Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2012

OR

 

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

For the transition period from                     to                    

 

 

 

Commission

File Number

  

Exact Name of Registrant as Specified in its Charter,

Principal Office Address and Telephone Number

   State of
Incorporation
   I.R.S. Employer
Identification  No
001-06033   

United Continental Holdings, Inc.

77 W. Wacker Drive, Chicago, Illinois 60601

(312) 997-8000

   Delaware    36-2675207
001-11355   

United Air Lines, Inc.

77 W. Wacker Drive, Chicago, Illinois 60601

(312) 997-8000

   Delaware    36-2675206
001-10323   

Continental Airlines, Inc.

1600 Smith Street, Dept HQSEO, Houston, Texas 77002

(713) 324-2950

   Delaware    74-2099724

 

 

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

 

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

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

 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or 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.

 

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

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

 

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

The number of shares outstanding of each of the issuer’s classes of common stock as of July 15, 2012 is shown below:

 

United Continental Holdings, Inc.    332,356,058 shares of common stock ($0.01 par value)
United Air Lines, Inc.   

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

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

Continental Airlines, Inc.   

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

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

 

 

OMISSION OF CERTAIN INFORMATION

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

 

 

 


Table of Contents

United Continental Holdings, Inc.

United Air Lines, Inc.

Continental Airlines, Inc.

Report on Form 10-Q

For the Quarter Ended June 30, 2012

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

United Continental Holdings, Inc.:

  

Statements of Consolidated Operations

     3   

Statements of Consolidated Comprehensive Income (Loss)

     4   

Consolidated Balance Sheets

     5   

Condensed Statements of Consolidated Cash Flows

     7   

United Air Lines, Inc.:

  

Statements of Consolidated Operations

     8   

Statements of Consolidated Comprehensive Income (Loss)

     9   

Consolidated Balance Sheets

     9   

Condensed Statements of Consolidated Cash Flows

     12   

Continental Airlines, Inc.:

  

Statements of Consolidated Operations

     13   

Statements of Consolidated Comprehensive Income (Loss)

     14   

Consolidated Balance Sheets

     15   

Condensed Statements of Consolidated Cash Flows

     17   

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

     18   

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

     35   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     48   

Item 4. Controls and Procedures

     48   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     50   

Item 1A. Risk Factors

     50   

Item 6. Exhibits

     50   

Signatures

     51   

Exhibit Index

     52   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Operating revenue:

        

Passenger—Mainline

   $ 6,944      $ 6,836      $ 12,898      $ 12,543   

Passenger—Regional

     1,824        1,734        3,378        3,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     8,768        8,570        16,276        15,687   

Cargo

     265        316        529        599   

Special revenue item

     —          107        —          107   

Other operating revenue

     906        816        1,736        1,618   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,939        9,809        18,541        18,011   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Aircraft fuel

     3,408        3,227        6,637        5,899   

Salaries and related costs

     2,024        1,916        3,921        3,722   

Regional capacity purchase

     643        615        1,259        1,188   

Landing fees and other rent

     503        502        972        975   

Aircraft maintenance materials and outside repairs

     432        444        839        883   

Depreciation and amortization

     378        385        758        773   

Distribution expenses

     345        375        682        725   

Aircraft rent

     251        252        502        505   

Special charges (Note 10)

     206        146        370        223   

Other operating expenses

     1,174        1,139        2,297        2,276   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,364        9,001        18,237        17,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     575        808        304        842   

Nonoperating income (expense):

        

Interest expense

     (213     (250     (429     (504

Interest capitalized

     9        8        17        14   

Interest income

     7        5        12        9   

Miscellaneous, net

     (38     (29     (11     (30
  

 

 

   

 

 

   

 

 

   

 

 

 
     (235     (266     (411     (511
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     340        542        (107     331   

Income tax expense

     1        4        2        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 339      $ 538      $ (109   $ 325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, basic

   $ 1.02      $ 1.63      $ (0.33   $ 0.98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, diluted

   $ 0.89      $ 1.39      $ (0.33   $ 0.88   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net income (loss)

   $ 339      $ 538      $ (109   $ 325   

Other comprehensive loss, net:

        

Fuel derivative financial instruments:

        

Reclassification into earnings

     38        (278     69        (432

Change in fair value

     (262     (231     (169     293   

Employee benefit plans:

        

Amortization of net actuarial items

     5        (8     9        (13

Investments and other

     —          3        9        7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (219     (514     (82     (145
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net

   $ 120      $ 24      $ (191   $ 180   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     June 30, 2012     December 31, 2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 6,086      $ 6,246   

Short-term investments

     1,618        1,516   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     7,704        7,762   

Restricted cash

     120        40   

Receivables, less allowance for doubtful accounts (2012 — $12; 2011 — $7)

     1,818        1,358   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 — $103; 2011 — $89)

     611        615   

Deferred income taxes

     658        615   

Prepaid expenses and other

     797        607   
  

 

 

   

 

 

 
     11,708        10,997   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     16,412        15,786   

Other property and equipment

     3,118        3,126   
  

 

 

   

 

 

 
     19,530        18,912   

Less — Accumulated depreciation and amortization

     (4,482     (4,005
  

 

 

   

 

 

 
     15,048        14,907   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     450        382   

Capital leases—

    

Flight equipment

     1,483        1,458   

Other property and equipment

     235        237   
  

 

 

   

 

 

 
     1,718        1,695   

Less — Accumulated amortization

     (639     (565
  

 

 

   

 

 

 
     1,079        1,130   
  

 

 

   

 

 

 
     16,577        16,419   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2012 — $732; 2011 — $670)

     4,681        4,750   

Restricted cash

     466        529   

Other, net

     739        770   
  

 

 

   

 

 

 
     10,409        10,572   
  

 

 

   

 

 

 
   $ 38,694      $ 37,988   
  

 

 

   

 

 

 

(continued on next page)

 

5


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     June 30, 2012     December 31, 2011  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 4,667      $ 3,114   

Frequent flyer deferred revenue

     2,526        2,405   

Accounts payable

     2,165        1,998   

Accrued salaries and benefits

     1,230        1,509   

Current maturities of long-term debt

     1,349        1,186   

Current maturities of capital leases

     119        125   

Other

     1,256        1,057   
  

 

 

   

 

 

 
     13,312        11,394   
  

 

 

   

 

 

 

Long-term debt

     10,128        10,496   

Long-term obligations under capital leases

     851        928   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,872        3,253   

Postretirement benefit liability

     2,438        2,407   

Pension liability

     1,849        1,862   

Advanced purchase of miles

     1,624        1,711   

Deferred income taxes

     1,646        1,603   

Lease fair value adjustment, net

     975        1,133   

Other

     1,364        1,395   
  

 

 

   

 

 

 
     12,768        13,364   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock

     —          —     

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 332,348,502 and 330,906,192 shares at June 30, 2012 and December 31, 2011, respectively

     3        3   

Additional capital invested

     7,135        7,114   

Retained deficit

     (4,972     (4,863

Stock held in treasury, at cost

     (32     (31

Accumulated other comprehensive loss

     (499     (417
  

 

 

   

 

 

 
     1,635        1,806   
  

 

 

   

 

 

 
   $ 38,694      $ 37,988   
  

 

 

   

 

 

 

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

 

6


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ (109   $ 325   

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

    

Depreciation and amortization

     758        773   

Debt and lease discount amortization

     (151     (119

Special items, non-cash portion

     52        (48

Other, net

     67        106   

Increase in advance ticket sales

     1,553        1,499   

Increase in receivables

     (402     (387

Decrease in frequent flyer deferred revenue and advanced purchase of miles

     (347     (89

Increase in other current assets

     (344     (251

Increase in accounts payable

     153        202   

Decrease in other liabilities

     (86     (224

Decrease in fuel hedge collateral

     (61     (29
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,083        1,758   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Capital expenditures

     (552     (350

Increase in short-term and other investments, net

     (96     (443

Proceeds from sale of property and equipment

     145        54   

Aircraft purchase deposits paid, net

     (67     (70

Increase in restricted cash, net

     (5     (20
  

 

 

   

 

 

 

Net cash used in investing activities

     (575     (829
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (696     (1,477

Proceeds from issuance of long-term debt

     86        142   

Principal payments under capital leases

     (64     (176

Other, net

     6        32   
  

 

 

   

 

 

 

Net cash used in financing activities

     (668     (1,479
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents during the period

     (160     (550

Cash and cash equivalents at beginning of the period

     6,246        8,069   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 6,086      $ 7,519   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

Property and equipment acquired through the issuance of debt

   $ 341      $ 97   

8% Contingent Senior Unsecured Notes, net of discount

     48        49   

Houston Bush Intercontinental Airport Terminal B Construction Obligation

     27        —     

Reclassification of debt to advanced purchases of miles

     —          270   

Reclassification of debt discount to other assets

     —          60   

Interest paid in kind on UAL 6% Senior Notes

     —          18   

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

 

7


Table of Contents

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Operating revenue:

        

Passenger—Mainline

   $ 3,695      $ 3,718      $ 6,853      $ 6,805   

Passenger—Regional

     1,033        1,039        1,909        1,917   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     4,728        4,757        8,762        8,722   

Cargo

     177        191        348        358   

Special revenue item

     —          88        —          88   

Other operating revenue

     570        534        1,140        1,078   
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,475        5,570        10,250        10,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Aircraft fuel

     1,929        1,833        3,771        3,345   

Salaries and related costs

     1,093        1,038        2,120        2,025   

Regional capacity purchase

     386        401        765        783   

Landing fees and other rent

     281        275        536        527   

Aircraft maintenance materials and outside repairs

     282        290        549        582   

Depreciation and amortization

     232        229        463        456   

Distribution expenses

     172        199        354        386   

Aircraft rent

     78        80        156        161   

Special charges (Note 10)

     176        90        272        164   

Other operating expenses

     762        698        1,488        1,372   
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,391        5,133        10,474        9,801   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     84        437        (224     445   

Nonoperating income (expense):

        

Interest expense

     (136     (159     (273     (327

Interest capitalized

     3        3        6        6   

Interest income

     2        3        5        5   

Miscellaneous, net

     (25     (3     (7     (8
  

 

 

   

 

 

   

 

 

   

 

 

 
     (156     (156     (269     (324
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (72     281        (493     121   

Income tax expense (benefit)

     (1     —          1        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (71   $ 281      $ (494   $ 121   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

8


Table of Contents

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net income (loss)

   $ (71   $ 281      $ (494   $ 121   

Other comprehensive loss, net:

        

Fuel derivative financial instruments:

        

Reclassification into earnings

     17        (213     32        (338

Change in fair value

     (148     (149     (90     236   

Employee benefit plans:

        

Amortization of net actuarial items

     (1     (1     (2     (1

Investments and other

     —          2        4        2   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (132     (361     (56     (101
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net

   $ (203   $ (80   $ (550   $ 20   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

9


Table of Contents

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
June 30, 2012
    December 31, 2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,076      $ 3,458   

Short-term investments

     342        275   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     4,418        3,733   

Restricted cash

     120        40   

Receivables from related parties (Note 11)

     2,432        228   

Receivables, less allowance for doubtful accounts (2012 — $10; 2011 — $5)

     1,568        763   

Deferred income taxes

     316        348   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 — $78; 2011 — $73)

     327        340   

Prepaid expenses and other

     619        447   
  

 

 

   

 

 

 
     9,800        5,899   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     9,269        9,135   

Other property and equipment

     2,190        2,260   
  

 

 

   

 

 

 
     11,459        11,395   

Less — Accumulated depreciation and amortization

     (3,592     (3,359
  

 

 

   

 

 

 
     7,867        8,036   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     60        57   

Capital leases—

    

Flight equipment

     1,483        1,458   

Other property and equipment

     65        67   
  

 

 

   

 

 

 
     1,548        1,525   

Less — Accumulated amortization

     (615     (548
  

 

 

   

 

 

 
     933        977   
  

 

 

   

 

 

 
     8,860        9,070   
  

 

 

   

 

 

 

Other assets:

    

Intangibles, less accumulated amortization (2012 — $561; 2011 — $534)

     2,255        2,283   

Receivables from related parties (Note 11)

     729        —     

Restricted cash

     325        393   

Other, net

     594        600   
  

 

 

   

 

 

 
     3,903        3,276   
  

 

 

   

 

 

 
   $ 22,563      $ 18,245   
  

 

 

   

 

 

 

(continued on next page)

 

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UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
June 30, 2012
    December 31, 2011  

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Advance ticket sales (Note 11)

   $ 4,481      $ 1,652   

Frequent flyer deferred revenue (Note 11)

     2,526        1,484   

Accounts payable

     1,406        1,109   

Accrued salaries and benefits

     777        988   

Current maturities of long-term debt

     643        615   

Current maturities of capital leases

     115        122   

Payables to related parties

     104        104   

Other

     1,044        853   
  

 

 

   

 

 

 
     11,096        6,927   
  

 

 

   

 

 

 

Long-term debt

     4,888        5,130   

Long-term obligations under capital leases

     674        735   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue (Note 11)

     2,872        2,018   

Postretirement benefit liability

     2,138        2,115   

Advanced purchase of miles (Note 11)

     1,624        1,442   

Deferred income taxes

     675        707   

Pension liability

     84        92   

Other

     959        983   
  

 

 

   

 

 

 
     8,352        7,357   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

Common stock at par, $5 par value; authorized 1,000 shares; issued and outstanding 205 shares at both June 30, 2012 and December 31, 2011

     —          —     

Additional capital invested

     3,439        3,432   

Retained deficit

     (5,702     (5,208

Accumulated other comprehensive loss

     (184     (128
  

 

 

   

 

 

 
     (2,447     (1,904
  

 

 

   

 

 

 
   $ 22,563      $ 18,245   
  

 

 

   

 

 

 

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

 

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UNITED AIR LINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ (494   $ 121   

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

    

Depreciation and amortization

     463        456   

Debt and lease discount amortization

     18        8   

Special charges, non-cash portion

     51        (28

Other, net

     44        93   

Increase in advance ticket sales

     2,829        915   

Increase in receivables

     (785     (199

Decrease in frequent flyer deferred revenue and advanced purchase of miles

     (309     (180

Increase in other current assets

     (238     (77

Increase in accounts payable

     283        253   

Decrease in other liabilities

     (77     (231

Increase in fuel hedge collateral

     (27     (29

Increase in receivables from related parties

     (586     (58

Increase (decrease) in payables to related parties

     40        (2
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,212        1,042   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Capital expenditures

     (245     (222

Increase in short-term and other investments, net

     (63     (153

Proceeds from sale of property and equipment

     55        1   

Aircraft purchase deposits paid, net

     (3     (3

(Increase) decrease in restricted cash, net

     1        (20
  

 

 

   

 

 

 

Net cash used in investing activities

     (255     (397
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (269     (1,037

Principal payments under capital leases

     (64     (175

Other, net

     (6     9   
  

 

 

   

 

 

 

Net cash used in financing activities

     (339     (1,203
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     618        (558

Cash and cash equivalents at beginning of the period

     3,458        4,665   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 4,076      $ 4,107   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

Transfer of OnePass frequent flyer liability and advanced purchase of miles from Continental

   $ 2,387      $ —     

8% Contingent Senior Unsecured Notes, net of discount

     48        49   

Interest paid in kind on UAL 6% Senior Notes

     —          18   

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

 

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CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Operating revenue:

        

Passenger—Mainline

   $ 3,249      $ 3,116      $ 6,045      $ 5,735   

Passenger—Regional

     791        696        1,469        1,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     4,040        3,812        7,514        6,962   

Cargo

     89        126        181        241   

Special revenue item

     —          19        —          19   

Other operating revenue

     459        327        815        620   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,588        4,284        8,510        7,842   

Operating expense:

        

Aircraft fuel

     1,479        1,394        2,866        2,554   

Salaries and related costs

     902        864        1,749        1,669   

Regional capacity purchase

     258        214        495        406   

Landing fees and other rent

     222        228        436        448   

Aircraft maintenance materials and outside repairs

     162        154        308        303   

Depreciation and amortization

     146        156        295        317   

Distribution expenses

     173        177        328        340   

Aircraft rent

     172        173        346        345   

Special charges (Note 10)

     30        56        98        59   

Other operating expenses

     550        494        1,055        998   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,094        3,910        7,976        7,439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     494        374        534        403   

Nonoperating income (expense):

        

Interest expense

     (80     (88     (160     (171

Interest capitalized

     6        4        11        8   

Interest income

     3        2        6        4   

Miscellaneous, net

     19        (28     42        (35
  

 

 

   

 

 

   

 

 

   

 

 

 
     (52     (110     (101     (194
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     442        264        433        209   

Income tax expense

     2        2        1        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 440      $ 262      $ 432      $ 205   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net income

   $ 440      $ 262      $ 432      $ 205   

Other comprehensive loss, net:

        

Fuel derivative financial instruments:

        

Reclassification into earnings

     21        (65     37        (94

Change in fair value

     (114     (82     (79     57   

Employee benefit plans:

        

Amortization of net actuarial items

     6        (7     11        (12

Investments and other

     (1     1        5        5   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (88     (153     (26     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income, net

   $ 352      $ 109      $ 406      $ 161   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     June 30, 2012     December 31, 2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 2,004      $ 2,782   

Short-term investments

     1,276        1,241   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     3,280        4,023   

Receivables, less allowance for doubtful accounts (2012 — $2; 2011 — $2)

     250        595   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 — $25; 2011 — $16)

     285        275   

Deferred income taxes

     347        267   

Prepaid expenses and other

     184        165   
  

 

 

   

 

 

 
     4,346        5,325   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     7,143        6,651   

Other property and equipment

     928        866   
  

 

 

   

 

 

 
     8,071        7,517   

Less — Accumulated depreciation and amortization

     (890     (646
  

 

 

   

 

 

 
     7,181        6,871   

Purchase deposits for flight equipment

     390        324   

Capital leases — Other property and equipment

     170        170   

Less — Accumulated amortization

     (24     (17
  

 

 

   

 

 

 
     146        153   
  

 

 

   

 

 

 
     7,717        7,348   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2012 — $171; 2011 — $136)

     2,428        2,469   

Restricted cash

     140        135   

Other, net

     434        364   
  

 

 

   

 

 

 
     7,525        7,491   
  

 

 

   

 

 

 
   $ 19,588      $ 20,164   
  

 

 

   

 

 

 

(continued on next page)

 

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Table of Contents

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     June 30, 2012     December 31, 2011  

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities:

    

Payables to related parties (Note 11)

   $ 2,210      $ 11   

Advance ticket sales (Note 11)

     186        1,462   

Accounts payable

     765        894   

Current maturities of long-term debt

     706        571   

Accrued salaries and benefits

     454        521   

Current maturities of capital leases

     3        3   

Frequent flyer deferred revenue (Note 11)

     —          921   

Other

     286        279   
  

 

 

   

 

 

 
     4,610        4,662   
  

 

 

   

 

 

 

Long-term debt

     4,834        4,957   

Long-term obligations under capital leases

     177        193   

Other liabilities and deferred credits:

    

Pension liability

     1,765        1,770   

Payables to related parties (Note 11)

     729        —     

Lease fair value adjustment, net

     975        1,133   

Deferred income taxes

     901        820   

Postretirement benefit liability

     300        292   

Frequent flyer deferred revenue (Note 11)

     —          1,235   

Advanced purchase of miles (Note 11)

     —          270   

Other

     551        507   
  

 

 

   

 

 

 
     5,221        6,027   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s equity:

    

Common stock at par, $0.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at both June 30, 2012 and December 31, 2011

     —          —     

Additional capital invested

     4,163        4,148   

Retained earnings

     906        474   

Accumulated other comprehensive loss

     (323     (297
  

 

 

   

 

 

 
     4,746        4,325   
  

 

 

   

 

 

 
   $ 19,588      $ 20,164   
  

 

 

   

 

 

 

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

 

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CONTINENTAL AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash Flows from Operating Activities:

    

Net income

   $ 432      $ 205   

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

    

Depreciation and amortization

     295        317   

Debt and lease discount amortization

     (170     (127

Special charges, non-cash portion

     1        (20

Net change in fuel hedge cash collateral

     (34     —     

Other, net

     69        30   

Increase (decrease) in advance ticket sales

     (1,276     583   

(Increase) decrease in receivables

     383        (188

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

     (39     91   

Increase in other current assets

     (204     (133

Decrease in accounts payable

     (128     (53

Decrease in other liabilities

     (1     (34

Increase in payables to related parties

     542        42   

(Increase) decrease in receivables from related parties

     (1     3   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (131     716   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Capital expenditures

     (307     (127

Increases in short-term investments, net

     (31     (291

Aircraft purchase deposits paid, net

     (64     (67

Proceeds from sale of property and equipment

     89        52   

Increase (decrease) in restricted cash, net

     (5     1   
  

 

 

   

 

 

 

Net cash used in investing activities

     (318     (432

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (427     (440

Proceeds from issuance of long-term debt

     86        142   

Other, net

     12        22   
  

 

 

   

 

 

 

Net cash used in financing activities

     (329     (276
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (778     8   

Cash and cash equivalents at beginning of the period

     2,782        3,398   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 2,004      $ 3,406   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

Transfer of frequent flyer liability and advanced purchase of miles to United

   $ 2,387      $ —     

Property and equipment acquired through the issuance of debt

     341        97   

Houston Bush Intercontinental Airport Terminal B Construction Obligation

     27        —     

Reclassification of debt to advanced purchases of miles

     —          270   

Reclassification of debt discount to other assets

     —          60   

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

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.,

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

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Interim Financial Statements. The UAL, United and Continental unaudited condensed consolidated financial statements shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. Certain prior year amounts have been reclassified to conform to the current year’s presentation. These reclassifications were made to conform the financial statement presentation of UAL, United and Continental. The UAL, United and Continental financial statements should be read together with the information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”). UAL’s quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results.

NOTE 1—FREQUENT FLYER AND PASSENGER REVENUE ACCOUNTING

Frequent Flyer Awards. Effective January 1, 2012, the Company updated its estimated selling price for miles to the contractual rate at which we sell miles to our Star Alliance partners participating in reciprocal frequent flyer programs. This change in estimate has been applied prospectively effective January 1, 2012.

United and Continental account for miles sold and awarded that will never be redeemed by program members, which the Company refers to as “breakage,” using the redemption method. UAL reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns. The Company re-evaluated its population breakage estimates for Continental OnePass miles, which were previously not subject to an expiration policy, and increased the estimate of miles in the population expected to ultimately expire. As a result, the rate at which we recognize redeemed miles has increased.

The Company’s estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions, the expiration policy, program rules or program redemption opportunities may result in material changes to the deferred revenue balance as well as recognized revenues from the Company’s frequent flyer program.

For the three and six months ended June 30, 2012, the combined net impact of these changes to UAL, United and Continental were not material.

NOTE 2—NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Fair Value Measurement: Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. Some of the key amendments to the fair value measurement guidance include the highest and best use and valuation premise for nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement and fair value of an instrument classified in a reporting entity’s shareholders’ equity. Additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy include a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation processes in place, a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs and the level in the fair value hierarchy of items that are not measured at fair value in the consolidated balance sheet but whose fair value must be disclosed. ASU 2011-04 became effective for the Company’s annual and interim periods beginning January 1, 2012, and the required disclosures are disclosed in Note 6 of this report.

 

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Table of Contents

NOTE 3—EARNINGS (LOSS) PER SHARE

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

UAL basic earnings (loss) per share:

        

Net income (loss)

   $ 339      $ 538      $ (109   $ 325   

Less: Income allocable to participating securities

     (1     (2     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) available to common stockholders

   $ 338      $ 536      $ (109   $ 324   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     331        330        331        329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, basic

   $ 1.02      $ 1.63      $ (0.33   $ 0.98   
  

 

 

   

 

 

   

 

 

   

 

 

 

UAL diluted earnings (loss) per share:

        

Earnings (loss) available to common stockholders

   $ 338      $ 536      $ (109   $ 324   

Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes

     2        11        —          —     

Effect of Continental 4.5% Convertible Notes

     2        2        —          4   

Effect of Continental 6% Convertible Junior Subordinated Debentures

     3        4        —          —     

Effect of UAL 6% Senior Convertible Notes

     4        5        —          9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) available to common stockholders including the effect of dilutive securities

   $ 349      $ 558      $ (109   $ 337   
  

 

 

   

 

 

   

 

 

   

 

 

 

UAL diluted shares outstanding:

        

Basic weighted average shares outstanding

     331        330        331        329   

Effect of stock options

     1        1        —          2   

Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes

     5        13        —          —     

Effect of Continental 4.5% Convertible Notes

     12        12        —          12   

Effect of Continental 6% Convertible Junior Subordinated Debentures

     4        4        —          —     

Effect of UAL 6% Senior Convertible Notes

     40        40        —          40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     393        400        331        383   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, diluted

   $ 0.89      $ 1.39      $ (0.33   $ 0.88   
  

 

 

   

 

 

   

 

 

   

 

 

 

UAL potentially dilutive shares excluded from diluted per share amounts:

        

Restricted stock and stock options

     5        7        7        6   

UAL 4.5% Senior Limited-Subordination Convertible Notes

     —          —          5        18   

Continental 4.5% Convertible Notes

     —          —          12        —     

Continental 6% Convertible Junior Subordinated Debentures

     —          —          4        4   

UAL 6% Senior Convertible Notes

     —          —          40        —     

UAL’s 6% Senior Notes due 2031 (the “6% Senior Notes”), with a principal amount of $652 million as of June 30, 2012, and the $125 million of UAL’s 8% Contingent Senior Notes (the “8% Notes”) issued by UAL in January 2012, are redeemable with either cash or shares of UAL common stock, or in the case of mandatory redemption, a combination thereof, at UAL’s option. The Company is obligated to issue an additional $62.5 million of the 8% Notes by February 2013, which are also redeemable on the same terms as the 6% Senior Notes and the other 8% Notes. These notes are not included in the diluted earnings (loss) per share calculation because it is UAL’s intent to redeem these notes with cash if UAL were to decide to redeem these notes.

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

 

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NOTE 4—INCOME TAXES

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

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Although the Company was no longer in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of financial losses in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance was still needed on net deferred tax assets. If UAL achieves significant profitability in 2012, then management will evaluate whether its recent history of profitability constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.

NOTE 5—EMPLOYEE BENEFIT PLANS

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

 

     Pension Benefits     Other Postretirement
Benefits
 
     Three Months Ended
June 30,
    Three Months Ended
June 30,
 
     2012     2011     2012     2011  

UAL

        

Service cost

   $ 25      $ 23      $ 13      $ 12   

Interest cost

     46        45        32        32   

Expected return on plan assets

     (35     (35     (1     —     

Amortization of unrecognized (gain) loss and prior service cost

     6        (7     (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 42      $ 26      $ 43      $ 43   
  

 

 

   

 

 

   

 

 

   

 

 

 

United

        

Service cost

   $ 2      $ 2      $ 9      $ 8   

Interest cost

     2        3        28        28   

Expected return on plan assets

     (3     (3     (1     —     

Amortization of unrecognized gain and prior service cost

     —          (1     (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 1      $ 1      $ 35      $ 36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Continental

        

Service cost

   $ 23      $ 21      $ 4      $ 4   

Interest cost

     44        42        4        4   

Expected return on plan assets

     (32     (32     —          —     

Amortization of unrecognized (gain) loss and prior service cost

     6        (6     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 41      $ 25      $ 8      $ 7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Pension Benefits     Other Postretirement
Benefits
 
     Six Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

UAL

        

Service cost

   $ 50      $ 44      $ 26      $ 24   

Interest cost

     92        89        63        63   

Expected return on plan assets

     (70     (69     (2     (1

Amortization of unrecognized (gain) loss and prior service cost

     11        (12     (2     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 83      $ 52      $ 85      $ 85   
  

 

 

   

 

 

   

 

 

   

 

 

 

United

        

Service cost

   $ 4      $ 3      $ 18      $ 17   

Interest cost

     4        5        55        56   

Expected return on plan assets

     (6     (5     (2     (1

Amortization of unrecognized gain and prior service cost

     —          (1     (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 2      $ 2      $ 69      $ 72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Continental

        

Service cost

   $ 46      $ 41      $ 8      $ 7   

Interest cost

     88        84        8        7   

Expected return on plan assets

     (64     (64     —          —     

Amortization of unrecognized (gain) loss and prior service cost

     11        (11     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 81      $ 50      $ 16      $ 13   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the six months ended June 30, 2012, Continental contributed $75 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $41 million to its tax-qualified defined benefit pension plans in July 2012.

Share-Based Compensation. In February 2012, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.5 million shares of restricted stock and 0.6 million restricted stock units (“RSUs”) that vest pro-rata over three years on the anniversary of the grant date. In addition, UAL granted 1.3 million performance-based RSUs which will vest based on UAL’s return on invested capital for the three years ending December 31, 2014. If this performance condition is achieved, cash payments will be made after the end of the performance period based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the RSUs as liability awards. The table below presents information related to share-based compensation (in millions):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Share-based compensation expense (a)

   $ 11       $ 14       $ 26       $ 27   

 

     June 30, 2012      December 31, 2011  

Unrecognized share-based compensation expense

   $ 47       $ 43   

 

 

(a) Includes $3 million and $7 million of expense recognized in integration-related costs for the three and six months ended June 30, 2012, respectively. Includes $6 million and $9 million of expense recognized in integration-related costs for the three and six months ended June 30, 2011, respectively.

Profit Sharing Plans. In 2012, substantially all employees participate in profit sharing, which pays 15% of total pre-tax earnings, excluding special items and share-based compensation expense, to eligible employees when pre-tax profit, excluding special items, profit sharing expense and share-based compensation program expense, exceeds $10 million. Eligible U.S. co-workers in each participating work group receive a profit sharing payout using a formula based on the ratio of each qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic workgroups. The international profit sharing plan pays eligible non-U.S. co-workers the same percentage of eligible pay that is calculated under the U.S. profit sharing plan. UAL recorded $54 and $90 million of profit sharing and related payroll tax expense in the six months ended June 30, 2012 and 2011, respectively. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations.

 

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NOTE 6—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements as of June 30, 2012 and December 31, 2011 (in millions):

 

     June 30, 2012     December 31, 2011  
     Total     Level 1      Level 2     Level 3     Total     Level 1      Level 2     Level 3  
     UAL  

Cash and cash equivalents

   $ 6,086      $ 6,086       $ —        $ —        $ 6,246      $ 6,246       $ —        $ —     

Short-term investments:

                  

Asset-backed securities

     522        —           522        —          478        —           478        —     

Corporate debt

     518        —           518        —          515        —           515        —     

Certificates of deposit placed through an account registry service (“CDARS”)

     421        —           421        —          355        —           355        —     

Auction rate securities

     112        —           —          112        113        —           —          113   

U.S. government and agency notes

     20        —           20        —          22        —           22        —     

Other fixed income securities

     25        —           25        —          33        —           33        —     

Enhanced equipment trust certificates (“EETC”)

     63        —           —          63        60        —           —          60   

Fuel derivatives, net

     (101     —           (101     —          73        —           73        —     

Foreign currency derivatives

     —          —           —          —          (1     —           (1     —     

Restricted cash

     586        586         —          —          569        569         —          —     
     United  

Cash and cash equivalents

   $ 4,076      $ 4,076       $ —        $ —        $ 3,458      $ 3,458       $ —        $ —     

Short-term investments:

                  

Asset-backed securities

     20        —           20        —          29        —           29        —     

Corporate debt

     132        —           132        —          138        —           138        —     

CDARS

     162        —           162        —          87        —           87        —     

U.S. government and agency notes

     6        —           6        —          5        —           5        —     

Other fixed income securities

     22        —           22        —          16        —           16        —     

EETC

     63        —           —          63        60        —           —          60   

Fuel derivatives, net

     (54     —           (54     —          44        —           44        —     

Restricted cash

     445        445         —          —          433        433         —          —     
     Continental  

Cash and cash equivalents

   $ 2,004      $ 2,004       $ —        $ —        $ 2,782      $ 2,782       $ —        $ —     

Short-term investments:

                  

Asset-backed securities

     502        —           502        —          449        —           449        —     

Corporate debt

     386        —           386        —          377        —           377        —     

CDARS

     259        —           259        —          268        —           268        —     

Auction rate securities

     112        —           —          112        113        —           —          113   

U.S. government and agency notes

     14        —           14        —          17        —           17        —     

Other fixed income securities

     3        —           3        —          17        —           17        —     

Fuel derivatives, net

     (47     —           (47     —          29        —           29        —     

Foreign currency derivatives

     —          —           —          —          (1     —           (1     —     

Restricted cash

     140        140         —          —          135        135         —          —     

Convertible debt derivative asset

     289        —           —          289        193        —           —          193   

Convertible debt option liability

     (147     —           —          (147     (95     —           —          (95

 

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The tables below present disclosures about the activity for “Level 3” financial assets and financial liabilities for the three and six months ended June 30 (in millions):

 

                                           
     Three Months Ended June 30,  
     2012      2011  

UAL (a)

   Auction Rate
Securities
     EETC      Auction Rate
Securities
     EETC  

Balance at March 31

   $ 112       $ 62       $ 120       $ 63   

Settlements

     —           —           —           —     

Reported in earnings—unrealized

     —           —           1         —     

Reported in other comprehensive income

     —           1         —           2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30

   $ 112       $ 63       $ 121       $ 65   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) For 2012 and 2011, United’s only Level 3 recurring measurements are the above EETCs.

 

                                           
     Six Months Ended June 30,  
     2012     2011  

UAL (a)

   Auction Rate
Securities
    EETC     Auction Rate
Securities
     EETC  

Balance at January 1

   $ 113      $ 60      $ 119       $ 66   

Settlements

     —          (2     —           (2

Reported in earnings—unrealized

     (1     —          1         —     

Reported in other comprehensive income

     —          5        1         1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30

   $ 112      $ 63      $ 121       $ 65   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) For 2012 and 2011, United’s only Level 3 recurring measurements are the above EETCs.

 

      Three Months Ended June 30,  
     2012     2011  

Continental

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

Balance at March 31

   $ 112       $ 231       $ (119   $ 120       $ 262      $ (152

Sales

     —           —           —          —           —          —     

Gains (losses):

               

Reported in earnings—unrealized

     —           58         (28     1         (11     9   

Reported in other comprehensive income

     —           —           —          —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30

   $ 112       $ 289       $ (147   $ 121       $ 251      $ (143
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

 

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Table of Contents
      Six Months Ended June 30,  
     2012     2011  

Continental

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

Balance at January 1

   $ 113      $ 193       $ (95   $ 119       $ 286      $ (164

Sales

     —          —           —          —           —          —     

Gains (losses):

              

Reported in earnings—unrealized

     (1     96         (52     1         (35     21   

Reported in other comprehensive income

     —          —           —          1         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30

   $ 112      $ 289       $ (147   $ 121       $ 251      $ (143
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

As of June 30, 2012, Continental’s auction rate securities, which had a par value of $135 million and an amortized cost basis of $112 million, were variable-rate debt instruments with contractual maturities generally greater than ten years and with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that Continental holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

As of June 30, 2012, United’s EETC securities have an amortized cost basis of $64 million and unrealized losses of $1 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

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

The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above as of June 30, 2012 and December 31, 2011 (in millions):

 

     Fair Value of Debt by Fair Value Hierarchy Level  
     June 30, 2012      December 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  
            Total      Level 1      Level 2      Level 3             Total      Level 1      Level 2      Level 3  

UAL debt

   $ 11,477       $ 12,542       $ —         $ 7,250       $ 5,292       $ 11,682       $ 11,992       $ —         $ 859       $ 11,133   

United debt

     5,531         5,718         —           2,197         3,521         5,745         5,630         —           —           5,630   

Continental debt

     5,540         5,832         —           4,061         1,771         5,528         5,503         —           —           5,503   

 

 

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Table of Contents

Quantitative Information About Level 3 Fair Value Measurements as of June 30, 2012 ($ in millions)

 

Item

  Fair Value at
June 30, 2012
   

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

Auction rate securities

  $ 112      Discounted Cash Flows   Credit risk premium (a) Illiquidity premium (b) Expected repayments (c)  

1%

5% Assumed repayment in years 2013 through 2036

EETC

  $ 63      Discounted Cash Flows   Structure credit risk (d)   7% - 9% (8%)

Convertible debt derivative asset

  $ 289      Binomial Lattice Model   Expected volatility (e) Own credit risk (f)  

45% - 60% (48%)

7% - 10% (8%)

Convertible debt option liability

  $ (147   Binomial Lattice Model   Expected volatility (e) Own credit risk (f)  

45% - 60% (48%)

7% - 10% (8%)

 

(a) Represents the credit risk premium component of the discount rate that the Company has determined market participants would use in pricing the investments.
(b) Represents the illiquidity premium component of the discount rate that the Company has determined market participants would use in pricing the investments.
(c) Represents the estimated timing of principal repayments used in the discounted cash flow model.
(d) Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use in pricing the instruments.
(e) Represents the range in volatility estimates that the Company has determined market participants would use when pricing the instruments.
(f) Represents the range of Company-specific risk adjustments that the Company has determined market participants would use as a model input.

Valuation Processes—Level 3 Measurements—The Company’s internal valuation group is responsible for determining the fair value of financial instruments. Depending on the instrument, the valuation group utilizes discounted cash flow methods or option pricing methods as indicated above. Valuations using discounted cash flow methods are generally conducted by the valuation group. Valuations using option pricing models are generally provided to the Company by third-party valuation experts. Each reporting period, the valuation group reviews the unobservable inputs used by third-party valuation experts for reasonableness utilizing relevant information available to the Company from other published sources. The Company has a formal process to review changes in fair value for satisfactory explanation.

Sensitivity Analysis—Level 3 Measurements—Changes in the unobservable input values would be unlikely to cause material changes in the fair value of the auction rate securities and EETCs.

The significant unobservable inputs used in the fair value measurement of the Continental convertible debt derivative assets and liabilities are the UAL stock expected volatility and the Company’s own credit risk. Significant increases (decreases) in expected volatility would result in a higher (lower) fair value measurement. Significant increases (decreases) in the Company’s own credit risk would result in a lower (higher) fair value measurement. A change in one of the inputs would not necessarily result in a directionally similar change in the other.

 

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Table of Contents

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

 

Description

  

Fair Value Methodology

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

NOTE 7—HEDGING ACTIVITIES

Aircraft Fuel Hedges. The Company has a risk management strategy to hedge a portion of its price risk related to projected aircraft fuel requirements. The Company periodically enters into derivative contracts to mitigate the adverse financial impact of potential increases in the price of fuel. The Company does not enter into derivative instruments for speculative, non-risk management purposes.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted special hedge accounting treatment. Generally, utilizing the special hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. The Company is exposed to the risk that its hedges may not be effective in offsetting changes in the cost of fuel and that its hedges may not continue to qualify for special hedge accounting. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is classified as other nonoperating income (expense).

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

 

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As of June 30, 2012, our projected fuel requirements for the remainder of 2012 were hedged as follows:

 

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

UAL (a)

     

Heating oil collars

     20   $ 3.41         20   $ 2.74   

Brent crude oil collars

     13        2.74         13        1.93   

Diesel fuel collars

     9        3.18         9        2.40   

Diesel fuel call options

     1        3.17         N/A        N/A   

Aircraft fuel collars

     1        3.00         1        2.35   

Aircraft fuel swaps

     1        2.72         1        2.72   
  

 

 

      

 

 

   

Total

     45        44  
  

 

 

      

 

 

   

 

(a) As of June 30, 2012, UAL had also hedged 15% of projected first half 2013 fuel consumption.

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

 

           June 30, 2012      December 31, 2011  

Derivatives designated as hedges

   Balance Sheet
Location
   UAL      United      Continental      UAL      United      Continental  

Assets:

                    

Fuel contracts due within one year

   Receivables    $ 3       $ 2       $ 1       $ 77       $ 48       $ 29   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                    

Fuel contracts due within one year

   Other Current Liabilities    $ 104       $ 56       $ 48       $ 4       $ 4       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

      Amount of Loss  Recognized
in AOCI on Derivatives
(Effective portion)
    Gain (Loss)
Reclassified from
AOCI into Income
(Fuel Expense)
     Amount of Loss
Recognized in Income

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

Fuel contracts

   2012     2011     2012     2011      2012     2011  

UAL

   $ (262   $ (231   $ (38   $ 278       $ (29   $ (34

United

     (148     (149     (17     213         (16     (7

Continental

     (114     (82     (21     65         (13     (27

 

      Amount of Gain (Loss)
Recognized

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

(Fuel Expense)
     Amount of Loss
Recognized in
Income

(Ineffective Portion)
 
     Six Months Ended
June 30,
     Six Months Ended
June 30,
     Six Months Ended
June 30,
 

Fuel contracts

   2012     2011      2012     2011      2012     2011  

UAL

   $ (169   $ 293       $ (69   $ 432       $ (4   $ (31

United

     (90     236         (32     338         (2     (5

Continental

     (79     57         (37     94         (2     (26

 

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Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The following table presents information related to the Company’s derivative credit risk as of June 30, 2012 (in millions):

 

     UAL      United      Continental  

Net derivative liability with counterparties

   $ 101       $ 54       $ 47   

Collateral posted by the Company with its counterparties (a)

     61         27         34   

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

     —           —           —     

 

  (a) Classified as a current receivable.

NOTE 8—COMMITMENTS AND CONTINGENCIES

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

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

The Company records liabilities for legal and environmental claims when a loss is probable and reasonably estimable. These amounts are recorded based on the Company’s assessments of the likelihood of their eventual disposition.

Commitments. On July 12, 2012, UAL entered into a purchase agreement with The Boeing Company (“Boeing”) for a firm narrowbody aircraft order of 100 Boeing 737 MAX 9 aircraft, with options to purchase an additional 100 Boeing 737 MAX 9 aircraft (the “737 MAX 9 Agreement”). Also on July 12, 2012, United entered into a purchase agreement with Boeing for a firm narrowbody aircraft order of 50 Boeing 737-900ER aircraft, with options to purchase an additional 60 Boeing 737-900ER aircraft. The firm order 50 Boeing 737-900ER aircraft and 100 Boeing 737 MAX 9 aircraft are expected to be delivered between 2013 and 2022.

The July 2012 Boeing aircraft order is part of the Company’s flexible fleet strategy, which provides the Company the ability to replace older, less fuel efficient aircraft and to adjust the size of its fleet to respond to market conditions and opportunities. Specifically, the Boeing 737-900ER order discussed above would largely serve as replacement for Boeing 757-200 aircraft that are operated by United whose leases expire over the next five years.

United Aircraft Commitments. As of June 30, 2012 (adjusted to include the order discussed above), United had firm commitments to purchase 100 new aircraft (25 Boeing 787 aircraft, 50 Boeing 737-900ER aircraft and 25 Airbus A350XWB aircraft) scheduled for delivery from 2013 through 2019. United also has options and purchase rights for 152 additional Boeing and Airbus aircraft.

Continental Aircraft Commitments. As of June 30, 2012 (adjusted to include the order discussed above) Continental had firm commitments to purchase 72 new aircraft (47 Boeing 737 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2012 through 2016. Continental also has options to purchase 89 Boeing aircraft. From July 1, 2012 through December 31, 2012, Continental expects to take delivery of nine Boeing 737-900ER aircraft and five Boeing 787-8 aircraft.

 

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United has secured considerable backstop financing commitments from its widebody aircraft and engine manufacturers, subject to certain customary conditions. In addition, Continental has arranged for financing of five Boeing 737-900ER aircraft and four Boeing 787-8 aircraft scheduled for delivery from July 2012 through December 2012. See Note 9 of this report for additional information. However, UAL and United do not have backstop financing or any other financing currently in place for their firm narrowbody aircraft orders with Boeing, and Continental does not have backstop financing or any other financing currently in place for its other Boeing aircraft on order. Financing will be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures. The Company can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to the Company on acceptable terms when necessary or at all.

The table below summarizes the capital commitments of the Company, United and Continental as of June 30, 2012, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and acquisition of information technology services and assets. The table below is adjusted to include the impact of the July 2012 Boeing 737-900ER and 737 MAX 9 aircraft orders discussed above. As UAL has the right, and intends in the future, to assign its interest under the 737 MAX 9 Agreement with respect to one or more of the Boeing 737 MAX 9 aircraft to either United or Continental, but has not determined the actual assignment of the Boeing 737 MAX 9 between United and Continental, the table below assumes that 50% of the Boeing 737 MAX 9 order is assigned to United and 50% of the Boeing 737 MAX 9 order is assigned to Continental. The table below is also adjusted to include the impact of the resolution between the Company and Boeing in July 2012 relating to compensation in connection with certain Boeing 787 aircraft delivery delays, which contemplates certain adjustments to Continental’s and United’s Boeing 787 purchase agreements.

 

     In billions  
     UAL      United      Continental  

Last six months of 2012

   $ 1.2       $ 0.3       $ 0.9   

2013

     1.4         0.4         1.0   

2014

     1.3         0.6         0.7   

2015

     2.1         0.8         1.3   

2016

     2.8         2.0         0.8   

After 2016

     9.7         7.2         2.5   
  

 

 

    

 

 

    

 

 

 
   $ 18.5       $ 11.3       $ 7.2   
  

 

 

    

 

 

    

 

 

 

Any incremental firm aircraft orders, including through the exercise of purchase options, will increase the total future capital commitments of the Company, United and/or Continental.

UAL and Continental have concluded their discussions with Boeing regarding delays in delivery of certain Boeing 787 aircraft, and have reached a resolution with Boeing regarding compensation to be received in connection with those delays.

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

As of June 30, 2012, $25 million was provided by the Company as a cash reserve for its credit card processing agreement with JPMorgan Chase Bank, N.A. and Paymentech, LLC. Our credit card processing agreement with JPMorgan Chase Bank, N.A. and Paymentech, LLC to process MasterCard/Visa transactions and our credit card processing agreement with American Express allow the applicable financial institution to require additional cash or other collateral reserves to be established or additional withholding of payments related to receivables collected if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents and short term investments. The Company’s current level of unrestricted cash, cash equivalents and short term investments is substantially in excess of these minimum levels. The amount of required cash or other collateral reserves or withheld payments would be no more than the liability of the credit card processor for tickets purchased with the applicable credit cards for travel that had not occurred. In conjunction with the single passenger service system conversion in March 2012, all tickets sold since that date have been on United ticket stock. As a result, the advance ticket sales by Continental have diminished and are expected to be zero by March 2013.

 

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Guarantees and Off-Balance Sheet Financing.

Guarantees. United and Continental are the guarantors of approximately $270 million and $1.7 billion, respectively, in aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon. These bonds, issued by various airport municipalities, are payable solely from rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with $1.8 billion ($270 million for United and $1.5 billion for Continental) of these obligations are accounted for as operating leases with the associated expense recorded on a straight-line basis resulting in ratable accrual of the lease obligation over the expected lease term. The leasing arrangements associated with $190 million (for Continental only) of these obligations are accounted for as capital leases. These bonds are due between 2015 and 2033.

In the Company’s financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate (“LIBOR”), for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject in most cases to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs. At June 30, 2012, UAL had $2.5 billion of floating rate debt (consisting of United’s $2.0 billion and Continental’s $498 million of debt) and $376 million of fixed rate debt (consisting of United’s $195 million and Continental’s $181 million of debt), with remaining terms of up to ten years, that are 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 balance of $2.8 billion (consisting of United’s $2.2 billion and Continental’s $595 million balance), the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions.

Houston Bush Terminal B Redevelopment Project. In May 2011, UAL, in partnership with the Houston Airport System, announced that it would begin construction of the first phase of a potential three-phase $1 billion terminal improvement project for Terminal B at George Bush Intercontinental Airport (“Houston Bush”) by the end of 2011. In November 2011, the City of Houston issued approximately $113 million of special facilities revenue bonds to finance the construction of a new south concourse at Houston Bush dedicated to the Company’s regional jet operations. The bonds are guaranteed by Continental and are payable from certain rentals paid by Continental under a special facilities lease agreement with the City of Houston. Continental’s initial commitment is to construct the first phase of the originally anticipated three-phase project. Continental’s cost of construction of phase one of the project is currently estimated to be approximately $100 million and is funded by special facilities revenue bonds. Construction of the remaining phases of the project, if any, will be based on demand over the next seven to 10 years, with phase one currently expected to be completed in late 2013.

Based on a qualitative assessment of the Houston Bush Terminal B Redevelopment Project, due to the fact that Continental is guaranteeing the special facilities revenue bonds and the requirement that Continental fund cost overruns with no stated limits, Continental is considered the owner of the property during the construction period for accounting purposes. As a result, the construction project is being treated as a financing transaction such that the property and related financing will be included on UAL’s consolidated balance sheet as an asset under operating property and equipment and as a construction obligation under other long-term liabilities.

Credit Facilities. As of June 30, 2012 the Company had its entire commitment capacity of $500 million available under the Credit and Guaranty Agreement, dated as of December 22, 2011 (the “Revolving Credit Facility”) with a syndicate of banks led by Citibank N.A., as administrative agent. The Revolving Credit Facility has an expiration date of January 30, 2015.

Labor Negotiations. As of June 30, 2012, UAL and its subsidiaries had approximately 88,000 active employees, of whom approximately 80% are represented by various U.S. labor organizations. On February 27, 2012, the pilots at both United and Continental agreed to an extension of their protocol for joint negotiations and continue to engage in joint bargaining with the Company. On February 28, 2012, the flight attendants at United ratified a new collective bargaining agreement and, on July 13, 2012, the flight attendants at Continental ratified a new collective bargaining agreement. On July 17, 2012, the Company reached a tentative agreement with its Continental Micronesia flight attendants, subject to ratification in the third quarter of 2012. Joint negotiations will begin shortly for a joint collective bargaining agreement covering the Company’s flight attendant work groups.

On March 7, 2012, the passenger service employees at both United and Continental voted to be represented by the International Association of Machinists and Aerospace Workers, AFL-CIO and negotiations are underway for a joint collective bargaining agreement for this employee group. The Company reached a tentative agreement with the United ground instructors, which the United ground instructors ratified on June 8, 2012. We are continuing our negotiations for joint collective bargaining agreements with other work groups, including technicians, dispatchers, fleet service employees, storekeepers and various smaller groups.

NOTE 9—DEBT

As of June 30, 2012, a substantial portion of our assets are pledged as collateral for our debt. These assets principally consist of aircraft and the related spare parts and engines, route authorities and loyalty program intangible assets. As of June 30, 2012, UAL, United and Continental were in compliance with their respective debt covenants.

 

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Continental EETCs. In March 2012, Continental created two pass-through trusts, one of which issued $753 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 4.15% and the other of which issued $139 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 6.25%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $892 million, have been and will be used to purchase equipment notes issued by Continental. Of the $892 million in proceeds raised by the pass-through trusts, Continental received $392 million as of June 30, 2012, in exchange for Continental’s issuance of an equivalent principal amount of equipment notes, which has been recorded as debt. The remaining amount is expected to be received during the last six months of this year as aircraft are delivered to Continental and Continental issues equipment notes to the trusts. Continental records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The proceeds have been and are expected to be used to fund the acquisition of new aircraft, and in the case of currently owned aircraft, for general corporate purposes.

The Company evaluated whether the pass-through trusts formed are variable interest entities (“VIEs”) required to be consolidated by the Company under applicable accounting guidance, and determined that the pass-through trusts are VIEs. The Company determined that it does not have a variable interest in the pass-through trusts. The Company does not invest in or obtain a financial interest in the pass-through trusts. Rather, Continental has an obligation to make interest and principal payments on its equipment notes held by the pass-through trusts. The Company did not intend to have any voting or non-voting equity interest in the pass-through trusts or to absorb variability from the pass-through trusts. Based on this analysis, the Company determined that it is not required to consolidate the pass-through trusts.

8% Contingent Senior Notes. UAL is obligated under an indenture to issue to the Pension Benefit Guaranty Corporation (“PBGC”) up to $500 million aggregate principal amount of 8% Notes in up to eight equal tranches of $62.5 million if certain financial triggering events occur (with each tranche issued no later than 45 days following the end of any applicable fiscal year).

During 2011, a financial triggering event under the 8% Notes indenture occurred at both June 30, 2011 and December 31, 2011 and, as a result, UAL issued two tranches of $62.5 million each of the 8% Notes in January 2012, which were recorded during 2011 at their fair value of $88 million as a component of integration costs. In addition, at June 30, 2012, a financial triggering event under the 8% Notes indenture occurred and, as a result, UAL is obligated to issue an additional tranche of $62.5 million of the 8% Notes by February 2013. UAL recorded a liability for the fair value of the obligation of $48 million during the second quarter of 2012.

NOTE 10—SPECIAL ITEMS

Special Revenue. During the second quarter of 2011, the Company modified the previously existing United and Continental co-branded credit card agreements with Chase Bank USA, N.A. This modification resulted in the following one-time adjustment to decrease frequent flyer deferred revenue and increase special revenue in accordance with ASU 2009-13 for the three and six months ended June 30, 2011 as follows (in millions):

 

     UAL      United      Continental  

Special revenue item

   $ 107       $ 88       $ 19   

 

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Special Charges. For the three and six months ended June 30, special charges consisted of the following (in millions):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

2012

   UAL     United      Continental     UAL     United     Continental  

Integration-related costs

   $ 137      $ 98       $ 39      $ 271      $ 169      $ 102   

Voluntary severance and benefits

     76        76         —          125        125