became nonoperational in 2008; therefore, United has one less nonoperating owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet at December 31, 2008.
100(b) During 2008, the Company sold 24 aircraft and leased them back. See Note 15, “Lease Obligations,” for additional information related to these sale-leaseback transactions. (c) During 2008, the Company acquired certain aircraft under existing lease terms. (d) At December 31, 2008, United’s operating fleet was the same as UAL’s fleet and included 62 unencumbered aircraft. The unencumbered aircraft at December 31, 2008 exclude nine aircraft which became encumbered with the December 2008 signing of a binding sale-leaseback agreement that closed in January 2009. See Note 12, “Debt Obligations and Card Processing Agreements,” and Note 23, “Subsequent Events,” for additional information. (e) As of December 31, 2008, the owned nonoperating aircraft and engines are classified as Other non-current assets in the Company’sStatements of Consolidated Financial Position.These aircraft are not classified as assets held for sale because the assets may not be sold within one year. As a result of the impairment testing discussed in Note 3, “Asset Impairments and Intangible Assets,” these assets have been recorded at their net realizable value of $198 million at December 31, 2008. (3) Asset Impairments and Intangible Assets
101 Year Ended December 31, 2008 Goodwill impairment $ 2,277 Indefinite-lived intangible assets: Codeshare agreements 44 Tradenames 20 Intangible asset impairments 64 Tangible assets: Pre-delivery advance deposits including related capitalized interest 105 B737 aircraft, B737 spare parts and other 145 Aircraft and related deposit impairments 250 Total impairments $ 2,591 Chapter 11the market approaches, the fair value of the mainline reporting unit was estimated based upon the fair value of invested capital for UAL, as well as a separate comparison to revenue and EBITDAR multiples for similar publicly traded companies in the airline industry. The fair value estimates using both market approaches included a control premium similar to those observed for historical airline and transportation company market transactions.
103 Weighted Average Life of 2008 2007 Assets Gross Carrying Accumulated Gross Carrying Accumulated (Dollars in millions) (in years) Amount Amortization Amount Amortization Amortized intangible assets Airport slots and gates 9 $ 72 $ 30 $ 72 $ 22 Hubs 20 145 22 145 14 Patents 3 70 68 70 45 Mileage Plus database 7 521 179 521 137 Contracts 13 140 35 216 101 Other 7 13 5 18 5 10 $ 961 $ 339 $ 1,042 $ 324 Unamortized intangible assets Goodwill $ — $ 2,280 Airport slots and gates 237 255 Route authorities 1,146 1,146 Tradenames 688 752 $ 2,071 $ 4,433 (4) Voluntary Reorganization Under Chapter 11 Company'sCompany’s Chapter 11 cases and is not intended to be an exhaustive summary. Detailed information pertaining to the bankruptcy filings may be obtained atwww.pd-ual.com."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
104"Bankruptcy Court"“Bankruptcy Court”). 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”). Pursuant to the Plan of Reorganization, UAL issued new debt and equity securities to certain of its creditors. On the Effective Date, the Company implemented fresh-start reporting. The Plan of Reorganization generally provided 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' creditors and employees in satisfaction of allowed unsecured and deemed claims. The Plan of Reorganization contemplated 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), including approximately 115 million shares of common stock to unsecured creditors and employees, up to 9.825 million shares of common stock (or options or other rights to acquire shares) under the management equity incentive plan approved by the Bankruptcy Court; and up to 175,000 shares of common stock (or options or other rights to acquire shares) under the director equity incentive plan approved by the Bankruptcy Court. The new common stock was listed on the NASDAQ National Market and began trading under the symbol "UAUA" on February 2, 2006. Pursuant to the Plan of Reorganization, UAL issued 5 million shares of 2% mandatorily convertible preferred stock to the Pension Benefit Guaranty Corporation ("PBGC"), approximately $150 million in aggregate principal amount of 5% senior convertible notes issued to holders of certainUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(1) Voluntary Reorganization Under Chapter 11 (Continued)municipal bonds, $726 million in aggregate principal amount of 4.5% senior limited-subordination convertible notes issued in July 2006 to certain irrevocable trusts established for the benefit of certain employees, and $500 million in aggregate principal amount of 6% senior notes issued to the PBGC. Pursuant to the Plan of Reorganization, UAL may also be obligated to issue up to $500 million of 8% senior unsecured notes to the PBGC contingent upon UAL's future financial performance. See Note 12, "Debt Obligations," for further information.2007.2008. During 2007, matters2008, the San Francisco International Airport (“SFO”) municipal bond secured interest matter was resolved. HSBC Bank Inc. (“HSBC”), as trustee for the 1997 municipal bonds related to SFO, had filed a complaint against United asserting a security interest in United’s leasehold for portions of its maintenance base at SFO. HSBC alleged that it was entitled to be paid the terminationvalue of that security interest, which HSBC had once 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. United Airlines Pilot Defined Benefit Pension Plan (the "Pilot Plan") were resolved inhas accrued this amount as its estimated obligation at December 31, 2008. During 2008, HSBC withdrew its appeal to the Company's favor. The matters generally involved (a) whether the Pilot Plan should have been involuntary terminated under the Employee Retirement Income Security Act, and (b) the obligationSeventh Circuit Court of Appeals of the CompanyDistrict Court’s affirmance of the October 2006 Bankruptcy Court ruling. The matter is now final and United expects to make benefit payments underpay the plan pending the resolution of such termination. These matters were resolved during 2007 as a result of favorable rulings by the applicable courts and exhaustion of all avenues available for appeal. The following matters remain to be resolved in There is pending litigation before the Bankruptcy Court or another court.regarding the extent to which the Los Angeles International Airport (“LAX”) municipal bond debt is entitled to secured status under Section 506(a) of the Bankruptcy Code. At December 31, 2006, United had accrued $60 million for this matter. Trial on this matter occurred during April 2007 and the two parties filed post-trial briefs in the second quarter of 2007. In August 2007, the Bankruptcy Court issued its written opinion holding that the value of the security interest is approximately $33 million, which United had accrued at December 31, 2007 and 2008. The District Court affirmed the Bankruptcy Court’s rulings and the trustee for the bondholders has appealed the matter to the Seventh Circuit Court of Appeals, which is pending. SeeClaims Resolution ProcessShare-Based Payment, below,(“SFAS 123R”) effective January 1, 2006. SFAS 123R requires companies to measure the cost of employee services received in exchange for detailsan award of special items recognized inequity instruments based on theStatements of Consolidated Operations for these matters.(a)SFO Municipal Bond Secured Interest. HSBC Bank Inc. ("HSBC"), as trustee for the 1997 municipal bonds related to San Francisco International Airport ("SFO"), filed a complaint against United asserting a security interest in United's leasehold for portions of its 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 grant-date fair value of the security interestaward. The resulting cost is approximately $27 million.recognized over the period during which
96an employee is required to provide service in exchange for the award, usually the vesting period. See Note 7, “Share-Based Compensation Plans,” for additional information. (n) Ticket Taxes—Certain governmental taxes are imposed on United’s ticket sales through a fee included in ticket prices. United has accrued this amount as its estimated obligation at December 31, 2007. After the Bankruptcy Court denied various post-trial motions, both parties have appealedcollects these fees and remits them to the District Courtappropriate government agency. These fees are recorded on a net basis (excluded from operating revenues).(o) Early Retirement of Leased Aircraft—The Company accrues for the present value of future minimum lease payments, net of estimated sublease rentals (if any) in the period aircraft are removed from service. When reasonably estimable and those appealsprobable, the Company estimates maintenance lease return condition obligations for items such as minimum aircraft and engine conditions specified in leases and accrues these amounts as contingent rent ratably over the lease term while the aircraft are pending.(b)LAX Municipal Bond Secured Interest. Thereoperating, and any remaining unrecognized estimated obligations are accrued in the period an aircraft is pending litigation beforeremoved from service. In addition, the Bankruptcy Court regardingCompany accrues for an early termination lease penalty in the extentperiod that the Company executes an early return agreement with a lessor.(p) New Accounting Pronouncements—In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(“APB14-1”). APB14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to whichseparately account for the Los Angeles International Airport ("LAX") municipal bond debt is entitled to secured status under Section 506(a)liability (debt) and equity (conversion option) components of the Bankruptcy Code. At December 31, 2006, United had accrued $60 millioninstrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. APB14-1, which is applied retrospectively, is effective for this matter. Trial on this matter occurred during April 2007 and the two parties filed post-trial briefs in the second quarter of 2007. In August 2007, the Bankruptcy Court issued its written opinion holdingCompany beginning January 1, 2009. The Company estimates that the fair value of the security interest isequity component of its two convertible debt instruments that may be cash settled was approximately $33$250 million which United has accrued at December 31, 2007. Both parties have appealedthe time of issuance of these instruments. This discount will be applied retrospectively to the District CourtCompany’s financial statements from the date of adoption of fresh-start reporting and those appealsamortized over the expected five-year life of the notes resulting in increased interest expense in historical and future periods.
97(q) Income Tax Contingencies—The Company has recorded reserves for income taxes and associated interest that may become payable in future years. Certain of these reserves are pending. Claims Resolution Process. As permitted under the bankruptcy process, the Debtors' creditors filed proofs of claimfor uncertain income tax positions which are accounted for in accordance with the Bankruptcy Court. Through the claims resolution process,FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), effective January 1, 2007. Although management believes that its positions taken on income tax matters are reasonable, the Company identified many claims which were disallowednevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the Bankruptcy CourtCompany, potentially resulting in additional liabilities for taxes and interest. The Company’s tax contingency reserves are reviewed periodically and are adjusted as events occur that affect 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, the identification of new tax contingencies, the release of administrative tax guidance affecting its estimates of tax liabilities,
98or the rendering of relevant court decisions. See Note 8, “Income Taxes,” for further information related to uncertain income tax positions and the adoption of FIN 48. (2) Company Operational Plans
99• As discussed in Note 23, “Subsequent Events,” in January 2009, the Company will continue to settle claims and file objections with the Bankruptcy Court to eliminate or reduce such claims. In addition, certain disputes, the most significantcompleted several financing-related transactions which generated approximately $315 million 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. The Company accrued an obligation for claims it believed were reasonably estimable and probable at the Effective Date. However, the claims resolution process is uncertain and adjustments to claims estimates could result in material adjustments to the Successor Company's financial statements in future periods as a result of court rulings, the receipt of new or revised information or the finalization of these matters. 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 twelve and eleven monthsproceeds. Balance at January 1, 2008 $ — Accruals 106 Payments (25 ) Balance at December 31, 2008 $ 81 B737s (Mainline) All Other Mainline Total Regional Owned Leased Total Owned Leased Total Mainline Affiliates Total Operating: Aircraft at December 31, 2007 (a) 47 47 94 208 158 366 460 279 739 Added (removed) from operating fleet (29 ) (19 ) (48 ) (3 ) — (3 ) (51 ) 1 (50 ) Converted from owned to leased (b) — — — (24 ) 24 — — — — Converted from leased to owned (c) — — — 10 (10 ) — — — — Aircraft at December 31, 2008 (d) 18 28 46 191 172 363 409 280 689 Removed from operating fleet in 2008 (e) 29 19 48 3 — 3 51 — 51 Sold/returned to lessor during 2008 (5 ) (7 ) (12 ) — — — (12 ) — (12 ) Nonoperating at December 31, 2008 (a) (e) 24 12 36 3 — 3 39 — 39 (a) At December 31, 2007, the Company had 113 unencumbered aircraft. In 2007, United leased one operating aircraft from UAL and 2006, respectively. These reservestherefore had one less owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet. This particular aircraft became nonoperational in 2008; therefore, United has one less nonoperating owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet at December 31, 2008.
100(3) 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 liabilitiesAsset Impairments and recorded as other current assets before the Effective Date, was released and reclassified to unrestricted cash.Intangible Assets Goodwill. During the eleven months ended December 31, 2006, goodwill was decreased by $62 million as a result of reversing the valuation allowance for deferred tax assets. See Note 8, "Intangibles," for further information. DIP and Credit Facility Financing Transactions. On the Effective Date, the Company received $1.4 billion in net proceeds from the credit facility, consisting 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 debtor-in-possession credit facility (the "DIP Financing"). For further details, see Note 12, "Debt Obligations."
101 Year Ended December 31, 2008 Goodwill impairment $ 2,277 Indefinite-lived intangible assets: Codeshare agreements 44 Tradenames 20 Intangible asset impairments 64 Tangible assets: Pre-delivery advance deposits including related capitalized interest 105 B737 aircraft, B737 spare parts and other 145 Aircraft and related deposit impairments 250 Total impairments $ 2,591
103 Weighted Average Life of 2008 2007 Assets Gross Carrying Accumulated Gross Carrying Accumulated (Dollars in millions) (in years) Amount Amortization Amount Amortization Amortized intangible assets Airport slots and gates 9 $ 72 $ 30 $ 72 $ 22 Hubs 20 145 22 145 14 Patents 3 70 68 70 45 Mileage Plus database 7 521 179 521 137 Contracts 13 140 35 216 101 Other 7 13 5 18 5 10 $ 961 $ 339 $ 1,042 $ 324 Unamortized intangible assets Goodwill $ — $ 2,280 Airport slots and gates 237 255 Route authorities 1,146 1,146 Tradenames 688 752 $ 2,071 $ 4,433 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(4) (1) Voluntary Reorganization Under Chapter 11 (Continued) Adjustments of Preconfirmation Contingencies. The Company recorded its best estimates for certain preconfirmation contingent liabilities that were not resolved at the Effective Date. 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 as discussed in the "Claims Resolution Process" section above and in Note 20, "Special Items."(2) Summary of Significant Accounting Policies (a) Basis of Presentation—UAL is a holding company whose principal subsidiary is United. The Company's consolidated financial statements include the accounts of its majority-owned affiliates. All significant intercompany transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation.
104 Upon emergence from its Chapter 11 proceedings, the Company adopted fresh-start reporting in accordance with SOP 90-7 as of February 1, 2006. The Company's emergence from reorganization resulted in a 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 consolidated financial statements presented on or after February 1, 2006. (b) Reclassifications—In 2007, UAL and United changed their classification of certain distribution-related costs, previously included in purchased services and commissions, to classify these costs as distribution expenses in theStatements of Consolidated Operations. Prior to 2007, "Commissions" were reported as a separate expense item and credit card transaction fees and global distribution systems ("GDS") transaction expenses were part of the "Purchased services" line item. The distribution expenses previously reported for the month of January 2006, the eleven months ended December 31, 2006 and the year ended December 31, 2005 were reclassified to provide a comparable presentation with results for the year ended December 31, 2007. Amounts originally reported in the Company's 2006 Annual Report on Form 10-K as "Commissions" and amounts reported as part of "Purchased services"UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summary of Significant Accounting Policies (Continued)that have been reclassified to "Distribution expenses" in the Company's 2007 Annual Report on Form 10-K are shown below: Successor Predecessor (In millions) Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 UAL and United Commissions (historical) $ 291 $ 24 $ 305 Purchased services (historical) 447 36 470 Distribution expenses (new) $ 738 $ 60 $ 775 UAL Purchased services (historical) $ 1,595 $ 134 $ 1,524 Reclassed to distribution expense (447 ) (36 ) (470 ) Purchased services (new) $ 1,148 $ 98 $ 1,054 United Purchased services (historical) $ 1,593 $ 133 $ 1,519 Reclassed to distribution expense (447 ) (36 ) (470 ) Purchased services (new) $ 1,146 $ 97 $ 1,049 (c) Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in 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 were remeasured using fair value, which was 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. The Company also estimates fair value of its financial instruments and its reporting units and indefinite-lived intangible assets for testing impairment of indefinite-lived intangible assets, including goodwill. 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. (d) Airline Revenues—The value of unused passenger tickets and miscellaneous charge orders ("MCO's") are included in current liabilities as advance ticket sales. United records passenger ticket sales and tickets sold by other airlines for use on United as operating revenues when the transportation is provided or when the ticket expires. Tickets sold by other airlines are recorded at the estimated values to be billed to the other airlines. Non-refundable tickets generally expire on the date of theUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summary of Significant Accounting Policies (Continued)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 the initial customer order are separately determined and represent distinct earnings processes. Refundable tickets expire after one year. MCO's can be either exchanged for a passenger ticket or refunded after issuance. United also records an estimate of MCO's that will not be exchanged or refunded as revenue ratably over the validity period based on historical results. United records an estimate of tickets that have been used, but not recorded as revenue due to system processing errors, as revenue in the month of sale 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 historical results. United recognizes cargo and mail revenue as service is provided. (e) Cash and Cash Equivalents, Short-Term Investments, 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. Investments classified as held-to-maturity are stated at amortized cost, which approximates market due to their short-term maturities. Investments in debt securities classified as available-for-sale are stated at fair value. The gains or losses from sales of available-for-sale securities are included in interest income. At December 31, 2007, UAL's and United's investments in debt securities classified as held-to-maturity included $1.3 billion and $1.2 billion, respectively, recorded in cash and cash equivalents and $2.3 billion recorded in short-term investments for both UAL and United. At December 31, 2006, UAL and United both had investments in debt securities classified as held-to-maturity of $3.8 billion and recorded in cash and cash equivalents and $312 million and $308 million, respectively, recorded in short-term investments. Short-term and long-term restricted cash in the Company'sStatements of Consolidated Financial Position represents security for workers' compensation obligations, security deposits for airport leases and reserves with institutions that process our credit card ticket sales. Financial and other institutions with which the Company conducts its business may require additional levels of security deposits or reserve holdbacks. Note 7, "Investments," for information related to the Company's investments in non-current debt securities. (f) Aircraft Fuel, Spare Parts and Supplies—The Company records fuel, maintenance, operating supplies, and aircraft spare parts at cost when acquired, and provides an obsolescence allowance for aircraft spare parts. (g) Operating Property and Equipment—Owned operating property and equipment, and equipment under capital leases, were stated at fair value as of February 1, 2006. The Company records additionsUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summary of Significant Accounting Policies (Continued)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' 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 27 to 30 years; buildings are depreciated over lives of 25 to 45 years; and other property and equipment are depreciated over lives of 4 to 15 years. 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 5 to 17 years for aircraft and 40 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-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. (h) Mileage Plus Awards—As a result of the adoption of fresh-start reporting, the Mileage Plus frequent flyer obligation was revalued at the Effective Date to reflect the estimated fair value of miles to be redeemed in the future. Outstanding miles earned by flying United or its partner carriers were revalued using a weighted-average per-mile equivalent ticket value, taking into account such factors as historical redemption patterns, differing classes of service and domestic and international ticket itineraries, which can be reflected in awards chosen by Mileage Plus members. The Successor Company also elected to change its accounting policy as of the Effective Date from an incremental cost basis to a deferred revenue model, to measure its obligation for miles to be redeemed based upon the equivalent ticket value of similar fares on United or amounts paid to Star Alliance partners, as applicable. Effective December 31, 2007, United's policy for customer accounts which are inactive for a period of 18 consecutive months is to cancel all miles contained in those accounts at the end of the 18 month period of inactivity. The Company recognizes revenue from the expiration of miles in such deactivated accounts by amortizing such expiration over the 18 month expiration period. Prior to December 31, 2007, the expiration period was 36 months and revenue from expiration was amortized over the 36 month expiration period. This change in the expiration period provided a benefit to United's operating revenues of $246 million for the year ended December 31, 2007. The pre-tax diluted per share benefit to UAL was approximately $1.60 for the year ended 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 revenue balance, as well as passenger revenues. See Note 18, "Advanced Purchase of Miles," for additional information related to the Mileage Plus program.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summary of Significant Accounting Policies (Continued) (i) 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. (j) United Express—United has 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 which we also refer to as "mainline" operations, to distinguish them from United Express regional operations). The vast majority of United Express flights are operated under capacity agreements, while a relatively smaller number are operated under prorate agreements. United Express operating revenues and expenses are classified as "Passenger—Regional Affiliates" and "Regional affiliates," respectively, in theStatements of Consolidated Operations, the latter includes both allocated and 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'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, the Company estimates United Express's portion of total expense and allocates the applicable portion of expense to the United Express carrier. United has the right to exclusively operate and direct the operations of these aircraft, and accordingly the minimum future lease payments for these aircraft are included in the Company's lease obligations. See Note 10, "Segment Information" and Note 16, "Lease Obligations," for additional information related to United Express. The Company recognizes revenue as flown on a net basis for flights on United Express covered by prorate agreements. United has call options on 152 regional jet aircraft currently being operated by certain United Express carriers. At December 31, 2007, none of the call options were exercisable because none of the required conditions to make an option exercisable by the Company were met. (k) Advertising—Advertising costs, which are included in other operating expenses, are expensed as incurred. (l) 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. Indefinite-lived intangible assets are not amortized but are 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 accelerated basis utilizing cash flows correlating to the expected attrition rate of the Mileage Plus database. The other customer relationships, which are included in "Contracts," are amortized in a manner consistent with the timing and amount of revenues that the Company expects to generate from these customer relationships. All other definite-lived intangible assets are amortized on a straight-line basis over the estimated lives of the related assets.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summary of Significant Accounting Policies (Continued) 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 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. 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 reporting unit to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets of a reporting unit exceeds the fair value of the reporting unit, 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 its reporting units considering both the market and income approaches. Under the market approach, fair value is based on a comparison of similar publicly traded companies. Under the income approach, fair value 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. No impairments of goodwill or indefinite-lived assets have been identified since the Effective Date. See Note 8, "Intangibles" for additional information. (m) Measurement of Impairments—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 the 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's carrying value and fair market value. (n) Share-Based Compensation—The Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment ("(“SFAS 123R"123R”) effective January 1, 2006. This pronouncementSFAS 123R requires companies to measure the cost of employee services received in exchange 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
96an 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") and 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 the Company's financial statements for 2005, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. If compensation cost for stock-based employee compensation plans had been determined using the fair value recognition provisions of SFAS 123, the Company's 2005 net loss and loss per share would have increased by $4 million and four cents, respectively. See Note 5, "Share-Based7, “Share-Based Compensation Plans,"” for additional information.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summary of Significant Accounting Policies (Continued) (o) (n) Ticket Taxes—Taxes—Certain governmental taxes are imposed on United'sUnited’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) Early Retirement of Leased Aircraft—The Company accrues for the present value of future minimum lease payments, net of estimated sublease rentals (if any) in the period aircraft are removed from service. When reasonably estimable and probable, the Company estimates maintenance lease return condition obligations for items such as minimum aircraft and engine conditions specified in leases and accrues these amounts as contingent rent ratably over the lease term while the aircraft are operating, and any remaining unrecognized estimated obligations are accrued in the period an aircraft is removed from service. In addition, the Company accrues for an early termination lease penalty in the period that the Company executes an early return agreement with a lessor. (p) New Accounting Pronouncements—Pronouncements—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. As originally issued, SFAS 157 is effective for fiscal years beginning January 1, 2008. The Company does not expect the adoption of SFAS 157 with respect to its financial assets and financial liabilities to have a material impact on its results of operations or financial position. In FebruaryMay 2008, the FASB issued FASB Staff Position ("FSP"(“FSP”) No. FAS 157-b. This FSP delayedAPB14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(“APB14-1”). APB14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. APB14-1, which is applied retrospectively, is effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until periodsCompany beginning January 1, 2009. The Company is currently evaluatingestimates that the impactfair value of SFAS 157 on the reporting and disclosureequity component of its nonfinancial assets and nonfinancial liabilities. In February 2007,two convertible debt instruments that may be cash settled was approximately $250 million at the FASB issued Statementtime of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities Including an amendmentissuance of FASB Statement No. 115 ("SFAS 159").these instruments. 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 establishes 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. The Company did not elect to apply the provisions of SFAS 159 to any of its existing financial assets or financial liabilities at January 1, 2008. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),Business Combinations ("SFAS 141R"). This statement replaces Statement of Financial Accounting Standards No. 141,Business Combinations. SFAS 141R retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. In addition, SFAS 141R provides new guidance intended to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. SFAS 141R is effective for the Company for any business combinations with an acquisition date on or after January 1, 2009. The Company will apply the provisions of SFAS 141R to any business combinations within the scope of SFAS 141R after its effective date. In accordance with the provisions of SFAS 141R that amended SFAS 109, beginning January 1, 2009, the Companydiscount will be requiredapplied retrospectively to recognize any changes in the valuation allowance for deferred tax assets, which was established as partCompany’s financial statements from the date of adoption of fresh-start reporting to be recognized as an adjustment to income tax expense. This reflects a change from current practice whichUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(2) Summaryamortized over the expected five-year life of Significant Accounting Policies (Continued)requires changesthe notes resulting in the valuation allowance to first reduce goodwill to zeroincreased interest expense in historical and then to reduce intangible assets to zero. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 ("SFAS 160"). This statement amends Accounting Research Bulletin 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the noncontrolling interest (also known as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for the Company for periods beginning January 1, 2009. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements. In 2006, the Company adopted FASB 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 ("SFAS 158").
97(q) Income Tax Contingencies—ContingenciesUAL and United have—The Company has recorded reserves for income taxes and associated interest that may become payable in future years as a result of audits by tax authorities.years. Certain of these reserves are for uncertain income tax positions taken on income tax returns which are accounted for in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48,48”), effective January 1, 2007. Although management believes that theits positions taken on previously filedincome tax returnsmatters are reasonable, UAL and Unitedthe 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. The Company'sCompany’s tax contingency reserves are reviewed periodically and are adjusted as events occur that affect 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 its estimates of tax liabilities,
98or the rendering of relevant court decisions. See Note 6, "Income8, “Income Taxes,"” for further information related to uncertain income tax positions and the adoption of FIN 48.(2) (3)Company Operational Plans• The Company is significantly reducing mainline domestic and consolidated capacity. Fourth quarter 2008 mainline domestic and consolidated capacity were down approximately 14% and 11%year-over-year, respectively. The Company is planning to further decrease mainline domestic and consolidated capacity in 2009. • The capacity reductions are being made through reductions in frequencies of routes and the elimination of unprofitable routes. These actions have resulted in the closure of a small number of airport operations where United cannot operate profitably in the current economic environment. Additional airport operations may be closed in future periods. • The Company has announced plans to permanently remove 100 aircraft from its mainline fleet, including its entire B737 fleet and six B747 aircraft, by the end of 2009. The B737 aircraft being retired are some of the oldest and least fuel efficient in the Company’s fleet. This planned reduction reflects the Company’s efforts to eliminate unprofitable capacity and divest the Company of assets that currently do not provide an acceptable return. • United is eliminating its Ted product for leisure markets and will reconfigure that fleet’s 56 A320s to include United First seating. The reconfiguration of the Ted aircraft will occur in stages, with expected completion by year-end 2009. We will continue to review the deployment of all of our aircraft in various markets and the overall composition of our fleet to ensure that we are using our assets appropriately to provide the best available return. • In connection with the capacity reductions, the Company is further streamlining its operations and corporate functions in order to reduce the size of its workforce to match the size of its operations. • The Company also recently entered into an alliance partnership with Continental Airlines that is expected to create revenue enhancements, costs savings and operational efficiencies. • The Company is managing its liquidity by investing only in those projects that are considered high-value, such as the international premium product. The Company has $0.2 billion of binding commitments for the purchase of property in 2009 and $0.8 billion of long-term debt obligations in 2009. • As of December 31, 2008, the Company has 62 unencumbered aircraft and other assets that may be used as collateral to obtain additional financing. The Company could also sell certain of these assets to generate liquidity.
99• As discussed in Note 23, “Subsequent Events,” in January 2009, the Company completed several financing-related transactions which generated approximately $315 million of proceeds. Balance at January 1, 2008 $ — Accruals 106 Payments (25 ) Balance at December 31, 2008 $ 81 B737s (Mainline) All Other Mainline Total Regional Owned Leased Total Owned Leased Total Mainline Affiliates Total Operating: Aircraft at December 31, 2007 (a) 47 47 94 208 158 366 460 279 739 Added (removed) from operating fleet (29 ) (19 ) (48 ) (3 ) — (3 ) (51 ) 1 (50 ) Converted from owned to leased (b) — — — (24 ) 24 — — — — Converted from leased to owned (c) — — — 10 (10 ) — — — — Aircraft at December 31, 2008 (d) 18 28 46 191 172 363 409 280 689 Removed from operating fleet in 2008 (e) 29 19 48 3 — 3 51 — 51 Sold/returned to lessor during 2008 (5 ) (7 ) (12 ) — — — (12 ) — (12 ) Nonoperating at December 31, 2008 (a) (e) 24 12 36 3 — 3 39 — 39 (a) At December 31, 2007, the Company had 113 unencumbered aircraft. In 2007, United leased one operating aircraft from UAL Common Stockholders' Equityand therefore had one less owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet. This particular aircraft became nonoperational in 2008; therefore, United has one less nonoperating owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet at December 31, 2008.
100(b) During 2008, the Company sold 24 aircraft and leased them back. See Note 15, “Lease Obligations,” for additional information related to these sale-leaseback transactions. (c) During 2008, the Company acquired certain aircraft under existing lease terms. (d) At December 31, 2008, United’s operating fleet was the same as UAL’s fleet and included 62 unencumbered aircraft. The unencumbered aircraft at December 31, 2008 exclude nine aircraft which became encumbered with the December 2008 signing of a binding sale-leaseback agreement that closed in January 2009. See Note 12, “Debt Obligations and Card Processing Agreements,” and Note 23, “Subsequent Events,” for additional information. (e) As of December 31, 2008, the owned nonoperating aircraft and engines are classified as Other non-current assets in the Company’sStatements of Consolidated Financial Position.These aircraft are not classified as assets held for sale because the assets may not be sold within one year. As a result of the Planimpairment testing discussed in Note 3, “Asset Impairments and Intangible Assets,” these assets have been recorded at their net realizable value of $198 million at December 31, 2008.(3) Asset Impairments and Intangible Assets
101 Year Ended December 31, 2008 Goodwill impairment $ 2,277 Indefinite-lived intangible assets: Codeshare agreements 44 Tradenames 20 Intangible asset impairments 64 Tangible assets: Pre-delivery advance deposits including related capitalized interest 105 B737 aircraft, B737 spare parts and other 145 Aircraft and related deposit impairments 250 Total impairments $ 2,591
103 Weighted Average Life of 2008 2007 Assets Gross Carrying Accumulated Gross Carrying Accumulated (Dollars in millions) (in years) Amount Amortization Amount Amortization Amortized intangible assets Airport slots and gates 9 $ 72 $ 30 $ 72 $ 22 Hubs 20 145 22 145 14 Patents 3 70 68 70 45 Mileage Plus database 7 521 179 521 137 Contracts 13 140 35 216 101 Other 7 13 5 18 5 10 $ 961 $ 339 $ 1,042 $ 324 Unamortized intangible assets Goodwill $ — $ 2,280 Airport slots and gates 237 255 Route authorities 1,146 1,146 Tradenames 688 752 $ 2,071 $ 4,433 (4) Voluntary Reorganization becomingUnder Chapter 11
104
105 2008 2007 2006 Balance at January 1, 2008 and 2007 and February 1, 2006 $ 98 $ 325 $ 583 Payments (7 ) (83 ) (193 ) Accruals reclassified — (31 ) — (a) Adjustments impacting income: Accrual adjustments classified as special revenue credits — (45 ) — (b) Other changes in contingent liabilities classified as revenues — (26 ) — (c) Accrual adjustments classified as special expense credits — (30 ) (36 )(d) Accrual adjustments classified as other operating expense (credit) 5 (12 ) (29 )(e) Total adjustments impacting income 5 (113 ) (65 ) Balance at December 31, 2008, 2007 and 2006 $ 96 $ 98 $ 325 Total charge (credit) to operating income during period from above items $ 5 $ (113 ) $ (65 ) Additional special operating expense credit — (14 ) — (f) Total operating income charge (benefit) $ 5 $ (127 ) $ (65 ) (a) These accruals were deemed to be no longer directly related to bankruptcy proceedings; therefore, the accruals were reclassified to non-bankruptcy accruals. (b) In the third quarter of 2007, the Company recorded a change in estimate for certain liabilities relating to bankruptcy administrative claims. This adjustment resulted directly from the progression of the Company’s ongoing efforts to resolve
106certain bankruptcy pre-confirmation contingencies; therefore, it was classified as a special operating revenue credit of $45 million that relates to both mainline passenger revenues ($37 million) and Regional affiliates revenues ($8 million). (c) The Company separately recorded a $26 million benefit from a change in estimate to certain other contingent liabilities based largely on changes in underlying facts and circumstances occurring during the third quarter of 2007. This benefit was recorded as a credit to mainline passenger revenues of $22 million and to Regional affiliates revenues of $4 million. (d) The 2007 amount relates to special operating expense credits of $30 million relating to ongoing litigation for San Francisco and Los Angeles facility lease secured interests as discussed above. For 2006, the then-outstanding equity securities$36 million benefit consists of a $12 million net benefit related to SFO and LAX lease litigation and a $24 million benefit related to pension matters, as welldiscussed in Note 19, “Special Items.”(e) This amount relates to accrual adjustments impacting various operating expense line items that the Company recorded due to a change in estimate for certain liabilities relating to bankruptcy administrative claims. These adjustments resulted directly from the progression of the Company’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies. (f) This amount relates to an accrual adjustment that the Company recorded due to a change in estimate for certain liabilities relating to bankruptcy administrative claims. This adjustment, which was recorded as a credit to other operating expense, resulted directly from the shares held in treasuryprogression of Predecessor UAL were canceled. New UAL common stock began trading on the NASDAQ market on February 2, 2006 underCompany’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies. Period from January 1 to January 31, 2006 UAL United Discharge of claims and liabilities $ 24,628 $ 24,389 (a) Revaluation of frequent flyer obligations (2,399 ) (2,399 ) (b) Revaluation of other assets and liabilities 2,106 2,111 (c) Employee-related charges (898 ) (898 ) (d) Contract rejection charges (429 ) (421 ) (e) Professional fees (47 ) (47 ) Pension-related charges (14 ) (14 ) Other (13 ) (12 ) $ 22,934 $ 22,709 (a) The discharge of claims and liabilities primarily relates to those unsecured claims arising during the symbol "UAUA."bankruptcy process, such as those arising from the termination and settlement of the 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, Successorthe Company discharged its obligations to unsecured creditors in exchange for the distribution of 115 million common shares of UAL and the issuance of certain other UAL securities. Accordingly, UAL and United recognized a non-cash reorganization gain of $24.6 billion and $24.4 billion, respectively.(b) The Company revalued its Mileage Plus Frequent Flyer Program (“Mileage Plus”) obligations at fair value as a result of fresh-start reporting, which resulted in a $2.4 billion non-cash reorganization charge. (c) In accordance with fresh-start reporting, the 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 non-cash reorganization gain of $2.1 billion, primarily as a result of newly recognized intangible assets, offset partly by reductions in the fair value of tangible property and equipment. (d) In exchange for 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
107employee 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 withnon-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. (5) Common Stockholders’ Equity and Preferred Securities Shares of UAL Common Stock General unsecured creditors and employees and certain management employees and non-employee directors.Party of InterestShares ofSuccessor UALCommon StockGeneral 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 Successor Predecessor Period from Period from February 1 January 1 Year Ended to to December 31, December 31, January 31, UAL 2008 2007 2006 2006 Shares outstanding at beginning of period 116,921,049 112,280,629 116,220,959 116,220,959 Cancellation of Predecessor UAL stock — — (116,220,959 ) — Issuance of UAL stock under equity offering 11,208,438 — — — Issuance of UAL stock upon conversion of preferred stock 11,145,812 — — — Issuance of UAL stock to creditors 765,780 3,849,389 108,347,814 — Issuance of UAL stock to employees 418,664 1,155,582 4,240,526 — Issuance of UAL stock to directors — — 100,000 — Forfeiture of non-vested UAL stock (110,926 ) (104,733 ) (270,934 ) — Shares acquired for treasury (310,889 ) (259,818 ) (136,777 ) — Shares outstanding at end of period 140,037,928 116,921,049 112,280,629 116,220,959 Treasury shares at beginning of period 396,595 136,777 — — Shares acquired for treasury 310,889 259,818 136,777 — Treasury shares at end of period 707,484 396,595 136,777 —
108Management equity incentive plan ("MEIP")9,825,000Director equity incentive plan ("DEIP")175,000125,000,000UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(6) (3) UAL Common Stockholders' Equity (Continued) Changes in the number of shares of UAL common stock outstanding during the year ended December 31, 2007, the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the year ended December 31, 2005 were as follows: Successor Predecessor UAL Year Ended
December 31, 2007 Period from
February 1 to
December 31, 2006 Period from
January 1 to
January 31, 2006 Year Ended
December 31, 2005Shares outstanding at beginning of period, net
of treasury shares 112,280,629 116,220,959 116,220,959 116,220,959 Cancellation of Predecessor UAL stock — (116,220,959 ) — — Issuance of Successor UAL stock to
creditors 3,849,389 108,347,814 — — Issuance of Successor UAL stock to
employees 1,155,582 4,240,526 — — Issuance of Successor UAL stock to
directors — 100,000 — — Forfeiture of non-vested Successor
UAL stock (104,733 ) (270,934 ) — — Shares acquired for treasury (259,818 ) (136,777 ) — — Shares outstanding at end of period 116,921,049 112,280,629 116,220,959 116,220,959 Treasury shares at beginning of period 136,777 — Shares acquired for treasury 259,818 136,777 Treasury shares at end of period 396,595 136,777 At December 31, 2007, 2.8 million of the initial 115 million shares authorized remain to be distributed to employees and holders of previously allowed claims and disputed claims that are pending final resolution. 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. See Note 5, "Share-Based Compensation Plans" for additional information related to the remaining grants available to be awarded under the MEIP and DEIP and outstanding option awards, neither of which are included in outstanding shares above.(4) UAL Per Share Amounts ("SFAS 128"), basic per share amounts were computed by dividing earnings (loss) available to common stockholders by the weighted-average number of shares of UAL common stock outstanding. Approximately 2.0 million, 2.8 million and 6.7 million UAL shares remaining to be issued to unsecured creditors and employees under the Plan of Reorganization are included in outstanding basic shares for 2008, 2007 and the eleven month period ended December 31, 2006, respectively, as the necessary conditions for issuance have been satisfied. UAL's $500UAL’s $546 million of 6% senior notes are callable at any time at 100% of par value, and can be redeemed with either cash or UAL common stock at UAL'sUAL’s option. These notesUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(4) UAL Per Share Amounts (Continued)UAL'sUAL’s intent to redeem these notes with cash. In January 2009, the Company issued additional common shares as discussed in Note 5, “Common Stockholders’ Equity and Preferred Securities,” above. The table below represents the reconciliation of the basic earnings (loss) per share to diluted earnings (loss) per share.
109 Successor Predecessor (In millions, except per share) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 UAL Basic earnings per share: Net income (loss) $ 403 $ 25 $ 22,851 $ (21,176 ) Preferred stock dividend requirements (10 ) (9 ) (1 ) (10 ) Earnings (loss) available to common
stockholders $ 393 $ 16 $ 22,850 $ (21,186 ) Basic weighted-average shares
outstanding 117.4 115.5 116.2 116.2 Earnings (loss) per share, basic $ 3.34 $ 0.14 $ 196.61 $ (182.29 ) Diluted earnings per share: Earnings (loss) available to common
stockholders $ 393 $ 16 $ 22,850 $ (21,186 ) Effect of 2% preferred securities 10 — — — Effect of 4.5% senior
limited-subordination convertible
notes 20 — — — Effect of 5% convertible notes 5 — — — Earnings available to common
stockholders including the effect of
dilutive securities $ 428 $ 16 $ 22,850 $ (21,186 ) Basic weighted-average shares
outstanding 117.4 115.5 116.2 116.2 Effect of non-vested stock options 0.2 — — — Effect of non-vested restricted shares 1.1 0.7 — — Effect of 2% preferred securities 11.0 — — — Effect of 4.5% senior
limited-subordination convertible
notes 20.8 — — — Effect of 5% convertible notes 3.2 — — — Diluted weighted-average shares
outstanding 153.7 116.2 116.2 116.2 Earnings (loss) per share, diluted $ 2.79 $ 0.14 $ 196.61 $ (182.29 ) Potentially dilutive shares excluded from
diluted per share amounts: Stock options 4.0 5.0 9.0 9.0 Restricted shares 0.9 2.0 — — 2% preferred securities — 10.8 — — 4.5% senior limited-subordination
convertible notes — 20.8 — — 5% convertible notes — 3.2 — — 4.9 41.8 9.0 9.0 (5) Share-Based Compensation Plans Successor Predecessor Period from Period from February 1 January 1 Year Ended to to (In millions, except per share) December 31, December 31, January 31, UAL 2008 2007 2006 2006 Net income (loss) $ (5,348 ) $ 403 $ 25 $ 22,851 Preferred stock dividend requirements (3 ) (10 ) (9 ) (1 ) Earnings (loss) available to common stockholders $ (5,351 ) $ 393 $ 16 $ 22,850 Basic weighted-average shares outstanding 126.8 117.4 115.5 116.2 Earnings (loss) per share, basic $ (42.21 ) $ 3.34 $ 0.14 $ 196.61 Earnings (loss) available to common stockholders $ (5,351 ) $ 393 $ 16 $ 22,850 Effect of 2% preferred securities — 10 — — Effect of 4.5% senior limited-subordination convertible notes — 20 — — Effect of 5% convertible notes — 5 — — Earnings available to common stockholders including the effect of dilutive securities $ (5,351 ) $ 428 $ 16 $ 22,850 Basic weighted-average shares outstanding 126.8 117.4 115.5 116.2 Effect of non-vested stock options — 0.2 — — Effect of non-vested restricted shares — 1.1 0.7 — Effect of 2% preferred securities — 11.0 — — Effect of 4.5% senior limited-subordination convertible notes — 20.8 — — Effect of 5% convertible notes — 3.2 — — Diluted weighted-average shares outstanding 126.8 153.7 116.2 116.2 Earnings (loss) per share, diluted $ (42.21 ) $ 2.79 $ 0.14 $ 196.61 Stock options 4.4 4.0 5.0 9.0 Restricted shares 1.4 0.9 2.0 — 2% preferred securities 3.1 — 10.8 — 4.5% senior limited-subordination convertible notes 22.2 — 20.8 — 5% convertible notes 3.4 — 3.2 — 34.5 4.9 41.8 9.0 (7) Share-Based Compensation Plans See Note 2(n), "Summary of Significant Accounting Policies—Share-BasedUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(5) Share-Based Compensation Plans (Continued)Compensation," for information regarding the Company's adoption of SFAS 123R effective January 1, 2006 and pro forma compensation expense for 2005.Company—Company—As of January 31, 2006, a total of 9nine million stock options were outstanding. The Company did not issue any stock-based awards during 2005. Under the Company'sCompany’s Plan of Reorganization, these stock options were canceled on the Effective Date. No material share-based compensation expense was incurred as a result of these outstanding options for the month of January 2006.Company—CompanyAs part of the Plan of Reorganization and as described in more detail below, the Bankruptcy Court approved UAL'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 planthe Company’s share-based compensation plans for management employees and directors as of December 31, 2007:2008: Employees Directors Total MEIP DEIP Total Authorized 9,825,000 175,000 10,000,000 8,339,284 175,000 8,514,284 Granted (10,354,250 ) (101,229 ) (10,455,479 ) (633,750 ) (113,111 ) (746,861 ) Canceled awards available for reissuance 1,183,716 — 1,183,716 336,365 — 336,365 Available for future grants 654,466 73,771 728,237 8,041,899 61,889 8,103,788 (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006Compensation cost: MEIP restricted stock $ 25 $ 84 MEIP stock options 24 72 Period from DEIP unrestricted stock — 3 Year Ended February 1 to December 31, December 31, 2008 2007 2006 Total compensation cost $ 49 $ 159 Compensation cost: Management plan restricted stock $ 18 $ 25 $ 84 Management plan stock options 13 24 72 DEIP unrestricted stock — — 3 Total compensation cost $ 31 $ 49 $ 159 years.years, respectively. 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, theshare-based compensation expense was reduced by approximately $7 million for the eleven month period ended December 31, 2006.("MEIP").which was automatically terminated with respect to future grants and otherwise replaced and superseded by the 2008 Plan. Any awards granted under the MEIP remain in effect pursuant to their terms.Human Resources Subcommittee2008 Plan allows for the grant of options intended to qualify as incentive stock options (“ISOs”) under Section 422 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 authorizesUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(5) Share-Based Compensation Plans (Continued)the HR Subcommittee to grant any of a variety of incentive Awards to participants, including the following:•including both tax qualified and non-qualified options,•which provide the participant the right to receive the excess (if any) of the fair market value of a specified number of(“SARs”), restricted share awards, restricted stock units (“RSUs”), performance compensation awards, performance units, cash incentive awards and other equity-based and equity-related awards. Any shares of our common stock atissued under the time2008 Plan will consist, in whole or in part, 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 or of UAL common stock or from UAL's treasury stock. shares.exercise price for each underlying share of UAL common stock under all options and stock appreciation rights awarded under2008 Plan provides that, unless otherwise provided in an award agreement, in the MEIP will not be less than the fair market valueevent of a sharechange of common stock oncontrol of the date of grant or as otherwise determined byCompany (as defined in the HR Subcommittee. Each instrument granted under the MEIP will generally expire 10 years after its date of grant.2008 Plan):• any options and SARs outstanding as of the date the change of control is determined to have occurred become fully exercisable and vested, as of immediately prior to the change of control. • all performance units, cash incentive awards and other awards designated as performance compensation awards will be paid out at the “target” performance level on a prorated basis based on the number of days elapsed from the beginning of the performance period up to and including the change of control. • all other outstanding awards are automatically deemed exercisable or vested and all restrictions and forfeiture provisions related thereto lapse as of immediately prior to such change of control.
111UAL's MEIPUAL’s Management Plan stock options for the year ended December 31, 2007: Options Weighted-
Average
Exercise Price Weighted-
Average
Remaining
Contractual
Life (in years) Aggregate
Intrinsic Value
(in millions)Outstanding at beginning of year 5,064,672 $ 35.13 Granted 256,866 44.26 Exercised(a) (989,848 ) 35.18 $ 11 Canceled (177,646 ) 35.78 Expired (3,951 ) 35.25 Outstanding at end of year 4,150,093 35.66
Vested and expected to vest at end of period
3,669,884
37.09
8.2
$
2Exercisable at end of period(b) 948,698 35.40 8.1 —
2008:(a)The aggregate intrinsic value of shares exercised in 2006 was $3 million.(b)Options represent the number of vested options at December 31, 2007. Aggregate intrinsic value is based only on vested options that have an exercise price less than the UAUA stock price at December 31, 2007.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(5) Share-Based Compensation Plans (Continued) Weighted- Average Weighted- Remaining Aggregate Average Contractual Intrinsic Value Options Exercise Price Life (in years) (in millions) Outstanding at beginning of year 4,150,093 $ 35.66 Granted 615,900 12.94 Exercised(a) (6,864 ) 33.88 $ — Canceled (142,536 ) 34.87 Expired (262,921 ) 33.77 Outstanding at end of year 4,353,672 32.80 Vested and expected to vest at end of period 4,005,308 32.97 7.4 $ 1 Exercisable at end of period(b) 2,031,242 35.14 7.0 — (a) The aggregate intrinsic value of shares exercised in 2008, 2007 and 2006 was less than $1 million, $11 million and $3 million, respectively. (b) Options represent the number of vested options at December 31, 2008. Aggregate intrinsic value is based only on vested options that have an exercise price less than the UAL stock price at December 31, 2008. Period from Year Ended February 1 December 31, to December 31, Weighted-average fair value assumptions: Year Ended
December 31,
2007 Period from
February 1 to
December 31, 2006 2008 2007 2006 Risk-free interest rate 3.4 - 5.0 % 4.4 - 5.1 % 1.9-3.6 % 3.4-5.0 % 4.4-5.1 % Dividend yield 0 % 0 % 0 % 0 % 0 % Expected market price volatility of UAL common
stock 55 % 55 - 57 % 55 % 55 % 55-57 % Expected life of options (years) 5.8 - 6.2 5.0 - 6.2 5.0-6.3 5.8-6.2 5.0-6.2
Weighted-average fair value
$
25.13
$
21.37
$ 7.86 $ 25.13 $ 21.37 Black-ScholesBlack 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 UAL'sUAL’s common stock was assumed to be zero since UAL did not have any plans to pay dividends at the time of the option grants. The Company did consider implied volatility data for both UAL and comparable airlines, using current exchange-traded options.Share-Based PaymentsAccounting for Uncertainty in Income Taxes.(“FIN 48”), effective January 1, 2007. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has 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. The stock options typically vest overCompany’s tax contingency reserves are reviewed periodically and are adjusted as events occur that affect 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, the identification of new tax contingencies, the release of administrative tax guidance affecting its estimates of tax liabilities,
98or the rendering of relevant court decisions. See Note 8, “Income Taxes,” for further information related to uncertain income tax positions and the adoption of FIN 48. (2) Company Operational Plans • The Company is significantly reducing mainline domestic and consolidated capacity. Fourth quarter 2008 mainline domestic and consolidated capacity were down approximately 14% and 11%year-over-year, respectively. The Company is planning to further decrease mainline domestic and consolidated capacity in 2009. • The capacity reductions are being made through reductions in frequencies of routes and the elimination of unprofitable routes. These actions have resulted in the closure of a four year period, exceptsmall number of airport operations where United cannot operate profitably in the current economic environment. Additional airport operations may be closed in future periods.• The Company has announced plans to permanently remove 100 aircraft from its mainline fleet, including its entire B737 fleet and six B747 aircraft, by the end of 2009. The B737 aircraft being retired are some of the oldest and least fuel efficient in the Company’s fleet. This planned reduction reflects the Company’s efforts to eliminate unprofitable capacity and divest the Company of assets that currently do not provide an acceptable return. • United is eliminating its Ted product for awardsleisure markets and will reconfigure that fleet’s 56 A320s to retirement-eligible employees, whichinclude United First seating. The reconfiguration of the Ted aircraft will occur in stages, with expected completion by year-end 2009. We will continue to review the deployment of all of our aircraft in various markets and the overall composition of our fleet to ensure that we are using our assets appropriately to provide the best available return.• In connection with the capacity reductions, the Company is further streamlining its operations and corporate functions in order to reduce the size of its workforce to match the size of its operations. • The Company also recently entered into an alliance partnership with Continental Airlines that is expected to create revenue enhancements, costs savings and operational efficiencies. • The Company is managing its liquidity by investing only in those projects that are considered vestedhigh-value, such as the international premium product. The Company has $0.2 billion of binding commitments for the purchase of property in 2009 and $0.8 billion of long-term debt obligations in 2009.• As of December 31, 2008, the Company has 62 unencumbered aircraft and other assets that may be used as collateral to obtain additional financing. The Company could also sell certain of these assets to generate liquidity.
99• As discussed in Note 23, “Subsequent Events,” in January 2009, the Company completed several financing-related transactions which generated approximately $315 million of proceeds. Balance at January 1, 2008 $ — Accruals 106 Payments (25 ) Balance at December 31, 2008 $ 81 B737s (Mainline) All Other Mainline Total Regional Owned Leased Total Owned Leased Total Mainline Affiliates Total Operating: Aircraft at December 31, 2007 (a) 47 47 94 208 158 366 460 279 739 Added (removed) from operating fleet (29 ) (19 ) (48 ) (3 ) — (3 ) (51 ) 1 (50 ) Converted from owned to leased (b) — — — (24 ) 24 — — — — Converted from leased to owned (c) — — — 10 (10 ) — — — — Aircraft at December 31, 2008 (d) 18 28 46 191 172 363 409 280 689 Removed from operating fleet in 2008 (e) 29 19 48 3 — 3 51 — 51 Sold/returned to lessor during 2008 (5 ) (7 ) (12 ) — — — (12 ) — (12 ) Nonoperating at December 31, 2008 (a) (e) 24 12 36 3 — 3 39 — 39 (a) At December 31, 2007, the Company had 113 unencumbered aircraft. In 2007, United leased one operating aircraft from UAL and therefore had one less owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet. This particular aircraft became nonoperational in 2008; therefore, United has one less nonoperating owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet at December 31, 2008.
100(b) During 2008, the grant date.Company sold 24 aircraft and leased them back. See Note 15, “Lease Obligations,” for additional information related to these sale-leaseback transactions.(c) During 2008, the Company acquired certain aircraft under existing lease terms. (d) At December 31, 2008, United’s operating fleet was the same as UAL’s fleet and included 62 unencumbered aircraft. The unencumbered aircraft at December 31, 2008 exclude nine aircraft which became encumbered with the December 2008 signing of a binding sale-leaseback agreement that closed in January 2009. See Note 12, “Debt Obligations and Card Processing Agreements,” and Note 23, “Subsequent Events,” for additional information. (e) As of December 31, 2008, the owned nonoperating aircraft and engines are classified as Other non-current assets in the Company’sStatements of Consolidated Financial Position.These aircraft are not classified as assets held for sale because the assets may not be sold within one year. As a result of the impairment testing discussed in Note 3, “Asset Impairments and Intangible Assets,” these assets have been recorded at their net realizable value of $198 million at December 31, 2008. (3) Asset Impairments and Intangible Assets
101 Year Ended December 31, 2008 Goodwill impairment $ 2,277 Indefinite-lived intangible assets: Codeshare agreements 44 Tradenames 20 Intangible asset impairments 64 Tangible assets: Pre-delivery advance deposits including related capitalized interest 105 B737 aircraft, B737 spare parts and other 145 Aircraft and related deposit impairments 250 Total impairments $ 2,591
103 Weighted Average Life of 2008 2007 Assets Gross Carrying Accumulated Gross Carrying Accumulated (Dollars in millions) (in years) Amount Amortization Amount Amortization Amortized intangible assets Airport slots and gates 9 $ 72 $ 30 $ 72 $ 22 Hubs 20 145 22 145 14 Patents 3 70 68 70 45 Mileage Plus database 7 521 179 521 137 Contracts 13 140 35 216 101 Other 7 13 5 18 5 10 $ 961 $ 339 $ 1,042 $ 324 Unamortized intangible assets Goodwill $ — $ 2,280 Airport slots and gates 237 255 Route authorities 1,146 1,146 Tradenames 688 752 $ 2,071 $ 4,433 (4) Voluntary Reorganization Under SFAS 123R,Chapter 11
104
105 2008 2007 2006 Balance at January 1, 2008 and 2007 and February 1, 2006 $ 98 $ 325 $ 583 Payments (7 ) (83 ) (193 ) Accruals reclassified — (31 ) — (a) Adjustments impacting income: Accrual adjustments classified as special revenue credits — (45 ) — (b) Other changes in contingent liabilities classified as revenues — (26 ) — (c) Accrual adjustments classified as special expense credits — (30 ) (36 )(d) Accrual adjustments classified as other operating expense (credit) 5 (12 ) (29 )(e) Total adjustments impacting income 5 (113 ) (65 ) Balance at December 31, 2008, 2007 and 2006 $ 96 $ 98 $ 325 Total charge (credit) to operating income during period from above items $ 5 $ (113 ) $ (65 ) Additional special operating expense credit — (14 ) — (f) Total operating income charge (benefit) $ 5 $ (127 ) $ (65 ) (a) These accruals were deemed to be no longer directly related to bankruptcy proceedings; therefore, the accruals were reclassified to non-bankruptcy accruals. (b) In the third quarter of 2007, the Company recorded a change in estimate for certain liabilities relating to bankruptcy administrative claims. This adjustment resulted directly from the progression of the Company’s ongoing efforts to resolve
106certain bankruptcy pre-confirmation contingencies; therefore, it was classified as a special operating revenue credit of $45 million that relates to both mainline passenger revenues ($37 million) and Regional affiliates revenues ($8 million). (c) The Company separately recorded a $26 million benefit from a change in estimate to certain other contingent liabilities based largely on changes in underlying facts and circumstances occurring during the third quarter of 2007. This benefit was recorded as a credit to mainline passenger revenues of $22 million and to Regional affiliates revenues of $4 million. (d) The 2007 amount relates to special operating expense credits of $30 million relating to ongoing litigation for San Francisco and Los Angeles facility lease secured interests as discussed above. For 2006, the $36 million benefit consists of a $12 million net benefit related to SFO and LAX lease litigation and a $24 million benefit related to pension matters, as discussed in Note 19, “Special Items.” (e) This amount relates to accrual adjustments impacting various operating expense line items that the Company recorded due to a change in estimate for certain liabilities relating to bankruptcy administrative claims. These adjustments resulted directly from the progression of the Company’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies. (f) This amount relates to an accrual adjustment that the Company recorded due to a change in estimate for certain liabilities relating to bankruptcy administrative claims. This adjustment, which was recorded as a credit to other operating expense, resulted directly from the progression of the Company’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies. Period from January 1 to January 31, 2006 UAL United Discharge of claims and liabilities $ 24,628 $ 24,389 (a) Revaluation of frequent flyer obligations (2,399 ) (2,399 ) (b) Revaluation of other assets and liabilities 2,106 2,111 (c) Employee-related charges (898 ) (898 ) (d) Contract rejection charges (429 ) (421 ) (e) Professional fees (47 ) (47 ) Pension-related charges (14 ) (14 ) Other (13 ) (12 ) $ 22,934 $ 22,709 (a) The discharge of claims and liabilities primarily relates to those unsecured claims arising during the bankruptcy process, such as those arising from the termination and settlement of the 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 discharged its obligations to unsecured creditors in exchange for the distribution of 115 million common shares of UAL and the issuance of certain other UAL securities. Accordingly, UAL and United recognized a non-cash reorganization gain of $24.6 billion and $24.4 billion, respectively. (b) The Company revalued its Mileage Plus Frequent Flyer Program (“Mileage Plus”) obligations at fair value as a result of fresh-start reporting, which resulted in a $2.4 billion non-cash reorganization charge. (c) In accordance with fresh-start reporting, the 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 non-cash reorganization gain of $2.1 billion, primarily as a result of newly recognized intangible assets, offset partly by reductions in the fair value of tangible property and equipment. (d) In exchange for employees’ contributions to the Restricted Stock awardssuccessful 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
107employee group received a deemed claim amount based upon a portion of the volume weighted-averagevalue 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 withnon-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. (5) Common Stockholders’ Equity and Preferred Securities Shares of UAL Common Stock 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 Successor Predecessor Period from Period from February 1 January 1 Year Ended to to December 31, December 31, January 31, UAL 2008 2007 2006 2006 Shares outstanding at beginning of period 116,921,049 112,280,629 116,220,959 116,220,959 Cancellation of Predecessor UAL stock — — (116,220,959 ) — Issuance of UAL stock under equity offering 11,208,438 — — — Issuance of UAL stock upon conversion of preferred stock 11,145,812 — — — Issuance of UAL stock to creditors 765,780 3,849,389 108,347,814 — Issuance of UAL stock to employees 418,664 1,155,582 4,240,526 — Issuance of UAL stock to directors — — 100,000 — Forfeiture of non-vested UAL stock (110,926 ) (104,733 ) (270,934 ) — Shares acquired for treasury (310,889 ) (259,818 ) (136,777 ) — Shares outstanding at end of period 140,037,928 116,921,049 112,280,629 116,220,959 Treasury shares at beginning of period 396,595 136,777 — — Shares acquired for treasury 310,889 259,818 136,777 — Treasury shares at end of period 707,484 396,595 136,777 —
108(6) UAL Per Share Amounts
109 Successor Predecessor Period from Period from February 1 January 1 Year Ended to to (In millions, except per share) December 31, December 31, January 31, UAL 2008 2007 2006 2006 Net income (loss) $ (5,348 ) $ 403 $ 25 $ 22,851 Preferred stock dividend requirements (3 ) (10 ) (9 ) (1 ) Earnings (loss) available to common stockholders $ (5,351 ) $ 393 $ 16 $ 22,850 Basic weighted-average shares outstanding 126.8 117.4 115.5 116.2 Earnings (loss) per share, basic $ (42.21 ) $ 3.34 $ 0.14 $ 196.61 Earnings (loss) available to common stockholders $ (5,351 ) $ 393 $ 16 $ 22,850 Effect of 2% preferred securities — 10 — — Effect of 4.5% senior limited-subordination convertible notes — 20 — — Effect of 5% convertible notes — 5 — — Earnings available to common stockholders including the effect of dilutive securities $ (5,351 ) $ 428 $ 16 $ 22,850 Basic weighted-average shares outstanding 126.8 117.4 115.5 116.2 Effect of non-vested stock options — 0.2 — — Effect of non-vested restricted shares — 1.1 0.7 — Effect of 2% preferred securities — 11.0 — — Effect of 4.5% senior limited-subordination convertible notes — 20.8 — — Effect of 5% convertible notes — 3.2 — — Diluted weighted-average shares outstanding 126.8 153.7 116.2 116.2 Earnings (loss) per share, diluted $ (42.21 ) $ 2.79 $ 0.14 $ 196.61 Stock options 4.4 4.0 5.0 9.0 Restricted shares 1.4 0.9 2.0 — 2% preferred securities 3.1 — 10.8 — 4.5% senior limited-subordination convertible notes 22.2 — 20.8 — 5% convertible notes 3.4 — 3.2 — 34.5 4.9 41.8 9.0 (7) Share-Based Compensation Plans Employees Directors Total Authorized 8,339,284 175,000 8,514,284 Granted (633,750 ) (113,111 ) (746,861 ) Canceled awards available for reissuance 336,365 — 336,365 Available for future grants 8,041,899 61,889 8,103,788 Period from Year Ended February 1 to December 31, December 31, 2008 2007 2006 Compensation cost: Management plan restricted stock $ 18 $ 25 $ 84 Management plan stock options 13 24 72 DEIP unrestricted stock — — 3 Total compensation cost $ 31 $ 49 $ 159 • any options and SARs outstanding as of the date the change of control is determined to have occurred become fully exercisable and vested, as of immediately prior to the change of control. • all performance units, cash incentive awards and other awards designated as performance compensation awards will be paid out at the “target” performance level on a prorated basis based on the datenumber of grant. These awards generally vest over four years. However, if an employee is retirement eligible atdays elapsed from the grant date, the award is immediately vested. In addition, if an employee will become retirement eligible within four yearsbeginning of the grant date,performance period up to and including the award will vest overchange of control.• all other outstanding awards are automatically deemed exercisable or vested and all restrictions and forfeiture provisions related thereto lapse as of immediately prior to such change of control.
111 Weighted- Average Weighted- Remaining Aggregate Average Contractual Intrinsic Value Options Exercise Price Life (in years) (in millions) Outstanding at beginning of year 4,150,093 $ 35.66 Granted 615,900 12.94 Exercised(a) (6,864 ) 33.88 $ — Canceled (142,536 ) 34.87 Expired (262,921 ) 33.77 Outstanding at end of year 4,353,672 32.80 Vested and expected to vest at end of period 4,005,308 32.97 7.4 $ 1 Exercisable at end of period(b) 2,031,242 35.14 7.0 — (a) The aggregate intrinsic value of shares exercised in 2008, 2007 and 2006 was less than $1 million, $11 million and $3 million, respectively. (b) Options represent the remaining period to retirement eligibility. Approximately 1.7 millionnumber of the 2.0 million nonvested restricted stock awardsvested options at December 31, 2007 are expected to vest. The table below summarizes Restricted Stock activity for the twelve months ended December 31, 2007: Restricted Stock Weighted-
Average
Grant PriceNonvested at beginning of year 2,712,787 $ 36.71 Granted 165,734 43.61 Vested (755,799 ) 36.83 Canceled (104,733 ) 37.23 Nonvested at end of year 2,017,989 37.20 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(5) Share-Based Compensation Plans (Continued) The fair2008. Aggregate intrinsic value of restricted sharesis based only on vested in 2007 was $28 million. The weighted-average grant date price of shares granted in 2006 was $36.78. Director Equity Incentive Plan ("DEIP"). The Nominating/Governance Committee of the UAL 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 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•UAL common stock in lieu of receipt of all or any portion of cash amounts payable by UAL 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 UAL common stock or from UAL's treasury stock. The that have an exercise price for each underlying share of UAL common stock under all options and stock appreciation rights awarded under the DEIP will not be less than the fair market value of a share of commonUAL stock on the date of grant. Each instrument 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 eleven month period ended December 31, 2006 immediately vested on their respective grant dates.(6) Income Taxes United and its domestic consolidated subsidiaries, file a consolidated federal income tax return with UAL. Under an intercompany tax allocation policy, United and its subsidiaries compute, record and pay UAL for their own tax liability as if they were separate companies filing separate returns. In determining their own tax liabilities, United and each of its subsidiaries take into account all tax credits or benefits generated and utilized as separate companies, and they are compensated for the aforementioned tax benefits only if they would be able to use those benefits on a separate company basis. In 2007, the Company's current regular taxable income was completely absorbed by utilization of its net operating loss ("NOL") carry forward; however, it did incur an alternative minimum tax ("AMT") liability of $6 million, as indicated in the table below. In 2006 and 2005, the Company incurred both a regular tax loss and an AMT loss.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(6) Income Taxes (Continued) The significant components of the income tax expense (benefit) are as follows: Successor Predecessor (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 UAL Current tax expense $ 6 $ — $ — $ — Deferred tax expense (benefit) (exclusive of
the other components listed below) 291 21 8,488 (7,830 ) Increase (decrease) in the valuation
allowance for deferred tax assets — — (8,488 ) 7,830 $ 297 $ 21 $ — $ — United Current tax expense $ 6 $ — $ — $ — Deferred tax expense (benefit) (exclusive of
the other components listed below) 290 29 8,397 (7,779 ) Increase (decrease) in the valuation
allowance for deferred tax assets — — (8,397 ) 7,779 $ 296 $ 29 $ — $ — The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows: Successor Predecessor (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 UAL Income tax provision at statutory rate $ 243 $ 15 $ 7,998 $ (7,410 ) State income taxes, net of federal income tax
benefit 13 1 423 (416 ) Nondeductible employee meals 10 9 1 11 Nondeductible interest expense 21 — — — Medicare Part D Subsidy (2 ) (12 ) (2 ) (17 ) Valuation allowance — — (8,488 ) 7,830 Share-based compensation 2 5 — — Other, net 10 3 68 2 $ 297 $ 21 $ — $ — UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(6) Income Taxes (Continued) Successor Predecessor (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 United Income tax provision at statutory rate $ 243 $ 20 $ 7,917 $ (7,363 ) State income taxes, net of federal income tax
benefit 13 1 419 (413 ) Nondeductible employee meals 10 9 1 11 Nondeductible interest expense 21 — — — Medicare Part D Subsidy (2 ) (12 ) (2 ) (17 ) Valuation allowance — — (8,397 ) 7,779 Share-based compensation 2 5 — — Other, net 9 6 62 3 $ 296 $ 29 $ — $ — Temporary differences and carry forwards that give rise to a significant portion of deferred tax assets and liabilitiesprice at December 31, 2007 and 2006 were as follows: UAL United December 31, December 31, (In millions) 2007 2006 2007 2006 Deferred income tax asset (liability): Employee benefits, including postretirement, medical and ESOP $ 1,292 $ 1,416 $ 1,322 $ 1,445 Federal and state net operating loss carry forwards 2,458 2,709 2,473 2,722 Mileage Plus deferred revenue 1,216 1,242 1,220 1,245 AMT credit carry forwards 297 291 297 291 Restructuring charges 170 223 165 218 Other asset 290 1,802 282 1,199 Less: Valuation allowance (1,815 ) (2,248 ) (1,757 ) (2,190 ) Total deferred tax assets $ 3,908 $ 5,435 $ 4,002 $ 4,930 Depreciation, capitalized interest and other $ (3,165 ) $ (3,139 ) $ (3,161 ) $ (3,168 ) Gains on sale and leasebacks (12 ) (9 ) (3 ) — Aircraft rent (31 ) (46 ) (25 ) (40 ) Intangibles (913 ) (964 ) (959 ) (1,010 ) Other liability (347 ) (1,843 ) (337 ) (1,194 ) Total deferred tax liabilities $ (4,468 ) $ (6,001 ) $ (4,485 ) $ (5,412 ) Net deferred tax liability $ (560 ) $ (566 ) $ (483 ) $ (482 ) The federal and state NOL carry forwards relate to prior years' NOLs which may be carried forward to reduce the tax liabilities of future years. This tax benefit is mostly attributable to federal pre-tax NOL carry forwards of $6.6 billion. If not utilized, the federal tax benefits of $1.0 billion expireUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(6) Income Taxes (Continued)in 2022, $0.4 billion expire in 2023, $0.5 billion expire in 2024 and $0.4 billion expire in 2025. In addition, the state tax benefit of $156 million, if not utilized, expires over a five to twenty year period. 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 an 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 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. 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 a portion, or all of the deferred tax assets, will not be realized. As a result, the Company has a valuation allowance against its deferred tax assets as of December 31, 2007 and 2006, to reflect management's assessment regarding the realizability of those assets. The Company expects to continue to maintain a valuation allowance on deferred tax assets until other positive evidence is sufficient. The current valuation allowance of $1,815 million and $1,757 million for UAL and United, respectively, if reversed in 2008 will be allocated to reduce goodwill and then other intangible assets; if reversed in 2009 or later, it will be allocated to reduce income tax expense as discussed in Note 2(p), "Summary of Significant Accounting Policies—New Accounting Pronouncements." In addition to the deferred tax assets listed above, the Company has an $801 million unrecorded tax benefit at December 31, 2007 attributable to the difference between the amount of the financial statement expense and the allowable tax deduction for UAL common stock issued to certain unsecured creditors and employees pursuant to the Plan of Reorganization. The Company is accounting for this unrecorded tax benefit by analogy to SFAS 123R which requires recognition of the tax benefit to be deferred until it is realized as a reduction of taxes payable. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,2008. Period from Year Ended February 1 December 31, to December 31, 2008 2007 2006 Risk-free interest rate 1.9-3.6 % 3.4-5.0 % 4.4-5.1 % Dividend yield 0 % 0 % 0 % Expected market price volatility of UAL common stock 55 % 55 % 55-57 % Expected life of options (years) 5.0-6.3 5.8-6.2 5.0-6.2 Weighted-average fair value $ 7.86 $ 25.13 $ 21.37 ("(“FIN 48"48”). Our adoption, effective January 1, 2007. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of FIN 48 resulted in a $24 million increase in the liability for unrecognized tax benefits ("UTB") which was accounted for as a $6 million decrease in goodwill, a $2 million increasepositions taken by the Company, potentially resulting in additional capital invested,liabilities for taxes and a $32 million increase to deferredinterest. The Company’s tax assets. At December 31, 2007, ourcontingency reserves are reviewed periodically and are adjusted as events occur that affect 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, for uncertainthe identification of new tax positions was $35 million. UTBcontingencies, the release of $19 million would affect our effectiveadministrative tax rate if recognized. Excluding amounts related toguidance affecting its estimates of tax positions for which the ultimate deductibility is highly certain, there were no significant changes in the components of the liability in the twelve months ending December 31, 2007. Any change in the amount of unrecognized tax benefits within the next twelve months is not expected to result in a significant impact on the results of operations liabilities,
98or the financial positionrendering of the Company. Included in the balance at December 31, 2007 is $16 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the effective tax rate but would cause a reduction to the net operating losses available for utilization. We record penalties and interest relating to uncertain tax positions in the other operating expense and interest expense line items, respectively, within our consolidated statement of income.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(6) Income Taxes (Continued) The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions:(In millions) Balance at January 1, 2007 $ 48 �� Increase in unrecognized tax benefits as a result of tax positions taken during the current period 1 Decrease in unrecognized tax benefits as a result of tax positions taken during a prior period (14 ) Decrease in unrecognized tax benefits relating to settlements with taxing authorities — Reductions to unrecognized tax benefits as a result of a lapse of the statute of limitations — Balance at December 31, 2007 $ 35 Our income tax returns for tax years after 2002 remain subject to examination by the Internal Revenue Service and state taxing jurisdictions.(7) Investments The Company had investments accounted for using the cost method of accounting of $5 million and $91 million at December 31, 2007 and 2006, respectively. The Company revalued its investments to their estimated fair values as of the Effective Date in accordance with SOP 90-7. Since that time, there have been no triggering events that required the Company to evaluate any of these investments for impairment. In the fourth quarter of 2007, United, along with certain other major air carriers, sold its interests in Aeronautical Radio, Inc. ("ARINC") to Radio Acquisition Corp., an affiliate of The Carlyle Group. ARINC is a provider of transportation communications and systems engineering. The transaction generated proceeds of $128 million and resulted in a pre-tax gain of $41 million. Investments at December 31, 2007 include $91 million of the Company's previously issued EETC debt securities that the Company repurchased in 2007. These securities remain outstanding and are classified as available-for-sale. An unrealized loss of $5 million to record these securities at fair value has been recognized in other comprehensive income during 2007.relevant court decisions. See Note 12, "Debt Obligations," for additional information.(8) Intangibles As discussed in Note 10, "Segment Information," in 2006 the Company determined that it has two reporting segments that reflect the management of its business: Mainline and United Express. See Note 2(l), "Summary of Significant Accounting Policies—Intangibles,"8, “Income Taxes,” for further information related to impairment testing.UAL Corporationuncertain income tax positions and Subsidiary CompaniesCombined Notes(2) Company Operational Plans • The Company is significantly reducing mainline domestic and consolidated capacity. Fourth quarter 2008 mainline domestic and consolidated capacity were down approximately 14% and 11%year-over-year, respectively. The Company is planning to Consolidated Financial Statements (Continued)(8) Intangibles (Continued)• The following table presents information aboutcapacity reductions are being made through reductions in frequencies of routes and the intangible assetselimination of unprofitable routes. These actions have resulted in the closure of a small number of airport operations where United cannot operate profitably in the current economic environment. Additional airport operations may be closed in future periods.• The Company has announced plans to permanently remove 100 aircraft from its mainline fleet, including its entire B737 fleet and six B747 aircraft, by the end of 2009. The B737 aircraft being retired are some of the Successoroldest and Predecessor Companies, including goodwill,least fuel efficient in the Company’s fleet. This planned reduction reflects the Company’s efforts to eliminate unprofitable capacity and divest the Company of assets that currently do not provide an acceptable return.• United is eliminating its Ted product for leisure markets and will reconfigure that fleet’s 56 A320s to include United First seating. The reconfiguration of the Ted aircraft will occur in stages, with expected completion by year-end 2009. We will continue to review the deployment of all of our aircraft in various markets and the overall composition of our fleet to ensure that we are using our assets appropriately to provide the best available return. • In connection with the capacity reductions, the Company is further streamlining its operations and corporate functions in order to reduce the size of its workforce to match the size of its operations. • The Company also recently entered into an alliance partnership with Continental Airlines that is expected to create revenue enhancements, costs savings and operational efficiencies. • The Company is managing its liquidity by investing only in those projects that are considered high-value, such as the international premium product. The Company has $0.2 billion of binding commitments for the purchase of property in 2009 and $0.8 billion of long-term debt obligations in 2009. • As of December 31, 2008, the Company has 62 unencumbered aircraft and other assets that may be used as collateral to obtain additional financing. The Company could also sell certain of these assets to generate liquidity.
99• As discussed in Note 23, “Subsequent Events,” in January 2009, the Company completed several financing-related transactions which generated approximately $315 million of proceeds. Balance at January 1, 2008 $ — Accruals 106 Payments (25 ) Balance at December 31, 2008 $ 81 B737s (Mainline) All Other Mainline Total Regional Owned Leased Total Owned Leased Total Mainline Affiliates Total Operating: Aircraft at December 31, 2007 (a) 47 47 94 208 158 366 460 279 739 Added (removed) from operating fleet (29 ) (19 ) (48 ) (3 ) — (3 ) (51 ) 1 (50 ) Converted from owned to leased (b) — — — (24 ) 24 — — — — Converted from leased to owned (c) — — — 10 (10 ) — — — — Aircraft at December 31, 2008 (d) 18 28 46 191 172 363 409 280 689 Removed from operating fleet in 2008 (e) 29 19 48 3 — 3 51 — 51 Sold/returned to lessor during 2008 (5 ) (7 ) (12 ) — — — (12 ) — (12 ) Nonoperating at December 31, 2008 (a) (e) 24 12 36 3 — 3 39 — 39 (a) At December 31, 2007, the Company had 113 unencumbered aircraft. In 2007, United leased one operating aircraft from UAL and therefore had one less owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet. This particular aircraft became nonoperational in 2008; therefore, United has one less nonoperating owned B737 aircraft and one more leased aircraft as compared to UAL’s fleet at December 31, 20072008.
100(b) During 2008, the Company sold 24 aircraft and 2006, respectively:leased them back. See Note 15, “Lease Obligations,” for additional information related to these sale-leaseback transactions. Weighted
Average Life of
Assets
(in years) Gross Carrying
Amount Accumulated
Amortization Gross Carrying
Amount Accumulated
Amortization(Dollars in millions) 2007 2006 Amortized intangible assets Airport slots and gates 9 $ 72 $ 22 $ 72 $ 14 Hubs 20 145 14 145 7 Patents 3 70 45 70 21 Mileage Plus database 7 521 137 521 77 Contracts 13 216 101 216 48 Other 7 18 5 18 2 10 $ 1,042 $ 324 $ 1,042 $ 169
Unamortized intangible assets
Goodwill $ 2,280 $ 2,703 Airport slots and gates 255 255 Route authorities 1,146 1,146 Trade-name 752 754 $ 4,433 $ 4,858 (c) During 2008, the Company acquired certain aircraft under existing lease terms. (d) At December 31, 2008, United’s operating fleet was the same as UAL’s fleet and included 62 unencumbered aircraft. The unencumbered aircraft at December 31, 2008 exclude nine aircraft which became encumbered with the December 2008 signing of a binding sale-leaseback agreement that closed in January 2009. See Note 12, “Debt Obligations and Card Processing Agreements,” and Note 23, “Subsequent Events,” for additional information. (e) As of December 31, 2008, the owned nonoperating aircraft and engines are classified as Other non-current assets in the Company’sStatements of Consolidated Financial Position.These aircraft are not classified as assets held for sale because the assets may not be sold within one year. As a result of the impairment testing discussed in Note 3, “Asset Impairments and Intangible Assets,” these assets have been recorded at their net realizable value of $198 million at December 31, 2008. (3) Asset Impairments and Intangible Assets
101 Year Ended December 31, 2008 Goodwill impairment $ 2,277 Indefinite-lived intangible assets: Codeshare agreements 44 Tradenames 20 Intangible asset impairments 64 Tangible assets: Pre-delivery advance deposits including related capitalized interest 105 B737 aircraft, B737 spare parts and other 145 Aircraft and related deposit impairments 250 Total impairments $ 2,591
103 Weighted Average Life of 2008 2007 Assets Gross Carrying Accumulated Gross Carrying Accumulated (Dollars in millions) (in years) Amount Amortization Amount Amortization Amortized intangible assets Airport slots and gates 9 $ 72 $ 30 $ 72 $ 22 Hubs 20 145 22 145 14 Patents 3 70 68 70 45 Mileage Plus database 7 521 179 521 137 Contracts 13 140 35 216 101 Other 7 13 5 18 5 10 $ 961 $ 339 $ 1,042 $ 324 Unamortized intangible assets Goodwill $ — $ 2,280 Airport slots and gates 237 255 Route authorities 1,146 1,146 Tradenames 688 752 $ 2,071 $ 4,433 (4) Voluntary Reorganization Under Chapter 11
104
105 2008 2007 2006 Balance at January 1, 2008 and 2007 and February 1, 2006 $ 98 $ 325 $ 583 Payments (7 ) (83 ) (193 ) Accruals reclassified — (31 ) — (a) Adjustments impacting income: Accrual adjustments classified as special revenue credits — (45 ) — (b) Other changes in contingent liabilities classified as revenues — (26 ) — (c) Accrual adjustments classified as special expense credits — (30 ) (36 )(d) Accrual adjustments classified as other operating expense (credit) 5 (12 ) (29 )(e) Total adjustments impacting income 5 (113 ) (65 ) Balance at December 31, 2008, 2007 and 2006 $ 96 $ 98 $ 325 Total charge (credit) to operating income during period from above items $ 5 $ (113 ) $ (65 ) Additional special operating expense credit — (14 ) — (f) Total operating income charge (benefit) $ 5 $ (127 ) $ (65 ) (a) These accruals were deemed to be no longer directly related to bankruptcy proceedings; therefore, the accruals were reclassified to non-bankruptcy accruals. (b) In the third quarter of 2007, the Company recorded a change in estimate for certain liabilities relating to bankruptcy administrative claims. This adjustment resulted directly from the progression of the Company’s ongoing efforts to resolve
106certain bankruptcy pre-confirmation contingencies; therefore, it was classified as a special operating revenue credit of $45 million that relates to both mainline passenger revenues ($37 million) and Regional affiliates revenues ($8 million). (c) The Company separately recorded a $26 million benefit from a change in estimate to certain other contingent liabilities based largely on changes in underlying facts and circumstances occurring during the third quarter of 2007. This benefit was recorded as a credit to mainline passenger revenues of $22 million and to Regional affiliates revenues of $4 million. (d) The 2007 amount relates to special operating expense credits of $30 million relating to ongoing litigation for San Francisco and Los Angeles facility lease secured interests as discussed above. For 2006, the $36 million benefit consists of a $12 million net benefit related to SFO and LAX lease litigation and a $24 million benefit related to pension matters, as discussed in Note 19, “Special Items.” (e) This amount relates to accrual adjustments impacting various operating expense line items that the Company recorded due to a change in estimate for certain liabilities relating to bankruptcy administrative claims. These adjustments resulted directly from the progression of tax accruals existing at the Effective Date. DuringCompany’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies.(f) This amount relates to an accrual adjustment that the eleven month period ended December 31, 2006, goodwill was decreased by $62 millionCompany recorded due to Successor Company tax activity that impacteda change in estimate for certain liabilities relating to bankruptcy administrative claims. This adjustment, which was recorded as a credit to other operating expense, resulted directly from the deferred tax asset valuation allowance,progression of the Company’s ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies. Period from January 1 to January 31, 2006 UAL United Discharge of claims and liabilities $ 24,628 $ 24,389 (a) Revaluation of frequent flyer obligations (2,399 ) (2,399 ) (b) Revaluation of other assets and liabilities 2,106 2,111 (c) Employee-related charges (898 ) (898 ) (d) Contract rejection charges (429 ) (421 ) (e) Professional fees (47 ) (47 ) Pension-related charges (14 ) (14 ) Other (13 ) (12 ) $ 22,934 $ 22,709 (a) The discharge of claims and increased by $9 millionliabilities primarily relates to those unsecured claims arising during the bankruptcy process, such as those arising from the termination and settlement of the 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 net adjustmentsthe 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 discharged its obligations to unsecured creditors in exchange for the fair valuesdistribution of 115 million common shares of UAL and the issuance of certain assetsother UAL securities. Accordingly, UAL and liabilities. Total amortization expenseUnited recognized was $155 million for the year ended December 31, 2007, $1 million for the one month period ended January 31, 2006a non-cash reorganization gain of $24.6 billion and $169 million for the eleven month period ended December 31, 2006. $24.4 billion, respectively.(b) The Company expects to record amortization expense of $92 million, $70 million, $64 million, $59 million and $56 million for 2008, 2009, 2010, 2011 and 2012, respectively. Open Skies. On April 30, 2007, the U.S. government and the European Union ("EU"revalued its Mileage Plus Frequent Flyer Program (“Mileage Plus”) signed a transatlantic aviation agreement to replace the existing bilateral arrangements between the U.S. Government and the 27 EU member states. The agreement is expected to become effectiveobligations at the end of March 2008. The agreement is based on the U.S. open skies model and authorizes U.S. airlines to operate between the United States and 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./EU markets. The agreement also authorizes all U.S. and EU carriers to operate services between theUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(8) Intangibles (Continued)United States and London Heathrow, thereby potentially adding new competition to United's Heathrow operation, although Heathrow is currently subject to both slot and facility constraints which may practically limit the extent of new competition in the near term. This agreement does not provide for a reallocation of existing slots among carriers. At December 31, 2007 and 2006, United recorded an indefinite-lived intangible asset of $255 million for its London Heathrow slots, based upon its estimation of the fair value for those slots as of the adoptiona result of fresh-start reporting, on February 1, 2006. United, however, determinedwhich resulted in a $2.4 billion non-cash reorganization charge.(c) In accordance with fresh-start reporting, the Company revalued its assets at fresh-start that its rights relating to its actual route authorities to Heathrow had atheir estimated fair value and liabilities at estimated fair value or the present value of zero. The EU/U.S. open skies agreement is expectedamounts to directly impact the future value and expected livesbe paid. This resulted in a non-cash reorganization gain of route authorities to Heathrow; however, there is no direct impact from the open skies agreement on airport slot rights, including those at Heathrow. The open skies agreement is also expected to provide United an opportunity to secure antitrust immunity for certain$2.1 billion, primarily as a result of its Star Alliance carrier relationships, and to provide United and other carriers with access to new marketsnewly recognized intangible assets, offset partly by reductions in EU countries. In September 2007, the DOT granted United and bmi antitrust immunity. The immunity goes into effect at the same time as the open skies agreement between the U.S. and the EU in March of 2008. Because of the diverse nature of these potential impacts on United's business, the overall future impact of the EU agreement on United's business in the EU region cannot be predicted with certainty. United has concluded that, in certain circumstances, the open skies agreement could indirectly and adversely affect the fair value of its slot rights at Heathrow,tangible property and therefore has further concluded thatequipment.(d) In exchange for employees’ contributions to the signingsuccessful reorganization of the open skies agreement on April 30, 2007, constituted an indicatorCompany, including agreeing to reductions in pay and benefits, the Company agreed in the Plan of impairmentReorganization 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
107employee 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 respect to United's Heathrow slots intangible asset. United performed annual impairment reviewsnon-represented salaried and management employees was recorded as a reorganization charge in January 2006, upon confirmation of goodwillthe 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 indefinite lived intangible assetsregional carrier contracts.(5) Common Stockholders’ Equity and Preferred Securities Shares of UAL Common Stock 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 Successor Predecessor Period from Period from February 1 January 1 Year Ended to to December 31, December 31, January 31, UAL 2008 2007 2006 2006 Shares outstanding at beginning of period 116,921,049 112,280,629 116,220,959 116,220,959 Cancellation of Predecessor UAL stock — — (116,220,959 ) — Issuance of UAL stock under equity offering 11,208,438 — — — Issuance of UAL stock upon conversion of preferred stock 11,145,812 — — — Issuance of UAL stock to creditors 765,780 3,849,389 108,347,814 — Issuance of UAL stock to employees 418,664 1,155,582 4,240,526 — Issuance of UAL stock to directors — — 100,000 — Forfeiture of non-vested UAL stock (110,926 ) (104,733 ) (270,934 ) — Shares acquired for treasury (310,889 ) (259,818 ) (136,777 ) — Shares outstanding at end of period 140,037,928 116,921,049 112,280,629 116,220,959 Treasury shares at beginning of period 396,595 136,777 — — Shares acquired for treasury 310,889 259,818 136,777 — Treasury shares at end of period 707,484 396,595 136,777 —
108(6) UAL Per Share Amounts
109 Successor Predecessor Period from Period from February 1 January 1 Year Ended to to (In millions, except per share) December 31, December 31, January 31, UAL 2008 2007 2006 2006 Net income (loss) $ (5,348 ) $ 403 $ 25 $ 22,851 Preferred stock dividend requirements (3 ) (10 ) (9 ) (1 ) Earnings (loss) available to common stockholders $ (5,351 ) $ 393 $ 16 $ 22,850 Basic weighted-average shares outstanding 126.8 117.4 115.5 116.2 Earnings (loss) per share, basic $ (42.21 ) $ 3.34 $ 0.14 $ 196.61 Earnings (loss) available to common stockholders $ (5,351 ) $ 393 $ 16 $ 22,850 Effect of 2% preferred securities — 10 — — Effect of 4.5% senior limited-subordination convertible notes — 20 — — Effect of 5% convertible notes — 5 — — Earnings available to common stockholders including the effect of dilutive securities $ (5,351 ) $ 428 $ 16 $ 22,850 Basic weighted-average shares outstanding 126.8 117.4 115.5 116.2 Effect of non-vested stock options — 0.2 — — Effect of non-vested restricted shares — 1.1 0.7 — Effect of 2% preferred securities — 11.0 — — Effect of 4.5% senior limited-subordination convertible notes — 20.8 — — Effect of 5% convertible notes — 3.2 — — Diluted weighted-average shares outstanding 126.8 153.7 116.2 116.2 Earnings (loss) per share, diluted $ (42.21 ) $ 2.79 $ 0.14 $ 196.61 Stock options 4.4 4.0 5.0 9.0 Restricted shares 1.4 0.9 2.0 — 2% preferred securities 3.1 — 10.8 — 4.5% senior limited-subordination convertible notes 22.2 — 20.8 — 5% convertible notes 3.4 — 3.2 — 34.5 4.9 41.8 9.0 (7) Share-Based Compensation Plans Employees Directors Total Authorized 8,339,284 175,000 8,514,284 Granted (633,750 ) (113,111 ) (746,861 ) Canceled awards available for reissuance 336,365 — 336,365 Available for future grants 8,041,899 61,889 8,103,788 Period from Year Ended February 1 to December 31, December 31, 2008 2007 2006 Compensation cost: Management plan restricted stock $ 18 $ 25 $ 84 Management plan stock options 13 24 72 DEIP unrestricted stock — — 3 Total compensation cost $ 31 $ 49 $ 159 • any options and SARs outstanding as of October 1,the date the change of control is determined to have occurred become fully exercisable and vested, as of immediately prior to the change of control.• all performance units, cash incentive awards and other awards designated as performance compensation awards will be paid out at the “target” performance level on a prorated basis based on the number of days elapsed from the beginning of the performance period up to and including the change of control. • all other outstanding awards are automatically deemed exercisable or vested and all restrictions and forfeiture provisions related thereto lapse as of immediately prior to such change of control.
111 Weighted- Average Weighted- Remaining Aggregate Average Contractual Intrinsic Value Options Exercise Price Life (in years) (in millions) Outstanding at beginning of year 4,150,093 $ 35.66 Granted 615,900 12.94 Exercised(a) (6,864 ) 33.88 $ — Canceled (142,536 ) 34.87 Expired (262,921 ) 33.77 Outstanding at end of year 4,353,672 32.80 Vested and expected to vest at end of period 4,005,308 32.97 7.4 $ 1 Exercisable at end of period(b) 2,031,242 35.14 7.0 — (a) The aggregate intrinsic value of shares exercised in 2008, 2007 and 2006 was less than $1 million, $11 million and determined$3 million, respectively.(b) Options represent the number of vested options at December 31, 2008. Aggregate intrinsic value is based only on vested options that no impairment was indicated. In addition, a 2007 interim impairment review was performed forhave an exercise price less than the Heathrow slots intangible asset, and the Company concluded that no impairment was then indicated and that no change was then required to the fresh-start assignment of an indefinite life to the Heathrow slots.UAL stock price at December 31, 2008. Period from Year Ended February 1 December 31, to December 31, 2008 2007 2006 Risk-free interest rate 1.9-3.6 % 3.4-5.0 % 4.4-5.1 % Dividend yield 0 % 0 % 0 % Expected market price volatility of UAL common stock 55 % 55 % 55-57 % Expected life of options (years) 5.0-6.3 5.8-6.2 5.0-6.2 Weighted-average fair value $ 7.86 $ 25.13 $ 21.37
112 Weighted- Average Restricted Stock Grant Price Non-vested at beginning of year 2,017,989 $ 37.20 Granted 413,800 15.76 Vested (886,188 ) 33.36 Canceled (114,926 ) 38.98 Non-vested at end of year 1,430,675 35.32 (8) Income Taxes Successor Predecessor Period from Period from Year Ended February 1 to January 1 December 31, December 31, to January 31, UAL 2008 2007 2006 2006 Current tax expense $ 1 $ 6 $ — $ — Deferred tax expense (benefit) (26 ) 291 21 8,488 Increase (decrease) in the valuation allowance for deferred tax assets — — — (8,488 ) $ (25 ) $ 297 $ 21 $ — Current tax expense $ 4 $ 6 $ — $ — Deferred tax expense (benefit) (26 ) 290 29 8,397 Increase (decrease) in the valuation allowance for deferred tax assets — — — (8,397 ) $ (22 ) $ 296 $ 29 $ —
113 Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, UAL 2008 2007 2006 2006 Income tax provision at statutory rate $ (1,880 ) $ 243 $ 15 $ 7,998 State income taxes, net of federal income tax benefit (67 ) 13 1 423 Goodwill 798 — — — Nondeductible employee meals 7 10 9 1 Nondeductible interest expense 10 21 — — Medicare Part D subsidy (12 ) (2 ) (12 ) (2 ) Valuation allowance 1,100 — — (8,488 ) Share-based compensation — 2 5 — Rate change beginning deferreds 14 — — — Other, net 5 10 3 68 $ (25 ) $ 297 $ 21 $ — Income tax provision at statutory rate $ (1,865 ) $ 243 $ 20 $ 7,917 State income taxes, net of federal income tax benefit (66 ) 13 1 419 Goodwill 798 — — — Nondeductible employee meals 7 10 9 1 Nondeductible interest expense 10 21 Medicare Part D subsidy (12 ) (2 ) (12 ) (2 ) Valuation allowance 1,083 — — (8,397 ) Share-based compensation — 2 5 — Rate change beginning deferreds 14 — — — Other, net 9 9 6 62 $ (22 ) $ 296 $ 29 $ — UAL United December 31, December 31, 2008 2007 2008 2007 Deferred income tax asset (liability): Employee benefits, including postretirement, medical and ESOP $ 1,345 $ 1,292 $ 1,374 $ 1,322 Federal and state net operating loss carry forwards 2,622 2,458 2,622 2,473 Mileage Plus deferred revenue 1,541 1,216 1,545 1,220 AMT credit carry forwards 298 297 298 297 Fuel hedge unrealized losses 294 — 294 — Restructuring charges 139 170 134 165 Other asset 337 290 329 282 Less: Valuation allowance (2,941 ) (1,815 ) (2,866 ) (1,757 ) Total deferred tax assets $ 3,635 $ 3,908 $ 3,730 $ 4,002
114 UAL United December 31, December 31, 2008 2007 2008 2007 Depreciation, capitalized interest and other $ (2,961 ) $ (3,165 ) $ (2,958 ) $ (3,161 ) Intangibles (864 ) (913 ) (910 ) (959 ) Fuel hedge unrealized gains — (13 ) — (13 ) Other liability (346 ) (377 ) (321 ) (352 ) Total deferred tax liabilities $ (4,171 ) $ (4,468 ) $ (4,189 ) $ (4,485 ) Net deferred tax liability $ (536 ) $ (560 ) $ (459 ) $ (483 ) 2008 2007 Balance at January 1, $ 35 $ 48 Increase in unrecognized tax benefits as a result of tax positions taken during the current period 1 1 Decrease in unrecognized tax benefits as a result of tax positions taken during a prior period (11 ) (14 ) Decrease in unrecognized tax benefits relating to settlements with taxing authorities (5 ) — Balance at December 31, $ 20 $ 35 (9) Retirement and Postretirement Plans The Company maintains various retirement plans, both defined benefit (qualified and non-qualified) and defined contribution, which cover substantially all employees. As discussed below, most of the Company's defined benefit plans were terminated and replaced with defined contribution plans as part of the bankruptcy reorganization. The Company also provides 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, 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.
116 Pension Benefits Other Benefits Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Benefit obligation at beginning of period $ 236 $ 251 $ 1,987 $ 2,116 Service cost 6 8 32 39 Interest cost 8 9 122 121 Plan participants’ contributions 1 1 69 56 Amendments — (16 ) — — Actuarial (gain) loss (9 ) (18 ) (46 ) (146 ) Curtailments — 1 (1 ) — Foreign currency exchange rate changes (8 ) 11 — — Federal subsidy — — 12 8 Gross benefits paid (13 ) (11 ) (217 ) (207 ) Benefit obligation at end of period $ 221 $ 236 $ 1,958 $ 1,987 Fair value of plan assets at beginning of period $ 167 $ 152 $ 56 $ 54 Actual return on plan assets (39 ) 9 3 3 Employer contributions 22 14 146 150 Plan participants’ contributions 1 1 69 56 Foreign currency exchange rate changes (14 ) 6 — — Expected transfer out — (4 ) — — Benefits paid (13 ) (11 ) (217 ) (207 ) Fair value of plan assets at end of period $ 124 $ 167 $ 57 $ 56 Funded status—Net amount recognized $ (97 ) $ (69 ) $ (1,901 ) $ (1,931 ) Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Noncurrent asset $ 19 $ 33 $ — $ — Current liability (4 ) (5 ) (89 ) (102 ) Noncurrent liability (112 ) (97 ) (1,812 ) (1,829 ) Net amount recognized $ (97 ) $ (69 ) $ (1,901 ) $ (1,931 ) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial gain (loss) $ — $ 43 $ 286 $ 254
117 December 31, 2008 2007 Projected benefit obligation $ 211 $ 208 Accumulated benefit obligation 175 171 Fair value of plan assets 94 106 Successor Predecessor Period from Period from Year Ended February 1 to January 1 December 31, December 31, to January 31, 2008 2007 2006 2006 Service cost $ 6 $ 8 $ 9 $ 1 Interest cost 8 9 8 1 Expected return on plan assets (10 ) (9 ) (8 ) (1 ) Recognized actuarial (gain) loss (2 ) (1 ) — — Net periodic benefit costs $ 2 $ 7 $ 9 $ 1 Service cost $ 32 $ 39 $ 33 $ 3 Interest cost 122 121 116 11 Expected return on plan assets (4 ) (3 ) (6 ) (1 ) Amortization of prior service cost including transition obligation — — — (13 ) Curtailment gain (1 ) — — Recognized actuarial (gain) loss (17 ) (11 ) — 8 Net periodic benefit costs $ 132 $ 146 $ 143 $ 8 Pension Benefits Other Benefits At At December 31, December 31, 2008 2007 2008 2007 Discount rate 3.59 % 4.16 % 5.97 % 6.27 % Rate of compensation increase 2.94 % 3.22 % — —
118 Pension Benefits Other Benefits Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Discount rate 4.16 % 3.88 % 6.27 % 5.93 % Expected return on plan assets 6.31 % 6.38 % 6.50 % 6.50 % Rate of compensation increase 3.22 % 3.15 % — — 2008 2007 Health care cost trend rate assumed for next year 8.00 % 8.50 % Rate to which the cost trend rate is assumed to decline (ultimate trend rate in 2015) 5.00 % 4.50 % 1% Increase 1% Decrease Effect on total service and interest cost for the year ended December 31, 2008 $ 19 $ (13 ) Effect on postretirement benefit obligation at December 31, 2008 290 (226 ) Pension Assets Other Benefit Assets at December 31 at December 31 2008 2007 2008 2007 Equity securities 52 % 70 % — % — % Fixed income 10 25 100 100 Other 38 5 — — Total 100 % 100 % 100 % 100 % Other Benefits— Other subsidy Pension Benefits receipts 2009 $ 11 $ 159 $ 13 2010 11 162 14 2011 11 163 16 2012 12 160 18 2013 12 159 20 Years 2014—2018 58 826 125 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(9) Retirement and Postretirement Plans (Continued) 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 the Company's domestic 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. In 2005, the Company recorded $640 million in curtailment charges related to these pension plans and reclassified $1.9 billion of pension obligations to Liabilities subject to compromise. The Company 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 88. See Note 1, "Voluntary Reorganization Under Chapter 11" 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 theStatements of Consolidated Financial Position for the defined benefit and other postretirement plans ("Other Benefits"): Pension Benefits Other Benefits Successor Predecessor Successor Predecessor (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Change in Benefit
Obligation Benefit obligation at
beginning of period $ 251 $ 247 $ 241 $ 2,116 $ 2,223 $ 2,256 Service cost 8 9 1 39 33 3 Interest cost 9 8 1 121 116 11 Plan participants'
contributions 1 1 — 56 52 4 Amendments (16 ) — — — — — Actuarial (gain) loss (18 ) (9 ) 2 (146 ) (123 ) (32 ) Curtailments 1 — — — — — Foreign currency
exchange rate
changes 11 8 3 — — — Federal subsidy — — — 8 9 — Gross benefits paid (11 ) (13 ) (1 ) (207 ) (194 ) (19 ) Benefit obligation at
end of period $ 236 $ 251 $ 247 $ 1,987 $ 2,116 $ 2,223 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(9) Retirement and Postretirement Plans (Continued) Pension Benefits Other Benefits Successor Predecessor Successor Predecessor (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Change in Plan Assets Fair value of plan
assets at beginning
of period $ 152 $ 136 $ 132 $ 54 $ 116 $ 116 Actual return on plan
assets 9 12 2 3 3 1 Employer contributions 14 11 1 150 77 14 Plan participants'
contributions 1 1 — 56 52 4 Foreign currency
exchange rate
changes 6 5 2 — — — Expected transfer out (4 ) — — — — — Benefits paid (11 ) (13 ) (1 ) (207 ) (194 ) (19 ) Fair value of plan
assets at end of
period $ 167 $ 152 $ 136 $ 56 $ 54 $ 116
Funded status
$
(69
)
$
(99
)
$
(111
)
$
(1,931
)
$
(2,062
)
$
(2,107
)Unrecognized actuarial
(gains) losses (a ) (a ) 43 (a ) (a ) 1,600 Unrecognized prior
service costs (a ) (a ) 1 (a ) (a ) (1,531 ) Unrecognized net
transition obligation (a ) (a ) 3 (a ) (a ) — Net amount recognized $ (69 ) $ (99 ) $ (64 ) $ (1,931 ) $ (2,062 ) $ (2,038 ) (a)Amounts are not applicable due to the adoption of SFAS 158 in 2006, which eliminated the accounting requirements for the recognition of additional minimum liability and intangible assets. Pension Benefits Other Benefits Year Ended
December 31, Year Ended
December 31, (In millions) 2007 2006 2007 2006 Amounts recognized in theStatements of Consolidated Financial
Position consist of: Non-current asset $ 33 $ 31 $ — $ — Current liability (5 ) — (102 ) (107 ) Non-current liability (97 ) (130 ) (1,829 ) (1,955 ) Net amount recognized $ (69 ) $ (99 ) $ (1,931 ) $ (2,062 ) Amounts recognized in accumulated other comprehensive income
consist of: Net actuarial gain $ 43 $ 13 $ 254 $ 120 The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2008 for actuarial gains are $1 million for pension plans and $17 million forUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(9) Retirement and Postretirement Plans (Continued)other postretirement plans. At exit the Company elected not to apply the corridor approach for amortization of unrecognized amounts included in accumulated other comprehensive income. This policy may result in more volatility in the amortization of these unrecognized amounts into net periodic pension cost. 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) 2007 2006 Projected benefit obligation $ 208 $ 231 Accumulated benefit obligation 171 189 Fair value of plan assets 106 100 The net periodic benefit cost included the following components: Successor Predecessor (In millions) Year Ended
December 31,
2007 Period from
February 1 to
December 31,
2006 Period from
January 1 to
January 31,
2006 Year Ended
December 31,
2005 Pension Benefits Service cost $ 8 $ 9 $ 1 $ 79 Interest cost 9 8 1 464 Expected return on plan assets (9 ) (8 ) (1 ) (392 ) Amortization of prior service cost including
transition obligation — — — 21 Curtailment charge — — — 640 Settlement losses, net — — — 1,067 Recognized actuarial (gain) loss (1 ) — — 100 Net periodic benefit costs $ 7 $ 9 $ 1 $ 1,979
Other Benefits
Service cost $ 39 $ 33 $ 3 $ 42 Interest cost 121 116 11 131 Expected return on plan assets (3 ) (6 ) (1 ) (9 ) Amortization of prior service cost including
transition obligation — — (13 ) (149 ) Recognized actuarial (gain) loss (11 ) — 8 93 Net periodic benefit costs $ 146 $ 143 $ 8 $ 108 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(9) Retirement and Postretirement Plans (Continued) The assumptions below are based on country-specific bond yields and other economic data. The weighted-average assumptions used for the benefit plans were as follows: Pension Benefits Other Benefits Weighted-average
assumptions used to
determine benefit
obligations At December 31, At December 31, At January 31,
2006 At January 31,
2006 2007 2006 2007 2006 Discount rate 4.16 % 3.88 % 3.63 % 6.27 % 5.93 % 5.84 % Rate of
compensation
increase 3.22 % 3.15 % 2.50 % — — —
Weighted-average
assumptions used to
determine net expense
Year Ended
December 31,
2007
Period from
February 1 to
December 31,
2006
Period from
January 1 to
January 31,
2006
Year Ended
December 31,
2007
Period from
February 1 to
December 31,
2006
Period from
January 1 to
January 31,
2006
Discount rate 3.88 % 3.63 % 3.56 % 5.93 % 5.84 % 5.68 % Expected return on
plan assets 6.38 % 6.49 % 6.49 % 6.50 % 8.00 % 8.00 % Rate of compensation
increase 3.15 % 2.50 % 2.47 % — — — The expected return on plan assets is based on an evaluation of the historical behavior of the broad financial markets and the Company's investment portfolio. 2007 2006 Health care cost trend rate assumed for next year 8.50 % 8.50 % Rate to which the cost trend rate is assumed to decline (ultimate trend rate in 2012) 4.50 % 4.50 % Assumed health care cost trend rates have a significant effect on the amounts reported for the Other Benefits plan. 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 year ended December 31, 2007 $ 20 $ (15 ) Effect on postretirement benefit obligation at December 31, 2007 $ 236 $ (162 ) The weighted-average asset allocations for the plans at December 31, 2007 and 2006, by asset category are as follows: Pension Assets
at December 31 Other
Benefit Assets
at December 31 Asset Category 2007 2006 2007 2006 Equity securities 70 % 71 % — % — % Fixed income 25 28 100 100 Other 5 1 — — Total 100 % 100 % 100 % 100 % UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(9) Retirement and Postretirement Plans (Continued) The Company believes that the long-term asset allocations on average will approximate the targeted allocations and regularly reviews the actual asset allocations to periodically rebalance the investments to the targeted allocations when appropriate. The target asset allocations are established with the objective of achieving the plans' expected return on assets without undue investment risk. Expected 2008 contributions are $29 million for the pension plans and $170 million for the other postretirement benefit plans. The following benefit payments are expected to be made in future years for the Company's retirement plans:(In millions) Pension Other Benefits Other Benefits—
subsidy receipts 2008 $ 12 $ 171 $ (12 ) 2009 12 172 (14 ) 2010 12 173 (16 ) 2011 13 174 (18 ) 2012 14 171 (20 ) Years 2013 - 2017 70 853 (127 ) Defined Contribution Plans 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 1 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 multi-employer plan whereby the assets contributed by the Company (based on hours worked) may be used to provide benefits to employees of other participating companies, since assets contributed by all participating companies are not segregated or restricted to provide benefits specifically to employees of one participating company. In accordance with the applicable 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 for the year ended December 31, 2005. The Successor Company recognized $232 million and $206 million of expense for the year ended December 31, 2007 and the eleven months ended December 31, 2006, respectively, for all of the Company's defined contribution employee retirement plans, of which $28 million and $21 million, respectively, related to the IAM multi-employer plan.Segment Information Segments. The Company manages its business by two reporting segments: Mainline and United Express. The Company manages its business as an integrated network with assets deployed across various regions.
120 Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, UAL 2008 2007 2006 2006 Revenue: Mainline $ 17,096 $ 17,035 $ 15,185 $ 1,254 United Express 3,098 3,063 2,697 204 Special revenue items — 45 — — Total $ 20,194 $ 20,143 $ 17,882 $ 1,458 Depreciation and amortization: Mainline $ 932 $ 925 $ 820 $ 68 United Express(a) 6 9 7 1 Segment earnings (loss) and reconciliation to Mainline $ (2,607 ) $ 448 $ (91 ) $ (59 ) United Express (150 ) 122 101 (24 ) Special revenue items (Note 19) — 45 — — Goodwill impairment (2,277 ) — — — Other impairments and special items (Note 19) (339 ) 44 36 — Gain on sale of investment (Note 20) — 41 — — Reorganization items, net — — — 22,934 Less: Equity earnings in affiliates(b) (6 ) (5 ) (3 ) (5 ) Consolidated earnings (loss) before income taxes and equity earnings in affiliates $ (5,379 ) $ 695 $ 43 $ 22,846 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(10) Segment Information (Continued) The accounting policies for each of these reporting 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 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(j), "Summary of Significant Accounting Policies—United Express" for additional information related to United Express expenses. The following table presents UAL segment information for the year ended December 31, 2007, the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the year ended December 31, 2005: Successor Predecessor (In millions) Year
Ended
2007 February 1 to
December 31,
2006 January 1 to
January 31,
2006 Year
Ended
2005 UAL Revenue: Mainline $ 17,035 $ 15,185 $ 1,254 $ 14,950 United Express 3,063 2,697 204 2,429 Special revenue items 45 — — — Total $ 20,143 $ 17,882 $ 1,458 $ 17,379 Depreciation and amortization: Mainline $ 925 $ 820 $ 68 $ 856 United Express(a) 9 7 1 17
Segment earnings (loss) and reconciliation to
Statements of Consolidated Operations:
Mainline $ 448 $ (91 ) $ (59 ) $ (240 ) United Express 122 101 (24 ) (317 ) Reorganization items, net — — 22,934 (20,601 ) Gain on sale of investment (Note 7) 41 — — — Special revenue items (Note 20) 45 — — — Special expense items (Note 20) 44 36 — (18 ) Less: Equity earnings in affiliates(b) (5 ) (3 ) (5 ) (4 ) Consolidated earnings (loss) before income taxes
and equity earnings in affiliates $ 695 $ 43 $ 22,846 $ (21,180 ) (a) United Express depreciation expense relates to assets used in United Express operations. This depreciation is included in Regional affiliates expense in the Company'sCompany’sStatements of Consolidated Operations..(b) Equity earnings are part of the mainline segment.
121 Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, United 2008 2007 2006 2006 Revenue: Mainline $ 17,139 $ 17,023 $ 15,183 $ 1,250 United Express 3,098 3,063 2,697 204 Special revenue items — 45 — — Total $ 20,237 $ 20,131 $ 17,880 $ 1,454 Depreciation and amortization: Mainline 932 $ 925 $ 820 $ 68 United Express(a) 6 9 7 1 Segment earnings (loss) and reconciliation to Mainline $ (2,562 ) $ 446 $ (76 ) $ (59 ) United Express (150 ) 122 101 (24 ) Special revenue items (Note 19) — 45 — — Goodwill impairment (2,277 ) — — — Other impairments and special items (Note 19) (339 ) 44 36 — Gain on sale of investment (Note 20) — 41 — — Reorganization items, net — — — 22,709 Less: Equity earnings in affiliates(b) (6 ) (5 ) (3 ) (5 ) Consolidated earnings (loss) before income taxes and equity earnings in affiliates $ (5,334 ) $ 693 $ 58 $ 22,621 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(10) Segment Information (Continued) The following table presents United segment information for the year ended December 31, 2007, the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the year ended December 31, 2005: Successor Predecessor (In millions) Year
Ended
2007 February 1 to
December 31,
2006 January 1 to
January 31,
2006 Year
Ended
2005 United Revenue: Mainline $ 17,023 $ 15,183 $ 1,250 $ 14,875 United Express 3,063 2,697 204 2,429 Special revenue items 45 — — — Total $ 20,131 $ 17,880 $ 1,454 $ 17,304 Depreciation and amortization: Mainline $ 925 $ 820 $ 68 $ 854 United Express(a) 9 7 1 17
Segment earnings (loss) and reconciliation to
Statements of Consolidated Operations:
Mainline $ 446 $ (76 ) $ (59 ) $ (282 ) United Express 122 101 (24 ) (317 ) Reorganization items, net — — 22,709 (20,432 ) Gain on sale of investments (Note 7) 41 — — — Special revenue items (Note 20) 45 — — — Special expense items (Note 20) 44 36 — (5 ) Less: Equity earnings in affiliates(b) (5 ) (3 ) (5 ) (4 ) Consolidated earnings (loss) before income taxes
and equity earnings in affiliates $ 693 $ 58 $ 22,621 $ (21,040 ) (a) United Express depreciation expense relates to assets used in United Express operations. This depreciation is included in Regional affiliates expense in the Company'sCompany’sStatements of Consolidated Operations..(b) Equity earnings are part of the mainline segment. 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 theStatements 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 reporting unit to calculate an estimated purchase price for such reporting unit. This purchase price was then allocated to the individual assets and liabilities assumed to be related to that reporting unit. Any excess purchase price is the amount of goodwill assigned to that reporting unit. To the extent that individual assets and liabilities could be assigned directly to specific reporting units, those assets and liabilities
122 UAL United 2008 2007 2008 2007 Mainline segment $ 19,415 $ 24,149 $ 19,586 $ 24,165 United Express segment 46 71 46 71 Total assets $ 19,461 $ 24,220 $ 19,632 $ 24,236 Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Domestic (U.S. and Canada) $ 12,819 $ 14,006 $ 11,981 $ 953 Pacific 3,712 3,262 3,214 283 Atlantic 3,055 2,365 2,158 167 Latin America 608 510 529 55 Total UAL $ 20,194 $ 20,143 $ 17,882 $ 1,458 Add (less): UAL other domestic 43 (12 ) (2 ) (4 ) Total United $ 20,237 $ 20,131 $ 17,880 $ 1,454 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(10) Segment Information (Continued)were so assigned. As a result of this process, all of the Company's goodwill has been allocated to the Mainline segment. See Note 8, "Intangibles," for further information related to goodwill. At December 31, 2007 and 2006, UAL's and United's net carrying values of Mainline and United Express segment assets were as follows: UAL United (In millions) 2007 2006 2007 2006 Mainline segment $ 24,149 $ 25,294 $ 24,165 $ 25,506 United Express segment 71 75 71 75 Total assets $ 24,220 $ 25,369 $ 24,236 $ 25,581 United Express assets include only those assets directly associated with its operations. The Company does not allocate corporate assets to the United Express segment. The Company's capital expenditures are reported in the Company'sConsolidated Statements of Cash Flows and are related to its Mainline operations. UAL and United's operating revenue by principal geographic region (as defined by the U.S. Department of Transportation) for the year ended December 31, 2007, the eleven month period ended December 31, 2006, the one month period ended January 31, 2006 and the year ended December 31, 2005 is presented in the table below. Successor Predecessor (In millions) Year Ended December 31, 2007 February 1 to December 31, 2006 January 1 to January 31, 2006 Year Ended December 31, 2005 UAL Domestic (U.S. and Canada) $ 14,006 $ 11,981 $ 953 $ 11,411 Pacific 3,262 3,214 283 3,283 Atlantic 2,365 2,158 167 2,189 Latin America 510 529 55 496 Total UAL $ 20,143 $ 17,882 $ 1,458 $ 17,379 Less: UAL other domestic (12 ) (2 ) (4 ) (75 ) Total United $ 20,131 $ 17,880 $ 1,454 $ 17,304 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.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)Accumulated Other Comprehensive Income (Loss) The table below presents the components of the Company's accumulated other comprehensive income (loss), net of tax. See Note 9, "Retirement As of December 31, 2008 2007 2006 Pension and other postretirement gains, net of tax $ 130 $ 141 $ 87 Financial instrument losses, net of tax (37 ) — (5 ) Accumulated other comprehensive income, net of tax $ 93 $ 141 $ 82
123(12) Debt Obligations and Postretirement Plans"Card Processing Agreements At December 31, 2008 2007 Secured notes, 1.64% to 9.52%, due 2009 to 2022 $ 4,331 $ 4,659 Credit Facility, 3%, due 2014 1,273 1,291 4.5% convertible notes, due 2021(a) 726 726 6% senior notes, due 2031(a) 546 515 5% senior convertible notes, due 2021(a) 150 150 Total debt 7,026 7,341 Less: unamortized debt discount (239 ) (251 ) Less: current portion of long-term debt (780 ) (678 ) Long-term debt, net $ 6,007 $ 6,412 Current portion of long-term debt $ 782 $ 678 Long-term debt, net 6,007 6,415 (a) Instruments were issued by UAL and Note 14, "Financial Instruments and Risk Management," for further information on these items. Successor Predecessor At December 31, (In millions) 2007 2006 2005 Pension and other postretirement gains (losses), net of tax $ 141 $ 87 $ (12 ) Financial instrument losses, net of tax — (5 ) (24 ) Accumulated other comprehensive income (loss), net of tax $ 141 $ 82 $ (36 ) The 2006 and 2005 pension-related amounts represent the adoption of SFAS 158 and the minimum pension liability under SFAS 87, respectively. During the initial adoption of SFAS 158, the Company recorded deferred taxes on the portion of other comprehensive income associated with the Medicare Part D subsidiary. In 2007, the Company recomputed deferred taxes on the portion of the initial other comprehensive balance at the adoption date excluding the amount of comprehensive income attributablepushed down to the Medicare Part D subsidiary. This adjustment of $40 million is excluded from comprehensive income and is reported separately in the Company'sStatements of Stockholders' Equity.(12) Debt Obligations In 2007, the Company prepaid and amended the credit facility and issued, repaid and repurchased various debt instruments,United as discussed below. Previously during 2006, in accordance with the Plan(b) A direct subsidiary of Reorganization, the Company issued newUAL had additional 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) in addition to repaying the DIP Financing in its entirety. Long-term debt amounts outstanding at December 31, 2007 and 2006 are shown below: At December 31, (In millions) 2007 2006 United Secured notes, 5.38% to 9.52%, due 2008 to 2022 $ 4,659 $ 5,221 Credit Facility, 7.13%, due 2014 1,291 2,786 Limited-Subordination Notes, 4.5%, due 2021 726 726 6% senior notes, due 2031 515 500 5% senior convertible notes, due 2021 150 150 Total debt 7,341 9,383 Less: unamortized debt discount (251 ) (247 ) Less: current portion (678 ) (1,687 ) Long-term debt, net $ 6,412 $ 7,449 UAL Secured notes of direct subsidiary 3 4 Long-term debt, net $ 6,415 $ 7,453 UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued)2007 Financing Transactions Amended Credit Facility. In February 2007, the Company prepaid $972 million of its credit facility debt (see 2006 Debt Transactions, below) 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 addition, United also incurred financing costs of $10 million of which $6 million was expensed and $4 million was capitalized. The financing costs associated with the credit facility amendment and prepayment, which were expensed, are classified within interest expense. The Company expensed approximately $17 million of deferred financing costs which are related to the portion of the credit facility prepaid in February 2007 and included in other assets on the December 31, 2006 Statements of Consolidated Financial Position. In addition, in December 2007 the Company prepaid an additional $500 million of the term loan under the Amended Credit Facility. In connection with this prepayment, the Company expensed an additional $6 million of previously capitalized debt issuance costs. The Company also recognized a $2 million, credit to interest expense to recognize previously deferred interest rate swap gains. The December 2007 amendment enabled the Company to undertake certain shareholder initiatives. UAL's Board of Directors approvedwhich is classified as a special distribution of $2.15 per share to holders of UAL common stock, or approximately $257 million, which was paid on January 23, 2008. The Company can undertake approximately $243 million in additional shareholder initiatives without any additional prepayment of the Amended Credit Facility. The amendment also provides that the Company can carry out further shareholder initiatives in an amount equal to future term loan prepayments. The Amended Credit Facility provided 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 without penalty or premium. In addition, letters of credit issued under the credit facilitycurrent debt obligation as of December 31, 2007 in an aggregate amount of $1022008, and $3 million were subject to a fee at the rate of 2.0% per annum. United's obligations under the Amended Credit Facility are unconditionally guaranteed by UAL Corporation and certain of its direct and indirect domestic subsidiaries, other than certain immaterial subsidiaries (the "Guarantors"). 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") that United had as of February 2, 2007, (ii) primary foreign slots, primary domesticUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued)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. In addition, United has the right to remove collateral pledged to the Amended Credit Facility as long as the minimum collateral ratio described in item (iii) below is achieved. The Amended Credit Facility contains covenants that in certain circumstances may limit 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, 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 the Amended Credit Facility covenants could result in a default under the Amended Credit Facility unless the 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 other credit arrangements that exceed $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. The Company was in compliance with the Amended Credit Facility covenants at December 31, 2007. EETC Pass Through Certificates, Series 2007-1. On June 26, 2007, United and Wilmington Trust Company, as subordination agent and pass through trustee under three pass through trusts newly formed by United (the "Trustee") entered into a note purchase agreement, dated as of June 26, 2007 (the "Note Purchase Agreement"). The Note Purchase Agreement provides for the issuance by United of equipment notes (the "Equipment Notes") in the aggregate principal amount of approximately $694 million to finance 13 aircraft owned by United. Ten of these owned aircraft had been financed by pre-existing aircraft mortgages which United repaid in full (approximately $590 million principal amount) with most of the proceeds of the Equipment Notes. The mortgages related to these ten aircraft had been adjusted to fair market value at the adoption of fresh-start reporting on February 1, 2006. The extinguishment of the aircraft mortgages resulted in the recognition of a $22 million gain for the unamortized premium, which was accounted for as a reduction in interest expense in the second quarter of 2007. The remaining three owned aircraft were unencumbered prior to the closing of the Enhanced Equipment Trust Certificates ("EETC") transaction. The payment obligations of United under the Equipment Notes are fully and unconditionally guaranteed by UAL. The Class B and Class C certificates are subject to transfer restrictions. They mayUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued)be sold only to qualified institutional buyers, as defined by Rule 144A under the Securities Act of 1933, as amended, for so long as they are outstanding. Pursuant to the Note Purchase Agreement, the Trustee for each pass through trust agreed to purchase Equipment Notes issued under a Trust Indenture and Mortgage (each, an "Indenture" and, collectively, the "Indentures") with respect to each aircraft financing entered into by United and Wilmington Trust Company, as Mortgagee. Each Indenture contemplated the issuance of Equipment Notes in three series: Series A, bearing interest at the rate of 6.636% per annum, Series B, bearing interest at the rate of 7.336% per annum, and Series C, bearing interest at the rate of six-month LIBOR plus 2.25% per annum, in the aggregate principal amount of approximately $694 million divided between the three series as follows: $485 million in the case of Series A Equipment Notes, $107 million in the case of Series B Equipment Notes, and $102 million in the case of Series C Equipment Notes. The Equipment Notes were purchased by the Trustee for each pass through trust using the proceeds from the sale of Pass Through Certificates, Series 2007-1A, Pass Through Certificates, Series 2007-1B, and Pass Through Certificates, Series 2007-1C (collectively, the "Certificates"). Interest on the Equipment Notes is payable semiannually on each January 2 and July 2, beginning on January 2, 2008. Principal payments are scheduled on January 2 and July 2 in scheduled years, beginning on January 2, 2008. The final payments will be due on July 2, 2022, in the case of the Series A Equipment Notes, July 2, 2019, in the case of the Series B Equipment Notes, and July 2, 2014, in the case of the Series C Equipment Notes. Maturity of the Equipment Notes may be accelerated upon the occurrence of certain events of default, including failure by United to make payments under the applicable Indenture when due or to comply with certain covenants, as well as certain bankruptcy events involving United. The Equipment Notes issued with respect to each of the 13 aircraft are secured by a lien on each such aircraft and are cross-collateralized by the rest of the 13 aircraft financed pursuant to the Note Purchase Agreement. Distributions on the Certificates are subject to certain subordination provisions whereby Morgan Stanley Senior Funding, Inc. provided a liquidity facility for each of the Class A and Class B certificates. The liquidity facilities are expected to provide an amount sufficient to pay up to three semiannual interest payments on the certificates of the related pass through trust. The Class C certificates do not have the benefit of a liquidity facility. Denver Special Facilities Airport Revenue Refunding Bonds, Series 2007A. On June 28, 2007, the City and County of Denver issued approximately $270 million of Denver International Airport ("DEN") refunding bonds ("Series 2007A Bonds"). The Series 2007A Bonds are unconditionally guaranteed by United. The Series 2007 A Bonds were issued in two tranches—approximately $170 million aggregate principal amount of 5.25% discount bonds and $100 million aggregate principal amount of 5.75% premium bonds. The weighted average yield to the 2032 maturity is approximately 5.47%. The Series 2007A Bonds were issued to refinance United's guaranteed principal of $261 million, plus accrued interest and new issuance costs relating to the City and County of Denver, Colorado Special Facilities Airport Revenue Bonds (United Air Lines Project) Series 1992A (the "1992 Bonds") that were issued in 1992 to finance certain facilities at the Denver International Airport. The 1992 Bonds were due in 2032 unless United elected not to extend its airport facility lease, in which case they were due in 2023. The Series 2007A Bonds similarly are due in 2032 unless United makes a similarUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued)election not to extend its lease. The outstanding bonds and related guarantee are not recorded in the Company'sStatements of Consolidated Financial Position at December 31, 2006 and 2007. See Note 15, "Commitments, Contingent Liabilities and Uncertainties" for additional information related to these bonds. EETC Repurchases. In addition, the Company purchased certain of its previously issued and outstanding EETC securities in open market transactions during 2007. The Company purchased EETC securities, including accrued interest, for $96 million and adjusted these securities to a fair value of $91 million at December 31, 2007. These EETC securities were issued by third-party pass-through trusts that are not consolidated by the Company. The pass-through trusts' only investments are equipment notes issued by United. The acquisition of the EETC securities does not legally extinguish the corresponding equipment notes; therefore, the certificates are classified as a non-current investment. Interest Rate Swap. In January 2007, the Company terminated the interest rate swap that had been used to hedge the future interest payments under the original credit facility debt. For further details, see Note 14, "Financial Instruments and Risk Management—Interest Rate Swap." 6% senior notes. In accordance with the provisions of the 6% senior notes issued in 2006 (see discussion below), UAL elected to pay interest in kind for one semi-annual interest payment in 2007. Accordingly, the notes have increased by $15 million reflecting this in kind interest payment.2006 Debt Transactions Credit Facility. On the Effective Date, United obtained a credit facility that provided for a total commitment of up to $3.0 billion that comprised two separate tranches: (i) Tranche A consisted 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; and (ii) Tranche B consisted 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's acquiring unencumbered title to some or all of the 14 airframes and related engines that were subject to United's 1997-1 EETC financing. The credit facility would have matured on February 1, 2012 but was amended in February 2007, as explained above. Borrowings under the credit facility were at a floating interest rate based 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 required regularly scheduled semi-annual payments of principal equal to 0.5% of the original principal amount of the Tranche B term loan. Interest was payable on the last day of the applicable interest period but in no event less than quarterly. United's obligations under the credit facility were unconditionally guaranteed by UAL and certain of the direct and indirect domestic subsidiaries of the Company, other than certain immaterial subsidiaries (the "Original Guarantors"), and were secured by a security interest in substantially all of the tangible and intangible assets of the Original Guarantors. The obligations under the credit facility were also secured by a pledge of the capital stock of United and the direct and indirect subsidiaries of UAL Corporation and United, except that a pledge of any first-tier foreign subsidiary was limited toUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued)65% of the stock of such subsidiary and such foreign subsidiaries were not required to pledge the stock of their subsidiaries. As of December 31, 2006, the Company had outstanding borrowings of $2.8 billion of which $2.438 billion was subject to an 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 facilitylong-term debt obligation as of December 31, 2006 in an aggregate amount of $63 million subject to an interest rate of 3.75%. The Company was in compliance with the credit facility covenants at December 31, 2006.
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126 Push Down of UAL Securities. The following instruments issued by UAL have been pushed down to United and are reflected as debt of United as part of fresh-start reporting. Limited-Subordination Notes. In July 2006, UAL 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. These notes may be converted into common stock of Successor UAL at any time after October 23, 2006. The conversion price, which was initially $34.84, is subject to adjustment for certain dilutive items and events. Effective January 10, 2008, the conversion price was changed to $32.64 due to UAL's January 23, 2008 special distribution to holders of Successor UAL common stock. 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. The notes are callable in cash and/or Successor UAL common stock beginning approximately five years after the issuance date, except that UAL 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 UAL to repurchase its notes, which UAL may elect to do through the payment of cash or Successor UAL 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, UAL agreed with employee groups to modify the conversion price to make the notes more marketable and to provide UAL 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 UAL 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 the July 25, 2006 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 ofUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued)issuance, which approximated the book value of the original 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 modified notes in July 2006, the trusts sold the notes to third parties and remitted the proceeds to the employee beneficiaries. 5% senior convertible notes. On the Effective Date, UAL issued these notes to certain holders of the O'Hare municipal bonds on the Effective Date. 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. These 5% senior convertible notes may be converted, at the holder's option, into Successor UAL common stock at any time at an initial conversion price of $46.86. Effective January 10, 2008, the conversion price was adjusted to $43.90 due to the UAL special distribution to holders of Successor UAL common stock on January 23, 2008. This conversion price is subject to adjustment for certain dilutive items and events. These notes are callable, at UAL's option, in cash or Successor UAL 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 Successor UAL 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 UAL to repurchase their notes on the 5th and 10th anniversary of the date of issuance, which UAL may elect to do through the payment of cash, common stock or a combination of both. 6% senior notes. On the Effective Date, UAL issued these notes to the PBGC. 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 UAL 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 UAL common stock at UAL's option. Upon a change in control or other event as defined in the agreement, UAL has an obligation to redeem the notes. In the case of such mandatory redemption, UAL may elect to redeem the notes in cash, in shares of Successor UAL common stock or a combination thereof. Contingent Senior Unsecured Notes. In addition to the debt issued as noted above, UAL 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 ending December 31, 2009 through fiscal year ending December 31, 2017. An issuance trigger event 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, beginning with the fiscal year ending December 31, 2009. However, if the issuance of a tranche would cause a default under any other securities then existing, UAL may satisfy its obligations with respect to such tranche by issuing UAL 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.
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128Number of Required Period Ending Three June 30, 2009 1.0 to 1.0 Six September 30, 2009 1.1 to 1.0 Nine December 31, 2009 and ending with the fiscal year ending December1.2 to 1.0 Twelve March 31, 2017. An issuance trigger event occurs when, among other things, the Company's EBITDAR exceeds $3.5 billion over the prior twelve months ending 20101.3 to 1.0 Twelve June 30, or December 31 of any applicable fiscal year, beginning with the fiscal year20101.4 to 1.0 Twelve September 30, 2010 and each quarter ending December 31, 2009. However, if the issuance of a tranche would cause a default under any other securities then existing, UAL may satisfy its obligations with respectthereafter1.5 to such tranche by issuing Successor UAL 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.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(12) Debt Obligations (Continued) At December 31, 2007, UAL's contractual principal payments under then-outstanding long-term debt agreements in each of the next five calendar years are as follows: 2008—$678 million; 2009—$737million; 2010—$918 million; 2011—$824 million; 2012—$385 million and thereafter—$3,802 million. At December 31, 2007, United's contractual principal payments under then-outstanding long-term debt agreements in each of the next five calendar years are as follows: 2008—$678 million; 2009—$736 million; 2010—$917 million; 2011—$824 million; 2012—$385 million and thereafter—$3,801 million. In addition to the Amended Credit Facility collateral described above, aircraft having an aggregate book value of $5.6 billion at December 31, 2007 were pledged as security under various loan agreements. As of December 31, 2007, 113 aircraft with a net book1.0
129Required % of Relevant Advance Ticket Sales Less than $2.5 billion 15 % Less than $2.0 billion were unencumbered.(13) UAL Preferred Stock The following instrument has been pushed down25 % Less than $1.0 billion 50 % (a) Includes unrestricted cash, cash equivalents and short-term investments at month-end, including certain cash amounts already held in reserve, as defined by the agreement. Required % of Net Current Exposure(b) Less than $2.4 billion 15 % Less than $2.0 billion 25 % Less than $1.35 billion 50 % Less than $1.2 billion 100 % (a) Includes unrestricted cash, cash equivalents and short-term investments at month-end, including certain cash amounts already held in reserve, as defined by the agreement.
130(b) Net current exposure equals relevant advance ticket sales less certain exclusions, and as adjusted for specified amounts payable between United and is reflected on United's booksthe processor, as part of fresh-start reporting. UAL 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 Successor UAL at an initial conversion price of $46.86 per common share; with dividends payable in kind semi-annually (in the form of increases to the liquidation value of the issued 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 (plus accrued and unpaid dividends) at the option of the issuer. The preferred stock is mandatorily convertible 15 years from the date of issuance. Upon a fundamental change or a change in ownership asfurther defined in UAL'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 UAL. At December 31, 2007 and 2006, 5 million shares of 2% convertible preferred stock were outstanding with an aggregate liquidation value of $519 million and $509 million, respectively, which includes $19 million and $9 million, respectively, of accrued and paid in kind dividends. At December 31, 2007 and 2006, the carrying value of the 2% convertible preferred stock was $371 million and $361 million, respectively. The carrying value includes $19 million and $9 million of accrued and paid in kind dividends at December 31, 2007 and 2006, respectively. In addition, the two shares of junior preferred stock were issued in 2006. In February 2008, 1.0 million preferred shares were converted into approximately 2.2 million common shares.(14) Financial Instruments and Risk Management Instruments designated as cash flow hedges are accounted for under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as long as the hedge is highly effective and the underlying transaction is probable. If both factors are present, the effective portion of the changes in fair value of these contracts is recorded in accumulated other comprehensive income (loss) until earnings are affected by the cash flows beingagreement.(13) UAL CorporationFair Value Measurements and Subsidiary CompaniesDerivative InstrumentsCombined Notes to Consolidated Financial Statements (Continued)(14) Financial Instruments and Risk Management (Continued)hedged. To the extent that the designated cash flow hedges are ineffective, gain or loss is recognized currently in earnings. The Company offsets the fair value of derivative instruments executed with the same counterparty when netting agreements exist. Mainline Fuel Nonoperating income (expense) Year Ended Year Ended December 31, December 31, 2008 2007 2006 2008 2007 2006 Fuel hedges(a): Cash fuel hedge (gains) losses $ 40 $ (63 ) $ 24 $ 249 $ — $ — Non-cash fuel hedge (gains) losses 568 (20 ) 2 279 — — Total fuel hedge (gains) losses $ 608 $ (83 ) $ 26 $ 528 $ — $ —
131(a) Fuel hedge gains (losses) are not allocated to Regional affiliates expense. Percentage ofProjected Barrels hedged (in 000s) Weighted-average price per barrel Fuel Payment Payment Hedge Hedge Requirements Purchased Sold Purchased Sold Obligations Obligations Protection Protection Hedged(a) Puts Puts(a) Calls Calls Stop Begin Begins Ends First Quarter 2009: % $ $ $ $ Calls 14 — — 1,975 — NA NA 83 (b) NA Collars 9 (10) — 1,425 1,275 — NA 109 118 NA 3-way collars 25 (29) — 4,125 3,525 3,525 NA 104 118 143 4-way collars 2 225 225 225 225 63 78 95 135 Total 50 225 5,775 7,000 3,750 Purchased puts 35 4,925 — — — 57 NA NA NA Full Year 2009: Calls 9 — — 5,350 — NA NA 81 (c) NA Collars 5 (6) — 3,450 2,775 — NA 111 123 NA 3-way collars 18 (22) — 12,525 10,350 10,350 NA 102 118 147 4-way collars 2 900 900 900 900 63 78 95 135 Total 34 900 16,875 19,375 11,250 Purchased puts 17 9,500 — — — 54 NA NA NA (a) Percent of expected consumption represents the notional amount of the purchased calls in the hedge structures. Certain3-way collars and collars included in the table above have sold puts with twice the notional amount of the purchased calls. The percentages in parentheses represent the notional amount of sold puts in these hedge structures. (b) Call position average includes the following two groupings of positions: 6% of consumption with protection beginning at $47 per barrel and 8% of consumption beginning at $106 per barrel. (c) Call position average includes the following two groupings of positions: 4% of consumption with protection beginning at $50 per barrel and 5% of consumption beginning at $106 per barrel.
132Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets Significant Other Significant Total for Observable Unobservable Gains/ December 31, Identical Assets Inputs Inputs (Losses) 2008 (Level 1) (Level 2) (Level 3) (Level 3)(b) Assets and Liabilities Measured at Fair Value on a Recurring Basis: $ 46 $ — $ — $ 46 $ (37 ) Foreign currency receivables 10 — 10 — — Total financial assets $ 56 $ — $ 10 $ 46 $ (37 ) Total financial liabilities—Fuel derivative payables(a) $ (867 ) $ — $ (867 ) $ — $ — (a) The fair value of the fuel hedge derivatives is recorded in other current and noncurrent assets and other current and noncurrent liabilities in the Company’sStatements of Consolidated Financial Positionbased on the timing of the contract settlement dates. As of December 31, 2008, $9 million of the total fuel derivative payable was classified as a noncurrent liability. The current fuel trade payable includes $140 million related to counterparty payables for pending settlements of purchased options and expired contracts. See below for further discussion of fuel derivative gains and losses. (b) During the year ended December 31, 2008, changes in the fair value of these contracts are recorded currently in income, with the offset to either current assets or liabilities each reporting period. Economic fuel hedge gains and lossesLevel 3 EETC securities are classified as part of aircraft fuel expense, and foreign currency hedge gains and losses are classified as part of nonoperating income.Aircraft Fuel Hedges. The Company has a risk management strategy to hedge a portion of its price risk related to projected jet fuel requirements primarily through collar options. The collars involvewithin “Accumulated other comprehensive income” in the purchase of fuel call options with the simultaneous sale of fuel put options with identical expiration dates. In the year ended December 31, 2007 and the eleven months ended December 31, 2006, the Successor Company entered into and settled various derivative positions for its mainline operations that were classified as economic hedges. In the year ended December 31, 2007, the Company's Mainline fuel expense included income of $83 million from net gains on economic hedges. The net hedge gains recorded in 2007 included $20 million of unrealized mark-to-market gains for contracts settling after December 31, 2007. 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 theCompany’sStatements of Consolidated Operations. In 2005, the Predecessor Company recognized income of $40 million in non-operating income primarily due to non-designated hedges. As of December 31, 2007, the Company had hedged 13% of forecasted first quarter 2008 fuel consumption of which 82% is through three-way collars with upside protection, on a weighted-average basis, beginning from $90 per barrel and capped at $100 per barrel with payment obligations, on a weighted-average basis, beginning if crude oil drops below $85 per barrel. The remaining 18% is hedged through collars with upside protection beginning, on a weighted-average basis, at a crude oil equivalent price of $101 per barrel with payment obligations, on a weighted- average basis, beginning if crude oil drops below $91 per barrel. As of December 31, 2007, the Company had hedged 13% of forecasted fuel consumption for 2008, of which 67% is through three-way collars with upside protection, on a weighted-average basis, beginning from $87 per barrel and capped at $100 per barrel with payment obligations, on a weighted-average basis, beginning if crude oil drops below $81 per barrel. The remaining 33% is hedged through collars with upside protection beginning, on a weighted-average, at a crude oil equivalent price of $94 per barrel with payment obligations, on a weighted-average, beginning if crude oil drops below $81 per barrel.Interest Rate Swap. From time to time, 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. InUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)Position. Available- Level 3 Financial Assets and Liabilities for-sale securities Balance at January 1, 2008 $ 91 Unrealized gains (losses) relating to instruments held at reporting date (37 ) Return of principal (8 ) Balance at December 31, 2008 $ 46
133 2008 2007 Carrying Fair Carrying Fair Amount Value Amount Value Long-tem debt (including current portion) $ 6,789 $ 4,192 $ 7,093 $ 6,796 Preferred stock — — 371 401 Lease deposits 326 351 516 531 Description (14) Financial Instruments and Risk Management (Continued)February 2006, the Successor Company entered into an interest rate swap with an initial notional amount of $2.45 billion that would have decreased to $1.8 billion over the term of the swap. 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. The Company initially applied hedge accounting for the swap but subsequently discontinued hedge accounting in 2006 as the Company determined that it was 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 retire a portion of the credit facility in advance of scheduled maturities. Any gains and losses related to interest rate swap agreements, if any, that are included in earnings are classified as interest expense. In January 2007, the Company terminated the interest rate swap that had been used to hedge the future interest payments under the original credit facility.Foreign Currency Derivatives. During 2007, the Company began hedging a portion of its remaining 2007 foreign currency risk exposure using foreign currency forward contracts. As of December 31, 2007, the Company hedged a portion of its expected foreign currency cash flows in the Australian dollar, Canadian dollar, British pound, European Euro and Japanese yen. As of December 31, 2007, the notional amount of these foreign currencies hedged with the forward contracts in U.S. dollars terms was approximately $346 million. These contracts expire at various dates through December 2008. For the year ended December 31, 2007, there were no material gains or losses from these derivative positions.of Financial Instruments.Methodology The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which such estimates can be made: and Short-term Investments.The carrying amounts approximate fair value because of theshort-term maturity of these investments. Derivative Financial Instruments.Enhanced Equipment Trust Certificates (“EETCs”) Market prices used to determine fairThe EETCs are not actively traded on an exchange. Fair value fuel-related and foreign currency derivatives are primarilyis based on the trading prices obtained from counterparties or broker-dealers.Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable and unobservable inputs. Fair value is determined with a formula utilizing observable inputs. Debt.DebtThe fair value is based on the quoted market prices for the same or similar issues, discounted cash flow models using appropriate market rates and the Black-Scholes model to value conversion rights in UAL'sUAL’s convertible preferred stock and debt instruments.following table presents the carrying amounts and estimatedCompany’s credit risk was considered in estimating fair values of the Company's financial instruments at December 31, 2007 and 2006. Amounts shown below are applicable to both UAL and United except that long-term debt is presented on a UAL consolidated basis, which is approximately $3 million and $4 million higher than both the carrying value and fair value of United's
value.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)Financial Instruments and Risk Management (Continued)long-term debt at December 31, 2007 and 2006, respectively, as disclosed in Note 12, "Debt Obligations." 2007 2006 (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt (including current portion) $ 7,093 $ 6,796 $ 9,140 $ 9,510 Preferred stock 371 401 361 443 Fuel derivative contracts—gains (losses) 20 20 (2 ) (2 ) Interest rate swap loss — — 12 12 Foreign currency derivative contract gains 1 1 — — Lease deposits 516 531 539 574 (15) Commitments, Contingent Liabilities and Uncertainties
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135 General Guarantees and Indemnifications. In the normal course of business, the Company enters into numerous real estate leasing and aircraft financing arrangements that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities. In both leasing and financing transactions, the Company typically indemnifies the lessors, and any tax/financing parties, against tort liabilities that arise out of the use, occupancy, operation or maintenance of the leased premises or financed aircraft. Currently, the Company believes that any future payments required under these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). Additionally, certain leased premises such as fueling stations or storage facilities include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premises. Legal and Environmental Contingencies. The Company has certain contingencies resulting from litigation and claims (including environmental issues) incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the information currently available, the views of legal counsel, the nature of contingencies to which the Company is subject and prior experience, that the ultimate disposition of these contingencies will not materially affect the Company's consolidated financial position or results of operations. The Company records liabilities for legal and environmental claims when a loss is probable and reasonably estimatable. These amounts are recorded based on the Company's assessments of the likelihood of their eventual disposition. The amounts of these liabilities could increase or decrease in the near term, based on revisions to estimates relating to the various claims. The Company 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. The Company is also currently analyzing whether any potential liability may result from air cargo/passenger surcharge cartel investigations following the receipt of a Statement of Objections that the European Commission (the "Commission") issued to 26 carriers on December 18, 2007. The Statement of Objections sets out evidence related to the utilization of fuel and security surcharges and exchange of pricing information that the Commission views as supporting the conclusion that an illegal price-UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)Commitments, Contingent Liabilities and Uncertainties (Continued)fixing cartel had been in operation in the air cargo transportation industry. United received a copy of the Statement of Objections and is currently evaluating the Commission's evidence related to the Company and its personnel. United is cooperating with the Commission's investigation. United intends to defend itself vigorously against these charges in its formal response to the Commission and in the European Court of Justice if necessary. The Company's evaluation of this matter is still in the early stages, and based upon the information currently available no reserve for potential liability has been recorded as of December 31, 2007. However, penalties for violation of European competition laws can be substantial and a finding that the Company engaged in improper activity could have a material adverse impact on our consolidated financial position and results of operations. Contingent Senior Unsecured Notes. UAL is obligated to issue up to $500 million of 8% senior unsecured notes to the PBGC in up to eight equal tranches of $62.5 million upon the occurrence of certain financial triggering events. Beginning with fiscal year ending December 31, 2009 and ending with fiscal year December 31, 2017, a triggering event may occur when, among other things, the Company's EBITDAR exceeds $3.5 billion over a prior twelve month period. In certain circumstances, UAL common stock may be issued in lieu of issuance of the notes. See Note 12, "Debt Obligations" for further information. Commitments. At December 31, 2007, future commitments for the purchase of property and equipment, principally aircraft, approximated $2.9 billion, after deducting advance payments. The Company's current commitments are primarily for the purchase of, in the aggregate, 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 $91 million of 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 $0.4 billion in 2008, $0.3 billion for the combined years of 2009 and 2010, $0.7 billion for the combined years of 2011 and 2012 and $1.5 billion thereafter.Guarantees and Off-Balance Sheet Financing. Fuel Consortia. The 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, 2007, approximately $890 million principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt. United's contingent exposure is approximately $195 million principal amount of such bonds based on its recent consortia participation. The Company's contingent exposure could increase if theUAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(15) Commitments, Contingent Liabilities and Uncertainties (Continued)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. Municipal Bond Guarantees. The Company has entered into long-term agreements to lease certain airport and maintenance facilities that are financed through tax-exempt municipal bonds. These bonds were issued by various local municipalities to build or improve airport and maintenance facilities. Under these lease agreements, United is required to make rental payments in amounts sufficient to pay the maturing principal and interest payments on the bonds. 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 final Bankruptcy Court decisions, certain leases (SFO and LAX) were considered to be financings resulting in the Company's guarantees being discharged in bankruptcy. The DEN lease related to the 1992 bonds, as discussed in Note 12, "Debt Obligations," was not rejected. The Company has guaranteed interest and principal payments on $270 million of the DEN bonds, which were originally issued in 1992, redeemed and reissued in 2007 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'sStatements of Consolidated Financial Position at December 31, 2007 or 2006. The related lease agreement is recorded on a straight-line basis resulting in ratable accrual of the final $270 million lease obligation over the lease term. 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 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 for these secured interests. See Note 1, "Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to be Resolved in Chapter 11 Cases," for a discussion of ongoing litigation with respect to certain of these obligations.Collective Bargaining Agreements. Approximately 81% of United's employees are represented by various U.S. labor organizations. During 2005, United reached new agreements with its labor unions for new collective bargaining agreements which became effective in January 2005. These agreements are not amendable until January 2010.(16) Lease Obligations The Company leases aircraft, airport passenger terminal space, aircraft hangars and related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and computer equipment and vehicles. As allowed under Section 365 of the Bankruptcy Code, during its reorganization the Company assumed, assumed and assigned, or rejected certain executory contracts and unexpired leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain other conditions. During bankruptcy, the Company also entered into numerous aircraft financing term sheets with financiers, some of which were implemented before the Effective Date, and others of which were implemented on the Effective Date.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(16) Lease Obligations (Continued)1716 years.
1362007,2008, the Company'sCompany’s leased aircraft, scheduled future minimum lease payments under capital leases (substantially all of which are for aircraft) and operating leases having initial or remaining noncancelable lease terms of more than one year were as follows: Operating Leases (In millions) Mainline Aircraft United Express Aircraft Non-aircraft Capital Leases(b) Number of Aircraft United 162 251 — 72 UAL 161 251 — 72
Payable during(a)
2008 $ 346 $ 410 $ 558 $ 341 2009 323 435 535 180 2010 307 433 516 465 2011 307 417 461 168 2012 297 372 422 119 After 2012 936 1,380 3,284 592 UAL minimum lease payments $ 2,516 $ 3,447 $ 5,776 1,865 Imputed interest (at rates of 1.0% to 8.9%) (509 ) Present value of minimum lease payments 1,356 Current portion (250 ) Long-term obligations under capital leases $ 1,106 (a) Operating Leases Mainline United Express Capital Aircraft Aircraft Non-aircraft Leases(b) United and UAL 142 269 — 69 2009 $ 351 $ 441 $ 553 $ 237 2010 323 441 518 509 2011 323 428 457 290 2012 312 383 415 149 2013 291 367 386 141 After 2013 655 1,090 2,798 520 UAL minimum lease payments $ 2,255 $ 3,150 $ 5,127 1,846 Imputed interest (at rates of 2.1% to 16.0%) (486 ) Present value of minimum lease payments 1,360 Current portion (168 ) Long-term obligations under capital leases $ 1,192 (a) Amounts apply to both UAL and United except that United leases one nonoperating aircraft from UAL, resulting in total United mainline aircraft operating lease payments of $2,258 million. The operating lease payments presented above also include future payments for 12 additional nonoperating aircraft as of December 31, 2008. (b) Aircraft capital lease obligations are for 58 mainline and 11 United Express aircraft. Includes non-aircraft capital lease payments aggregating $19 million in years 2009 through 2013 and United Express capital lease obligations of $6 million in 2009 and $5 million in each of the years 2010 through 2013. from UAL, resulting in total United mainline aircraft operating lease payments of $2,523 million.(b)Aircraft lease obligations are for 44 Mainline and 28 United Express aircraft. Includes non-aircraft capital lease payments aggregating $19related accrued interest ($306 million in years 2008 through 2011,equivalent U.S. dollars at December 31, 2008) is denominated in foreign currencies that expose the Company to risks associated with changes in foreign exchange rates. To hedge against this risk, United has placed foreign currency deposits ($306 million in equivalent U.S. dollars at December 31, 2008), primarily for euros, to meet foreign currency lease obligations denominated in that respective currency. Since unrealizedmark-to-market gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency obligations, United has hedged its overall exposure to foreign currency exchange rate volatility with respect to its foreign lease deposits and United Expressobligations. In addition, the Company has $20 million of U.S. dollar denominated deposits to meet U.S. dollar denominated lease obligations. These deposits will be used to repay an equivalent amount of recorded capital lease obligations and are classified as aircraft lease deposits in theStatements of $13 million in 2008, $11 million in 2009, $5 million each in years 2010, 2011 and 2012 and $4 million thereafter.1five to 26 years, with expiration dates ranging from 20082009 through 2024. The Company has facility operating leases that extend to 2030.2032. Under the terms of most leases, the Company has 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. See Note 2(j)1(i), "Summary“Summary of Significant Accounting Policies—United Express"Express,” for additional information related to United Express contracts.UAL Corporationcontracts and Subsidiary CompaniesCombined NotesNote 2, “Company Operational Plans,” for information related to Consolidated Financial Statements (Continued)(16) Lease Obligations (Continued)Company'sCompany’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
137Company'sCompany’s aircraft leases are fully reflected as capital lease obligations in theStatements 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, 2007 an aggregate 338 million euros ($497 million) and $19 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 theStatements of Consolidated Financial Position. Amounts charged to rent expense, net of minor amounts of sublease rentals, were $934 million and $936 million for UAL and United, respectively, for the year ended December 31, 2007; $833 million and $834 million for UAL and United, respectively, for the eleven months ended December 31, 2006; $76 million for both UAL and United for the month ended January 31, 2006; and $1.0 billion for the year ended December 31, 2005 for both UAL and United. Included in Regional affiliates expense in theStatements of Consolidated Operations were operating rents for United Express aircraft of $425 million and $403 million for the Successor Company for the year ended December 31, 2007 and the eleven months ended December 31, 2006, respectively; and $35 million and $449 million for the month ended January 31, 2006 and the year ended December 31, 2005, respectively, for the Predecessor Company.121119 aircraft in which the lessors are trusts established specifically to purchase, finance and lease aircraft to United. These leasing entities related to 108 of these aircraft meet the criteria for VIEs; however, the Company does not hold a significant variable interest in and is not considered the primary beneficiary of the leasing entities since the lease terms are consistent with market terms at the inception of the lease 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 Company to participate in increases in the value of the financed aircraft. In addition, of the Company'sCompany’s total aircraft operating leases only 1011 of these aircraft leases have leasing entities that meet the criteria for VIEs and allow the Company to purchase the aircraft at other than fair market value; thesevalue. These leases have fixed price buy outpurchase options specified in the lease agreements.agreements which at the inception of the lease approximated the aircraft’s expected fair market value at the option date.Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(17) Statement of Consolidated Cash Flows—Supplemental DisclosuresOperationswere operating rents for United Express aircraft of $413 million, $425 million and $403 million for the Successor Company for the years ended December 31, 2008 and 2007 and the eleven months ended December 31, 2006, respectively; and $35 million for the month ended January 31, 2006 for the Predecessor Company.
138(16) Statement of Consolidated Cash Flows—Supplemental Disclosures Successor Predecessor (In millions) Year Ended December 31, 2007 Period from February 1 to December 31, 2006 Period from January 1 to January 31, 2006 Year Ended December 31, 2005 Cash paid during the period for: Interest (net of amounts capitalized) $ 614 $ 703 $ 35 $ 456 Income taxes 10 — — — Non-cash transactions: Long-term debt incurred to acquire assets $ — $ 242 $ — $ — Capital lease obligations incurred to acquire assets — 155 — — Pension and other postretirement changes recorded
in other comprehensive income (loss) — 87 (4 ) (661 ) Accrued special distribution on UAL common
stock (UAL only) 257 — — — Interest paid in kind on 6% senior notes 15 — — — Net unrealized gain (loss) on financial instruments
recorded in other comprehensive income (loss) 5 (5 ) 24 — Successor Predecessor Period from Period from Year Ended February 1 to January 1 to December 31, December 31, January 31, 2008 2007 2006 2006 Cash paid during the period for: Interest (net of amounts capitalized) $ 412 $ 614 $ 703 $ 35 Income taxes 3 10 — — Non-cash transactions: Long-term debt incurred to acquire assets $ — $ — $ 242 $ — Capital lease obligations incurred to acquire assets 281 — 155 — Pension and other postretirement changes recorded in other comprehensive income (loss) (11 ) — 87 (4 ) Accrued special distribution on UAL common stock (UAL only) — 257 — — Interest paid in kind on 6% senior notes 31 15 — — Net unrealized gain (loss) on financial instruments recorded in other comprehensive income (loss) (37 ) 5 (5 ) 24 Receivable from unsettled stock sales as of December 31, 2008 15 — — — 1, "Voluntary4, “Voluntary Reorganization Under Chapter 11,"” Note 5, “Common Stockholders’ Equity and Preferred Securities,” Note 12, "Debt Obligations"“Debt Obligations and Card Processing Agreements,” and Note 13, "Preferred Stock."(18) Advanced Purchase of Miles(17) Advanced Purchase of Miles October 2005,September 2008, the Company entered into an amendment toamended certain terms of its agreement with Chase regarding the Mileage Plus Visaits co-branded credit 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.Chase Mileage Plus agreement,Amendment, the Company provided Chasesold an additional $500 million of pre-purchased miles to its co-branded credit card partner and extended the term of the agreement to December 31, 2017. Prior to the Amendment, our Advanced purchase of miles obligation to our co-branded credit card partner was approximately $600 million, which represented pre-purchased miles purchased by our co-branded credit card partner. As a junior lien upon, and security interest in, all collateral pledged or in which security interestresult of the additional $500 million purchase of miles, our co-branded credit card partner has a remaining pre-purchase miles balance of approximately $1.1 billion as of December 31, 2008. As part of the Amendment, our co-branded credit card partner cannot use the pre-purchased miles for issuance to its cardholders prior to 2011; accordingly, the $1.1 billion of deferred revenue at December 31, 2008 for the pre-purchased miles is granted,classified as security“Advanced purchase of miles” in the non-current liabilities section of the Company’sStatements of Consolidated Financial Position. The Amendment specifies the maximum amount of the pre-purchased miles that our co-branded credit facility. The security interest was juniorcard partner can award to other credit facility debt, and appliedits cardholders each year from 2011 to no more than $850 million in total advance purchases at any time. In February 2007, the Company amended the agreement with Chase whereby Chase released their junior security interest in the collateral pledged2017.Amended Credit Facility. However under certain circumstances,Amendment, the Company is obligatedpre-purchased miles were reflected as a current liability because the miles pre-purchased by our co-branded credit card partner were generally awarded to reinstate Chase's junior security interest in the assets pledged to the Amended Credit Facility.cardholders within one year of purchase. As of December 31, 2007, and 2006, the total advancedAdvanced purchase of miles was $694 millionmillion.$681 million, respectively.repurchase outstanding pre-purchased miles in cases such as the Company’s insolvency, bankruptcy false representations or other material breaches.
139UAL CorporationSubsidiary CompaniesCombined Notes toStatements of Consolidated Financial Position.(Continued)of Consolidated Financial Position(19) Related Party Transactions(18) Related Party Transactions • In December 2008, UAL contributed 100% of the capital stock United BizJet Holdings, Inc. (“Bizjet”) to United, which had a book value of $10 million. In accordance with SFAS 141, United’s results of operations reflect the results of operations of Bizjet as though the contribution from UAL occurred on January 1, 2006, the earliest period presented. Subsequently, United and Bizjet entered into a merger agreement under which Bizjet was merged with and into United, with United being the surviving company. This merger was effective December 31, 2008. The only impact that this contribution will have on United’s previously reported results of operations in 2008 is an increase to income of $29 million in the three and six month periods ended June 30, 2008 and the nine month period ended September 30, 2008. • In addition, UAL contributed cash of $163 million to United. This contribution included $107 million of proceeds that UAL generated from the issuance and sale of UAL common stock. ("MPI"(“MPI”), had a $200 million note receivable from UAL. During 2007, UAL, United and MPI executed a note payment agreement to pay and thereby cancel this note payable (plus accrued interest). This transaction had no effect in the UAL consolidated financial statements and was treated as a forgiveness
140United'sUnited’s financial statements, resulting in a decrease in paid in capital equal to the total decrease in notes and interest receivable.(19) Special Items (20) Special Items20082007—Successor CompanyCompany'sCompany’s recorded obligation for the SFO municipal bonds to the amount considered probable of being allowed by the Bankruptcy Court.Company'sCompany’s recorded obligation for the LAX municipal bonds to the amount considered probable of being allowed by the Bankruptcy Court. See Note 1, "Voluntary4, “Voluntary Reorganization Under Chapter 11—Significant Matters Remaining to be Resolved in Chapter 11 Cases"Cases” for further information related to the SFO and LAX litigation.Company'sCompany’s ongoing efforts to resolve certain bankruptcypre-confirmation contingencies. Therefore, the Company recorded a special operating revenue credit of $45 million and a special operating expense credit of $14 million for these changes in estimate.2006—Successor CompanyCompany'sCompany’s underlying leasehold. After the denial of post-trial motions, both parties have appealed to the District Court. In accordance withSOP 90-7, as of the Effective Date, the Company 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'sCompany’s recorded obligation for the SFO municipal bonds to the amount the Company estimated liability at that time.Company'sCompany’s recorded obligation for this matter. This adjustment was based on the receipt of a favorable court ruling in ongoing litigation and the Company'sCompany’s determination that it was probable the Company would not be required to satisfy this obligation.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)(20) Special Items (Continued)Company'sCompany’s recorded obligation for the LAX municipal bonds to the amount the Company estimated was probable to be allowed by the Bankruptcy Court.2005—Predecessor Company Aircraft Impairment. During(20) Investments secondfourth quarter of 2005, UAL2007, United, along with certain other major air carriers, sold its interests in Aeronautical Radio, Inc. (“ARINC”) to Radio Acquisition Corp., an affiliate of The Carlyle Group.
141United recognized chargessystems engineering. The transaction generated proceeds of $18$128 million and resulted in a pre-tax gain of $41 million.respectively,to record these securities at fair value has been recognized in other comprehensive income during 2008 and 2007, respectively. See Note 12, “Debt Obligations and Card Processing Agreements,” for aircraft impairments related to the planned accelerated retirement of certain aircraft.(21) 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 its 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. The Company recognizes its severance obligations 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. In 2006, the Company accrued $30 million, which was substantially paid in 2006, for severance primarily due to a significant restructuring program that resulted in the elimination of a significant number of positions.(22) Distribution Payable(21) Distribution Payable has beenwhich is characterized as a return of capital for income tax purposes, was accrued at December 31, 2007 in UAL'sUAL’sConsolidated Statements of Consolidated Financial Position.United'sUnited’s Board of Directors approved a dividend of up to $260 million to UAL to fund the January 23, 2008 special distribution to UAL common stockholders. As such, United did not accrue the distribution at December 31, 2007. The determination2007 in itsStatements of whether the $2.15 per share distribution is characterized as a return of capital or a dividend for income tax purposes will not be finalized until January 2009 after UAL determines the amount of its 2008 taxable profit. If all, or a portion of, the distribution exceeds UAL's accumulated or 2008 profits, the excess will be taxed as a return of capital rather than a dividend.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)Position(23) UAL Selected Quarterly Financial Data (Unaudited) Successor Predecessor Quarter Ended (In millions, except per share amounts) Period from January 1 to January 31 Period from February 1 to March 31 March 31 June 30 September 30 December 31 2007: Operating revenues (b ) (b ) $ 4,373 $ 5,213 $ 5,527 $ 5,030 Earnings (loss) from operations (b ) (b ) (92 ) 537 656 (64 ) Net income (loss) (b ) (b ) (152 ) 274 334 (53 ) Basic earnings (loss) per share (b ) (b ) $ (1.32 ) $ 2.31 $ 2.82 $ (0.47 ) Diluted earnings (loss) per
share(a) (b ) (b ) $ (1.32 ) $ 1.83 $ 2.21 $ (0.47 )
2006:
Operating revenues $ 1,458 $ 3,007 (b ) $ 5,113 $ 5,176 $ 4,586 Earnings (loss) from operations (52 ) (119 ) (b ) 260 335 23 Net income (loss) 22,851 (223 ) (b ) 119 190 (61 ) Basic earnings (loss) per share $ 196.61 $ (1.95 ) (b ) $ 1.01 $ 1.62 $ (0.55 ) Diluted earnings (loss) per
share(a) $ 196.61 $ (1.95 ) (b ) $ 0.93 $ 1.30 $ (0.55 ) (a)Diluted EPS was significantly impacted in certain quarters by the Limited-Subordination Notes, including the modification of the conversion price from $46.86 to $34.84 in July 2006. See Note 4, "UAL Per Share Amounts" and Note 12, "Debt Obligations," for further information.(b)Not applicable. UAL's.(22) UAL Selected Quarterly Financial Data (Unaudited) Quarter Ended (In millions, except per share amounts) March 31 June 30 September 30 December 31 2008: Operating revenues $ 4,711 $ 5,371 $ 5,565 $ 4,547 Loss from operations (441 ) (2,694 ) (491 ) (812 ) Net loss (537 ) (2,729 ) (779 ) (1,303 ) Basic and diluted loss per share $ (4.45 ) $ (21.47 ) $ (6.13 ) $ (9.91 ) 2007: Operating revenues $ 4,373 $ 5,213 $ 5,527 $ 5,030 Earnings (loss) from operations (92 ) 537 656 (64 ) Net income (loss) (152 ) 274 334 (53 ) Basic earnings (loss) per share $ (1.32 ) $ 2.31 $ 2.82 $ (0.47 ) Diluted earnings (loss) per share $ (1.32 ) $ 1.83 $ 2.21 $ (0.47 ) UAL'sUAL’s quarterly results were impacted by the following significant items:• The second quarter was negatively impacted by impairment charges of $2.5 billion related to the Company’s interim impairment testing of its intangible assets. In addition, the Company incurred $110 million of severance and employee benefit charges, as well as $26 million of purchased services charges. Offsetting these impacts was a $29 million gain from a litigation-related settlement gain. • The third quarter included reversals of $16 million of intangible asset impairments recorded during the second quarter. The Company also recorded an additional $6 million of severance
1422007•The first and third quarters include $22 million and $8 million, respectively, of favorable adjustments to operating income for the SFO and LAX municipal bonds.•The third quarter was impacted by a special operating revenue credit of $45 million and a special operating expense credit of $14 million for changes in estimates for certain liabilities relating to bankruptcy administrative claims.•The fourth quarter includes a gain of $41 million from the sale of ARINC.•The Company's change in the expiration period for unused frequent flier miles increased revenues by approximately $28 million, $47 million, $50 million and $121 million in each quarter of 2007, respectively.2006•The January period includes reorganization income of $22.9 billion.UAL Corporation and Subsidiary CompaniesCombined Notes to Consolidated Financial Statements (Continued)charges, as well as $8 million of losses on the sale of assets and $7 million of lease termination and other charges. • During the fourth quarter, the Company recorded $107 million of impairment charges, $18 million of severance, $53 million of employee benefit charges, $34 million of accelerated depreciation related to aircraft groundings and $18 million of lease termination and other special charges. In addition, an $11 million net gain on asset sales partially offset these unfavorable expenses. (23) UAL Selected Quarterly Financial Data (Unaudited) (Continued)2007•The third quarter includes income of $30 million from a special item as discussed in Note 20, "Special Items."•The third quarter was favorably impacted by the reversal of accrued interest of $30 million while the first and second quarters were adversely affected by interest accruals related to the Chase agreement as discussed in Note 18, "Advanced Purchase of Miles."• The first and third quarters include $22 million and $8 million, respectively, of favorable adjustments to operating income for the SFO and LAX municipal bonds. • The third quarter was impacted by a special operating revenue credit of $45 million and a special operating expense credit of $14 million for changes in estimates for certain liabilities relating to bankruptcy administrative claims. • The fourth quarter includes a gain of $41 million from the sale of ARINC. • The Company’s change in the expiration period for unused frequent flyer miles increased revenues by approximately $28 million, $47 million, $50 million and $121 million in each quarter of 2007, respectively. 1, "Voluntary4, “Voluntary Reorganization Under Chapter 11"11” and Note 20, "Special19, “Special Items,"” for further discussion of these items.(23) Subsequent Events (24) Subsequent Event2009 Financing InitiativesFebruary 2008, 1.0January 2009, the Company completed a $95 million sale-leaseback agreement for nine aircraft. The Company expects this transaction to be treated as a capital lease.2% convertible preferredunsettled trades at December 31, 2008 under its $200 million common stock were converteddistribution agreement. After issuance of these shares, the Company had issued shares for gross proceeds of $172 million of the $200 million available under this stock offering, leaving $28 million available for future issuance under this program, as further discussed in Note 5, “Common Stockholders’ Equity and Preferred Securities.”2.2$160 million UAL common shares.from O’Hare in accordance with the lease amendment. In addition, the lease amendment requires that the City of Chicago provide the Company with another site at O’Hare upon which a replacement cargo facility could be constructed. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ITEM 9A. CONTROLS AND PROCEDURES. ("SEC"(“SEC”) is recorded, processed, summarized and reported, within the time periods specified by the SEC'sSEC’s rules and forms, and is accumulated and communicated to management including the Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. The management of UAL and United, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation to conclude with reasonable assurance that UAL'sUAL’s and United'sUnited’s disclosure controls and procedures were designed and operating effectively to report the information each company is required to disclose in the reports they file with the SEC on a timely basis. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer of UAL and United have concluded that as of December 31, 2007,2008, disclosure controls and procedures were effective.20072008UAL'sUAL’s or United'sUnited’s internal control over financial reporting during their most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, their internal control over financial reporting, except that UAL and United designed and implemented procedures that resulted in remediation of the income tax accounting material weakness previously reported in their 2006 Annual Reports on Form 10-K and 2007 Quarterly Reports on Form 10-Q. These remediation steps were developed following investigation and review of the processes and activities surrounding the material weakness and include changes to these processes to prevent or detect similar future occurrences.reporting.
144 In response to the identified material weakness, our management, with oversight from our Audit Committee, implemented a plan of remediation. As a result of this plan, the following control improvements were made during 2007:•Recruited experienced, permanent tax professionals who have significant tax accounting and reporting experience;•Implemented programs designed to reduce staff turnover;•Enhanced processes and controls related to income tax accounting and reporting; and•Provided additional and ongoing training to our tax staff on the application of technical accounting literature to the Company's transactions.February 27, 2008("UAL"(“UAL”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f). Our internal control over financial reporting is designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.2007.2008. In making this assessment, management used the framework set forth inInternal Control—Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal controls over financial reporting were effective as of December 31, 2007. During the fiscal year ended December 31, 2007, management designed and implemented remediation steps over an income tax accounting material weakness previously reported in our Annual Report on Form 10-K dated March 16, 2007, as described within Item 9A.UAL'sUAL’s consolidated financial statements included in thisForm 10-K, has issued a report on UAL'sUAL’s internal control over financial reporting, which is included herein.
145February 27, 2008("United"(“United”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f). Our internal control over financial reporting is designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.2007.2008. In making this assessment, management used the framework set forth inInternal Control—Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal controls over financial reporting were effective as of December 31, 2007.2008.
146 During the fiscal year ended December 31, 2007, management designed and implemented remediation steps over an income tax accounting material weakness previously reported in our Annual Report on Form 10-K dated March 29, 2007, as described within Item 9A."Company"“Company”) as of December 31, 2007,2008, based on criteria established inInternal Control—Integrated Frameworkissued 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, included in the accompanying Management Report on Internal Control Over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit.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.2007,2008, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
14720072008 of the Company and our report dated February 27, 2008March 2, 2009 expressed an unqualified opinion on those financial statements and financial statement schedule.
148ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. UAL'sUAL’s definitive proxy statement for its 20082009 Annual Meeting of Stockholders. Certain informationInformation regarding the executive officers of UAL is included in Part I of thisForm 10-K under the caption “Executive Officers of the Registrant.”incorporated by reference from United's definitive information statementomitted pursuant to be filed within 120 daysGeneral Instruction I(2)(c) of December 31, 2007. Information regarding the executive officers of UAL and United is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant."ITEM 11. EXECUTIVE COMPENSATION. UAL'sUAL’s definitive proxy statement for its 20082009 Annual Meeting of Stockholders. Certain informationincorporated by reference from United's definitive information statementomitted pursuant to be filed within 120 daysGeneral Instruction I(2)(c) of December 31, 2007. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Form 10-K.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. UAL'sUAL’s definitive proxy statement for its 20082009 Annual Meeting of Stockholders. Certain informationincorporated by reference from United's definitive information statementomitted pursuant to be filed within 120 daysGeneral Instruction I(2)(c) of December 31, 2007. ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Form 10-K.ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. UAL'sUAL’s definitive proxy statement for its 20082009 Annual Meeting of Stockholders. Certain informationincorporated by reference from United's definitive information statementomitted pursuant to General Instruction I(2)(c) ofForm 10-K.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. filed within 120 daysprovided to the Company and its subsidiaries and affiliates by its auditors. The process by which this is carried out is as follows:December 31, 2007.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.
150 2008 2007 Audit Fees $ 3,807,300 $ 3,420,740 Audit-Related Fees 2,065,479 1,266,400 Tax Fees 384,850 546,005 All Other Fees 165,800 165,800 Total $ 6,423,429 $ 5,398,945
151 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Information required by this item with respect to UAL is incorporated by reference from UAL's definitive proxy statement for its 2008 Annual Meeting of Stockholders. Certain information required by this item with respect to United is incorporated by reference from United's definitive information statement to be filed within 120 days of December 31, 2007.(a)ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES. (a)(1) Financial Statements. The financial statements required by this item are listed in Item 8,Financial Statements and Supplementary Dataherein.
(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—Valuation and Qualifying Accounts for the yearyears ended December 31, 2008 and 2007, the month ended January 31, 2006 and the eleven month period ended December 31, 2006 and the year ended December 31, 2005.2006.
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.UAL CORPORATIONUNITED AIR LINES, INC.(Registrants)Date: February 28, 2008/s/ Glenn F. TiltonGlenn F. TiltonChairman of the Board, Presidentand Chief Executive Officer
UNITED AIR LINES, INC.Glenn F. Tilton
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer) Frederic F. BraceFrederic F. BraceKathryn A. MikellsExecutiveKathryn A. Mikells
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)
/s/ Robert D. Krebs
Robert D. Krebs
DirectorRichard J. AlmeidaDirector
Richard J. Almeida
DirectorRobert S. Miller, Jr.
DirectorMary K. Bush
Director
/s/ James J. O'ConnorJames J. O'ConnorO’Connor
DirectorStephen R. CanaleDirector
Stephen R. Canale
DirectorDavid J. Vitale
DirectorW. James FarrellDirector
W. James Farrell
DirectorJohn H. Walker
DirectorWalter IsaacsonDirector
Walter Isaacson
DirectorStephen A. Wallach
DirectorDate: February 28, 2008
153Glenn F. Tilton
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer) Frederic F. BraceFrederic F. BraceKathryn A. MikellsExecutiveKathryn A. Mikells
Senior Vice President and
Chief Financial Officer and Director
(principal financial officer)
David M. Wing
Vice President and Controller
(principal accounting officer)
Graham W. Atkinson
Director
Peter D. McDonald
Director
John P. Tague
Director
Date: February 28, 2008
Schedule II
Valuation and Qualifying Accounts
For the YearYears Ended December 31, 2008 and 2007,
the Eleven Month Period Ended December 31, 2006,
and the Month Ended January 31, 2006 Additions Balance at Charged to Balance at Beginning of Costs and End of Period Expenses Deductions(a) Period Reserves deducted from assets to which they apply: 2008 (Successor) $ 27 $ 25 $ 28 $ 24 2007 (Successor) 27 21 21 27 2006 (Successor) 27 18 18 27 January 2006 (Predecessor) 23 6 2 27 Allowance for doubtful accounts (United): 2008 (Successor) $ 27 $ 25 $ 28 $ 24 2007 (Successor) 27 21 21 27 2006 (Successor) 27 18 18 27 January 2006 (Predecessor) 22 6 1 27 Obsolescence allowance—spare parts (UAL and United): 2008 (Successor) $ 25 $ 26 $ 3 $ 48 2007 (Successor) 6 19 — 25 2006 (Successor) — 6 — 6 January 2006 (Predecessor) 66 — 66 (b) — Valuation allowance for deferred tax assets (UAL): 2008 (Successor) $ 1,815 $ 1,126 $ — $ 2,941 2007 (Successor) 2,248 — 433 1,815 2006 (Successor) 2,310 — 62 2,248 January 2006 (Predecessor) 10,618 180 8,488 (b) 2,310 Valuation allowance for deferred tax assets (United): 2008 (Successor) $ 1,757 $ 1,109 $ — $ 2,866 2007 (Successor) 2,190 — 433 1,757 2006 (Successor) 2,252 — 62 2,190 January 2006 (Predecessor) 10,494 155 8,397 (b) 2,252 (a) Deduction from reserve for purpose for which reserve was created. (b) Amounts include adjustments as required for the adoption of fresh- start reporting on February 1, 2006. andthe Year Ended December 31, 2005
155(In millions) Additions
Charged to
Costs and
Expenses Description Balance at
Beginning of
Period Deductions(a) Balance at
End of
PeriodReserves deducted from assets to which they apply: Allowance for doubtful accounts (UAL): 2007 (Successor) $ 27 $ 21 $ 21 $ 27 2006 (Successor) 27 18 18 27 January 2006 (Predecessor) 23 6 2 27 2005 (Predecessor) 24 8 9 23
Allowance for doubtful accounts (United):
2007 (Successor) $ 27 $ 21 $ 21 $ 27 2006 (Successor) 27 18 18 27 January 2006 (Predecessor) 22 6 1 27 2005 (Predecessor) 23 8 9 22
Obsolescence allowance—spare parts
(UAL and United): 2007 (Successor) $ 6 $ 19 $ — $ 25 2006 (Successor) — 6 — 6 January 2006 (Predecessor) 66 — 66 (b) — 2005 (Predecessor) 42 44 20 66
Valuation allowance for deferred tax assets (UAL):
2007 (Successor) $ 2,248 $ — $ 433 $ 1,815 2006 (Successor) 2,310 — 62 2,248 January 2006 (Predecessor) 10,618 180 8,488 (b) 2,310 2005 (Predecessor) 2,819 7,830 31 10,618
Valuation allowance for deferred tax assets (United):
2007 (Successor) $ 2,190 $ — $ 433 $ 1,757 2006 (Successor) 2,252 — 62 2,190 January 2006 (Predecessor) 10,494 155 8,397 (b) 2,252 2005 (Predecessor) 2,743 7,779 28 10,494 (a)Deduction from reserve for purpose for which reserve was created.(b)Amounts include adjustments as required for the adoption of fresh-start reporting on February 1, 2006. 3 .1 Restated Certificate of Incorporation of UAL Corporation *3 .2 Restated Certificate of Incorporation of United Air Lines, Inc. (filed as Exhibit 3.1 to United’sForm 8-K filed February 1, 2006, Commission file number 1-11355, and incorporated herein by reference) *3 .3 Amended and Restated Bylaws of UAL Corporation (filed as Exhibit 3.2 to UAL’sForm 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference) *3 .4 Amended and Restated Bylaws of United Air Lines, Inc. (filed as Exhibit 3.2 to United’sForm 8-K filed February 1, 2006, Commission file number 1-11355, and incorporated herein by reference) *4 .1 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’sForm 8-K filed February 5, 2007, Commission file number 1-6033, and incorporated herein by reference) *4 .2 First Amendment to Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, dated December 5, 2007 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. (filed as Exhibit 4.1 to UAL’sForm 8-K filed December 7, 2007, Commission file number 1-6033, and incorporated herein by reference) *4 .3 Second Amendment to the Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, dated May 5, 2008 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. (filed as Exhibit 4.1 to UAL’sForm 8-K filed May 7, 2008, Commission file number 1-6033, and incorporated herein by reference) *4 .4 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 UAL’sForm 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference) *4 .5 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 UAL’sForm 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference) *4 .6 First Supplement to ORD 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 UAL’sForm 8-K filed February 21, 2006, Commission file number 1-6033, and incorporated herein by reference) *4 .7 Indenture dated as of July 25, 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 of 4.50% Senior Limited-Subordination Convertible Notes due 2021 (filed as Exhibit 4.1 to UAL’sForm 8-K filed July 27, 2006, Commission file number 1-6033, and incorporated herein by reference) *†10 .1 UAL Corporation Success Sharing Program—Performance Incentive Plan effective January 1, 2007 (filed as Exhibit 99.1 to UAL’sForm 8-K filed March 26, 2007, Commission file number 1-6033, and incorporated herein by reference)
156*3.1 Restated Certificate of Incorporation of UAL Corporation (filed as Exhibit 3.1 to UAL's Form 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference)*3.2
*†10Restated Certificate of Incorporation of United Air Lines, Inc. (filed as Exhibit 3.1 to United's Form 8-K filed February 1, 2006, Commission file number 1-11355, and incorporated herein by reference)*3.3.2
Amended and Restated Bylaws of UAL Corporation (filed as Exhibit 3.2 to UAL's Form 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference)*3.4Amended and Restated Bylaws of United Air Lines, Inc. (filed as Exhibit 3.2 to United's Form 8-K filed February 1, 2006, Commission file number 1-11355, and incorporated herein by reference)*4.1Amended 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)*4.2First Amendment to Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, dated December 5, 2007, 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. (filed as Exhibit 4.1 to UAL's Form 8-K filed December 7, 2007, Commission file number 1-6033, and incorporated herein by reference)*4.3Indenture 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 UAL's Form 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference)*4.4ORD 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 UAL's Form 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference)*4.5First 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 UAL's Form 8-K filed February 21, 2006, Commission file number 1-6033, and incorporated herein by reference)*4.6Indenture dated as of July 25, 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 of 4.50% Senior Limited-Subordination Convertible Notes due 2021 (filed as Exhibit 4.1 to UAL's Form 8-K filed July 27, 2006, Commission file number 1-6033, and incorporated herein by reference)*†10.1UAL Corporation Success Sharing Program—Performance Incentive Plan effective January 1, 2007 (filed as Exhibit 99.1 to UAL's Form 8-K filed March 26, 2007, Commission file number 1-6033, and incorporated herein by reference)†10.2
UAL Corporation Success Sharing Program—Performance Incentive Plan Amendment No. 1 dated January 1, 2008 (filed as Exhibit 10.2 to UAL’sForm 10-K for the year ended December 31, 2007, Commission file number 1-6033, and incorporated herein by reference)*† 10.310
.3UAL Corporation Success Sharing Program—Performance Incentive Plan Amendment No. 2 (filed as Exhibit 10.1 to UAL’sForm 10-Q for the quarter ended September 30, 2008, Commission file number 1-6033, and incorporated herein by reference) †10 .4 UAL Corporation 2009 Annual Incentive Plan *†10 .5 UAL Corporation Success Sharing Program—Profit Sharing Plan effective January 1, 2006 (filed as Exhibit 99.2.99.2 to UAL's UAL’sForm 8-K filed March 26, 2007, Commission filenumber 1-6033, and incorporated herein by reference)*†10 .6 UAL Corporation Executive Severance Plan dated April 1, 2007 (filed as Exhibit 10.1 to UAL’sForm 8-K filed March 26, 2007, Commission file number 1-6033, and incorporated herein by reference) *† 10.410
.7UAL Corporation Executive Severance Plan Amendment No. 1 dated AprilJanuary 1, 20072008 (filed as Exhibit 10.110.5 to UAL's UAL’sForm 8-K filed March 26,10-K for the year ended December 31, 2007, Commission file number 1-6033, and incorporated herein by reference)†10.5
UAL Corporation Executive Severance Plan Amendment No. 1 dated January 1, 2008*† 10.610
.8Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton (filed as Exhibit 10.3 to UAL's UAL’sForm 10-Q for the quarter ended September 30, 2002, Commission file number 1-6033, and incorporated herein by reference)*† 10.710
.9Amendment 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 UAL's UAL’sForm 10-K for the year ended December 31, 2002, Commission file number 1-6033, and incorporated herein by reference)*† 10.810
.10Amendment 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 UAL's UAL’sForm 10-K for the year ended December 31, 2002, Commission file number 1-6033, and incorporated herein by reference)*† 10.910
.11Amendment No. 3 dated September 29, 2006 to the Employment Agreement dated September 5, 2002, by and among UAL Corporation, United Air Lines, Inc., UAL Corporation, and Glenn F. Tilton (filed as Exhibit 99.2 to UAL's UAL’sForm 8-K filed on September 29, 2006, Commission file number 1-6033, and incorporated herein by reference)*† 10.1010
.12Amendment No. 4 dated September 25, 2008 to the Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton (filed as Exhibit 10.3 to UAL’sForm 10-Q for the quarter ended September 30, 2008, Commission fileno. 1-6033, and incorporated herein by reference) *†10 .13 Employment Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (filed as Exhibit 99.3 to UAL's UAL’sForm 8-K filed on September 29, 2006, Commission file number 1-6033, and incorporated herein by reference)*† 10.1110
.14Amendment No. 1 dated May 15, 2008 to the Employment Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (filed as Exhibit 10.1 to UAL’sForm 10-Q for the quarter ended June 30, 2008, Commission file number 1-6033, and incorporated herein by reference) *†10 .15 Peter D. McDonald Secular Trust Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (filed as Exhibit A to Exhibit 99.3 to UAL's UAL’sForm 8-K filed on September 29, 2006, Commission file number 1-6033, and incorporated herein by reference)
157 *†10 .16 Amendment No. 1 dated March 12, 2007 to the Peter D. McDonald Secular Trust Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (filed as Exhibit 10.48 to UAL’sForm 10-K for the year ended December 31, 2006, Commission file number 1-6033, and incorporated herein by reference) *†10 .17 Amendment No. 2 dated June 4, 2007 to the Peter D. McDonald Secular Trust Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (filed as Exhibit 10.1 to UAL’sForm 10-Q for the quarter ended June 30, 2007, Commission file number 1-6033, and incorporated herein by reference) *†10 .18 Amendment No. 3 dated May 15, 2008 to the Peter D. McDonald Secular Trust Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald (filed as Exhibit 10.2 to UAL’sForm 10-Q for the quarter ended June 30, 2008, Commission file number 1-6033, and incorporated herein by reference) †10 .19 Amendment No. 4 dated December 18, 2008 to the Peter D. McDonald Secular Trust Agreement dated September 29, 2006 by and among UAL Corporation, United Air Lines, Inc. and Peter D. McDonald †10 .20 Separation Agreement dated October 9, 2008 by and among UAL Corporation, United Air Lines, Inc. and Frederic F. Brace †10 .21 Description of Officer Benefits *†10 .22 UAL Corporation 2006 Management Equity Incentive Plan (filed as Exhibit 10.1 to UAL’sForm 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference) *†10 .23 UAL Corporation 2008 Incentive Compensation Plan (filed as Appendix A to UAL’s Definitive Proxy filed on April 25, 2008, Commission file number 1-6033, and incorporated herein by reference) *†10 .24 Form of Restricted Share Award Notice pursuant to the UAL Corporation 2008 Incentive Compensation Plan (filed as Exhibit 10.4 to UAL’sForm 10-Q for the quarter ended June 30, 2008, Commission file number 1-6033, and incorporated herein by reference) *†10 .25 Form of Stock Option Award Notice pursuant to the UAL Corporation 2008 Incentive Compensation Plan (filed as Exhibit 10.5 to UAL’sForm 10-Q for the quarter ended June 30, 2008, Commission file number 1-6033, and incorporated herein by reference) *†10 .26 Form of Restricted Stock Unit Award Notice pursuant to the UAL Corporation 2008 Incentive Compensation Plan (filed as Exhibit 10.6 to UAL’sForm 10-Q for the quarter ended June 30, 2008, Commission file number, 1-6033, and incorporated herein by reference) †10 .27 Description of Benefits for UAL Corporation Directors *†10 .28 UAL Corporation 2006 Directors Equity Incentive Plan (filed as Exhibit 10.2 to UAL’sForm 8-K dated February 1, 2006, Commission file number 1-6033, and incorporated herein by reference) *†10 .29 Amendment No. 1 to the UAL Corporation 2006 Directors Equity Incentive Plan (filed as Exhibit 10.2 to UAL’sForm 10-Q for the quarter ended September 30, 2008, Commission file number 1-6033, and incorporated herein by reference) *†10 .30 Letter Agreement dated April 28, 1994 between UAL Corporation and James J. O’Connor (filed as Exhibit 10.44 to UAL’sForm 10-K for year ended December 31, 2005, Commission file number 1-6033, and incorporated herein by reference) 12 .1 UAL Corporation Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements 12 .2 United Air Lines, Inc. Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements 21 List of UAL Corporation and United Air Lines, Inc. Subsidiaries
158 23 .1 Consent of Independent Registered Public Accounting Firm for UAL Corporation 23 .2 Consent of Independent Registered Public Accounting Firm for United Air Lines, Inc. 31 .1 Certification of the Principal Executive Officer of UAL Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) 31 .2 Certification of the Principal Financial Officer of UAL Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) 31 .3 Certification of the Principal Executive Officer of United Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) 31 .4 Certification of the Principal Financial Officer of United Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) 32 .1 Certification of the Chief Executive Officer and Chief Financial Officer of UAL Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) 32 .2 Certification of the Chief Executive Officer and Chief Financial Officer of United Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) *†10.12Amendment No. 1 dated March 12, 2007 to the Peter D. McDonald Secular Trust Agreement dated September 29, 2006 (filed as Exhibit 10.48 to UAL's Form 10-K for the year ended December 31, 2006, Commission file number 1-6033, and incorporated herein by reference)†10.13*Description of Officer BenefitsPreviously filed*†10.14UAL Corporation 2006 Management Equity Incentive Plan (filed as Exhibit 10.1 to UAL's Form 8-K filed February 1, 2006, Commission file number 1-6033, and incorporated herein by reference)
†10.15Description of Benefits for UAL Corporation Directors*†10.16UAL Corporation 2006 Directors Equity Incentive Plan (filed as Exhibit 10.2 to UAL's Form 8-K dated February 1, 2006, Commission file number 1-6033, and incorporated herein by reference)*†10.17Letter Agreement dated April 28, 1994 between UAL Corporation and James J. O'Connor (filed as Exhibit 10.44 to UAL's Form 10-K for year ended December 31, 2005, Commission file number 1-6033, and incorporated herein by reference)Indicates management contract or compensatory plan or arrangement12.1UAL Corporation Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements12.2United Air Lines, Inc. Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements21List of UAL Corporation and United Air Lines, Inc. Subsidiaries23.1Consent of Independent Registered Public Accounting Firm for UAL Corporation23.2Consent of Independent Registered Public Accounting Firm for United Air Lines, Inc.31.1Certification of the Principal Executive Officer of UAL Pursuant to 15 U.S.C. 78m(a) or 78o(d) Section 302 of the Sarbanes-Oxley Act of 2002)31.2Certification of the Principal Financial Officer of UAL Pursuant to 15 U.S.C. 78m(a) or 78o(d) Section 302 of the Sarbanes-Oxley Act of 2002)31.3Certification of the Principal Executive Officer of United Pursuant to 15 U.S.C. 78m(a) or 78o(d) Section 302 of the Sarbanes-Oxley Act of 2002)31.4Certification of the Principal Financial Officer of United Pursuant to 15 U.S.C. 78m(a) or 78o(d) Section 302 of the Sarbanes-Oxley Act of 2002)32.1Certification of the Chief Executive Officer and Chief Financial Officer of UAL Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)32.2Certification of the Chief Executive Officer and Chief Financial Officer of United Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)*Previously filed†Indicates management contract or compensatory plan or arrangementQuickLinks
159UAL Corporation and Subsidiary Companies and United Air Lines, Inc. and Subsidiary Companies Report on Form 10-K For the Year Ended December 31, 2007PART IITEM 2. PROPERTIES.ITEM 3. LEGAL PROCEEDINGS.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.ITEM 6. SELECTED FINANCIAL DATA.UAL Corporation and Subsidiary Companies Statements of Consolidated Operations (In millions, except per share amounts)UAL Corporation and Subsidiary Companies Statements of Consolidated Cash Flows (In millions)UAL Corporation and Subsidiary Companies Statements of Consolidated Stockholders' Equity (Deficit) (In millions)United Air Lines, Inc. and Subsidiary Companies Statements of Consolidated Operations (In millions)United Air Lines, Inc. and Subsidiary Companies Statements of Consolidated Cash Flows (In millions)United Air Lines, Inc. and Subsidiary Companies Statements of Consolidated Stockholder's Equity (Deficit) (In millions)UAL Corporation and Subsidiary Companies Combined Notes to Consolidated Financial StatementsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.ITEM 9A. CONTROLS AND PROCEDURES.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.ITEM 11. EXECUTIVE COMPENSATION.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.PART IVSIGNATURESSchedule II Valuation and Qualifying Accounts For the Year Ended December 31, 2007, the Eleven Month Period Ended December 31, 2006, the Month Ended January 31, 2006 and the Year Ended December 31, 2005EXHIBIT INDEX