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Continental Airlines 10-Q 2011
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2011

OR

 

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

For the transition period from              to             

 

 

 

Commission

File Number

  

Exact Name of Registrant as Specified in its Charter,

Principal Office Address and Telephone Number

  

State of

Incorporation

  

I.R.S. Employer

Identification No

001-06033   

United Continental Holdings, Inc.

77 W. Wacker

Drive, Chicago,

Illinois 60601

(312) 997-8000

   Delaware    36-2675207
001-11355    United Air Lines, Inc.    Delaware    36-2675206
  

77 W. Wacker

Drive, Chicago,

Illinois 60601

(312) 997-8000

     
001-10323    Continental Airlines, Inc.    Delaware    74-2099724
  

1600 Smith Street,

Dept HQSEO,

Houston, Texas

77002

(713) 324-2950

     

 

 

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

 

United Continental Holdings, Inc.

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

Continental Airlines, Inc.

   Yes  x    No  ¨         

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

 

United Continental Holdings, Inc.

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

Continental Airlines, Inc.

   Yes  x    No  ¨         

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

 

United Continental Holdings, Inc.   Large accelerated filer   x    Accelerated filer   ¨
  Non-accelerated filer   ¨    Smaller reporting company   ¨
United Air Lines, Inc.   Large accelerated filer   ¨    Accelerated filer   ¨
  Non-accelerated filer   x    Smaller reporting company   ¨
Continental Airlines, Inc.   Large accelerated filer   ¨    Accelerated filer   ¨
  Non-accelerated filer   x    Smaller reporting company   ¨

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

 

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

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

The number of shares outstanding of each of the issuer’s classes of common stock as of April 15, 2011 is shown below:

 

United Continental Holdings, Inc.    330,468,892 shares of common stock ($0.01 par value)
United Air Lines, Inc.    205 (100% owned by United Continental Holdings, Inc.) There is no market for United Air Lines, Inc. common stock.
Continental Airlines, Inc.    1,000 (100% owned by United Continental Holdings, Inc.) There is no market for Continental Airlines, Inc. common stock.

 

 

OMISSION OF CERTAIN INFORMATION

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

 

 

 


Table of Contents

United Continental Holdings, Inc.

United Air Lines, Inc.

Continental Airlines, Inc.

Report on Form 10-Q

For the Quarter Ended March 31, 2011

 

     Page  
PART I. FINANCIAL INFORMATION   

Item 1. Financial Statements

  

United Continental Holdings, Inc.:

  

Statements of Consolidated Operations

     3   

Consolidated Balance Sheets

     4   

Condensed Statements of Consolidated Cash Flows

     6   

United Air Lines, Inc.:

  

Statements of Consolidated Operations

     7   

Consolidated Balance Sheets

     8   

Condensed Statements of Consolidated Cash Flows

     10   

Continental Airlines, Inc.:

  

Statements of Consolidated Operations

     11   

Consolidated Balance Sheets

     12   

Condensed Statements of Consolidated Cash Flows

     14   

Combined Notes to Condensed Consolidated Financial Statements

(United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc.)

     15   

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

     30   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4. Controls and Procedures

     41   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     42   

Item 1A. Risk Factors

     42   

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

     42   

Item 5. Other Information

     42   

Item 6. Exhibits

     43   

Signatures

     44   

Exhibit Index

     45   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Three Months Ended
March 31,
 
     2011     2010  

Operating revenue:

    

Passenger:

    

Mainline

   $ 5,763      $ 2,869   

Regional

     1,424        788   
                

Total passenger revenue

     7,187        3,657   

Cargo

     283        157   

Other operating revenue

     732        427   
                
     8,202        4,241   
                

Operating expenses:

    

Aircraft fuel

     2,672        1,207   

Salaries and related costs

     1,806        990   

Regional capacity purchase

     573        388   

Landing fees and other rent

     473        257   

Aircraft maintenance materials and outside repairs

     439        222   

Depreciation and amortization

     388        221   

Distribution expenses

     350        172   

Aircraft rent

     253        81   

Special charges

     77        18   

Other operating expenses

     1,137        609   
                
     8,168        4,165   
                

Operating income

     34        76   

Nonoperating income (expense):

    

Interest expense

     (254     (185

Interest income

     4        1   

Interest capitalized

     6        2   

Miscellaneous, net

     (1     24   
                
     (245     (158
                

Loss before income taxes and equity in earnings of affiliates

     (211     (82

Income taxes

     2        1   
                

Loss before equity in earnings of affiliates

     (213     (83

Equity in earnings of affiliates, net of tax

     —          1   
                

Net loss

   $ (213   $ (82
                

Loss per share, basic and diluted

   $ (0.65   $ (0.49
                

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     March 31,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 8,165      $ 8,069   

Short-term investments

     722        611   
                

Total unrestricted cash, cash equivalents and short-term investments

     8,887        8,680   

Restricted cash

     71        37   

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

     2,357        1,613   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $69; 2010 — $64)

     619        466   

Deferred income taxes

     554        591   

Prepaid expenses and other

     660        658   
                
     13,148        12,045   
                

Operating property and equipment:

    

Owned —

    

Flight equipment

     15,552        15,181   

Other property and equipment

     2,921        2,890   
                
     18,473        18,071   

Less — accumulated depreciation and amortization

     (3,131     (2,858
                
     15,342        15,213   
                

Purchase deposits for flight equipment

     269        230   

Capital leases —

    

Flight equipment

     1,635        1,741   

Other property and equipment

     48        217   
                
     1,683        1,958   

Less — accumulated amortization

     (462     (456
                
     1,221        1,502   
                
     16,832        16,945   
                

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2011 — $547; 2010 — $504)

     4,866        4,917   

Restricted cash, cash equivalents and investments

     354        350   

Investments

     98        103   

Other, net

     731        715   
                
     10,572        10,608   
                
   $ 40,552      $ 39,598   
                

 

(continued on next page)

 

4


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     March 31,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 4,324      $ 2,998   

Frequent flyer deferred revenue

     2,565        2,582   

Current maturities of long-term debt

     2,319        2,411   

Accounts payable

     1,897        1,805   

Accrued salaries and benefits

     1,208        1,470   

Current maturities of capital leases

     148        252   

Other

     1,413        1,127   
                
     13,874        12,645   
                

Long-term debt

     11,115        11,434   

Long-term obligations under capital leases

     1,002        1,036   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     3,523        3,491   

Postretirement benefit liability

     2,366        2,344   

Pension liability

     1,465        1,473   

Advanced purchase of miles

     1,131        1,159   

Deferred income taxes

     1,549        1,585   

Other

     2,615        2,704   
                
     12,649        12,756   
                

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock

     —          —     

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 329,887,195 and 327,922,565 shares at March 31, 2011 and December 31, 2010, respectively

     3        3   

Additional capital invested

     7,100        7,071   

Retained deficit

     (5,916     (5,703

Stock held in treasury, at cost

     (31     (31

Accumulated other comprehensive income

     756        387   
                
     1,912        1,727   
                
   $ 40,552      $ 39,598   
                

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net loss

   $ (213   $ (82

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

    

Increase in advance ticket sales

     1,326        511   

Depreciation and amortization

     388        221   

Special charges, non-cash portion

     4        18   

Increase in receivables

     (379     (226

Net change in fuel hedge cash collateral

     178        7   

Increase (decrease) in accrued wages and liabilities

     (235     40   

Other, net

     (64     (7
                

Net cash provided by operating activities

     1,005        482   
                

Cash Flows from Investing Activities:

    

Capital expenditures

     (205     (51

Aircraft purchase deposits paid, net

     (38     (42

(Increase) decrease in restricted cash

     (9     10   

Proceeds from sale of property and equipment

     39        4   

Purchases of short-term investments, net

     (109     —     

Other, net

     2        3   
                

Net cash used in investing activities

     (320     (76
                

Cash Flows from Financing Activities:

    

Proceeds from issuance of long-term debt

     32        1,309   

Payments of long-term debt

     (528     (1,204

Principal payments under capital leases

     (125     (27

Other, net

     32        (10
                

Net cash provided by (used in) financing activities

     (589     68   
                

Increase in cash and cash equivalents during the period

     96        474   

Cash and cash equivalents at beginning of the period

     8,069        3,042   
                

Cash and cash equivalents at end of the period

   $ 8,165      $ 3,516   
                

Investing and Financing Activities Not Affecting Cash:

    

Property and equipment acquired through the issuance of debt

   $ 64      $ —     

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)

 

     Three Months Ended
March 31,
 
     2011     2010  

Operating revenue:

    

Passenger:

    

Mainline

   $ 3,139      $ 2,869   

Regional

     891        788   
                

Total passenger revenue

     4,030        3,657   

Cargo

     167        157   

Other operating revenue

     479        429   
                
     4,676        4,243   
                

Operating expenses:

    

Aircraft fuel

     1,512        1,207   

Salaries and related costs

     987        990   

Regional capacity purchase

     382        388   

Landing fees and other rent

     252        257   

Aircraft maintenance materials and outside repairs

     292        222   

Depreciation and amortization

     227        221   

Distribution expenses

     187        172   

Aircraft rent

     81        81   

Special charges

     74        18   

Other operating expenses

     674        608   
                
     4,668        4,164   
                

Operating income

     8        79   

Nonoperating income (expense):

    

Interest expense

     (168     (180

Interest income

     2        1   

Interest capitalized

     3        2   

Miscellaneous, net

     (5     24   
                
     (168     (153
                

Loss before income taxes and equity in earnings of affiliates

     (160     (74

Income taxes

     —          1   
                

Loss before equity in earnings of affiliates

     (160     (75

Equity in earnings of affiliates, net of tax

     —          1   
                

Net loss

   $ (160   $ (74
                

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

7


Table of Contents

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
March 31,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,806      $ 4,665   

Restricted cash

     71        37   

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

     1,419        1,004   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $64; 2010 — $61)

     340        321   

Receivables from related parties

     155        135   

Deferred income taxes

     297        373   

Prepaid expenses and other

     402        366   
                
     7,490        6,901   
                

Operating property and equipment:

    

Owned —

    

Flight equipment

     8,985        8,718   

Other property and equipment

     2,107        2,086   
                
     11,092        10,804   

Less — accumulated depreciation and amortization

     (2,867     (2,717
                
     8,225        8,087   
                

Purchase deposits for flight equipment

     54        51   

Capital leases —

    

Flight equipment

     1,467        1,741   

Other property and equipment

     48        49   
                
     1,515        1,790   

Less — accumulated amortization

     (456     (453
                
     1,059        1,337   
                
     9,338        9,475   
                

Other assets:

    

Intangibles, less accumulated amortization (2011 — $488; 2010 — $473)

     2,329        2,343   

Restricted cash

     195        190   

Investments

     93        97   

Other, net

     635        622   
                
     3,252        3,252   
                
   $ 20,080      $ 19,628   
                

 

(continued on next page)

 

8


Table of Contents

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
March 31,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Advance ticket sales

   $ 2,272      $ 1,536   

Frequent flyer deferred revenue

     1,655        1,703   

Current maturities of long-term debt

     1,313        1,546   

Accounts payable

     1,116        907   

Accrued salaries and benefits

     801        938   

Current maturities of capital leases

     145        249   

Other

     1,208        1,013   
                
     8,510        7,892   
                

Long-term debt

     5,349        5,480   

Long-term obligations under capital leases

     824        858   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,304        2,321   

Postretirement benefit liability

     2,108        2,091   

Pension liability

     100        101   

Advanced purchase of miles

     1,131        1,159   

Deferred income taxes

     655        731   

Other

     974        972   
                
     7,272        7,375   
                

Commitments and contingencies

    

Stockholder’s deficit:

    

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

     —          —     

Additional capital invested

     3,423        3,421   

Retained deficit

     (5,649     (5,489

Accumulated other comprehensive income

     351        91   
                
     (1,875     (1,977
                
   $ 20,080      $ 19,628   
                

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

9


Table of Contents

UNITED AIR LINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Three Months Ended
March  31,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net loss

   $ (160   $ (74

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

    

Increase in advance ticket sales

     736        511   

Depreciation and amortization

     227        221   

Special charges, non-cash portion

     6        18   

Increase in receivables

     (184     (226

Net change in fuel hedge cash collateral

     178        7   

Increase (decrease) in accrued wages and other liabilities

     (119     40   

Increase in accounts payable

     146        85   

Other, net

     (44     (103
                

Net cash provided by operating activities

     786        479   
                

Cash Flows from Investing Activities:

    

Capital expenditures

     (125     (51

Aircraft purchase deposits paid, net

     (3     (42

(Increase) decrease in restricted cash

     (10     10   

Proceeds from sale of property and equipment

     1        4   

Other, net

     2        3   
                

Net cash used in investing activities

     (135     (76
                

Cash Flows from Financing Activities:

    

Proceeds from issuance of long-term debt

     —          1,309   

Payments of long-term debt

     (397     (1,203

Principal payments under capital leases

     (125     (27

Other, net

     12        (8
                

Net cash provided by (used in) financing activities

     (510     71   
                

Increase in cash and cash equivalents during the period

     141        474   

Cash and cash equivalents at beginning of the period

     4,665        3,036   
                

Cash and cash equivalents at end of the period

   $ 4,806      $ 3,510   
                

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

10


Table of Contents

CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amount)

 

     Successor            Predecessor  
     Three Months
Ended
March 31, 2011
           Three Months
Ended
March 31, 2010
 

Operating revenue:

         

Passenger:

         

Mainline

   $ 2,623           $ 2,257   

Regional

     533             501   
                     

Total passenger revenue

     3,156             2,758   

Cargo

     115             102   

Other operating revenue

     287             303   
                     
     3,558             3,163   
                     

Operating expenses:

         

Aircraft fuel

     1,160             874   

Salaries and related costs

     805             796   

Regional capacity purchase

     192             196   

Landing fees and other rent

     220             213   

Aircraft maintenance materials and outside repairs

     149             142   

Depreciation and amortization

     161             134   

Distribution expenses

     163             145   

Aircraft rent

     172             229   

Special charges

     3             10   

Other operating expenses

     504             474   
                     
     3,529             3,213   
                     

Operating income (loss)

     29             (50
 

Nonoperating income (expense):

         

Interest expense

     (83          (94

Interest income

     2             2   

Interest capitalized

     4             7   

Miscellaneous, net

     (7          (11
                     
     (84          (96
                     
 

Loss before income taxes

     (55          (146

Income taxes

     2             —     
                     

Net loss

   $ (57        $ (146
                     
 

Loss per share, basic and diluted

          $ (1.05
               

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     Successor  
     (Unaudited)
March 31,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 3,353      $ 3,398   

Short-term investments

     722        611   
                

Total cash, cash equivalents and short-term investments

     4,075        4,009   

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

     1,064        671   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $5; 2010 — $3)

     279        246   

Deferred income taxes

     266        225   

Prepaid expenses and other

     253        185   
                
     5,937        5,336   
                

Operating property and equipment:

    

Owned —

    

Flight equipment

     6,567        6,463   

Other property and equipment

     814        804   
                
     7,381        7,267   

Less — accumulated depreciation and amortization

     (263     (141
                
     7,118        7,126   

Purchase deposits for flight equipment

     215        178   

Capital leases — other property and equipment

     168        168   

Less — accumulated amortization

     (7     (3
                
     161        165   
                
     7,494        7,469   
                

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2011 — $59; 2010 — $31)

     2,540        2,575   

Restricted cash, cash equivalents and investments

     159        160   

Other, net

     351        375   
                
     7,573        7,633   
                
   $ 21,004      $ 20,438   
                

 

(continued on next page)

 

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CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     Successor  
     (Unaudited)
March 31,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 2,052      $ 1,463   

Frequent flyer deferred revenue

     909        879   

Current maturities of long-term debt

     1,006        865   

Accounts payable

     980        961   

Accrued salaries and benefits

     407        532   

Current maturities of capital leases

     3        3   

Other

     271        236   
                
     5,628        4,939   
                

Long-term debt

     5,349        5,536   

Long-term obligations under capital leases

     178        178   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     1,219        1,170   

Postretirement benefit liability

     258        253   

Pension liability

     1,364        1,372   

Lease fair value adjustment, net

     1,309        1,374   

Deferred income taxes

     826        784   

Other

     486        522   
                
     5,462        5,475   
                

Commitments and contingencies

    

Stockholder’s equity:

    

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

     —          —     

Additional capital invested

     4,140        4,115   

Retained deficit

     (152     (95

Accumulated other comprehensive income

     399        290   
                
     4,387        4,310   
                
   $ 21,004      $ 20,438   
                

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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CONTINENTAL AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Successor            Predecessor  
     Three Months
Ended
March  31, 2011
           Three Months
Ended
March  31, 2010
 

Cash Flows from Operating Activities:

         

Net loss

   $ (57        $ (146

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

         

Increase in advance ticket sales

     589             570   

Depreciation and amortization

     161             134   

Special charges, non-cash portion

     (2          10   

Amortization of debt and lease fair value adjustment

     (65          —     

Increase (decrease) in accrued liabilities

     (127          43   

Increase in receivables

     (279          (161

Other, net

     (2          (19
                     

Net cash provided by operating activities

     218             431   
 

Cash Flows from Investing Activities:

         

Capital expenditures

     (80          (80

Aircraft purchase deposits paid, net

     (35          (52

Proceeds from sale of property and equipment

     38             24   

(Purchases) sales of short-term investments, net

     (109          24   

Other, net

     2             —     
                     

Net cash used in investing activities

     (184          (84
 

Cash Flows from Financing Activities:

         

Proceeds from issuance of long-term debt

     32             109   

Payments of long-term debt

     (131          (151

Other, net

     20             10   
                     

Net cash used in financing activities

     (79          (32
                     

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

     (45          315   

Cash and cash equivalents at beginning of the period

     3,398             2,546   
                     

Cash and cash equivalents at end of the period

   $ 3,353           $ 2,861   
                     
 

Investing and Financing Activities Not Affecting Cash:

         

Property and equipment acquired through the issuance of debt

   $ 64           $ —     

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

 

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UNITED CONTINENTAL HOLDINGS, INC.,

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

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

Interim Financial Statements. The UAL, United and Continental unaudited condensed consolidated financial statements shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments such as asset impairment charges, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The significant reclassifications are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). These reclassifications were made to conform the financial statement presentation of United and Continental. These financial statements should be read together with the information included in the 2010 Annual Report.

NOTE 1 — NEW ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncements.

The Company made changes in accounting for its loyalty programs as a result of the adoption of Accounting Standards Update 2009-13, “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). See the Company’s 2010 Annual Report for additional information related to the Company’s accounting for its loyalty programs.

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

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

As a result of the prospective adoption, the new accounting policy was only applied to new sales of air transportation in 2011. Generally, as compared to the historical accounting policy, the new accounting policy decreases the value of miles that the Company records as deferred revenue and increases the passenger revenue recorded at the time air transportation is provided. Due to the average period from purchase of air transportation to the provision of air transportation, the new accounting policy was only applicable to a portion of the Company’s multiple element ticket transactions recorded during the first quarter of 2011. The application of the new accounting method in the first quarter of 2011 increased UAL revenue by approximately $55 million ($0.17 per basic and diluted share), consisting of $38 million and $17 million for United and Continental, respectively, as

 

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compared to revenue that would have been recorded under the historical method of accounting. We estimate that application of the new accounting method in the remaining three quarters of 2011 will increase UAL’s revenue as compared to revenue that would have been recorded under the historical method of accounting. The Company cannot reliably estimate the impact of ASU 2009-13 on its future revenue, because the impact depends on many factors, including the volume of air transportation sales with mileage credit components.

In addition, United and Continental each have a significant contract to sell miles to their co-branded credit card partners. These contracts may be modified later in 2011 as a result of the merger. A modified contract would be subject to ASU 2009-13 in the period the contract modification is executed. We may record material adjustments to revenue in the period we modify the contract based on the provisions of ASU 2009-13, which requires us to adjust our deferred revenue balance as if we had been applying ASU 2009-13 since the contract initiation. We expect a contract modification would require us to decrease our deferred revenue balance. The amount of any impact cannot be readily determined until such contract modification is executed.

NOTE 2 — LOSS PER SHARE

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

 

     Three Months Ended
March  31,
 
     2011     2010  

UAL basic and diluted loss per share:

    

Loss available to common stockholders

   $ (213   $ (82
                

Basic and diluted weighted average shares outstanding

     328        167   
                

Loss per share, basic and diluted

   $ (0.65   $ (0.49
                

Potentially dilutive shares excluded from diluted per share amounts:

    

Restricted stock and stock options

     9        7   

UAL 6% senior convertible notes

     40        40   

UAL 4.5% senior limited subordination convertible notes

     22        22   

Continental 4.5% convertible notes

     12        N/A   

Continental 6% convertible junior subordinated debentures

     4        N/A   

UAL 5% senior convertible notes (Note 9)

     —          3   

UAL’s 6% Senior Notes due 2031, with a principal amount of $615 million as of March 31, 2011, are callable at any time at 100% of par value and can be redeemed with either cash or shares of UAL common stock, or a combination thereof, at UAL’s option. These notes are not included in the diluted earnings per share calculation as it is UAL’s intent to redeem these notes with cash.

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

 

     Three Months Ended
March 31,

2010
 

Continental Predecessor basic and diluted loss per share:

  

Loss available to common stockholders

   $ (146
        

Basic and diluted weighted average shares outstanding

     139   
        

Loss per share, basic and diluted

   $ (1.05
        

Approximately 24 million potential shares of Continental Predecessor’s common stock related to Continental’s convertible debt securities were excluded from the computation of diluted loss per share in the three months ended March 31, 2010 because they were antidilutive. In addition, approximately eight million weighted average options to purchase shares of Continental Predecessor’s common stock were excluded from the computation of diluted loss per share for the three months ended March 31, 2010 because the effect of including the options would have been antidilutive.

 

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NOTE 3 — INCOME TAXES

Our effective tax rates differ from the federal statutory rate of 35% primarily due to the following: changes in the valuation allowance, expenses that are not deductible for federal income tax purposes, and foreign and state income taxes. We are required to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets will ultimately not be realized. As a result, our pre-tax losses for the first quarter of 2011 and 2010 were not reduced by any tax benefit.

NOTE 4 — SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

Share-Based Compensation. In February 2011, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.5 million shares of restricted stock that vest pro-rata over three years on the anniversary of the grant date. These awards also include approximately 3.0 million performance-based restricted stock units (“RSUs”) (equivalent to approximately 1.9 million RSUs at the target performance level), consisting of approximately 1.2 million RSUs that vest based on UAL’s return on invested capital for the period beginning January 1, 2011 and ending December 31, 2013 and 1.8 million RSUs that vest based on the achievement of merger-related goals. Vesting of a portion of the merger incentive RSUs is based on the achievement of certain merger-related milestones and vesting of the remainder of the merger incentive RSUs is based on the achievement of revenue and cost synergies over a three-year performance period ending December 31, 2013. The RSUs will be settled in cash. If the specified performance conditions are achieved, cash payments will be made shortly after the end of the performance period or achievement of the specified merger milestone, as applicable, based on the fair market value of UAL common stock. The Company accounts for the performance-based RSUs as liability awards. UAL had unrecognized share-based compensation of $73 million and $43 million as of March 31, 2011 and December 31, 2010, respectively. UAL’s share-based compensation was $13 million in both the first quarter of 2011 and 2010.

 

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

 

     Pension Benefits     Other Postretirement
Benefits
 
     Three Months Ended
March 31,
    Three Months Ended
March 31,
 
     2011     2010     2011     2010  

UAL

        

Service cost

   $ 21      $ 1      $ 12      $ 8   

Interest cost

     44        2        31        29   

Expected return on plan assets

     (34     (2     (1     (1

Amortization of unrecognized gain and prior service cost

     (5     —          —          (3
                                

Net periodic benefit costs

   $ 26      $ 1      $ 42      $ 33   
                                

United

        

Service cost

   $ 1      $ 1      $ 9      $ 8   

Interest cost

     2        2        28        29   

Expected return on plan assets

     (2     (2     (1     (1

Amortization of unrecognized gain and prior service cost

     —          —          —          (3
                                

Net periodic benefit costs

   $ 1      $ 1      $ 36      $ 33   
                                

Continental (a)

        

Service cost

   $ 20      $ 16      $ 3      $ 3   

Interest cost

     42        40        3        3   

Expected return on plan assets

     (32     (28     —          —     

Amortization of unrecognized (gain) loss and prior service cost

     (5     25        —          4   
                                

Net periodic benefit costs

   $ 25      $ 53      $ 6      $ 10   
                                

 

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

During the first quarter of 2011, Continental contributed $38 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $33 million to its tax-qualified defined benefit pension plans in April 2011.

 

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NOTE 5 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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

 

     March 31, 2011     December 31, 2010  
     Total     Level 1      Level 2     Level 3     Total     Level 1      Level 2     Level 3  
     UAL  

Cash and cash equivalents

   $ 8,165      $ 8,165       $ —        $ —        $ 8,069      $ 8,069       $ —        $ —     

Short-term investments:

                  

Auction rate securities

     120        —           —          120        119        —           —          119   

CDARS

     138        138         —          —          45        45         —          —     

Asset-backed securities

     282        282         —          —          258        258         —          —     

Corporate debt

     135        135         —          —          135        135         —          —     

U.S. government and agency notes

     27        27         —          —          39        39         —          —     

Other fixed income securities

     20        20         —          —          15        15         —          —     

EETC

     63        —           —          63        66        —           —          66   

Current fuel derivative instruments asset

     695        —           695        —          375        —           375        —     

Foreign currency derivatives

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

Restricted cash (a)

     159        159         —          —          160        160         —          —     
     United  

Cash and cash equivalents

   $ 4,806      $ 4,806       $ —        $ —        $ 4,665      $ 4,665       $ —        $ —     

EETC

     63        —           —          63        66        —           —          66   

Current fuel derivative instruments asset

     482        —           482        —          277        —           277        —     
     Continental Successor  

Cash and cash equivalents

   $ 3,353      $ 3,353       $ —        $ —        $ 3,398      $ 3,398       $ —        $ —     

Short-term investments:

                  

Auction rate securities

     120        —           —          120        119        —           —          119   

CDARS

     138        138         —          —          45        45         —          —     

Asset-backed securities

     282        282         —          —          258        258         —          —     

Corporate debt

     135        135         —          —          135        135         —          —     

U.S. government and agency notes

     27        27         —          —          39        39         —          —     

Other fixed income securities

     20        20         —          —          15        15         —          —     

Current fuel derivative instruments asset

     213        —           213        —          98        —           98        —     

Foreign currency derivatives

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

Restricted cash

     159        159         —          —          160        160         —          —     

Convertible debt derivative asset

     262        —           —          262        286        —           —          286   

Convertible debt option liability

     (152     —           —          (152     (164     —           —          (164

 

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

 

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The tables below present disclosures about the activity for “Level Three” financial assets and financial liabilities for the three months ended March 31 (in millions):

 

     2011     2010  
     Auction Rate
Securities
     EETC     EETC  

UAL (a)

       

Balance at January 1

   $ 119       $ 66      $ 51   

Settlements

     —           (2     (2

Reported in other comprehensive income (loss)

     1         (1     9   
                         

Balance at March 31

   $ 120       $ 63      $ 58   
                         

 

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

 

     Continental Successor — 2011            Continental Predecessor — 2010  
     Auction Rate
Securities
     Convertible
Debt
Supplemental
Derivative
Asset (a)
    Convertible
Debt
Conversion
Option
Liability (a)
           Auction Rate
Securities
    Auction Rate
Securities Put Right
 

Balance at January 1

   $ 119       $ 286      $ (164        $ 201      $ 20   

Sales

     —           —          —               (42     —     

Gains (losses):

                

Reported in earnings:

                

Realized

     —           —          —               6        (5

Unrealized

     —           (24     12             —          1   

Reported in other comprehensive income (loss)

     1         —          —               (1     —     
                                              

Balance at March 31

   $ 120       $ 262      $ (152        $ 164      $ 16   
                                              

 

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

As of March 31, 2011, Continental’s auction rate securities, which had a par value of $145 million and unrealized gains of $2 million, were variable-rate debt instruments with contractual maturities generally greater than ten years and with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are secured by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that Continental holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

During the first three months of 2010, Continental Predecessor sold, at par, auction rate securities having a par value of $42 million. Certain of these auction rate securities were subject to a put right granted to Continental by an institution permitting Continental to sell to the institution certain auction rate securities at their full par value. Continental classified the auction rate securities underlying the put right as trading securities and elected the fair value option under applicable accounting standards for the put right, with changes in the fair value of the put right and the underlying auction rate securities recognized in earnings currently. Continental recognized gains on the sales using the specific identification method. The gains were substantially offset by the cancellation of the related put rights. The net gains are included in miscellaneous nonoperating income (expense) in the Continental Predecessor statement of consolidated operations and were not material.

As of March 31, 2011, United’s enhanced equipment trust certificate (“EETC”) securities, which were repurchased in open market transactions in 2007, have an amortized cost basis of $67 million and unrealized losses of $4 million. As of March 31, 2011, these securities have been in an unrealized loss position for a period of over twelve months. However, during the first quarter of 2011, United has not recognized an impairment loss in earnings related to these securities because it does not intend or expect to be required to sell the securities and expects to recover the entire amortized cost basis. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

The Continental Successor debt-related derivatives presented in the table above relate to (a) supplemental indenture agreements that provide that Continental’s convertible debt, which was previously convertible into shares of Continental

 

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

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

 

     March 31, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

UAL debt

   $ 13,434       $ 14,402       $ 13,845       $ 14,995   

United debt

     6,662         6,874         7,026         7,350   

Continental Successor debt

     6,355         6,535         6,401         6,663   

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

 

Description

  

Fair Value Methodology

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

NOTE 6 — HEDGING ACTIVITIES

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

 

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For fuel derivative instruments designated as cash flow hedges, the Company records the effective portion of periodic changes in fair value of the derivatives in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to Nonoperating income (expense) — Miscellaneous, net in the statements of consolidated operations.

The Company records each derivative instrument as a derivative asset or liability (on a gross basis) in its consolidated balance sheets and, accordingly, records any related collateral on a gross basis. As of March 31, 2011 and December 31, 2010, all of the Company’s fuel derivatives were designated as cash flow hedges.

As of March 31, 2011, our projected fuel requirements for the remainder of 2011 were hedged as follows:

 

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

UAL

         

Heating oil swaps

     6   $ 2.21         6   $ 2.21   

Heating oil call options

     6        2.22         N/A        N/A   

Heating oil collars

     7        3.34         7        2.57   

West Texas Intermediate (“WTI”) crude oil swaps

     14        2.14         14        2.14   

WTI crude oil call options

     10        2.30         N/A        N/A   

WTI crude oil collars

     1        2.25         1        1.55   
                     

Total

     44        28  
                     

United

         

Heating oil swaps

     10   $ 2.21         10   $ 2.21   

Heating oil call options

     10        2.22         N/A        N/A   

Heating oil collars

     6        3.35         6        2.58   

WTI crude oil swaps

     10        2.19         10        2.19   

WTI crude oil call options

     7        2.32         N/A        N/A   
                     

Total

     43        26  
                     

Continental

         

Heating oil collars

     9   $ 3.34         9   $ 2.57   

WTI crude oil swaps

     19        2.11         19        2.11   

WTI crude oil call options

     13        2.28         N/A        N/A   

WTI crude oil collars

     3        2.25         3        1.55   
                     

Total

     44        31  
                     

As of March 31, 2011, UAL, United and Continental had hedged 6%, 6% and 5%, respectively, of projected first quarter 2012 fuel consumption.

 

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The following tables present information about the financial statement classification of the Company’s derivative assets and related gains (in millions):

 

Derivatives designated as hedges

          March 31, 2011      December 31, 2010  
     Balance  Sheet
Location
     UAL      United      Continental
Successor
     UAL      United      Continental
Successor
 

Assets:

                    

Fuel contracts due within one year

     Receivables       $ 695       $ 482       $ 213       $ 375       $ 277       $ 98   
                                                        

 

Fuel contracts

   Amount of  Gain
Recognized
in AOCI on Derivatives
(Effective portion)
     Gain
Reclassified from
AOCI  into Income
(Fuel Expense)
(Effective Portion)
     Amount of Gain
Recognized  in
Income (Nonoperating
Expense)
(Ineffective Portion)
 
     Three Months Ended
March 31,
     Three Months Ended
March 31,
     Three Months Ended
March 31,
 
     2011      2010      2011      2010      2011      2010  

UAL

   $ 524       $ —         $ 154       $ —         $ 3       $ —     

United

     385         —           125         —           2         —     

Continental (a)

     139         16         29         4         1         —     

 

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

Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. As of March 31, 2011, United and Continental had net derivative assets of $482 million and $213 million, respectively, with certain of their fuel derivative counterparties. As of March 31, 2011, the Company was not required to post cash collateral with any of its fuel derivative counterparties. As of March 31, 2011, United held cash collateral of $270 million. The obligation to return the cash collateral is classified as an other current liability in United’s consolidated balance sheet. If all of the Company’s counterparties failed to perform, based on the value of the fuel derivatives and collateral held at March 31, 2011, UAL’s, United’s and Continental’s potential credit-risk loss would be $425 million, $212 million and $213 million, respectively.

 

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NOTE 7 — COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) for the three months ended March 31 included the following (in millions):

 

     UAL     United     Continental
Successor (a)
           Continental
Predecessor (a)
 
     2011     2010     2011     2010     2011            2010  

Net loss

   $ (213   $ (82   $ (160   $ (74   $ (57        $ (146

Other comprehensive income (loss) adjustments, before tax:

                 

Investments

     1        9        (1     9        2             —     

Fuel derivative financial instruments:

                 

Reclassification into earnings

     (154     —          (125     —          (29          (4

Change in fair value

     524        —          385        —          139             16   

Employee benefit plans:

                 

Amortization of net actuarial (gains) losses

     (5     (3     —          (3     (5          21   

Amortization of prior service cost

     —          —          —          —          —               8   

Other

     3        (1     1        —          2             —     
                                                     

Comprehensive income (loss) adjustments, before tax

     369        5        260        6        109             41   
                                                     

Total comprehensive income (loss) (a)

   $ 156      $ (77   $ 100      $ (68   $ 52           $ (105
                                                     

 

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

NOTE 8 — COMMITMENTS AND CONTINGENCIES

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

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

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

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

Contingent Senior Unsecured Notes. UAL would be obligated under an indenture to issue to the Pension Benefit Guaranty Corporation (“PBGC”) up to $500 million aggregate principal amount of 8% Contingent Senior Notes (the “8% Notes”) if certain financial triggering events occur. The 8% Notes would be issued to the PBGC in up to eight equal tranches of $62.5 million (with each tranche issued no later than 45 days following the end of any applicable fiscal year). A triggering event occurs when UAL’s EBITDAR (as defined in the PBGC indenture) exceeds $3.5 billion over the prior twelve months ending June 30 or December 31 of any applicable fiscal year. The twelve month measurement periods will end with the fiscal year ending December 31, 2017. In certain circumstances, UAL common stock may be issued in lieu of issuance of the 8% Notes. As of March 31, 2011, a triggering event has not yet occurred under this indenture. Given that a triggering event has not occurred, UAL has not recorded a liability in its consolidated balance sheet for this matter. If a triggering event was to occur as of June 30, 2011, UAL would be obligated to issue $62.5 million of the 8% Notes by February 2012 and would record such obligation in the second quarter of 2011.

 

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Other Contingencies. United is a party to a multi-year technology services agreement and has engaged in discussions with the counterparty to amend or restructure certain performance obligations. In the event that these discussions are not successful, the counterparty may assert claims for damages. The ultimate outcome of these discussions and the exact amount of the damages and costs, if any, to the Company cannot be predicted with certainty at this time.

Commitments. The table below summarizes the Company’s commitments as of March 31, 2011, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and include other commitments primarily to acquire information technology services and assets (in millions).

 

     UAL      United      Continental
Successor
 

2011

   $ 333       $ 207       $ 126   

2012

     1,389         118         1,271   

2013

     849         67         782   

2014

     982         90         892   

2015

     1,642         372         1,270   

After 2015

     7,495         6,834         661   
                          
   $ 12,690       $ 7,688       $ 5,002   
                          

United Aircraft Commitments. As of March 31, 2011, United had firm commitments to purchase 25 Boeing 787 aircraft and 25 Airbus A350XWB aircraft for delivery from 2016 through 2019. United also has purchase options for 42 Airbus A319 and A320 aircraft and purchase rights for 50 Boeing 787 aircraft and 50 Airbus A350XWB aircraft.

United has secured considerable backstop financing commitments from its aircraft and engine manufacturers, subject to certain customary conditions. However, there is no guarantee that United will be able to obtain any or all of the backstop financing, or any other financing, for the aircraft and engines on acceptable terms when necessary or at all.

Continental Aircraft Commitments. As of March 31, 2011, Continental had firm commitments to purchase 84 new aircraft (59 Boeing 737 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from April 2011 through 2016. Continental took delivery of two Boeing 737 aircraft in March 2011 and is currently scheduled to take delivery of two additional Boeing 737 aircraft in the remainder of 2011. Continental also has options to purchase 89 additional Boeing aircraft.

Continental does not have backstop financing or any other financing currently in place for most of the Boeing aircraft on order. Further financing will be necessary to satisfy Continental’s capital commitments for its firm order aircraft and other related capital expenditures. Continental can provide no assurance that backstop financing or any other financing not already in place for aircraft deliveries will be available to Continental on acceptable terms when necessary or at all.

Credit Card Processing Agreements. United and Continental have agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. Under certain of United’s and Continental’s credit card processing agreements, the financial institutions either require, or under certain circumstances have the right to require, that United and Continental maintain a reserve equal to a portion of advance ticket sales that have been processed by that financial institution, but for which United and Continental have not yet provided the air transportation.

As of March 31, 2011, United and Continental provided a cash reserve of $25 million each, as required under their respective credit card processing agreements with JPMorgan Chase and its affiliates. Additional reserves may be required under these or other credit card processing agreements of United or Continental in certain circumstances, such as decreases in credit ratings, decreases in United’s or Continental’s unrestricted cash balance below amounts required by the processing agreements, or decreases in minimum ratios of unrestricted cash to current liabilities. In addition, in certain circumstances, an increase in the future reserve requirements as provided by the terms of one or more of United’s and Continental’s credit card processing agreements could materially reduce the Company’s liquidity. See the Company’s 2010 Annual Report for a detailed discussion of the obligations under the Company’s credit card processing agreements.

Guarantees and Off-Balance Sheet Financing. In the Company’s financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements

 

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and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate (“LIBOR”), for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject in most cases to certain mitigation obligations of the lenders. At March 31, 2011, UAL had $3.3 billion of floating rate debt (consisting of United’s $2.3 billion and Continental’s $1.0 billion of floating rate debt) and $453 million of fixed rate debt (consisting of United’s $218 million and Continental’s $235 million of fixed rate debt), with remaining terms of up to ten years, that is subject to these increased cost provisions. In several financing transactions involving loans or leases from non-U.S. entities, with remaining terms of up to ten years and an aggregate carrying value of $3.6 billion (consisting of United’s $2.5 billion and Continental’s $1.1 billion of carrying value), the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions.

United has guaranteed interest and principal payments on $270 million of the Denver International Airport bonds, which are due in 2032 unless United elects not to extend its equipment and ground lease, in which case the bonds are due in 2023. The 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 related lease obligation is accounted for as an operating lease with the associated expense recorded on a straight-line basis resulting in ratable accrual of the final $270 million lease obligation over the expected lease term through 2032.

Continental is contingently liable for US Airways’ obligations under a lease agreement between US Airways and the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia Airport. These obligations include the payment of ground rentals to the Port Authority and the payment of other rentals in respect of the full amounts owed on special facilities revenue bonds issued by the Port Authority having an outstanding par amount of $95 million at March 31, 2011, and a final scheduled maturity in 2015. If US Airways defaults on these obligations, Continental would be obligated to cure the default and would have the right to occupy the terminal after US Airways’ interest in the lease had been terminated.

Continental is the lessee of real property under long-term leases at a number of airports where it is also the guarantor of approximately $1.7 billion of underlying debt and interest thereon. These leases are typically with municipalities or other governmental entities, which are excluded from the consolidation requirements concerning variable interest entities. To the extent Continental’s lease and related guarantee are with a separate legal entity other than a governmental entity, Continental is not the primary beneficiary because the lease terms are consistent with market terms at the inception of the lease and the lease does not include a residual value guarantee, fixed-price purchase option or similar feature. The leasing arrangements associated with approximately $1.5 billion of these obligations are accounted for as operating leases, and the leasing arrangements associated with approximately $190 million of these obligations are accounted for as capital leases.

Credit Facilities. United has a $255 million revolving loan commitment available under its Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, dated as of February 2, 2007 (the “Amended Credit Facility”). United used $225 million and $253 million of the commitment capacity for letters of credit at March 31, 2011 and December 31, 2010, respectively. Through a separate arrangement, United has an additional $150 million available under an unused credit facility.

Labor Negotiations. As of March 31, 2011, UAL and its subsidiaries had approximately 84,000 active employees, of whom approximately 73% were represented by various U.S. labor organizations. United and Continental had approximately 82% and 63%, respectively, of their active employees represented by various U.S. labor organizations. United has been in negotiations for amended collective bargaining agreements with all of its unions since 2009. Consistent with commitments contained in its current labor contracts, United has filed for mediation assistance in conjunction with four of its six unions — the Air Line Pilots Association (“ALPA”), the Association of Flight Attendants — Communication Workers of America (“AFA”), the International Association of Machinists (“IAM”) and the Aerospace Workers and the Professional Airline Flight Control Association. While the labor contract with the International Brotherhood of Teamsters (“IBT”) also contemplates filing for mediation, the parties have agreed to continue in direct negotiations. The current contract with the International Federation of Professional and Technical Engineers does not stipulate filing for mediation.

After the Company’s May 2010 merger announcement, ALPA opted to suspend negotiations at both United and Continental to focus on joint negotiations for a new collective bargaining agreement that would apply to the combined company. In July 2010, United and Continental reached agreement with ALPA on a Transition and Process Agreement that provides a framework for conducting pilot operations for the two employee groups until the parties reach agreement on a joint collective bargaining agreement and the carriers obtain a single operating certificate. In August 2010, United and Continental began joint negotiations with ALPA and those negotiations are presently ongoing. In December 2010, ALPA and the Company jointly applied to the National Mediation Board (the “NMB”) for mediation assistance for the pilots and flight instructors.

 

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In January 2011, Continental reached an agreement on a new labor contract with the union that represents its flight attendants. The agreement was ratified in February 2011. In March 2011, United reached a tentative agreement on a labor contract with the IBT which represents United’s maintenance technicians and related employees. The agreement covers approximately 5,500 United maintenance technicians and related employees located throughout the United States.

Certain unions have filed applications seeking single carrier findings by the NMB for purposes of union representation. If the NMB determines that United and Continental are considered a single carrier, the NMB may order an election if there is a difference in union representation between the employee groups. Until the union representation issues are resolved, the incumbent unions will continue to represent those employee groups they currently represent. In December 2010, ALPA filed for a single carrier finding with the NMB although there is no dispute as to which union represents the pilot groups. In January 2011, the IAM filed two separate applications seeking single carrier findings by the NMB for fleet service and stores/stock clerk employees. Also in January 2011, the AFA filed a similar request with the NMB for United and Continental flight attendants. In April 2011, the NMB ruled that United and Continental are now operating as a single carrier for union representation of flight attendants, permitting the NMB to begin the union representation election process for that group. Additional rulings for single carrier status are pending for the three other employee groups. The Company anticipates that other applications will be filed by various unions covering other groups of employees.

The outcome of labor negotiations may materially impact the Company’s future financial results. However, it is too early in the process to assess the timing or magnitude of the impact, if any.

NOTE 9 — DEBT

Substantially all of our assets are pledged as collateral for our debt. These assets principally consist of aircraft and the related spare parts and engines, route authorities and, in the case of United, loyalty program intangible assets. As of March 31, 2011, UAL, United and Continental were in compliance with their respective debt covenants.

In the first quarter of 2011, UAL repurchased all of its $150 million face value 5% Senior Convertible Notes due in 2021 with cash after substantially all of the notes were put to UAL by the noteholders.

NOTE 10 — SPECIAL CHARGES

For the three months ended March 31, special charges consisted of the following (in millions):

 

2011

   UAL     United      Continental
Successor
 

Integration-related costs

   $ 79      $ 74       $ 5   

Gain on aircraft sales

     (2     —           (2
                         

Total

   $ 77      $ 74       $ 3   
                         

2010

   UAL     United      Continental
Predecessor
 

Aircraft-related charges, net

   $ 17      $ 17       $ 6   

Salary and severance related

     —          —           4   

Other

     1        1         —     
                         

Total

   $ 18      $ 18       $ 10   
                         

Integration-related costs include costs to terminate certain service contracts that will not be used by the Company, costs to write-off system assets that are no longer used or planned to be used by the Company, and payments to third-party consultants to assist with integration planning and organization design. Integration-related costs also include salary and severance related costs primarily associated with administrative headcount reductions and compensation costs related to the integration.

 

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During the first quarter of 2010, UAL and United recorded an asset impairment charge of $17 million which relates to a decrease in value of aircraft-related assets. During the first quarter of 2010, Continental recorded $6 million of aircraft-related charges related to grounded Boeing 737-300 aircraft, which is net of gains on the sale of two Boeing 737-500 aircraft.

Accrual Activity

Activity related to the accruals for severance and medical costs and future lease payments on permanently grounded aircraft is as follows (in millions):

 

2011 Activity

   Severance/ Medical
Costs
    Permanently Grounded
Aircraft
 

UAL