f093010form10q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
 
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:  1-10323
 
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware
74-2099724
 
(State or other jurisdiction
(I.R.S. Employer
 
of incorporation or organization)
Identification No.)
 
 
1600 Smith Street, Dept. HQSEO
Houston, Texas  77002
(Address of principal executive offices)
(Zip Code)
 
713-324-2950
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X     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 (Section 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).    Yes    X      No _____
 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if
smaller reporting company)
        X        
_________
Accelerated filer
Smaller reporting company
_________
_________
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes           No   X  
 
The registrant is a wholly owned subsidiary of United Continental Holdings, Inc., and there is no market for the registrant's common stock.  As of October 21, 2010, there were 1,000 shares of the registrant's Common Stock outstanding with a par value of $0.01 per share.
 
OMISSION OF CERTAIN INFORMATION
Continental Airlines, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.


 
 

 


TABLE OF CONTENTS



   
PAGE
     
PART I
FINANCIAL INFORMATION
 
     
Item 1.
 
     
 
4
     
   
 
5
 
6
     
 
7
     
 
8
     
Item 2.
 
31
     
Item 3.
51
     
Item 4.
51
     
PART II
OTHER INFORMATION
 
     
Item 1.
52
     
Item 1A.
53
     
Item 2.
56
     
Item 3.
56
     
Item 4.
56
     
Item 5.
56
     
Item 6.
57
     
 
59
     
 
60


 
 

 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data) (Unaudited)

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
      2010      
      2009      
    2010    
    2009   
         
Operating Revenue:
       
  Passenger:
       
    Mainline
$
2,967 
 
$
2,442 
 
$
8,002 
 
$
6,940 
 
    Regional
 
588 
   
505 
   
1,667 
   
1,391 
 
      Total Passenger Revenue
 
3,555 
   
2,947 
   
9,669 
   
8,331 
 
  Cargo
 
115 
   
92 
   
328 
   
259 
 
  Other
 
283 
   
278 
   
833 
   
814 
 
    Total Operating Revenue
 
3,953 
   
3,317 
   
10,830 
   
9,404 
 
                         
Operating Expenses:
                       
  Aircraft fuel and related taxes
 
984 
   
881 
   
2,806 
   
2,507 
 
  Wages, salaries and related costs
 
909 
   
794 
   
2,527 
   
2,358 
 
  Aircraft rentals
 
230 
   
233 
   
689 
   
705 
 
  Landing fees and other rentals
 
228 
   
222 
   
656 
   
647 
 
  Regional capacity purchase
 
212 
   
211 
   
625 
   
641 
 
  Distribution costs
 
193 
   
160 
   
555 
   
467 
 
  Maintenance, materials and repairs
 
131 
   
159 
   
413 
   
473 
 
  Depreciation and amortization
 
124 
   
124 
   
380 
   
353 
 
  Passenger services
 
106 
   
99 
   
299 
   
282 
 
  Special charges
 
   
20 
   
18 
   
68 
 
  Merger-related costs
 
11 
   
   
29 
   
 
  Other
 
382 
   
353 
   
1,114 
   
1,050 
 
    Total Operating Expenses
 
3,512 
   
3,256 
   
10,111 
   
9,551 
 
                         
Operating Income (Loss)
 
441 
   
61 
   
719 
   
(147)
 
                         
Nonoperating Income (Expense):
                       
  Interest expense
 
(102)
   
(91)
   
(288)
   
(274)
 
  Interest capitalized
 
   
   
17 
   
25 
 
  Interest income
 
   
   
   
10 
 
  Other, net
 
   
   
(12)
   
19 
 
    Total Nonoperating Expense
 
(87)
   
(79)
   
(277)
   
(220)
 
                         
Income (Loss) before Income Taxes
 
354 
   
(18)
   
442 
   
(367)
 
Income Taxes
 
   
   
(1)
   
 
Net Income (Loss)
$
354 
 
$
(18)
 
$
441 
 
$
(367)
 
                         
Earnings (Loss) per Share:
                       
  Basic
$
2.52 
 
$
(0.14)
 
$
3.16 
 
$
(2.91)
 
  Diluted
$
2.16 
 
$
(0.14)
 
$
2.81 
 
$
(2.91)
 
                         
Shares Used for Computation:
                       
  Basic
 
140 
   
132 
   
140 
   
126 
 
  Diluted
 
167 
   
132 
   
167 
   
126 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
 

 

CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)


 
September 30,
December 31,
September 30,
ASSETS
   2010   
       2009       
   2009   
 
(Unaudited)
 
(Unaudited)
       
Current Assets:
     
  Cash and cash equivalents
$
3,698 
 
$
2,546 
 
$
2,313 
 
  Short-term investments
 
506 
   
310 
   
229 
 
  Total unrestricted cash, cash equivalents and
    short-term investments
 
4,204 
   
2,856 
   
2,542 
 
                   
  Restricted cash and cash equivalents
 
161 
   
164 
   
164 
 
  Accounts receivable, net
 
640 
   
494 
   
549 
 
  Spare parts and supplies, net
 
253 
   
254 
   
245 
 
  Deferred income taxes
 
266 
   
203 
   
180 
 
  Prepayments and other
 
475 
   
 402 
   
435 
 
      Total current assets
 
5,999 
   
4,373 
   
4,115 
 
                   
Property and Equipment:
                 
  Owned property and equipment:
                 
    Flight equipment
 
9,352 
   
8,769 
   
8,807 
 
      Other
 
1,841 
   
1,787 
   
1,755 
 
        Flight equipment and other
 
11,193 
   
10,556 
   
10,562 
 
    Less:  Accumulated depreciation
 
3,814 
   
3,509 
   
3,444 
 
      Owned property and equipment, net
 
7,379 
   
7,047 
   
7,118 
 
                   
  Purchase deposits for flight equipment
 
220 
   
242 
   
226 
 
                   
  Capital leases
 
195 
   
194 
   
195 
 
    Less:  Accumulated amortization
 
69 
   
63 
   
60 
 
      Capital leases, net
 
126 
   
131 
   
135 
 
        Total property and equipment, net
 
7,725 
   
7,420 
   
7,479 
 
                   
Routes and airport operating rights, net
 
777 
   
778 
   
794 
 
Other assets
 
231 
   
210 
   
208 
 
                   
        Total Assets
$
14,732 
 
$
12,781 
 
$
12,596 
 

(continued on next page)

 
 

 

CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)


LIABILITIES AND
STOCKHOLDERS' EQUITY
September 30,
December 31,
September 30,
      2010      
        2009        
      2009      
 
(Unaudited)
 
(Unaudited)
       
Current Liabilities:
     
  Current maturities of long-term debt and capital leases
$
818 
 
$
975 
 
$
734 
 
  Accounts payable
 
915 
   
924 
   
911 
 
  Air traffic and frequent flyer liability
 
2,396 
   
1,855 
   
1,936 
 
  Accrued payroll
 
512 
   
367 
   
405 
 
  Accrued other liabilities
 
325 
   
268 
   
279 
 
    Total current liabilities
 
4,966 
   
4,389 
   
4,265 
 
                   
Long-Term Debt and Capital Leases
 
6,079 
   
5,291 
   
5,290 
 
                   
Deferred Income Taxes
 
266 
   
203 
   
180 
 
                   
Accrued Pension Liability
 
1,176 
   
1,248 
   
1,368 
 
                   
Accrued Retiree Medical Benefits
 
224 
   
216 
   
241 
 
                   
Other Non-Current Liabilities
 
859 
   
844 
   
806 
 
                   
Stockholders' Equity:
                 
  Class B common stock - $.01 par, 400,000,000 shares
    authorized; 140,921,965, 138,537,127 and
    138,117,042 issued and outstanding
 
   
   
 
  Additional paid-in capital
 
2,254 
   
2,216 
   
2,210 
 
  Accumulated deficit
 
(1)
   
(442)
   
(527)
 
  Accumulated other comprehensive loss
 
(1,092)
   
(1,185)
   
(1,238)
 
    Total stockholders' equity
 
1,162 
   
590 
   
446 
 
      Total Liabilities and Stockholders' Equity
$
14,732 
 
$
12,781 
 
$
12,596 
 


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
 

 

CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)


 
Nine Months Ended September 30,
 
    2010    
    2009    
 
   
Cash Flows from Operating Activities:
       
  Net income (loss)
$
441 
 
$
(367)
 
  Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:
           
    Depreciation and amortization
 
380 
   
353 
 
    Special charges
 
18 
   
68 
 
    Stock-based compensation related to equity awards
 
10 
   
 
    Other, net
 
20 
   
35 
 
    Changes in operating assets and liabilities
 
438 
   
91 
 
  Net cash provided by operating activities
 
1,307 
   
187 
 
             
Cash Flows from Investing Activities:
           
  Capital expenditures
 
(246)
   
(301)
 
  Aircraft purchase deposits refunded, net
 
10 
   
42 
 
  Proceeds from (purchases) sales of short-term investments, net
 
(171)
   
256 
 
  Proceeds from sales of property and equipment
 
32 
   
46 
 
  Decrease in restricted cash and cash equivalents
 
   
26 
 
  Expenditures for airport operating rights
 
   
(22)
 
  Other
 
   
(3)
 
    Net cash (used in) provided by investing activities
 
(372)
   
44 
 
             
Cash Flows from Financing Activities:
           
  Proceeds from issuance of long-term debt, net
 
1,025 
   
295 
 
  Payments on long-term debt and capital lease obligations
 
(836)
   
(542)
 
  Proceeds from public offering of common stock
 
   
158 
 
  Proceeds from issuance of common stock pursuant to stock plans
 
28 
   
 
    Net cash provided by (used in) financing activities
 
217 
   
(83)
 
             
Net Increase in Cash and Cash Equivalents
 
1,152 
   
148 
 
             
Cash and Cash Equivalents - Beginning of Period
 
2,546 
   
2,165 
 
             
Cash and Cash Equivalents - End of Period
$
3,698 
 
$
2,313 
 
             
Investing and Financing Activities Not Affecting Cash:
           
  Property and equipment acquired through the issuance of debt
$
467 
 
$
370 
 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
 

 

CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


In our opinion, the unaudited consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated.  Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature.  We recorded $11 million of depreciation expense during the quarter ended March 31, 2010 that relates to prior periods, the impact of which is not material to any individual prior period or our expected annual results for 2010.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2009 (the "2009 Form 10-K").  Due to seasonal fluctuations common to the airline industry, our results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  As used in these Notes to Consolidated Financial Statements, the terms "Continental," "we," "us," "our" and similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries.

NOTE 1 – MERGER WITH UNITED

On October 1, 2010, we became a wholly-owned subsidiary of United Continental Holdings, Inc. (formerly UAL Corporation and referred to herein as "UAL"), as a result of the merger of JT Merger Sub Inc. ("Merger Sub"), a wholly-owned subsidiary of UAL, with and into Continental (the "Merger").  In connection with the Merger, UAL changed its name to United Continental Holdings, Inc. to reflect that both United Air Lines, Inc. ("United") and Continental are its wholly-owned subsidiaries.  The Merger was effected pursuant to an Agreement and Plan of Merger dated as of May 2, 2010, entered into by and among UAL, Continental and Merger Sub (the "Merger Agreement").  Until the operational integration of United and Continental is complete, United and Continental will continue to operate as separate airlines.

Pursuant to the terms of the Merger Agreement, each outstanding share of Continental common stock was converted into and became exchangeable for 1.05 fully paid and nonassessable shares of UAL common stock with any fractional shares paid in cash.  UAL issued approximately 148 million shares of UAL common stock to former holders of Continental common stock.  Based on the closing price of $23.66 per share of UAL common stock on The NASDAQ Global Select Market ("NASDAQ") on September 30, 2010, the last trading day before the closing of the Merger, the aggregate value of the consideration paid in connection with the Merger to former holders of Continental common stock was approximately $3.5 billion.  Upon completion of the Merger, Continental stock options became exercisable into shares of UAL common stock and Continental convertible debt became convertible into shares of UAL common stock, in each case after giving effect to the exchange ratio.

Upon the closing of the Merger, the shares of Continental common stock, which previously traded under the ticker symbol "CAL" on the New York Stock Exchange (the "NYSE"), ceased trading on, and were delisted from, the NYSE.

The Merger will be accounted for using the acquisition method of accounting with UAL being considered the acquirer of Continental for accounting purposes.  UAL will allocate the purchase price to the fair value of Continental's tangible and intangible assets and liabilities at the acquisition date, with the excess purchase price being recorded as goodwill.  Under the acquisition method of accounting, goodwill is not amortized but is tested for impairment at least annually.  The new basis for our assets and liabilities will also be reflected in our separate-entity financial statements.

We incurred costs totaling $11 million and $29 million in the three and nine months ended September 30, 2010, respectively, relating to the Merger.  We currently expect to incur additional costs of at least $140 million in the fourth quarter of 2010 related to the Merger.  These costs include financial advisor fees, legal and other advisory fees, integration costs, severance to departing employees and their benefits earned upon the change in control.  We expect that we will also incur additional expenses in periods after 2010 related to the Merger.

NOTE 2 – ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Variable Interest Entities.  In June 2009, the Financial Accounting Standards Board ("FASB") issued guidance to change financial reporting by enterprises involved with variable interest entities ("VIEs").  The standard replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE and the obligation to absorb losses of the entity or the right to receive the entity's residual returns.  This accounting standard became effective for us on January 1, 2010.  The adoption of this pronouncement did not have any effect on our consolidated financial statements.

Revenue Arrangements with Multiple Deliverables.  In October 2009, the FASB issued guidance that changes the accounting for revenue arrangements with multiple deliverables.  The guidance requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices and eliminates the use of the residual method of allocation.  The guidance establishes a hierarchy for determining the selling price of a deliverable, based on vendor-specific objective evidence, third-party evidence or estimated selling price.   In addition, this guidance expands required disclosures related to a vendor's multiple-deliverable revenue arrangements.  This accounting standard is effective for us on January 1, 2011 and may change our accounting for the sale of frequent flyer mileage credits.  We may elect to adopt this guidance through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or retrospective application to all applicable revenue arrangements for all periods presented.  We are currently evaluating the requirements of this pronouncement and have not determined the impact, if any, that adoption of this standard will have on our consolidated financial statements.
 
NOTE 3 – EARNINGS (LOSS) PER SHARE

The following table sets forth the components of basic and diluted earnings (loss) per share (in millions):

 
Three Months
Ended September 30,
Nine Months
Ended September 30,
 
   2010   
   2009   
   2010   
  2009   
                         
Numerator:
                       
  Numerator for basic earnings (loss) per share -
    net income (loss)
$
354 
 
$
(18)
 
$
441 
 
$
(367)
 
  Effect of dilutive securities - interest expense on:
                       
    5% convertible notes
 
   
   
10 
   
 
    6% convertible junior subordinated debentures
      held by subsidiary trust
 
   
   
10 
   
 
    4.5% convertible notes
 
   
   
   
 
  Numerator for diluted earnings (loss) per share -
    net income (loss) after assumed conversions
$
362 
 
$
(18)
 
$
468 
 
$
(367)
 
                         
Denominator:
                       
  Denominator for basic earnings (loss) per share -
    weighted average shares
 
140 
   
132 
   
140 
   
126 
 
  Effect of dilutive securities:
                       
    5% convertible notes
 
   
   
   
 
    6% convertible junior subordinated debentures
      held by subsidiary trust
 
   
   
   
 
    4.5% convertible notes
 
12 
   
   
12 
   
 
    Employee stock options
 
   
   
   
 
      Dilutive potential shares
 
27 
   
   
27 
   
 
  Denominator for diluted earnings (loss) per share -
     weighted average shares after assumed conversions
 
167 
   
132 
   
167 
   
126 
 

The adjustments to net income (loss) to determine the numerator for diluted earnings (loss) per share are net of the related effect of applicable income taxes and profit sharing.

Approximately 13 million potential shares of our common stock related to convertible debt securities were excluded from the computation of diluted earnings (loss) per share in the three and nine months ended September 30, 2009 because they were antidilutive.  In addition, approximately two million weighted average options to purchase shares of our common stock for the three and nine months ended September 30, 2010 and approximately eight million weighted average options for the three and nine months ended September 30, 2009 were excluded from the computation of diluted earnings per share because the effect of including the options would have been antidilutive.

NOTE 4 – FLEET INFORMATION

As of September 30, 2010, our operating fleet consisted of 348 mainline jets and 252 regional aircraft.  The 348 mainline jets are operated exclusively by us, while the 252 regional aircraft are operated on our behalf by other operators under capacity purchase agreements.

We own or lease 274 regional jets.  Of these, 206 are leased or subleased to ExpressJet Airlines, Inc. ("ExpressJet") and operated on our behalf under a capacity purchase agreement with ExpressJet, 43 are subleased to ExpressJet and other operators but are not operated on our behalf and 25 are temporarily grounded.  Additionally, our regional operating fleet includes 46 regional jet and turboprop aircraft owned or leased by third parties that are operated on our behalf by other operators under capacity purchase agreements.

The following table summarizes our operating fleet (aircraft operated by us and by others on our behalf) as of September 30, 2010:

         
       
Third-Party
Aircraft Type
Total
Owned
Leased
Aircraft
         
Mainline (a):
       
  777-200ER
22
 
10
 
12
 
-
 
  767-400ER
16
 
14
 
2
 
-
 
  767-200ER
10
 
9
 
1
 
-
 
  757-300
21
 
9
 
12
 
-
 
  757-200
41
 
15
 
26
 
-
 
  737-900ER
30
 
30
 
-
 
-
 
  737-900
12
 
8
 
4
 
-
 
  737-800
126
 
53
 
73
 
-
 
  737-700
36
 
12
 
24
 
-
 
  737-500
34
 
-
 
34
 
  -
 
  Total mainline
348
 
160
 
188
 
   -
 
                 
Regional (b):
               
  ERJ-145XR
89
 
-
 
89
 
-
 
  ERJ-145
132
 
18
 
99
 
15
(c)
  Q400
15
 
-
 
-
 
15
(d)
  Q200
16
 
-
 
-
 
16
(e)
  Total regional
252
 
  18
 
188
 
 46
 
                 
Total
600
 
178
 
376
 
   46
 
___________________________

(a)
Excludes five grounded Boeing 737-500 aircraft (two owned and three leased) and three grounded owned Boeing 737-300 aircraft.
(b)
Excludes 25 ERJ-135 aircraft that are temporarily grounded and 15 ERJ-145XR aircraft, 23 ERJ-145 aircraft and five ERJ-135 aircraft that are subleased to other operators, but are not operated on our behalf.
(c)
Operated by Chautauqua Airlines, Inc. ("Chautauqua") under a capacity purchase agreement.
(d)
Operated by Colgan Air, Inc. ("Colgan") under a capacity purchase agreement.
(e)
Operated by Champlain Enterprises, Inc. ("CommutAir") under a capacity purchase agreement.

Substantially all of the aircraft and engines we own are subject to mortgages.

Mainline Fleet Activity.  During the first nine months of 2010, we placed into service two owned Boeing 777 aircraft, three leased Boeing 757-300 aircraft and nine owned Boeing 737-800 aircraft.  We also removed three Boeing 737-300 aircraft from service.

Regional Fleet Activity.  In December 2009, we agreed with ExpressJet to amend our capacity purchase agreement to permit ExpressJet to fly eight ERJ-145 aircraft for United under a capacity purchase agreement.  These eight aircraft had been removed from service on our behalf as of September 30, 2010.

In September 2010, Colgan began operating one new Q400 aircraft on our behalf under our existing capacity purchase agreement.  An additional 14 Q400 aircraft are scheduled to be inducted into service under the agreement through the second quarter of 2011.

Firm Order and Option Aircraft.  As of September 30, 2010, we had firm commitments to purchase 78 new aircraft (53 Boeing 737 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an estimated aggregate cost of $4.6 billion including related spare engines.  In addition to our firm order aircraft, we had options to purchase a total of 94 additional Boeing aircraft as of September 30, 2010.  We are currently scheduled to take delivery of three Boeing 737 aircraft in the fourth quarter of 2010.

NOTE 5 – LONG-TERM DEBT

Maturities.  Maturities of long-term debt due before December 31, 2010 and for the next four years are as follows (in millions):

October 1, 2010 through December 31, 2010
$
339
 
Year ending December 31,
     
  2011
 
828
 
  2012
 
624
 
  2013
 
850
 
  2014
 
375
 

Senior Secured Notes.  In August 2010, we issued $800 million aggregate principal amount of 6.75% Senior Secured Notes due 2015.  The Senior Secured Notes have a maturity date of September 15, 2015 and have an annual interest rate of 6.75%.  The notes were sold at 98.938% of par which resulted in our receiving net cash proceeds of $776 million upon issuance, after giving effect to issuance costs.  We may redeem some or all of the Senior Secured Notes at any time on or after September 15, 2012 at specified redemption prices.  If we sell certain of our assets or if we experience specific kinds of change in control, we will be required to offer to repurchase the Senior Secured Notes.

Our obligations under the Senior Secured Notes are unconditionally guaranteed by our subsidiaries Air Micronesia, Inc. ("AMI") and Continental Micronesia, Inc. ("CMI").  The Senior Secured Notes and related guarantees are secured by certain of our U.S.-Asia and U.S.-London Heathrow routes and related assets, all of the outstanding common stock of AMI and CMI and substantially all of the other assets of AMI and CMI, including route authorities and related assets.

The indenture for the Senior Secured Notes includes covenants that, among other things, restrict our ability to sell assets, incur additional indebtedness, issue preferred stock, make investments or pay dividends.  In addition, if we fail to maintain a collateral coverage ratio of 1.5 to 1, we must pay additional interest on the Senior Secured Notes at the rate of 2% per annum until the collateral coverage ratio equals at least 1.5 to 1.  The indenture for the Senior Secured Notes also includes events of default customary for similar financings.

In conjunction with the issuance of the Senior Secured Notes, we repaid the $350 million senior secured term loan credit facility that was due in June 2011 and bore interest at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 3.375%.

Convertible Debt Securities.  Our 5% Convertible Notes with a principal amount of $175 million are convertible, effective October 1, 2010, into 52.5 shares of UAL common stock per $1,000 principal amount at a conversion price of $19.0476 per share.  Prior to the Merger, the notes were convertible into shares of Continental common stock.  If a holder of the notes exercises the conversion right, in lieu of delivering shares of UAL common stock, we may elect to pay cash or a combination of cash and shares of UAL common stock for the notes surrendered.  All or a portion of the notes are also redeemable at any time for cash at our option at par plus accrued and unpaid interest, if any.  On October 4, 2010, we notified the holders of the notes of our intent to redeem $75 million principal amount of the notes at par plus accrued and unpaid interest on November 4, 2010.  Holders who received a redemption notice may, prior to November 4, 2010, elect to convert their notes into shares of UAL common stock at a conversion price of $19.0476 per share.

Holders of the notes may require us to repurchase all or a portion of their notes at par plus any accrued and unpaid interest on June 15 of 2013 or 2018.  We may at our option choose to pay the repurchase price on those dates in cash, shares of UAL common stock or any combination thereof.  However, if we are required to repurchase all or a portion of the notes, our policy is to settle the notes in cash.  The holders of the notes also had the right to require us to repurchase their notes on June 15, 2010; however, none did so.  Accordingly, we have classified these notes as long-term debt and capital leases at September 30, 2010.  The maturity table above reflects the principal amount of the notes as due in 2013.

Holders of the notes may also require us to repurchase all or a portion of their notes for cash at par plus any accrued and unpaid interest if certain changes in control of Continental occur.  The Merger did not result in the holders of the notes having any additional rights to require us to repurchase their notes, nor did it trigger any repayment obligation on any of our other outstanding debt.

2009-2 Enhanced Equipment Trust Certificates.  In November 2009, we obtained financing for eight currently-owned Boeing aircraft, nine new Boeing 737-800 aircraft and two new Boeing 777 aircraft.  We applied this financing to these aircraft during the first nine months of 2010 and recorded related debt of $644 million.  In connection with this financing, enhanced equipment trusts raised $644 million through the issuance of two classes of enhanced equipment trust certificates.  Class A certificates, with an aggregate principal amount of $528 million, bear interest at 7.25% and Class B certificates, with an aggregate principal amount of $117 million, bear interest at 9.25%.  As we refinanced or took delivery of the aircraft, we issued equipment notes to the trusts, which purchased such notes with proceeds from the issuance of the Class A and Class B certificates.  Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders will begin in November 2010 and will end in November 2019 for Class A certificates and in May 2017 for Class B certificates.

NOTE 6 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Accounting rules for fair value clarify that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  FASB Accounting Standards Codification ("ASC") Topic 820, "Fair Value Measurements and Disclosures," requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs.  These inputs are prioritized as follows:

 
Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets
 
Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
 
Level 3:
Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities

The valuation techniques that may be used to measure fair value are as follows:

 
(A)
Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
 
(B)
Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and the excess earnings method
 
(C)
Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

    Assets (liabilities measured at fair value on a recurring basis include (in millions):

 
Carrying Amount
Level 1
Level 2
Level 3
Valuation
Technique
                             
September 30, 2010
                           
Cash and cash equivalents
$
3,698 
 
$
3,698 
 
$
 
$
 
(A)
 
Short-term investments:
                           
  Auction rate securities
 
117 
   
-
   
   
117 
 
(B)
 
  Asset-backed securities
 
196 
   
196 
   
   
 
(A)
 
  Fixed income mutual fund
 
11 
   
   
11
   
 
(A)
 
  Corporate debt
 
119 
   
119 
   
   
 
(A)
 
  U.S. government and agency notes
 
61 
   
61 
   
   
 
(A)
 
  Municipal bonds
 
   
   
   
 
(A)
 
Restricted cash and cash equivalents
 
161 
   
161 
   
   
 
(A)
 
Fuel derivatives:
                           
  Swaps
 
36 
   
   
   
36 
 
(A)
 
  Call options
 
   
   
   
 
(A)
 
  Collars
 
   
   
   
 
(A)
 
Foreign currency forward contracts
 
(6)
   
   
(6)
   
 
(A)
 
                             
December 31, 2009
                           
Cash and cash equivalents
$
2,546 
 
$
2,546 
 
$
 
$
 
(A)
 
Short-term investments:
                           
  Auction rate securities
 
201 
   
   
   
201 
 
(B)
 
  CDARS
 
102 
   
102 
   
   
 
(A)
 
  Asset-backed securities
 
   
   
   
 
(A)
 
Restricted cash and cash equivalents
 
164 
   
164 
   
   
 
(A)
 
Auction rate securities put right
 
20 
   
   
   
20 
 
(B)
 
Fuel derivatives:
                           
  Swaps
 
   
   
   
 
(A)
 
  Call options
 
   
   
   
 
(A)
 
Foreign currency forward contracts
 
   
   
   
 
(A)
 
                             
September 30, 2009
                           
Cash and cash equivalents
$
2,313 
 
$
2,313 
 
$
 
$
 
(A)
 
Short-term investments:
                           
  Auction rate securities
 
205 
   
   
   
205 
 
(B)
 
  CDARS
 
24 
   
24 
   
   
 
(A)
 
Restricted cash and cash equivalents
 
164 
   
164 
   
   
 
(A)
 
Auction rate securities put right
 
23 
   
   
   
23 
 
(B)
 
Fuel derivatives:
                           
  Swaps
 
   
   
   
 
(A)
 
  Collars
 
   
   
   
 
(A)
 
Foreign currency forward contracts
 
(3)
   
   
(3)
   
 
(A)
 

The determination of fair value of each of these items is discussed below:

Cash and Cash Equivalents and Restricted Cash.  Cash and cash equivalents and restricted cash consist primarily of U.S. Government and Agency money market funds and other AAA-rated money market funds with original maturities of three months or less.  The original cost of these assets approximates fair value due to their short-term maturity.

Short-Term Investments Other than Auction Rate Securities.  The fair values of short-term investments other than auction rate securities are based on observable market data.  "CDARS" are certificates of deposit placed through an account registry service.  Asset-backed securities mature through 2011.  The fixed income mutual fund invests primarily in money market instruments and investment grade fixed income securities and is valued at the net asset value of shares held by us.  The investments underlying the fixed income mutual fund have a weighted average contractual maturity of less than 90 days.  Corporate debt securities, government and agency notes and municipal bonds have a weighted average maturity of less than two years.

Student Loan-Related Auction Rate Securities.  At September 30, 2010, we held student loan-related auction rate securities with a fair value of $117 million, a par value of $145 million and amortized cost of $117 million.  These securities, which we classify as available-for-sale, are variable-rate debt instruments with contractual maturities generally greater than ten years and interest rates that are reset every seven, 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 we hold are senior obligations under the applicable indentures authorizing the issuance of the securities.  We estimated the fair value of these securities taking into consideration the limited sales and offers to purchase such securities and using internally-developed models of the expected future cash flows related to the securities.  Our models incorporated our probability-weighted assumptions about the cash flows of the underlying student loans and discounts to reflect a lack of liquidity in the market for these securities.

During the first nine months of 2010, we sold, at par, auction rate securities having a par value of $106 million.  Certain of these auction rate securities were subject to a put right granted to us by an institution permitting us to sell to the institution at their full par value certain auction rate securities.  We recognized gains on the sales using the specific identification method.  The gains were substantially offset by the cancellation of any related put rights.  The net gains are included in other non-operating income (expense) in our consolidated statement of operations and were not material.  We did not hold any put rights as of September 30, 2010.

We continue to monitor the market for auction rate securities and consider its impact, if any, on the fair value of our investments.  If current market conditions deteriorate further, we may be required to record additional losses on these securities.

Fuel Derivatives.  We determine the fair value of our fuel derivatives by obtaining inputs from a broker's pricing model that is based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets.  We verify the reasonableness of these inputs by comparing the resulting fair values to similar quotes from our counterparties as of each date for which financial statements are prepared.  For derivatives not covered by collateral, we also make an adjustment to incorporate credit risk into the valuation.  Due to the fact that certain of the inputs utilized to determine the fair value of the fuel derivatives are unobservable (principally volatility of crude oil prices and the credit risk adjustments), we have categorized these option contracts as Level 3.
 
Foreign Currency-Forward Contracts.  We determine the fair value of our foreign currency derivatives by comparing our contract rate to a published forward price of the underlying currency, which is based on market rates for comparable transactions.

Unobservable Inputs.  The reconciliation of our assets (liabilities) measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows (in millions):

 
Auction
 
                 Fuel Derivatives                 
 
Rate Securities
Put Right
Swap
Call Options
Collars
                               
Three Months Ended
  September 30, 2010
                             
Balance at beginning of period
$
117 
 
$
 
$
(6)
 
$
 
$
(2)
 
Purchases, sales, issuances and   settlements (net)
 
   
   
   
   
 
Gains and losses:
                             
Reported in earnings:
                             
  Unrealized
 
   
   
   
   
 
Reported in other comprehensive
  income (loss)
 
   
   
32 
   
(4)
   
 
Balance as of September 30, 2010
$
117 
 
$
 
$
36 
 
$
 
$
 

Three Months Ended
  September 30, 2009
                             
Balance at beginning of period
$
230 
 
$
27 
 
$
16 
 
$
 
$
(33) 
 
Purchases, sales, issuances and   settlements (net)
 
(30)
   
   
(6)
   
   
38 
 
Gains and losses:
                             
Reported in earnings:
                             
  Realized
 
5
   
(4)
   
   
   
 
  Unrealized
 
   
   
   
   
 
Reported in other comprehensive   income (loss)
 
   
   
(3)
   
   
(4)
 
Balance as of September 30, 2009
$
205 
 
$
23 
 
$
 
$
 
$
 
 
 
Auction
 
                 Fuel Derivatives                 
 
Rate Securities
Put Right
Swap
Call Options
Collars
                               
Nine Months Ended
  September 30, 2010
                             
Balance at beginning of period
$
201 
 
$
20 
 
$
 
$
8
 
$
 
Purchases, sales, issuances and   settlements (net)
 
(106)
   
   
10 
   
25 
   
 
Gains and losses:
                             
Reported in earnings:
                             
  Realized
 
23 
   
(21)
   
   
   
 
  Unrealized
 
   
   
   
(1)
   
(1)
 
Reported in other comprehensive   income (loss)
 
(1)
   
   
19 
   
(23)
   
 
Balance as of September 30, 2010
$
117 
 
$
 
$
36 
 
$
 
$
 

Nine Months Ended
  September 30, 2009
                             
Balance at beginning of period
$
229 
 
$
26 
 
$
 
$
1
 
$
(418)
 
Purchases, sales, issuances and   settlements (net)
 
(31)
   
   
(1)
   
(1)
   
404 
 
Gains and losses:
                             
Reported in earnings:
                             
  Realized
 
   
(4)
   
   
   
 
  Unrealized
 
   
   
   
   
(2)
 
Reported in other comprehensive   income (loss)
 
   
   
(2)
   
   
17 
 
Balance as of September 30, 2009
$
205 
 
$
23 
 
$
 
$
 
$
 

Other Financial Instruments.  Other financial instruments that are not subject to the disclosure requirements of ASC Topic 820 are as follows:

· 
Debt.  The fair value of our debt was approximately as follows (in billions):

 
Carrying Amount
Fair Value
             
September 30, 2010
$
6.7
 
$
7.0
 
December 31, 2009
 
6.1
   
5.8
 
September 30, 2009
 
5.8
   
5.1
 

 
These estimates were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.
   
· 
Accounts Receivable and Accounts Payable.  The fair values of accounts receivable and accounts payable approximated carrying value due to their short-term maturity.

NOTE 7 - HEDGING ACTIVITIES

As part of our risk management program, we use a variety of derivative financial instruments to help manage our risks associated with changes in fuel prices and foreign currency exchange rates.  We do not hold or issue derivative financial instruments for trading purposes.

We are exposed to credit losses in the event of non-performance by issuers of derivative financial instruments.  To manage credit risks, we select issuers based on credit ratings, limit our exposure to any one issuer under our defined guidelines and monitor the market position with each counterparty.

Fuel Price Risk Management.  We routinely hedge a portion of our future fuel requirements, provided the hedges are expected to be cost effective.  We have historically entered into swap agreements, purchased call options or structured costless collar arrangements to protect us against sudden and significant increases in jet fuel prices.  We typically conduct our fuel hedging activities using a combination of crude oil, jet fuel and heating oil contracts.  We strive to maintain fuel hedging levels and exposure generally comparable to that of our major competitors, so that our fuel cost is not disproportionate to theirs.

As of September 30, 2010, our projected consolidated fuel requirements for the fourth quarter of 2010 and the first half 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)
     
Fourth Quarter of 2010
   
WTI crude oil swaps
 
21
%
$
1.81
   
21
%
$
1.81
 
Jet fuel swaps
 
19
   
2.13
   
19
   
2.13
 
WTI crude oil call options
 
22
   
2.28
   
N/A
   
N/A
 
WTI crude oil collars
 
6
   
2.38
   
6
   
1.73
 
  Total
 
68
%
       
46
%
     
     
First Half of 2011
   
WTI crude oil swaps
 
14
%
$
1.86
   
14
%
$
1.86
 
WTI crude oil call options
 
12
   
2.20
   
N/A
   
N/A
 
WTI crude oil collars
 
8
   
2.29
   
8
   
1.57
 
  Total
 
34
%
       
22
%
     

We account for our fuel derivatives as cash flow hedges and record them at fair value in our consolidated balance sheet with the change in fair value, to the extent effective, being recorded to accumulated other comprehensive income (loss) ("accumulated OCI"), net of applicable income taxes.  Fuel hedge gains (losses) are recognized as a component of fuel expense when the underlying fuel hedged is used.  The ineffective portion of our fuel hedges is determined based on the correlation between jet fuel and crude oil or heating oil prices and is included in nonoperating income (expense) in our consolidated statement of operations.

When our fuel hedges are in a liability position, we may be required to post cash collateral with our counterparties.  We were not required to post any such collateral at September 30, 2010, December 31, 2009 or September 30, 2009.  The cash collateral is reported in prepayments and other current assets in our consolidated balance sheet.

Foreign Currency Exchange Risk Management.  We have historically used foreign currency average rate options and forward contracts to hedge against the currency risk associated with our forecasted Japanese yen, British pound, Canadian dollar and euro-denominated cash flows.  The average rate options and forward contracts have only nominal intrinsic value at the date contracted.  At September 30, 2010, we had forward contracts outstanding to hedge the following cash inflows, primarily from passenger ticket sales, in foreign currencies:

·
34% of our projected Japanese yen-denominated cash inflows through the fourth quarter of 2011.
·
6% of our projected Canadian dollar-denominated cash inflows through the fourth quarter of 2010.

We account for these instruments as cash flow hedges.  They are recorded at fair value in our consolidated balance sheet with the change in fair value, to the extent effective, being recorded to accumulated OCI, net of applicable income taxes.  Gains and losses from settlement of these instruments are recognized as passenger revenue.  We measure hedge effectiveness of average rate options and forward contracts based on the forward price of the underlying currency.  Hedge ineffectiveness, if any, is included in other nonoperating income (expense) in our consolidated statement of operations.

Quantitative Disclosures.  All of our derivative instruments were designated as cash flow hedges and were reported in our consolidated balance sheet as follows (in millions):

 
Asset Derivatives (1)
 
Liability Derivatives (2)
 
September 30,
    2010    
December 31,
        2009       
September 30,
    2009    
 
September 30,
    2010    
December 31,
        2009       
September 30,
    2009    
               
Fuel derivatives
$
47
 
$
14
 
$
9
   
$
-
 
$
-
 
$
-
 
Foreign currency
  derivatives
 
-
   
5
   
-
     
6
   
-
   
3
 
  Total derivatives
$
47
 
$
19
 
$
9
   
$
6
 
$
-
 
$
3
 
____________________

(1)
Amounts are included in prepayments and other current assets.
(2)
Amounts are included in accrued other current liabilities.

The gains (losses) related to the effective portion of our cash flow hedges reported in accumulated OCI in our consolidated balance sheet and in our consolidated statement of operations were as follows (in millions):

 
 
Gain (Loss)
Recognized in OCI
(Effective Portion)
Gain (Loss) Reclassified
from Accumulated OCI
into Income
(Effective Portion) (1)
 
Gain (Loss)
Recognized in Income
(Ineffective Portion) (2)
 
2010
2009
2010
2009
2010
2009
             
Three Months
  Ended September  30
           
Fuel derivatives
$
33 
 
$
(6)
 
$
(16)
 
$
(41)
 
$
 
$
1
 
Foreign currency derivatives
 
(5)
   
(3)
   
   
   
   
 
Total
$
28 
 
$
(9)
 
$
(16)
 
$
(41)
 
$
 
$
1
 
                                     
Nine Months
  Ended September 30
                                   
Fuel derivatives
$
(4)
 
$
23 
 
$
(23)
 
$
(392)
 
$
(2)
 
$
7
 
Foreign currency derivatives
 
(9)
   
   
   
   
   
 
Total
$
(13)
 
$
29 
 
$
(22)
 
$
(392)
 
$
(2)
 
$
7
 
__________________

(1)
Amounts related to fuel derivatives are included in aircraft fuel and related taxes and amounts related to foreign currency derivatives are included in passenger revenue.
(2)
Amounts are included in other nonoperating income (expense).

NOTE 8 - COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) included the following (in millions):

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
   2010   
   2009   
   2010  
   2009   
                         
Net income (loss)
$
354 
 
$
(18)
 
$
441 
 
$
(367)
 
                         
Other comprehensive income (loss)
  adjustments, before tax:
                       
  Derivative financial instruments:
                       
    Reclassification into earnings
 
16 
   
40 
   
24 
   
383 
 
    Change in fair value
 
28 
   
(9)
   
(13)
   
29 
 
  Unrealized gain on student-loan related
    auction rate securities
 
   
   
   
 
  Employee benefit plans:
                       
   (Increase) decrease in net actuarial
      losses
 
 
(3)
   
 
   
 
(3)
   
 
 
    Amortization of net actuarial losses
 
21 
   
27 
   
62 
   
81 
 
    Amortization of prior service cost
 
   
   
23 
   
23 
 
      Comprehensive income (loss)
        adjustments, before tax
 
70 
   
65 
   
93 
   
518 
 
Income taxes related to items of other
  comprehensive income (loss)
 
   
   
   
 
                         
Total comprehensive income
$
424 
 
$
47 
 
$
534 
 
$
151 
 


NOTE 9 – STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

Profit Based RSU Awards.  In February 2010, we issued 1.4 million profit based restricted stock unit ("RSUs") awards, which can result in cash payments to our officers upon the achievement of specified profit sharing-based performance targets.  The performance period for these awards is January 1, 2010 through December 31, 2012.  These awards have cumulative profit sharing performance targets ranging from $4 million to $120 million and payment percentages ranging from 25% to 200% of the initial award size.  The cash hurdle associated with these awards is $2.2 billion.  These awards were issued pursuant to our Incentive Plan 2010, which was approved by our stockholders on June 9, 2010.  Our statement of operations for the nine months ended September 30, 2010 reflects expense associated with a payment percentage of 150% for these awards and a payment percentage of 100% for our other awards outstanding with performance periods from January 1, 2008 through December 31, 2010 and January 1, 2009 through December 31, 2011, as we concluded, as of September 30, 2010, that it was probable that the applicable performance targets would be met.

Upon completion of the Merger, the performance targets for each performance period were deemed satisfied at a payment percentage of 150% and the minimum cash balance requirement was deemed satisfied. Following the Merger, with limited exceptions as described below, payments under all outstanding profit based RSU awards remain subject to continued employment by the participant and will continue to be paid on their normal payment dates over a three-year period. Payments will be made in cash based on $23.48 per award, the average closing price per share of Continental common stock for the 20 trading days preceding the completion of the Merger. Upon termination of employment under certain circumstances following the Merger, the outstanding profit based RSU awards will be accelerated and paid in full. Accelerated payments will also be made to participants who are, or become, eligible to retire. Our anticipated Merger-related costs in the fourth quarter of 2010 include $46 million related to the profit based RSU awards.

Stock-Based Compensation Expense.  Total stock-based compensation expense (credit) included in wages, salaries and related costs was $49 million, $16 million, $57 million and $(7) million for the three months ended September 30, 2010 and 2009 and the nine months ended September 30, 2010 and 2009, respectively.  Upon the closing of the Merger, substantially all unvested employee stock options granted prior to 2010 were vested pursuant to the terms of those awards and the profit based RSU awards were affected as discussed above.

Employee Stock Purchase Plan.  In conjunction with the Merger, the employee stock purchase plan was terminated in September 2010.

Defined Benefit Pension and Retiree Medical Plans.  Net periodic defined benefit pension and retiree medical benefits expense included the following components (in millions):

 
Defined Benefit Pension
Retiree Medical Benefits
 
Three Months
Ended September 30,
Nine Months
Ended September 30,
Three Months
Ended September 30,
Nine Months
Ended September 30,
 
2010
2009
2010
2009
2010
2009
2010
2009
                                                 
Service cost
$
17 
 
$
16 
 
$
50 
 
$
48 
 
$
 
$
 
$
 
$
 
Interest cost
 
40 
   
38 
   
119 
   
115 
   
   
   
10 
   
12 
 
Expected return on
  plan assets
 
 
(29)
   
 
(22)
   
 
(82)
   
 
(66)
   
 
   
 
   
 
   
 
 
Amortization of
  unrecognized net   
  actuarial loss
 
22
   
28 
   
65 
   
83 
   
(1)
   
(1)
   
(3)
   
(2)
 
Amortization of
  prior service cost
 
   
   
   
   
   
   
16 
   
16 
 
Net periodic benefit
  expense
$
53 
 
$
62 
 
$
159 
 
$
187 
 
$
10
 
$
11 
 
$
30 
 
$
34 
 

During the first nine months of 2010, we contributed $153 million to our tax-qualified defined benefit pension plans.  On October 7, 2010 we contributed an additional $40 million to the plans, satisfying our minimum funding requirements during calendar year 2010.

Defined Contribution Plans.  As of September 30, 2010, our defined contribution 401(k) employee savings plans covered substantially all employees.  Company matching contributions are made in cash.  Total expense for all defined contribution plans was $24 million, $22 million, $74 million and $72 million for the three months ended September 30, 2010 and 2009 and the nine months ended September 30, 2010 and 2009, respectively.

Profit Sharing Plan.  Effective January 1, 2010, we adopted a new profit sharing plan with a five year term.  Our new profit sharing plan creates an award pool of 15% of annual pre-tax income excluding special items.  Generally, the profit sharing pool will be distributed among eligible employees based on an employee's annual base pay relative to the annual base pay of all employees.  We recorded profit sharing expense totaling $53 million and $71 million in the three and nine months ended September 30, 2010, respectively.

NOTE 10 – SPECIAL CHARGES

Special charges were as follows (in millions):

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
   2010   
   2009   
   2010   
   2009   
     
Aircraft-related charges, net
$
 
$
6
 
$
6
 
$
53
 
Severance
 
   
5
   
3
   
5
 
Other
 
   
9
   
9
   
10
 
Total special charges
$
 
$
20
 
$
18
 
$
68
 

The special charges all relate to our mainline segment unless otherwise noted.

In the first nine months of 2010, we 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 to a foreign buyer.  We also recorded $3 million of severance during the first nine months of 2010 related to the elimination of approximately 600 reservation positions and other special charges of $9 million primarily related to further increases in our reserve for unused facilities due to a reduction in expected sublease income for a maintenance hangar in Denver.

In the third quarter of 2009, we entered into agreements to sublease five temporarily grounded ERJ-135 aircraft.  The subleases have terms of five years, but may be cancelled by the lessee under certain conditions after an initial term of two years.  We recorded a $6 million non-cash charge in our regional segment for the difference between the sublease rental income and the contracted rental payments on those aircraft during the initial term of the agreement.

During the first nine months of 2009, we announced plans to eliminate certain operational, management and clerical positions across the company.  In the third quarter of 2009, we recorded a charge of $5 million for severance and other costs in connection with the reductions in force, furloughs and leaves of absence and a $9 million adjustment to our reserve for unused facilities due to reductions in expected sublease income primarily for a maintenance hangar in Denver.

Aircraft-related charges in 2009 prior to the third quarter include $31 million of non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and related assets and $16 million of other charges ($12 million of which was non-cash) related to the grounding and disposition of Boeing 737-300 aircraft and the write-off of certain obsolete spare parts.

Accrual Activity.  Activity related to the accruals for severance and associated continuing medical coverage costs and future lease payments on unused facilities is as follows (in millions):

 
Severance/
Medical Costs
Unused
Facilities
     
Balance, December 31, 2009
$
14 
 
$
26 
 
Accrual
 
   
 
Payments
 
(14)
   
(2)
 
Balance, September 30, 2010
$
 
$
33
 

Cash payments related to the accruals for severance and associated continuing medical coverage costs will be made through the third quarter of 2011.  Remaining lease payments on unused facilities will be made through 2018.

NOTE 11 - INCOME TAXES

Our effective tax rates differ from the federal statutory rate of 35% primarily due to changes in the valuation allowance, expenses that are not deductible for federal income tax purposes 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 three and nine months ended September 30, 2009 were not reduced by any tax benefit.  No federal income tax expense was recognized related to our pretax income for the three and nine months ended September 30, 2010 due to the utilization of book net operating loss carryforwards ("NOLs") for which no benefit had previously been recognized.

Our ability to use our NOL carryforwards may be limited if we experience an "ownership change" as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the "Code").  Based on currently available information, we believe the Merger resulted in an ownership change of Continental under Section 382.  However, we do not believe that the impact of an ownership change would be material to our results of operations, financial condition or liquidity.

NOTE 12 - SEGMENT REPORTING

We have two reportable segments:  mainline and regional.  The mainline segment consists of flights using larger jets while the regional segment currently consists of flights with a capacity of 78 or fewer seats.  As of September 30, 2010, flights in our regional segment were operated by ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase agreements.

We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss).  However, we do not manage our business or allocate resources based on segment operating profit or loss because (1) our flight schedules are designed to maximize revenue from passengers flying, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing) and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment.

Financial information by business segment is set forth below (in millions):

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
   2010   
   2009   
   2010   
   2009   
     
Operating Revenue:
               
  Mainline
$
3,355 
 
$
2,797 
 
$
9,131 
 
$
7,970 
 
  Regional
 
598 
   
520 
   
1,699 
   
1,434 
 
  Total Consolidated
$
3,953 
 
$
3,317 
 
$
10,830 
 
$
9,404 
 
                         
Operating Income (Loss):
                       
  Mainline
$
430 
 
$
111 
 
$
758 
 
$
111 
 
  Regional
 
11 
   
(50)
   
(39)
   
(258)
 
  Total Consolidated
$
441 
 
$
61 
 
$
719 
 
$
(147)
 
                         
Net Income (Loss):
                       
  Mainline
$
345 
 
$
35 
 
$
489 
 
$
(99)
 
  Regional
 
   
(53)
   
(48)
   
(268)
 
  Total Consolidated
$
354 
 
$
(18)
 
$
441 
 
$
(367)
 

The amounts in the table above are presented on the basis of how our management reviews segment results.  Under this basis, the regional segment's revenue includes a prorated share of our ticket revenue for segments flown by regional carriers and expenses include all activity related to the regional operations, regardless of whether the costs were paid directly by us or to the regional carriers.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Aircraft Purchase Commitments.  As of September 30, 2010, we had firm commitments to purchase 78 new aircraft (53 Boeing 737 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an estimated aggregate cost of $4.6 billion including related spare engines.  We are currently scheduled to take delivery of three Boeing 737 aircraft in the fourth quarter of 2010.  In addition to our firm order aircraft, we had options to purchase a total of 94 additional Boeing aircraft as of September 30, 2010.

We do not have backstop financing or any other financing currently in place for any of the Boeing aircraft on order.  Further financing will be needed to satisfy our capital commitments for our firm aircraft and other related capital expenditures.  We can provide no assurance that backstop financing or any other financing not already in place for our aircraft deliveries will be available to us when needed on acceptable terms or at all.  Since the commitments for firm order aircraft are non-cancelable, and assuming no breach of the agreement by Boeing, if we are unable to obtain financing and cannot otherwise satisfy our commitment to purchase these aircraft, the manufacturer could exercise its rights and remedies under applicable law, such as seeking to terminate the contract for a material breach, selling the aircraft to one or more other parties and suing us for damages to recover any resulting losses incurred by the manufacturer.

Financings and Guarantees.  We are the guarantor of approximately $1.7 billion in aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon, excluding the US Airways contingent liability described below.  These bonds, issued by various airport municipalities, are payable solely from our rentals paid under long-term agreements with the respective governing bodies.  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.

We are 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 $109 million at September 30, 2010 and a final scheduled maturity in 2015. If US Airways defaults on these obligations, we would be obligated to cure the default and we would have the right to occupy the terminal after US Airways' interest in the lease had been terminated.

We also had letters of credit and performance bonds relating to various real estate, customs, and aircraft financing obligations at September 30, 2010 in the amount of $73 million.  These letters of credit and performance bonds have expiration dates through June 2014.

General Guarantees and Indemnifications.  We are the lessee under many real estate leases.  It is common in such commercial lease transactions for us as the lessee to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to our use or occupancy of the leased premises and the use or occupancy of the leased premises by regional carriers operating flights on our behalf.  In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct.   Additionally, we typically indemnify such parties for any environmental liability that arises out of or relates to our use of the leased premises.

In our aircraft financing agreements, we typically indemnify the financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct.

We expect that we would be covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to real estate we lease and aircraft we operate.

In our financing transactions that include loans, we typically agree to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on 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 September 30, 2010, we had $1.0 billion of floating rate debt and $254 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 $1.1 billion, we bear 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.

We may be required to make future payments under the foregoing indemnities and agreements due to unknown variables related to potential government changes in capital adequacy requirements, laws governing LIBOR based loans or tax laws, the amounts of which cannot be estimated at this time.

Credit Card Processing Agreements.  The covenants contained in our domestic bank-issued credit card processing agreement with Chase Bank USA, N.A. ("Chase") require that we post additional cash collateral if we fail to maintain (1) a minimum level of unrestricted cash, cash equivalents and short-term investments, (2) a minimum ratio of unrestricted cash, cash equivalents and short-term investments to current liabilities of 0.25 to 1.0 or (3) a minimum senior unsecured debt rating of at least Caa3 and CCC- from Moody's and Standard & Poor's, respectively.

Under the terms of our credit card processing agreement with American Express, if a covenant trigger under the Chase processing agreement requires us to post additional collateral under that agreement, we would be required to post additional collateral under the American Express processing agreement.  The amount of additional collateral required under the American Express processing agreement would be based on a percentage of the value of unused tickets (for travel at a future date) purchased by customers using the American Express card.  The percentage for purposes of this calculation is the same as the percentage applied under the Chase processing agreement, after taking into account certain other risk protection maintained by American Express.

Under these processing agreements and based on our current air traffic liability exposure (as defined in each agreement), we would be required to post collateral up to the following amounts if we failed to comply with the covenants described above:

· 
a total of $86 million if our unrestricted cash, cash equivalents and short-term investments balance falls below $2.0 billion;
· 
a total of $257 million if we fail to maintain the minimum unsecured debt ratings specified above;
· 
a total of $484 million if our unrestricted cash, cash equivalents and short-term investments balance (plus any collateral posted at Chase) falls below $1.4 billion or if our ratio of unrestricted cash, cash equivalents and short-term investments to current liabilities falls below 0.25 to 1.0; and
· 
a total of $1.1 billion if our unrestricted cash, cash equivalents and short-term investments balance (plus any collateral posted at Chase) falls below $1.0 billion or if our ratio of unrestricted cash, cash equivalents and short-term investments to current liabilities falls below 0.22 to 1.0.

The amounts shown above are incremental to the current collateral we have posted with these companies.  We are currently in compliance with all of the covenants under these processing agreements.

Credit Ratings.  At September 30, 2010, our senior unsecured debt was rated B3 by Moody's and CCC+ by Standard & Poor's.  These ratings are significantly below investment grade.  Due to our current credit ratings, our borrowing costs are higher and our financing options are more limited than borrowers with investment grade credit ratings.  Downgrades in our credit ratings could further increase our borrowing costs and reduce the availability of financing to us in the future.  We do not have any debt obligations that would be accelerated as a result of a credit rating downgrade.  However, as discussed above, we would have to post additional collateral of approximately $257 million under our Chase and American Express processing agreements if our senior unsecured debt rating were to fall below Caa3 as rated by Moody's or CCC- as rated by Standard & Poor's.  The insurer under our workers' compensation program has the right to require us to post up to $36 million of additional collateral under a number of conditions, including based on our current senior unsecured debt rating, which is currently at the minimum of B3 as rated by Moody's and below the minimum of B- as rated by Standard & Poor's.  We could also be required to post a higher amount of collateral with our fuel hedge counterparties if our credit ratings were to fall, or if our unrestricted cash, cash equivalents and short-term investments balance fell below certain specified levels, and our fuel hedges were in a liability position.  In such a case, the total amount of the collateral that we might be required to post at any time would be up to the amount of our liability to our respective counterparties under the related derivative instruments.  Our fuel hedging agreement with one counterparty also requires us to post additional collateral of up to 10% of the notional amount of our hedging contracts with that counterparty if either of our corporate credit ratings falls below its current level, which is B2 as rated by Moody's or B as rated by Standard & Poor's.  Our fuel derivative contracts do not contain any other credit risk-related contingent features, other than those related to a change in control.

Trans-Atlantic Joint Venture.  We, United, Lufthansa and Air Canada are implementing a trans-Atlantic joint venture, which remains under review by the European Commission.  As part of the trans-Atlantic joint venture, we are in negotiations to implement a revenue-sharing structure amongst the joint venture participants.  As currently contemplated, the revenue sharing structure would result in payments among participants based on a formula that compares current period unit revenue performance on trans-Atlantic routes to a historic period or "baseline," which is reset annually.  The payments would be calculated on a quarterly basis and subject to a cap.  Assuming that revenue sharing is implemented and that the revenue sharing formula is applied retroactive to January 1, 2010, as currently contemplated, we estimate that our payment for revenue sharing to joint venture carriers that we have relatively outperformed would be approximately $65 million for the nine months ended September 30, 2010.  This estimated payment is higher than earlier estimates because our revenues related to the joint venture have exceeded our prior expectations.  The estimated revenue sharing payment is substantially less than the additional passenger revenue we receive from the joint marketing, scheduling and pricing efforts of the joint venture.  Future results will also be impacted by the current year results, which will serve as the baseline in future years for calculating relative performance in the revenue sharing formula.

Employees.  As of September 30, 2010, we had approximately 40,415 employees.  Due to the number of part-time employees and adjusting for overtime, we had an average of 38,900 full-time equivalent employees for the three months ended September 30, 2010.  Including the fleet service employees discussed below, approximately 63% of our full-time equivalent employees are represented by unions.

On February 12, 2010, the National Mediation Board informed us that our fleet service employees had voted in favor of representation by the International Brotherhood of Teamsters ("Teamsters").  The election covers approximately 7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo agents.  We are in the process of negotiating a collective bargaining agreement with the Teamsters covering our fleet service employees.

On March 18, 2010, we announced that we had reached a tentative agreement on a new four-year labor contract with the Transport Workers Union ("TWU"), the union that represents our dispatchers, which agreement our dispatchers ratified on April 20, 2010.  On September 10, 2010, we announced that we had reached a tentative agreement on a new labor contract with the International Brotherhood of Teamsters ("IBT"), the union that represents our aircraft maintenance technicians and related employees.  The IBT is holding a ratification vote, and is expected to announce the results of the vote on November 4, 2010.  On September 30, 2010, we announced that we had reached a tentative agreement on a new labor contract with the International Association of Machinists and Aerospace Workers ("IAM"), the union that represents our flight attendants.  The IAM is holding a ratification vote, and is expected to announce the result of the vote in late October 2010.

Most of our other collective bargaining agreements are currently amendable or become amendable in 2010.  The collective bargaining agreements with our pilots became amendable in December 2008 and those with Continental Micronesia, Inc. ("CMI") mechanics became amendable in December 2009.  With respect to our workgroups with amendable contracts, prior to the announcement of the Merger Agreement, we had been meeting with representatives of the applicable unions to negotiate amended collective bargaining agreements with a goal of reaching agreements that are fair to us and fair to our employees.  We are engaging in discussions with several unions to find the best ways to achieve the future integration of the merged employee groups with the least amount of disruption.  In July 2010, United and Continental reached agreement with the Air Line Pilots Association International ("ALPA"), the union that represents the pilots of both companies, on a transition and process agreement that provides a framework for conducting pilot operations of the two employee groups until the parties reach agreement on a joint collective bargaining agreement and the carriers obtain a single operating certificate.  We began discussions with ALPA regarding a joint collective bargaining agreement to cover all pilots in the merged entity in early August.  The integration of Railway Labor Act ("RLA") employee groups is a difficult and sometimes contentious process, and management's role is limited.  The process is governed by federal laws, including the RLA and the McCaskill-Bond Amendment, and must be accomplished in accordance with all applicable collective bargaining agreements and company policies.  We cannot predict the outcome of these processes or of our ongoing negotiations with our unionized workgroups, although significant increases in the pay and benefits resulting from new collective bargaining agreements could have a material adverse effect on us.  Furthermore, there can be no assurance that our generally good labor relations and high labor productivity will continue.

           Environmental Matters.  We are continuing environmental remediation of jet fuel contamination on and near our aircraft maintenance hangar leasehold in Los Angeles, which began in 2005 under a work plan approved by the Los Angeles Regional Water Quality Control Board ("LARWQCB") and our landlord, Los Angeles World Airports.  Additionally, we could be responsible for environmental remediation costs primarily related to solvent contamination on and near this site.  On June 30, 2010, the LARWQCB required us to perform additional investigation of the site in connection with our closure plan.  If necessary, we plan to appeal the imposition of certain additional requirements to the California State Water Quality Control Board.  At September 30, 2010, we had an accrual for estimated costs of environmental remediation throughout our system of $29 million, based primarily on third-party environmental studies and estimates as to the extent of the contamination and nature of the required remedial actions.  We have evaluated and recorded this accrual for environmental remediation costs separately from any related insurance recovery.  We did not have any receivables related to environmental insurance recoveries at September 30, 2010.  Based on currently available information, we believe that our accrual for potential environmental remediation costs is adequate, although our accrual could be adjusted in the future due to new information or changed circumstances.  However, we do not expect these items to materially affect our results of operations, financial condition or liquidity.

Legal ProceedingsDuring the period between 1997 and 2001, we reduced or capped the base commissions that we paid to domestic travel agents, and in 2002 we eliminated those base commissions.  These actions were similar to those also taken by other air carriers.  We are a defendant, along with several other air carriers, in two lawsuits brought by travel agencies that purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern District of North Carolina), filed on June 21, 2000, in which the defendant airlines prevailed on summary judgment that was upheld on appeal.  These similar suits against Continental and other major carriers allege violations of antitrust laws in reducing and ultimately eliminating the base commissions formerly paid to travel agents and seek unspecified money damages and certain injunctive relief under the Clayton Act and the Sherman Anti-Trust Act.  The pending cases, which involve a total of 90 travel agency plaintiffs, are Tam Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 2003 and Swope Travel Agency, et al. v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003.  By order dated November 10, 2003, these actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio.  On October 29, 2007, the judge for the consolidated lawsuit dismissed the case for failure to meet the heightened pleading standards established earlier in 2007 by the U.S. Supreme Court's decision in Bell Atlantic Corp. v. Twombly.  On October 2, 2009, the U.S. Court of Appeals for the Sixth Circuit affirmed the trial court's dismissal of the case.  On December 18, 2009, the plaintiffs' request for rehearing by the Sixth Circuit en banc was denied.  On March 18, 2010, the plaintiffs filed a Petition for a Writ of Certiorari with the U.S. Supreme Court, to which the defendants responded on June 16, 2010.  The plaintiffs in the Swope lawsuit, encompassing 43 travel agencies, have also alleged that certain claims raised in their lawsuit were not, in fact, dismissed.  The trial court has not yet ruled on that issue.  In the consolidated lawsuit, we believe the plaintiffs' claims are without merit, and we intend to defend vigorously any appeal.  Nevertheless, a final adverse court decision awarding substantial money damages could have a material adverse effect on our results of operations, financial condition or liquidity.

We and/or certain of our subsidiaries are defendants in various other pending lawsuits and proceedings and are subject to various other claims arising in the normal course of our business, many of which are covered in whole or in part by insurance.  Although the outcome of these lawsuits and proceedings (including the probable loss we might experience as a result of an adverse outcome) cannot be predicted with certainty at this time, we believe, after consulting with outside counsel, that the ultimate disposition of such suits will not have a material adverse effect on us.

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

This quarterly report on Form 10-Q contains forward-looking statements that are not limited to historical facts, but reflect our current beliefs, expectations or intentions regarding future events.  All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  For examples of such risks and uncertainties, please see the risk factors set forth in Part II, Item 1A. "Risk Factors" in this quarterly report, in Part I, Item 1A.  "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2009 (the "2009 Form 10-K") and in our reports and registration statements filed from time to time with the Securities and Exchange Commission ("SEC"), which identify important matters such as risks related to the Merger, the potential for significant volatility in the cost of aircraft fuel,  the consequences of our high leverage and other significant capital commitments, our high labor and pension costs, delays in scheduled aircraft deliveries, service interruptions at one of our hub airports, disruptions to the operations of our regional operators, disruptions in our computer systems, and industry conditions, including continuing weakness in the U.S. and global economies, the airline pricing environment, terrorist attacks, regulatory matters, excessive taxation, industry consolidation and airline alliances, the availability and cost of insurance, public health threats and the seasonal nature of the airline business.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report, except as required by applicable law.

OVERVIEW

We are a major United States air carrier engaged in the business of transporting passengers, cargo and mail.  We are the world's fifth largest airline as measured by the number of scheduled miles flown by revenue passengers in 2009.  Including our wholly-owned subsidiary CMI and regional flights operated on our behalf under capacity purchase agreements with other carriers, we operate more than 2,200 daily departures.  As of September 30, 2010, we flew to 117 domestic and 125 international destinations and offered additional connecting service through alliances with domestic and foreign carriers.

On October 1, 2010, we became a wholly-owned subsidiary of UAL.  Pursuant to the terms of the Merger Agreement, each outstanding share of Continental common stock was converted into and became exchangeable for 1.05 fully paid and nonassessable shares of UAL common stock with any fractional shares paid in cash.  UAL issued approximately 148 million shares of UAL common stock to former holders of Continental common stock.  Based on the closing price of $23.66 per share of UAL common stock on NASDAQ on September 30, 2010, the last trading day before the closing of the Merger, the aggregate value of the consideration paid in connection with the Merger to former holders of Continental common stock was approximately $3.5 billion.  Upon completion of the Merger, Continental stock options were converted into stock options with respect to UAL common stock and Continental convertible debt became convertible into shares of UAL common stock, in each case after giving effect to the exchange ratio.

General information about us can be found on our website, continental.com.  Electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

We recorded net income of $354 million for the three months ended September 30, 2010, as compared to a net loss of $18 million for the three months ended September 30, 2009.  The improvement in our results reflects higher revenue resulting from improving economic conditions.  Excluding special items, we recorded net income of $367 million for the three months ended September 30, 2010, compared to net income of $2 million for the three months ended September 30, 2009.  Net income excluding special items is significant because it provides management and investors the ability to measure and monitor our performance on a consistent basis.  Special items relate to activities that are not central to our ongoing operations or are unusual in nature.  A reconciliation of our net income (loss) to the non-GAAP financial measure of net income (loss) excluding special items is provided at the end of this Item.

Third Quarter Financial Highlights

·
Passenger revenue and cargo revenue increased 20.6% and 25.0%, respectively, during the third quarter of 2010 as compared to the third quarter of 2009 primarily due to increasing demand resulting from improving global economic conditions.
   
·
We recorded operating income of $441 million during the third quarter of 2010 as compared to operating income of $61 million in the third quarter of 2009, due primarily to higher passenger revenue.
   
·
Unrestricted cash, cash equivalents and short-term investments totaled a record $4.2 billion at September 30, 2010.

Third Quarter Operational Highlights

·
Consolidated traffic increased 1.6% and capacity remained essentially flat during the third quarter of 2010 as compared to the third quarter of 2009, resulting in a record third quarter load factor of 85.9%.
   
·
We recorded a U.S. Department of Transportation ("DOT") on-time arrival rate of 83.2% for Continental mainline flights and a mainline segment completion factor of 99.8% for the third quarter of 2010, compared to a DOT on-time arrival rate of 82.8% and a mainline segment completion factor of 97.9% for the third quarter of 2009.
   
·
We took delivery of two Boeing 777 and nine Boeing 737-800 aircraft during the third quarter of 2010.
   
·
As of September 30, 2010, we had installed flat-bed seats on 14 of our Boeing 777 aircraft and 22 of our Boeing 757-200 aircraft.

RESULTS OF OPERATIONS

The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three and nine months ended September 30, 2010 as compared to the corresponding period in 2009.

Comparison of Three Months Ended September 30, 2010 to Three Months Ended September 30, 2009

Consolidated Results of Operations

Statistical Information.  Certain statistical information for our consolidated operations for the three months ended September 30 is as follows:

 
 
   2010  
 
   2009  
% Increase
(Decrease)
       
Passengers (thousands) (1)
 
16,587
   
16,795
 
(1.2)
%
Revenue passenger miles (millions) (2)
 
25,015
   
24,617
 
1.6 
%
Available seat miles (millions) (3)
 
29,108
   
28,933
 
0.6 
%
Passenger load factor (4)
 
85.9
%
 
85.1
%
0.8 
pts.
Passenger revenue per available seat mile (cents)
 
12.21
   
10.19
 
19.8 
%
Total revenue per available seat mile (cents)
 
13.58
   
11.46
 
18.5 
%
Average yield per revenue passenger mile (cents) (5)
 
14.21
   
11.97
 
18.7 
%
Cost per available seat miles ("CASM") (cents)
 
12.06
   
11.25
 
7.2 
%
CASM excluding special charges, merger-related costs and
  aircraft fuel and related taxes (cents) (6)
 
8.64
   
8.13
 
6.3 
%
Average price per gallon of fuel, including fuel taxes (cents)
 
221.1
   
199.0
 
11.1 
%
Fuel gallons consumed (millions)
 
445
   
443
 
0.5 
%
Average full-time equivalent employees
 
38,900
   
39,930
 
(2.6)
%
____________________

(1)
The number of revenue passengers measured by each flight segment flown.
(2)
The number of scheduled miles flown by revenue passengers.
(3)
The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
(4)
Revenue passenger miles divided by available seat miles.
(5)
The average passenger revenue received for each revenue passenger mile flown.
(6)
See "Reconciliation of GAAP to non-GAAP Financial Measures" at the end of this Item.

Results of Operations.  We recorded net income of $354 million in the third quarter of 2010 as compared to a net loss of $18 million in the third quarter of 2009.  We consider a key measure of our performance to be operating income, which was $441 million for the third quarter of 2010, as compared to $61 million for the third quarter of 2009.  Significant components of our consolidated operating results for the three months ended September 30 are as follows (in millions, except percentage changes):

 
 
  2010  
 
  2009  
Increase
(Decrease)
% Increase
(Decrease)
                         
Operating Revenue
$
3,953 
 
$
3,317 
 
$
636 
   
19.2
%
Operating Expenses
 
3,512 
   
3,256 
   
256 
   
7.9
%
Operating Income
 
441 
   
61 
   
380 
   
NM
 
Nonoperating Expense
 
(87)
   
(79)
   
   
10.1
%
Net Income (Loss)
$
354 
 
$
(18)
 
$
372 
   
NM
 

NM = Not Meaningful

Each of these items is discussed in the following sections.

Operating Revenue.  The table below shows components of operating revenue for the quarter ended September 30, 2010 and period to period comparisons for operating revenue, available seat miles ("ASMs") and passenger revenue per available seat mile ("RASM") by geographic region for our mainline and regional operations:

 
 
Revenue
Percentage Increase (Decrease) in
Third Quarter 2010 vs Third Quarter 2009
(in millions)
Revenue
ASMs
RASM
         
Passenger revenue:
       
  Domestic
$
1,351 
 
14.8
%
(1.2)
%
16.2
%
  Trans-Atlantic
 
848 
 
30.8
%
3.9 
%
25.8
%
  Latin America
 
424 
 
17.4
%
0.5 
 %
16.8
%
  Pacific
 
344 
 
34.7
%
0.9 
 %
33.4
%
  Total Mainline
 
2,967 
 
21.5
%
0.6 
 %
20.8
%
                   
  Regional
 
588 
 
16.4
%
0.5 
%
15.8 
%
                   
    Total
 
3,555 
 
20.6
%
0.6 
%
19.8
%
                   
  Cargo
 
115 
 
25.0
%
       
  Other
 
283 
 
1.8
%
       
                   
    Operating Revenue
$
3,953 
 
19.2
%
       

Passenger revenue increased in the third quarter of 2010 as compared to the third quarter of 2009 due to increased traffic and higher average fares.  The increased revenue is a result of the improving economic conditions in the U.S. and globally.

Cargo revenue increased due to increased freight volume.  Other revenue increased due to higher fees for checking bags.

Operating Expenses.  The table below shows period-to-period comparisons by type of operating expense for our consolidated operations for the three months ended September 30 (in millions, except percentage changes):

 
 
  2010  
 
  2009  
Increase
(Decrease)
% Increase
(Decrease)
     
Aircraft fuel and related taxes
$
984
 
$
881
 
$
103 
 
11.7 
%
Wages, salaries and related costs
 
909
   
794
   
115 
 
14.5 
%
Aircraft rentals
 
230
   
233
   
(3)
 
(1.3)
%
Landing fees and other rentals
 
228
   
222
   
 
2.7 
%
Regional capacity purchase
 
212
   
211