<PAGE>
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1994
                                                        REGISTRATION NO. 33-
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                ---------------
 
                                   FORM S-4
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                                ---------------
 
                  UAL CORPORATION AND UNITED AIR LINES, INC.
          (EXACT NAME OF EACH REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                ---------------
 
    DELAWARE--UAL                  4512--UAL            36-2675207--UAL
   DELAWARE--UNITED              4512--UNITED          36-2675206--UNITED
   (STATE OR OTHER            (PRIMARY STANDARD         (I.R.S. EMPLOYER
   JURISDICTION OF        INDUSTRIAL CLASSIFICATION   IDENTIFICATION NUMBER)
   INCORPORATION OR              CODE NUMBER)
    ORGANIZATION)  
                   
                   
 
                           1200 EAST ALGONQUIN ROAD
                      ELK GROVE TOWNSHIP, ILLINOIS 60007
                                (708) 952-4000
 
      (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
              CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
 
                                                     Copies to:
      LAWRENCE M. NAGIN, ESQ.                 PETER ALLAN ATKINS, ESQ.
          UAL CORPORATION                     THOMAS H. KENNEDY, ESQ.
           P.O. BOX 66100                      ERIC L. COCHRAN, ESQ.
      CHICAGO, ILLINOIS 60666             SKADDEN, ARPS, SLATE, MEAGHER &
           (708) 952-4000                               FLOM
   (NAME, ADDRESS, INCLUDING ZIP                  919 THIRD AVENUE
    CODE, AND TELEPHONE NUMBER,               NEW YORK, NEW YORK 10022
 INCLUDING AREA CODE, OF AGENT FOR
              SERVICE)
 
                                ---------------
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
effective time of the recapitalization (the "Recapitalization") of UAL
Corporation described in the Proxy Statement/Joint Prospectus forming a part
of this Registration Statement.
  If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
 
                                ---------------
 
                        CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
================================================================================================ 
 TITLE OF EACH CLASS OF        AMOUNT           PROPOSED         PROPOSED
    SECURITIES TO BE            TO BE       MAXIMUM OFFERING MAXIMUM AGGREGATE     AMOUNT OF
       REGISTERED            REGISTERED      PRICE PER UNIT   OFFERING PRICE   REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S>                       <C>               <C>              <C>               <C>
Common Stock, par value
 $.01 per share, of
 UAL...................   14,463,093 shares       (1)               (1)        $700,462.52(1)(2)
- ------------------------------------------------------------------------------------------------
Series B Preferred Stock
 of UAL (or depositary
 receipts representing
 such shares)..........   35,984,175 shares       (1)               (1)               (1)
- ------------------------------------------------------------------------------------------------
Series D Redeemable
 Preferred Stock of
 UAL...................     28,927 shares         (1)               (1)               (1)
- ------------------------------------------------------------------------------------------------
Series A Senior
 Debentures due 2004 of
 United................     $449,802,200         (1)(2)           (1)(2)            (1)(2)
- ------------------------------------------------------------------------------------------------
Series B Senior
 Debentures due 2014 of
 United................     $449,802,200         (1)(2)           (1)(2)            (1)(2)
================================================================================================ 
</TABLE>


(1) This Registration Statement covers the shares of Common Stock, par value
    $0.01 per share, of UAL (the "New Shares"), the shares of the Series B
    Preferred Stock of UAL and the shares of Series D Redeemable Preferred
    Stock of UAL to be issued in exchange for, and upon conversion of the
    shares of the Common Stock, par value $5 per share, of UAL (the "Old
    Shares") in connection with the Recapitalization. Immediately upon
    issuance, the Series D Redeemable Preferred Stock will be redeemed for
    cash, Series A Debentures due 2004 of United and Series B Debentures due
    2014 of United (collectively, the "Debentures"). For the purposes of
    calculating the registration fee pursuant to Rule 457(f)(l), (i) the
    number of Old Shares to be exchanged and converted is 28,926,185 and (ii)
    $746,295,573 of cash ($25.80 per Old Share), which will be paid by UAL in
    connection with the Recapitalization, has been subtracted (pursuant to
    Rule 457(f)(3)) from the aggregate market value of Old Shares to be
    exchanged and converted in the Recapitalization. The aggregate market
    value of the Old Shares has been computed by taking the average of the
    high and low prices for the Old Shares on the New York Stock Exchange,
    Inc. on April 6, 1994 ($127.125).
 
(2) As noted below, the Debentures were registered as Debt Securities of
    United pursuant to the Registration Statement on Form S-3 (No. 33-57192)
    filed on January 21, 1993. Of the aggregate fee calculated pursuant to
    Rule 457(f), $310,208.41 is attributable to the Debentures, and the amount
    of the registration fee has been reduced by such amount.
 
                                ---------------
 
  THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
  AS PROVIDED UNDER RULE 429, THE DEBENTURES TO BE OFFERED HEREUNDER WERE
REGISTERED AS DEBT SECURITIES OF UNITED PURSUANT TO THE REGISTRATION STATEMENT
ON FORM S-3 (NO. 33-57192) FILED ON JANUARY 21, 1993.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
                                UAL CORPORATION
                             UNITED AIRLINES, INC.
 
                             CROSS-REFERENCE SHEET
 
                 PURSUANT TO ITEM 501(B) OF REGULATION S-K 
        SHOWING THE LOCATION IN THE PROXY STATEMENT/JOINT PROSPECTUS 
             OF THE INFORMATION REQUIRED TO BE INCLUDED THEREIN
                      IN RESPONSE TO PART I OF FORM S-4
 

<TABLE>
<CAPTION>
                                               LOCATION OR HEADING IN
    S-4 ITEM NUMBER AND CAPTION           PROXY STATEMENT/JOINT PROSPECTUS
    ---------------------------           --------------------------------
<S>                                  <C>
 1. Forepart of Registration      
    Statement and Outside Front    
    Cover Page of Prospectus.......  FACING PAGE; CROSS-REFERENCE SHEET; OUTSIDE
                                     FRONT COVER PAGE
 2. Inside Front and Outside Back
    Cover Pages of Prospectus......  AVAILABLE INFORMATION; INCORPORATION OF
                                     CERTAIN DOCUMENTS BY REFERENCE; TABLE OF
                                     CONTENTS
 3. Risk Factors, Ratio of Earnings
    to Fixed Charges, and Other    
    Information....................  SUMMARY OF PROXY STATEMENT/JOINT
                                     PROSPECTUS; --The Plan of
                                     Recapitalization--Certain Risk Factors;--
                                     Selected Consolidated Historical and Pro
                                     Forma Information; --SPECIAL FACTORS--
                                     Certain Risk Factors; SELECTED CONSOLIDATED
                                     FINANCIAL AND OPERATING INFORMATION;
                                     UNAUDITED PRO FORMA FINANCIAL INFORMATION

 4. Terms of the Transaction.......  SUMMARY OF THE PROXY STATEMENT/JOINT
                                     PROSPECTUS--The Plan of Recapitalization;
                                     --The Plan of Recapitalization--Background
                                     of the Recapitalization; --The Plan of
                                     recapitalization--Opinion of Certain
                                     Financial Advisors to the Board; --The Plan
                                     of Recapitalization--Certain Federal Income
                                     Tax Consequences; BACKGROUND OF THE
                                     RECAPITALIZATION; SPECIAL FACTORS--Opinions
                                     of the Financial Advisors to the Board;--
                                     Purpose and Structure of the
                                     Recapitalization;--Certain Effects of the
                                     Recapitalization; CERTAIN FEDERAL INCOME
                                     TAX CONSEQUENCES; THE PLAN OF
                                     RECAPITALIZATION--Terms and Conditions;--
                                     Establishment of ESOP; DESCRIPTION OF
                                     SECURITIES
 5. Pro Forma Financial            
    Information....................  SUMMARY OF PROXY STATEMENT/JOINT
                                     PROSPECTUS--Selected Consolidated and Pro
                                     forma Operating Information; UNAUDITED PRO
                                     FORMA FINANCIAL INFORMATION
</TABLE>


<PAGE>
 

<TABLE>
<CAPTION>
                                               LOCATION OR HEADING IN
    S-4 ITEM NUMBER AND CAPTION           PROXY STATEMENT/JOINT PROSPECTUS
    ---------------------------           --------------------------------
<S>                                  <C>
 6. Material Contacts with the
    Company Being Acquired.........  SUMMARY OF PROXY STATEMENT/JOINT
                                     PROSPECTUS--The Plan of Recapitalization--
                                     Background of the Recapitalization;
                                     BACKGROUND OF THE RECAPITALIZATION
 7. Additional Information Required
    for Reoffering by Persons and
    Parties Deemed to be
    Underwriters...................  NOT APPLICABLE
 8. Interests of Named Experts and 
    Counsel........................  SPECIAL FACTORS--Opinions of the Financial
                                     advisors to the Board; EXPERTS; LEGAL
                                     OPINION
 9. Disclosure of Commission
    Position on Indemnification for
    Securities Act Liability.......  NOT APPLICABLE
10. Information With Respect to S-3
    Registrants....................  INCORPORATION OF CERTAIN DOCUMENTS BY
                                     REFERENCE; BACKGROUND OF THE PLAN OF
                                     RECAPITALIZATION
11. Incorporation of Certain
    Information by Reference.......  INCORPORATION OF CERTAIN DOCUMENTS BY
                                     REFERENCE
12. Information With Respect to S-2
    or S-3 Registrants.............  NOT APPLICABLE
13. Incorporation of Certain
    Information by Reference.......  NOT APPLICABLE
14. Information With Respect to
    Registrants Other Than S-3 or
    S-2 Registrants................  NOT APPLICABLE
15. Information With Respect to S-3
    Companies......................  NOT APPLICABLE
16. Information With Respect to S-2
    or S-3 Companies...............  NOT APPLICABLE
17. Information With Respect to
    Companies Other Than S-2 or S-3
    Companies......................  NOT APPLICABLE
18. Information if Proxies,       
    Consents or Authorizations Are 
    to be Solicited................  SUMMARY OF PROXY STATEMENT/JOINT
                                     PROSPECTUS--Date, Time and Place of
                                     Meeting; --Vote Required; --The Plan of
                                     Recapitalization--Interests of Certain
                                     Persons in the Recapitalization; --The Plan
                                     of Recapitalization--No Appraisal Rights;
                                     INTRODUCTION; --Voting Rights and Proxy
                                     Information; --No Appraisal Rights; SPECIAL
                                     FACTORS--Interests of Certain Persons in
                                     the Recapitalization; --Management
                                     Arrangements; THE PLAN OF
                                     RECAPITALIZATION--Revised Governance
                                     Structure; ELECTION OF DIRECTORS;
                                     BENEFICIAL OWNERSHIP OF SECURITIES;
                                     EXECUTIVE COMPENSATION
19. Information if Proxies,
    Consents or Authorizations are
    not to be Solicited, or in an
    Exchange Offer.................  NOT APPLICABLE
</TABLE>


<PAGE>
 
                                [UAL LETTERHEAD]
 
                                                          ________________, 1994
 
Dear Stockholder:
 
  At a Meeting of Stockholders of UAL Corporation scheduled to be held at the
      on      , common stockholders will be asked to approve a recapitalization
transaction that substantially alters the cost structure of UAL's principal
subsidiary, United Airlines, a change that is intended to immediately
strengthen the carrier's competitive position in worldwide aviation markets
while improving its long-term financial viability well into the future.
 
  As part of the transaction, employees will make an investment, which is
estimated by the Company to have a net present value of approximately $4.9
billion, in the form of wage concessions, work-rule changes and related
savings. In return, through the establishment of Employee Stock Ownership
Plans, participating employees will hold, initially, approximately 53 percent
of the equity of the Company with current stockholders, initially, retaining
approximately 47 percent of the equity in the Company, subject to adjustment in
certain circumstances. In addition, current common stockholders will receive
additional consideration in the form of cash, debentures and preferred stock.
 
  We believe that the transaction directly addresses the major problem facing
United and virtually all mature air carriers in the United States: a high cost
structure that impedes effective competition with newer, low-cost carriers that
have increased significantly their U.S. domestic market share over the past
five years and that are continuing to make significant inroads into United's
traditional markets.
 
  The employee investment is expected to reduce costs substantially throughout
United's worldwide route system. The investment specifically addresses the
critical challenge facing United in U.S. domestic markets by facilitating the
creation of a new operation--an "airline-within-an-airline"--that is intended
to compete more effectively with low-cost carriers in short-haul markets where
they are most predominant.
 
  In addition--and importantly in a service business such as an airline--this
transaction should enhance the commitment of employees by providing a tangible
link between the Company's operating performance and the resulting rewards that
can be realized by employee-owners of the Company.
 
  The transaction will take the form of a recapitalization that will provide an
immediate return to common stockholders of $25.80 in cash, $31.10 liquidation
value of Company preferred stock and $31.10 face amount of United debentures
and will permit current stockholders to retain a significant ongoing equity
interest in the Company.
 
  The attached Proxy Statement/Joint Prospectus details the proposed
transaction, including the establishment of a revised corporate governance
structure that will be implemented through, among other things, amendments to
the Company's Restated Certificate of Incorporation and Bylaws.
 
  The Board of Directors has approved the recapitalization plan and has
determined that the proposed recapitalization is fair to the holders of the
Company's common stock. The Board of Directors recommends that holders of
common stock vote FOR approval of the recapitalization plan and the related
matters identified as Items 2 through 7 on the enclosed proxy card.
 
  You are urged to read the information concerning the proposed
recapitalization contained in the attached Proxy Statement/Joint Prospectus,
including pages 13 through 25 that outline the benefits the Company

<PAGE>
 
expects to achieve as a result of the employee investment, and the opinions of
the Company's financial advisors, CS First Boston Corporation and Lazard Freres
& Co. The Proxy Statement/Joint Prospectus also describes a number of other
matters to be voted upon by holders of common stock at the Meeting.
 
  We ask you to fill out, sign and mail promptly the enclosed proxy. If you
plan to attend, please request an admission card by marking the proxy card in
the space provided. If you attend the meeting, you may vote your shares in
person whether or not you have previously submitted a proxy.
 
  Thank you for your cooperation.
 
                                          Very truly yours,
 
                                          Stephen M. Wolf
                                          Chairman of the Board
                                          and Chief Executive Officer
 
                                       2

<PAGE>
 
                                UAL CORPORATION
                                P.O. BOX 66919
                            CHICAGO, ILLINOIS 60666
 
                               ----------------
 
                       NOTICE OF MEETING OF STOCKHOLDERS
 
To the Stockholders:
 
  A Meeting of stockholders of UAL Corporation, a Delaware corporation (the
"Company"), will be held at the                       ,                     ,
                 , on                , 1994, at   :00 a.m., local time, for
the following purposes:
 
    1. To approve the Agreement and Plan of Recapitalization, dated as of
  March 25, 1994 (the "Plan of Recapitalization"). The Plan of
  Recapitalization provides for the reclassification of the Company's
  outstanding common stock and other amendments to the Company's Restated
  Certificate of Incorporation and Bylaws, as a result of which each
  outstanding share of common stock, par value $5.00 per share, of the
  Company (the "Old Shares") will be reclassified as, and exchanged for, one-
  half (0.5) of a new share of common stock, par value $.01 per share, of the
  Company (the "New Shares"), $31.10 liquidation value of Series B Preferred
  Stock, without par value, of the Company, and one one-thousandth of a share
  of Series D Redeemable Preferred Stock, without par value, of the Company,
  which one one-thousandth of a share will be redeemed immediately after
  issuance for $25.80 in cash, $15.55 principal amount of Series A Debentures
  due 2004 of United Air Lines, Inc. ("United") and $15.55 principal amount
  of Series B Debentures due 2014 of United.
 
    2. Subject to and conditioned upon approval of the Plan of
  Recapitalization, to approve the amendment and restatement of the Company's
  Restated Certificate of Incorporation and Bylaws as set forth in the Plan
  of Recapitalization (the "Charter and Bylaw Amendments").
 
    3. Subject to and conditioned upon approval of the Plan of
  Recapitalization and the Charter and Bylaw Amendments, to approve the
  issuance of (a) shares of Class 1 ESOP Convertible Preferred Stock to State
  Street Bank and Trust Company ("State Street"), as trustee of the UAL
  Corporation Employee Stock Ownership Plan Trust, (b) shares of Class 2 ESOP
  Convertible Preferred Stock to State Street, as trustee of the UAL
  Corporation Supplemental ESOP Trust, (c) shares of (i) Class P ESOP Voting
  Preferred Stock, (ii) Class M ESOP Voting Preferred Stock and (iii) Class S
  ESOP Voting Preferred Stock to State Street, as trustee of the UAL
  Corporation Employee Stock Ownership Plan Trust and the UAL Corporation
  Supplemental ESOP Trust, (d) shares of Class I Junior Preferred Stock to
  certain individuals to be named as directors of the Company, (e) a share of
  Class Pilot MEC Junior Preferred Stock to the United Airlines Pilots Master
  Executive Council of the Air Line Pilots Association, International, (f) a
  share of Class IAM Junior Preferred Stock to the International Association
  of Machinists and Aerospace Workers or its designee and (g) shares of Class
  SAM Preferred Stock to an individual to be named as a director of the
  Company on behalf of its salaried and management employees and to an
  additional designated stockholder.
 
    4. Subject to and conditioned upon approval of the Plan of
  Recapitalization and the Charter and Bylaw Amendments, to elect four
  directors to serve as "Public Directors" of the Company until their
  successors are duly elected and qualified.
 
    5. Subject to and conditioned upon approval of the Plan of
  Recapitalization and the Charter and Bylaw Amendments, to amend the
  Company's 1981 Incentive Stock Program.
 
    6. Subject to and conditioned upon approval of the Plan of
  Recapitalization and the Charter and Bylaw Amendments, to amend the
  Company's 1988 Restricted Stock Plan.
 

<PAGE>
 
    7. Subject to and conditioned upon approval of the Plan of
  Recapitalization, to amend the Company's Incentive Compensation Plan.
 
    8. To consider and act upon three stockholder proposals.
 
    9. To ratify the selection of Arthur Andersen & Co. as the Company's
  independent accountants for the year ending December 31, 1994.
 
    10. To transact such other business as may properly come before the
  Meeting or any adjournment or postponement thereof.
 
  If the Plan of Recapitalization is approved and directors are elected at the
Meeting, the Meeting will be deemed to constitute the Company's 1994 annual
meeting. If the Plan of Recapitalization is not approved and/or if directors
are not elected at the Meeting, an annual meeting of stockholders for 1994 will
be scheduled in the near future.
 
  Only holders of record of Old Shares at the close of business on , 1994 are
entitled to notice of, and to vote at, the Meeting and at any adjournment or
postponement thereof. A list of such holders will be open for examination
during ordinary business hours by any stockholder for any purpose germane to
the meeting at      for a period of ten days prior to the meeting. The list
will also be available on      at the place of the Meeting.
 
  Stockholders will not be entitled to appraisal rights in connection with any
of the matters to be voted on at the Meeting.
 
  Stockholders are urged to fill out, sign and mail promptly the enclosed proxy
in the accompanying envelope, which requires no postage if mailed in the United
States. Proxies forwarded by or for brokers or fiduciaries should be returned
as directed. The prompt return of proxies will save the expense involved in
further communication.
 
                                          By Order of the Board of Directors.
 
                                          Francesca M. Maher,
                                          Secretary
 
Chicago, Illinois
           , 1994
 
  PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU
INTEND TO BE PRESENT AT THE MEETING.
 
                                       2

<PAGE>
 
                  SUBJECT TO COMPLETION, DATED APRIL 12, 1994
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                                UAL CORPORATION
                             UNITED AIR LINES, INC.
 
                        PROXY STATEMENT/JOINT PROSPECTUS
 
  This Proxy Statement/Joint Prospectus (the "Proxy Statement/Prospectus") is
being furnished in connection with the solicitation of proxies by the Board of
Directors of UAL Corporation, a Delaware corporation (the "Company"), from
holders of the outstanding shares of common stock, par value $5.00 per share,
of the Company ("Old Shares") for use at the Meeting of Stockholders of the
Company (the "Meeting") to be held at the time and place and for the purposes
set forth in the accompanying Notice.
 
  At the Meeting, the holders of Old Shares will be asked to consider and to
vote upon (i) the Agreement and Plan of Recapitalization, dated as of March 25,
1994 (the "Plan of Recapitalization"), which contemplates certain transactions
collectively referred to as the "Recapitalization," (ii) subject to and
conditioned upon approval of the Plan of Recapitalization, the amendment and
restatement of the Company's Restated Certificate of Incorporation and Bylaws
(the "Charter and Bylaw Amendments"), (iii) subject to and conditioned upon
approval of the Plan of Recapitalization and the Charter and Bylaw Amendments,
the approval of the issuance of (a) shares of Class 1 ESOP Convertible
Preferred Stock to State Street Bank and Trust Company ("State Street"), as
trustee of the UAL Corporation Employee Stock Ownership Plan Trust, (b) shares
of Class 2 ESOP Convertible Preferred Stock to State Street, as trustee of the
UAL Corporation Supplemental ESOP Trust, (c) shares of (1) Class P ESOP Voting
Preferred Stock, (2) Class M ESOP Voting Preferred Stock and (3) Class S ESOP
Voting Preferred Stock to State Street, as trustee of the UAL Corporation
Employee Stock Ownership Plan Trust and the UAL Corporation Supplemental ESOP
Trust, (d) shares of Class I Junior Preferred Stock to certain individuals to
be named as directors of the Company, (e) a share of Class Pilot MEC Junior
Preferred Stock to the United Airlines Pilots Master Executive Council ("ALPA-
MEC") of the Air Line Pilots Association, International ("ALPA"), (f) a share
of Class IAM Junior Preferred Stock to the International Association of
Machinists and Aerospace Workers (the "IAM") or its designee, and (g) shares of
Class SAM Preferred Stock to an individual to be named as a director of the
Company on behalf of salaried and management employees and to an additional
designated stockholder, (iv) subject to and conditioned upon approval of the
Plan of Recapitalization and the Charter and Bylaw Amendments, the election of
four "Public Directors" of the Company, (v) subject to and conditioned upon
approval of the Plan of Recapitalization and the Charter and Bylaw Amendments,
the amendment of the Company's 1981 Incentive Stock Program, (vi) subject to
and conditioned upon approval of the Plan of Recapitalization and the Charter
and Bylaw Amendments, the amendment of the Company's 1988 Restricted Stock
Plan, (vii) subject to and conditioned upon approval of the Plan of
Recapitalization, the amendment of the Company's Incentive Compensation Plan,
(viii) three stockholder proposals, and (ix) ratification of the selection of
Arthur Andersen & Co. as the Company's independent accountants for the year
ending December 31, 1994.
 
  As a result of the Recapitalization, each outstanding Old Share, including
each share of restricted stock issued pursuant to the UAL 1988 Restricted Stock
Plan, together with up to 1,000,000 Old Shares held by the Company as treasury
stock or owned by any wholly-owned subsidiary of the Company, will be
reclassified as, and converted into, one-half (0.5) of a new share of common
stock, par value $.01 per share, of the Company (the "New Shares"), $31.10
liquidation value of Series B Preferred Stock, without par value, of the
Company (the "Public Preferred Stock"), and one one-thousandth (0.001) of a
share of Series D Redeemable Preferred Stock, without par value, of the Company
(the "Redeemable Preferred Stock"), which will be redeemed immediately after
issuance for $25.80 in cash, $15.55 principal amount of Series A Debentures due
2004 (the "Series A Debentures") of United Air Lines, Inc. ("United"), and
$15.55 principal amount of Series B Debentures due 2014 of United (the "Series
B Debentures" and, together with the Series A Debentures, collectively, the
"Debentures"). One-half of a New Share will represent an equity interest (based
on "Fully Diluted Old Shares") as defined in the "PLAN OF RECAPITALIZATION--
Terms and Conditions") immediately after the Recapitalization of 47% of one Old
Share's current percentage equity interest in the Company, subject to possible
reduction. See "PLAN OF RECAPITALIZATION--Establishment of ESOP--Additional
Shares." The funds required to effect the Recapitalization, to pay related
expenses (including

<PAGE>
 
certain expenses of ALPA and the IAM) and to provide for the Company's working
capital needs after the Recapitalization are expected to be provided from the
Company's internal resources.
 
  The Plan of Recapitalization provides for amendments to the Company's
Restated Certificate of Incorporation and Bylaws which will provide, among
other things, for a restructuring of the entire Board of Directors of the
Company. If the Recapitalization is consummated, these amendments, together
with the ownership initially of at least 53% of the Company's common stock
interests by trusts for certain of its employees and provisions that will
preserve the majority voting power of the employee groups so long as their
percentage economic interest in the Company remains above certain levels, will
have the effect of a change in control of the Company and may make more
difficult a future change in control of the Company. See "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure."
 
  IN ASSESSING THE RECAPITALIZATION, EACH STOCKHOLDER SHOULD BE AWARE THAT
CERTAIN FACTORS INVOLVED IN THE RECAPITALIZATION MAY INCREASE THE RISK
ASSOCIATED WITH, AND MAY OTHERWISE ADVERSELY AFFECT THE VALUE OF, MAINTAINING
AN EQUITY INVESTMENT IN THE COMPANY. THESE FACTORS INCLUDE AN IMMEDIATE CHANGE
OF THE COMPANY'S CAPITALIZATION TO ONE THAT IS MORE LEVERAGED. SEE "SPECIAL
FACTORS--CERTAIN RISK FACTORS" AND "--CERTAIN EFFECTS OF THE RECAPITALIZATION."
 
  Consummation of the Recapitalization is subject to certain conditions,
including approval of the Plan of Recapitalization by holders of at least a
majority of the outstanding Old Shares. See "THE PLAN OF RECAPITALIZATION--
Terms and Conditions."
 
  The address of the principal executive offices of the Company is 1200 East
Algonquin Road, Elk Grove Township, Illinois 60007, its telephone number at
such address is (708) 952-4000 and the mailing address of the Company is P.O.
Box 66919, Chicago, Illinois 60666.
 
  The Company and United have filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), covering the New Shares, the Public Preferred Stock, the Redeemable
Preferred Stock and the Debentures to be issued in the Recapitalization. This
Proxy Statement/Prospectus, which is first being mailed to stockholders of the
Company on or about         , 1994, constitutes the joint prospectus of the
Company and United included as part of the Registration Statement. The Company
has also filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
"Schedule 13E-3") in connection with the Recapitalization. Copies of the
Registration Statement and the Schedule 13E-3 may be obtained as set forth
below under "AVAILABLE INFORMATION."
 
  No person is authorized in connection with any offering made hereby to give
any information or to make any representations other than those contained in
this Proxy Statement/Prospectus, and if given or made, such other information
or representations must not be relied upon as having been authorized. This
Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of any offer to buy, by any person in any jurisdiction in which it
is unlawful for such person to make such offer or solicitation. Neither the
delivery of this Proxy Statement/Prospectus nor any sale made hereunder shall
under any circumstances create any implication that information herein is
correct as of any time subsequent to the date hereof.
 
                               ----------------
 
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT PASSED UPON
THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 
                               ----------------
 
         The date of this Proxy Statement/Prospectus is         , 1994
 
                                       ii

<PAGE>
 
                             AVAILABLE INFORMATION
 
  The Company and United are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. The reports, proxy statements and other information filed by
the Company and United with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission at Seven World Trade Center, 13th Floor, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material also can be obtained by mail from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, material filed by the
Company can be inspected at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005, the Chicago Stock Exchange, 440
South LaSalle Street, Chicago, Illinois 60605 and the Pacific Stock Exchange,
301 Pine Street, San Francisco, California 94104.
 
  The Company and United have filed with the Commission a Registration
Statement under the Securities Act, with respect to the New Shares, the Public
Preferred Stock, the Redeemable Preferred Stock, and the Debentures to be
issued pursuant to or as contemplated by the Recapitalization as described in
this Proxy Statement/Prospectus. This Proxy Statement/Prospectus does not
contain all the information set forth or incorporated by reference in the
Registration Statement and the exhibits and schedules relating thereto, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. For further information, reference is made to the
Registration Statement and the exhibits filed or incorporated as a part
thereof, which are on file at the offices of the Commission and may be obtained
upon payment of the fee prescribed by the Commission, or may be examined
without charge at the offices of the Commission. Statements contained in this
Proxy Statement/Prospectus, or in any document incorporated in this Proxy
Statement/Prospectus by reference, as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, and
each such statement is qualified in all respects by such reference.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
  The following documents filed with the Commission by the Company and United
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement/Prospectus:
 
   1. The Company's Annual Report on Form 10-K for the year ended December
      31, 1993, as amended.
 
   2. The Company's Current Reports on Form 8-K dated March 28, 1994 and
      March 29, 1994.
 
   3. United's Annual Report on Form 10-K for the year ended December 31,
      1993.
 
   4. United's Current Reports on Form 8-K both dated March 29, 1994.
 
  All documents and reports subsequently filed by the Company or United
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to the date of the Meeting of
Stockholders of the Company shall be deemed to be incorporated by reference in
this Proxy Statement/Prospectus and to be a part hereof from the date of filing
of such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement/Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
 
  THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM UAL CORPORATION, P.O. BOX 66919, CHICAGO, ILLINOIS 60666
(TELEPHONE NUMBER (708) 952-4000), ATTENTION: FRANCESCA M. MAHER, SECRETARY. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE
BY         , 1994.
 
                                      iii

<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
SUMMARY OF PROXY STATEMENT/PROSPECTUS.....................................  vii
  The Company and United..................................................  vii
  Date, Time and Place of Meeting.........................................  vii
  Purpose of the Meeting..................................................  vii
  Record Date; Stockholders Entitled to Vote.............................. viii
  Vote Required........................................................... viii
  The Plan of Recapitalization............................................ viii
    Effective Time of the Recapitalization................................    x
    Conditions to the Recapitalization....................................    x
    Payment for Old Shares................................................   xi
    Background of the Recapitalization....................................   xi
    Recommendation of the Board...........................................  xii
    Opinions of Financial Advisors to the Board........................... xiii
    Interests of Certain Persons in the Recapitalization..................  xiv
    Certain Risk Factors..................................................  xiv
    Fraudulent Conveyance.................................................  xiv
    Certain Federal Income Tax Consequences...............................  xix
    No Appraisal Rights...................................................  xix
  Market Prices of the Old Shares; Dividends..............................  xix
  Unaudited Pro Forma Consolidated Financial Position.....................  xxi
  Selected Consolidated Historical and Pro Forma Operating Information.... xxii
INTRODUCTION..............................................................    1
  Purpose of the Meeting..................................................    1
  Voting Rights and Proxy Information.....................................    3
  No Appraisal Rights.....................................................    4
BACKGROUND OF THE PLAN OF RECAPITALIZATION................................    4
SPECIAL FACTORS...........................................................   14
  Certain Company Analyses................................................   14
  Certain Revenue and Earnings Scenarios..................................   18
  Effect of the Recapitalization on Income Statement, Book Equity and Cash
   Flow...................................................................   19
  Implementation of the "Airline-Within-an-Airline" (U2)..................   21
  Unit Costs..............................................................   24
  Recommendation of the Board.............................................   25
  Opinions of the Financial Advisors to the Board.........................   26
  Opinion of Valuation Firm...............................................   34
  Purpose and Structure of the Recapitalization...........................   38
  Interests of Certain Persons in the Recapitalization....................   38
  Certain Risk Factors....................................................   40
  Certain Effects of the Recapitalization.................................   47
  Management Arrangements.................................................   48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................   49
LITIGATION................................................................   52
THE PLAN OF RECAPITALIZATION..............................................   53
  Investment for Unionized Employees......................................   53
  Investment For Salaried and Management Employees........................   56
  Revised Governance Structure............................................   57
</TABLE>

 
                                       iv

<PAGE>
 

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
  Terms and Conditions....................................................  66
    General...............................................................  66
    Effective Time........................................................  67
    Payment for Shares....................................................  67
    Stock Options.........................................................  68
    Convertible Company Securities........................................  69
    Treasury Shares.......................................................  69
    Pricing the Securities................................................  69
    Record and Payment Dates..............................................  70
    Representations and Warranties........................................  70
    Certain Covenants.....................................................  70
    Conditions............................................................  72
    Termination...........................................................  74
    Survival..............................................................  75
    Amendments; No Waivers................................................  75
    Fees and Expenses; Indemnification....................................  76
    Parties in Interest...................................................  78
    Specific Performance..................................................  78
  Establishment of ESOPs..................................................  78
ELECTION OF DIRECTORS.....................................................  84
  Nominees for Election as Public Directors...............................  84
  Public Directors........................................................  84
  Independent Directors...................................................  85
  SAM Director............................................................  85
MARKET PRICES OF THE SHARES; DIVIDENDS....................................  86
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION.................  87
UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................  88
  Pro Forma Condensed Statement of Consolidated Operations................  89
  Notes to Pro Forma Condensed Statement of Consolidated Operations.......  90
  Pro Forma Condensed Statement of Consolidated Financial Position........  92
  Notes to Pro Forma Condensed Statement of Consolidated Financial
   Position...............................................................  93
CAPITALIZATION............................................................  94
BENEFICIAL OWNERSHIP OF SECURITIES........................................  95
  Securities Beneficially Owned by Directors and Executive Officers.......  96
CERTAIN INFORMATION CONCERNING THE BOARD OF DIRECTORS.....................  98
EXECUTIVE COMPENSATION.................................................... 100
APPROVAL OF AMENDMENTS TO THE 1981 INCENTIVE STOCK PROGRAM................ 106
APPROVAL OF AMENDMENTS TO THE 1988 RESTRICTED STOCK PLAN.................. 108
APPROVAL OF AMENDMENTS TO THE INCENTIVE COMPENSATION PLAN................. 110
DESCRIPTION OF SECURITIES................................................. 111
  The Debentures.......................................................... 111
  The Capital Stock of the Company........................................ 115
  The Public Preferred Stock.............................................. 115
  The Redeemable Stock.................................................... 119
  The ESOP Preferred Stock................................................ 121
</TABLE>

 
                                       v

<PAGE>
 

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
  The Voting Preferred Stock.............................................. 124
  The Director Preferred Stock............................................ 125
  The Common Stock, the Series A Preferred Stock and the Junior
   Participating Preferred Stock.......................................... 128
STOCKHOLDER PROPOSALS..................................................... 132
FEES AND EXPENSES......................................................... 135
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 135
DISCRETIONARY AUTHORITY OF PROXIES........................................ 135
EXPERTS................................................................... 136
LEGAL OPINION............................................................. 136
PROXY SOLICITATION........................................................ 136
PROPOSALS FOR 1995 ANNUAL MEETING......................................... 137
OTHER MATTERS............................................................. 137
ANNEX I--Opinion of CS First Boston Corporation...........................
ANNEX II--Opinion of Lazard Freres & Co...................................
</TABLE>

 
                                       vi

<PAGE>
 
                  SUMMARY OF PROXY STATEMENT/JOINT PROSPECTUS
 
  The following summary is intended only to highlight certain information
contained in the Proxy Statement/Joint Prospectus (the "Proxy
Statement/Prospectus"). This summary is not intended to be a complete statement
of all material features of the proposed Recapitalization (defined below) and
is qualified in its entirety by reference to the detailed information contained
elsewhere in this Proxy Statement/Prospectus, the Annexes hereto and the
documents referred to herein. Stockholders are urged to read this Proxy
Statement/Prospectus and the Annexes hereto in their entirety.
 
THE COMPANY AND UNITED
 
  UAL Corporation, a Delaware corporation (the "Company"), is a holding company
and its primary subsidiary is United Air Lines, Inc., a Delaware corporation
("United"), which is wholly owned. At the end of 1993, United served 159
airports in the United States and 32 foreign countries. During 1993, United
averaged 2,040 departures daily, flew a total of 101 billion revenue passenger
miles, and carried an average of 191,000 passengers per day. At the end of
1993, United's fleet of aircraft totaled 544. United's major hub operations are
located at Chicago, Denver, San Francisco, Washington D.C., London and Tokyo.
 
  The address of the principal executive offices of the Company and United is
1200 East Algonquin Road, Elk Grove Township, Illinois 60007, their telephone
number at such address is (708) 952-4000 and the mailing address of the Company
and United is P.O. Box 66919, Chicago, Illinois 60666.
 
DATE, TIME AND PLACE OF MEETING
 
  The Annual Meeting of Stockholders of the Company (the "Meeting") is
scheduled to be held at the    on    .
 
PURPOSE OF THE MEETING
 
  Holders of shares of common stock, par value $5 per share, of the Company
(the "Old Shares") are being asked to consider and vote upon:
 
    (i) the Agreement and Plan of Recapitalization dated as of March 25, 1994
  (the "Plan of Recapitalization") pursuant to which, among other things,
  each Old Share that is outstanding at the Effective Time (as defined below)
  will be converted into, and become a right to receive, (a) $25.80 in cash,
  (b) $15.55 principal amount of Series A Debentures due 2004 of United (the
  "Series A Debentures"), (c) $15.55 principal amount of Series B Debentures
  due 2014 of United (the "Series B Debentures" and, together with the Series
  A Debentures, the "Debentures"), (d) $31.10 liquidation value of Series B
  Preferred Stock, without par value, of the Company (the "Public Preferred
  Stock") and (e) one half (0.5) of a share of new common stock, par value
  $0.01 per share, of the Company (the "New Shares") (collectively, the
  "Recapitalization Consideration");
 
    (ii) certain amendments to the Company's Certificate of Incorporation and
  Bylaws (the "Charter and Bylaw Amendments") that will effectuate the
  Recapitalization and put into place a revised corporate governance
  structure that is contemplated by the Plan of Recapitalization;
 
    (iii) the issuance of new classes of preferred stock that will (a)
  transfer approximately 53% (which, under certain circumstances, may be
  increased to up to a maximum of approximately 63%) of the common equity and
  voting power of the Company to employee stock ownership plans to be
  established for the benefit of certain groups of employees (the "ESOPs")
  and (b) effectuate the corporate governance structure referred to above by
  permitting different constituent groups to elect members of the Company's
  Board of Directors;
 
    (iv) the election of four directors, designated as "Public Directors," to
  the Company's Board of Directors (the "Board"), as contemplated by the
  corporate governance structure referred to above;
 
    (v) certain amendments to the Company's 1981 Incentive Stock Program;
 
                                      vii

<PAGE>
 
 
    (vi) certain amendments to the Company's 1988 Restricted Stock Plan;
 
    (vii) certain amendments to the Company's Incentive Compensation Plan;
 
    (viii) three stockholder proposals; and
 
    (ix) ratification of the Company's independent accountants for the year
  ending December 31, 1994.
 
  The approval of matters (ii) through (vii) will be subject to the approval of
the Plan of Recapitalization, and the approval of matters (iii) through (vi)
will be subject to the approval of the Charter and Bylaw Amendments. See
"INTRODUCTION--Purpose of the Meeting," "BACKGROUND OF THE PLAN OF
RECAPITALIZATION" and "THE PLAN OF RECAPITALIZATION."
 
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
 
  Only holders of record of Old Shares at the close of business on    , 1994
(the "Record Date") will be entitled to notice of, and to vote at, the Meeting
and any adjournment or postponement thereof. Stockholders of record on the
Record Date are entitled to one vote per Old Share held as of that date on any
matter that may properly come before the Meeting. See "INTRODUCTION--Voting
Rights and Proxy Information."
 
VOTE REQUIRED
 
  Under the Delaware General Corporation Law (the "DGCL"), the affirmative vote
of the holders of at least a majority of the outstanding Old Shares on the
Record Date will be required in order to approve and adopt the Plan of
Recapitalization and the Charter and Bylaw Amendments and the affirmative vote
of the holders of a plurality of Old Shares present in person or represented by
proxy at the Meeting will be required to elect each of the Public Directors and
the affirmative vote of the holders of a majority of Old Shares present in
person or represented by proxy at the Meeting will be required to approve or
adopt each of the other matters identified in this Proxy Statement/Prospectus
as being presented to holders of Old Shares at the Meeting. None of the votes
described above requires the separate approval of at least a majority of the
Company's unaffiliated stockholders for its adoption. The Company's directors
and executive officers, and their affiliates, have sole or shared voting power
and beneficial ownership with respect to approximately 3.7 percent of the
outstanding Old Shares which they intend to vote in favor of the Plan of
Recapitalization and the Charter and Bylaw Amendments. Accordingly, the
affirmative vote of the holders of more than approximately 46.3 percent of the
outstanding Old Shares (other than directors and Executive Officers and their
affiliates) is required for approval of the Plan of Recapitalization. See
"INTRODUCTION--Voting Rights and Proxy Information."
 
THE PLAN OF RECAPITALIZATION
 
  The Plan of Recapitalization provides for the following transactions (the
"Recapitalization"):
 
  (i) Reclassification--Upon the Effective Time, each outstanding Old Share,
including each share of restricted stock issued pursuant to the Company's 1988
Restricted Stock Plan, together with up to 1,000,000 Old Shares held by the
Company as treasury stock or owned by any wholly-owned subsidiary of the
Company, will be reclassified as, and converted into, one-half (0.5) of a New
Share, $31.10 liquidation value of Public Preferred Stock and one one-
thousandth of a share of Series D Redeemable Preferred Stock, without par
value, of the Company (the "Redeemable Preferred Stock"), which will be
redeemed immediately after issuance for $25.80 in cash, $15.55 principal amount
of Series A Debentures and $15.55 principal amount of Series B Debentures. One-
half of a New Share will represent an equity interest (based on Fully Diluted
Old Shares outstanding, see "PLAN OF RECAPITALIZATION--Terms and Conditions")
immediately after consummation of the Recapitalization of 47% of one Old
Share's current percentage equity interest in the Company, based on the Fully
Diluted Old Shares (as described below in "THE PLAN OF RECAPITALIZATION--Terms
and Conditions--General") although, under certain circumstances that
 
                                      viii

<PAGE>
 
percentage may be reduced to a minimum of approximately 37%. See "PLAN OF
RECAPITALIZATION--Establishment of ESOP--Additional Shares." The interest rate
on the Series A Debentures has been fixed provisionally at 9.00%, the interest
rate on the Series B Debentures has been fixed provisionally at 9.70% and the
dividend rate on the Public Preferred Stock has been fixed provisionally at
10.25%. The interest rates on the Debentures and the dividend rate on the
Public Preferred Stock will be adjusted not less than five nor more than ten
days before the date of the Meeting to rates (which, in each case, if there is
an upward adjustment, may not be more than 1.125% higher than the respective
provisional rates) that, in the opinion of the certain financial advisors to
the Company and the Unions (as defined below) and, in the case of a deadlock,
Salomon Brothers Inc, would permit the Debentures and the Public Preferred
Stock to trade at par on such date on a fully distributed basis. See "THE PLAN
OF RECAPITALIZATION--Terms and Conditions--Pricing the Securities."
 
  (ii) Charter and Bylaw Amendments--The Plan of Recapitalization provides for
the Charter and Bylaw Amendments that will, among other things, effectuate the
Recapitalization and put into place the revised corporate governance structure
contemplated by the Plan of Recapitalization. See "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure."
 
  (iii) The Stock Issuance--Pursuant to the Plan of Recapitalization, the
Company will issue, in addition to the securities issued as part of the
Recapitalization Consideration, (a) the Class 1 ESOP Convertible Preferred
Stock and the Class 2 ESOP Convertible Preferred Stock (collectively, the "ESOP
Preferred Stock") to the trustee (the "ESOP Trustee") for the "ESOPs" that will
be established for the benefit of the employee groups that will be making wage,
salary and other work-rule changes in connection with the Plan of
Recapitalization, (b) the Class P ESOP Voting Preferred Stock, the Class M ESOP
Voting Preferred Stock and the Class S ESOP Voting Preferred Stock
(collectively, the "Voting Preferred Stock") to the ESOP Trustee, (c) the Class
I Junior Preferred Stock to the initial independent directors who will enter
into a stockholders' agreement to vote their shares to elect the future
independent directors to the Board, (d) one share of the Class Pilot MEC Junior
Preferred Stock to the United Airlines Pilots Master Executive Council (the
"ALPA-MEC") of the Airline Pilots Association, International ("ALPA"), which
will have the right to elect a director to the Board (the "ALPA Director"), (e)
one share of the Class IAM Junior Preferred Stock to the International
Association of Machinists and Aerospace Workers (the "IAM" and, together with
ALPA, the "Unions"), or its designee, which will have the right to elect a
director to the Board (the "IAM Director" and together with the ALPA Director,
the ("Union Directors")) and (f) two shares of Class SAM Preferred Stock to the
person nominated to serve as the salaried and management employees director
(the "Salaried and Management Director") and one share to an additional
designated person, which will have the right to vote as a class to elect a
director to the Board. See "THE PLAN OF RECAPITALIZATION--Establishment of
ESOP," "--Revised Governance Structure" and "DESCRIPTION OF SECURITIES." The
ESOP Preferred Stock and the Voting Preferred Stock will initially represent a
53% equity interest (based on Fully Diluted Old Shares), including voting
interest on all matters presented to holders of New Shares other than the
election of Outside Public Directors (as defined below), immediately after
consummation of the Recapitalization, although under certain conditions the
percentage may be increased, up to a maximum of approximately 63%. See "THE
PLAN OF RECAPITALIZATION--Establishment of ESOP--Additional Shares." The
holders of the Voting Preferred Stock will continue to represent the same final
percentage of voting power of the Company following the Recapitalization until
the economic interest represented by the ESOP Preferred Stock becomes less than
20% of the common equity of the Company calculated as described under "THE PLAN
OF RECAPITALIZATION--Revised Governance Structure--Nondilution."
 
  (iv) Employee Investment--Certain amendments to the existing ALPA collective
bargaining agreement and the IAM collective bargaining agreements, and creation
of a salaried and management employees cost reduction program, all of which
will become effective at the Effective Time, are estimated to provide United
with approximately $8.2 billion in improved operating earnings over a twelve
year period, with a net present value of approximately $4.9 billion.
Approximately $5.2 billion of such improvement is expected to arise from
 
                                       ix

<PAGE>
 
savings in labor costs, while the remaining approximately $3.0 billion is
expected to arise from the startup of a new short-haul "airline-within-an-
airline" referred to herein as "U2", which is expected to compete effectively
against other low-cost, short-haul carriers. See "SPECIAL FACTORS--Certain
Company Analyses," and "--Implementation of "Airline-Within-an-Airline' (U2)."
 
  (v) Employee Benefit Plans--Certain employee benefit plans maintained by the
Company and United will be amended to permit employees to acquire substantial
amounts of the New Shares, Public Preferred Stock and the Debentures. See "THE
PLAN OF RECAPITALIZATION--Terms and Conditions--Certain Covenants."
 
Effective Time of the Recapitalization
 
  The Recapitalization will be consummated at such time as the amendment and
restatement of the Company's Restated Certificate of Incorporation (the
"Restated Certificate"), which provides for the reclassification of the Old
Shares, is duly filed with the Secretary of State of the State of Delaware or
at such later time as may be mutually agreed upon by the Company and each of
the Unions and as is specified in the Restated Certificate (the "Effective
Time"). The filing of the Restated Certificate is currently anticipated to be
made as promptly as practicable after the Meeting. Such filing will be made,
however, only upon satisfaction or, where permissible, waiver of all conditions
contained in the Plan of Recapitalization and provided that the Plan of
Recapitalization has not been terminated. See "THE PLAN OF RECAPITALIZATION--
Terms and Conditions" and "--Termination."
 
Conditions to the Recapitalization
 
  Pursuant to the Plan of Recapitalization, the obligation of the Company to
file the Restated Certificate at the Effective Time and the obligations of each
of the Unions to enter into the revised collective bargaining agreements at the
Effective Time are subject to the satisfaction of the following conditions,
among others: (i) holders of Old Shares have approved and adopted the Plan of
Recapitalization and related transactions, as identified in "INTRODUCTION--
Purpose of the Meeting," (ii) all material actions by or in respect of or
filings with any governmental body, agency, official, or authority required to
permit the consummation of the Recapitalization, including, if applicable,
notifications from the Department of Justice and the Federal Trade Commission
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976; have been
obtained, (iii) the New Shares issuable as part of the Recapitalization have
been authorized for listing on the New York Stock Exchange, Inc. (the "NYSE"),
subject to official notice of issuance, (iv) the ESOP Trustee has received the
written opinion of Houlihan Lokey Howard & Zukin, to the effect that, as of the
Effective Time, the acquisition of the ESOP Preferred Stock by the ESOPs, is
fair, from a financial point of view, to the ESOP participants, (v) the Board
has received an updated solvency opinion from American Appraisal Associates,
Inc. ("American Appraisal"), (vi) all the agreements required to be executed
and delivered at the Effective Time are legal, valid and binding agreements of
the Company and the other parties thereto from and after the Effective Time,
enforceable against the Company and such other parties in accordance with their
terms, including the stock purchase agreements pursuant to which the ESOPs will
purchase a portion of the ESOP Preferred Stock, (vii) Mr. Gerald M. Greenwald
(or such other person as proposed by the Unions prior to the Effective Time and
not found unacceptable by the Company) is ready, willing and able to assume the
office of Chief Executive Officer ("CEO") of the Company and United, (viii) the
Board has received updated written opinions of each of CS First Boston
Corporation ("CS First Boston") and Lazard Freres & Co. ("Lazard") confirming
their earlier opinions, to the effect that the Recapitalization Consideration
taken as a whole, is fair from a financial point of view to the holders of Old
Shares, (ix) the revised collective bargaining agreements have been executed
and delivered by the Unions and United and will be in full force and effect as
of the Effective Time, (x) the Board has received satisfactory opinions of
counsel and (xi) the Company has determined that the Company will be reasonably
likely to have sufficient surplus (whether revaluation surplus or earned
surplus) or net profits under the Delaware General Corporation Law (the "DGCL")
to permit the legal payment of dividends on the ESOP Preferred Stock and the
Public Preferred Stock when due. See "THE PLAN OF RECAPITALIZATION--
Conditions."
 
                                       x

<PAGE>
 
 
Payment for Old Shares
 
  To receive the Recapitalization Consideration, each holder of Old Shares must
surrender his certificates representing Old Shares, together with a duly
executed letter of transmittal, to First Chicago Trust Company of New York (the
"Exchange Agent"). Instructions regarding the surrender of certificates,
together with a form of transmittal letter to be used for this purpose, will be
forwarded to stockholders promptly after the Effective Time. STOCKHOLDERS
SHOULD NOT FORWARD CERTIFICATES WITH THE ENCLOSED PROXY CARD. STOCKHOLDERS
SHOULD SURRENDER CERTIFICATES ONLY AFTER RECEIVING INSTRUCTIONS FROM THE
EXCHANGE AGENT. In lieu of any fractional interests of New Shares, Debentures
or Public Preferred Stock each former holder of Old Shares would otherwise be
entitled to receive, the Exchange Agent will make a pro rata distribution of
the cash proceeds received by the Exchange Agent from sale of the aggregate
fractional interests of New Shares, Debentures and Public Preferred Stock. No
interest will be paid or accrued in favor of any stockholder on the amounts
payable upon surrender of certificates. Each stockholder will be responsible
for the payment of transfer and other taxes, if any. See "THE PLAN OF
RECAPITALIZATION--Payment for Shares."
 
Background of the Recapitalization
 
  Since the mid 1980s, in response to enhanced competition from low-cost air
carriers resulting from the industry's deregulation and discordant relations
between the Company and its principal unions, ALPA, the IAM and the Association
of Flight Attendants ("AFA"), several attempts to effect a potential change in
corporate control or the sale of substantial assets of the Company have
occurred or were proposed, many of which involved the participation of one or
more of the Company's unions.
 
  In recent years, including during 1992, the Company has noted a fundamental
shift in consumer behavior, with an increased focus on the price/value
relationship. Travel preference has continued to shift to low-cost travel as
provided by carriers such as Southwest Airlines, Morris Air and Reno Air. The
Company believed that this trend was long-term and would continue even if the
weak economic conditions of the early 1990s improved. The Company determined
that its ability to be competitive in such an environment required a
substantial reduction of its operating costs.
 
  Thus, on January 6, 1993, the Company announced a $400 million cost reduction
program, including the sub-contracting of certain services and the furlough of
2,800 employees. It also significantly reduced its aircraft purchase
commitments through 1996, with a net effect of reducing the Company's planned
capital spending through 1996 by over $6.2 billion. The Company determined that
it was necessary to reduce its single largest expense, labor costs, to be
competitive in the changed environment of the 1990s. Thus, in addition to the
subcontracting, furloughs and the implementation of a 5% salary reduction
program for certain management employees, the Company requested concessions
from its three principal unions. However, this request was rejected by the IAM
and the AFA, and ALPA requested a financial review of the Company. In light of
the unwillingness of the Unions to participate in the Company's cost-cutting
efforts, the Company thereafter announced its intention to undertake various
other cost-cutting actions, including selling its flight kitchens and
subcontracting certain ground services, opening a flight attendant domicile in
Taiwan, and evaluating the sale of the Denver flight training center. The
Company also discussed the possibility of selling its jet engine over-haul
maintenance facility in San Francisco, subcontracting its components business,
subcontracting its ground equipment over-haul business and subcontracting its
line maintenance work, building maintenance work and computer terminal
technician work.
 
  In reports presented to the Board of Directors by Booz . Allen & Hamilton
("BAH"), BAH advised the Board that it seemed unlikely that carriers such as
United could achieve sufficient cost reductions without a major restructuring.
The report also suggested that subcontracting jet engine repair could result in
substantial cost savings. In a presentation to the Board on June 24, 1993, BAH
indicated that, in the absence of labor cooperation, the Company had four
options: (i) restructure and downsize to focus on those markets where United
could be profitable in the long term, (ii) restructure and grow to create a
stronger domestic and
 
                                       xi

<PAGE>
 
international competitive position, (iii) return value to stockholders by
monetizing flying assets, services and/or other hard assets and (iv) sell the
airline in whole or in parts. On August 5, 1993, the Board considered a
presentation by BAH and members of Company's management concerning ways to
improve the Company's profitability and provide additional shareholder value,
with specific focus on establishment of one or more domestic short-haul
carriers which would be owned independently of the Company and United and which
would virtually eliminate short-haul flying by United, along with other
fundamental alterations of the Company's business and structure (the
"Fundamental Restructuring Plan"). The Board continued to review its various
alternatives through the fall and early winter of 1993 until an agreement in
principle (the "Agreement in Principle") was reached with ALPA and the IAM in
December 1993.
 
  As a result of considering the various alternatives presented to the Board
over the past several years and realizing that, in order to achieve a long term
cost reduction program, the employees of the Company must be involved in any
major restructuring of the Company, the Company's management concluded that
long term stockholder value would be maximized through the proposed
Recapitalization.
 
  Since the spring of 1993, the Company has been engaged in extensive
discussions and negotiations with ALPA, the IAM and the AFA with respect to a
"shared solution" that would enable the Company to reduce costs and allow
certain employee groups to gain significant ownership of the Company. In
September of 1993, the AFA ceased to participate in the negotiations, which
continued with ALPA and the IAM (the "Coalition"). On December 22, 1993 the
"Agreement in Principle' was reached among the Company, ALPA and the IAM
pursuant to which (i) employee trusts will acquire approximately 53% of the
common equity and voting power of the Company, subject to increase to up to
approximately 63% based on stock price performance in the year after closing,
(ii) holders of Old Shares will receive cash, debt securities, preferred stock
and common stock, (iii) participating employees of the Company will provide
wage and benefit reductions and various work-rule changes and (iv) a new
corporate governance structure will be implemented. A definitive agreement was
signed on March 25, 1994. See "BACKGROUND OF THE PLAN OF RECAPITALIZATION."
 
  Amendments to the collective bargaining agreements with ALPA and the IAM, to
be entered into upon consummation of the Plan of Recapitalization, and a
salaried and management employees cost reduction program, to be established
upon consummation of the Plan of Recapitalization, are estimated to provide
United with approximately $8.2 billion of improved operating earnings over a
twelve year period, with a net present value of approximately $4.9 billion.
Approximately $5.2 billion of such improvement is expected to arise from
savings in labor costs, while the remaining approximately $3.0 billion is
expected to arise from earnings of a new short-haul "airline-within-an-
airline," referred to herein as "U2," which is expected to compete effectively
with low-cost short-haul carriers.
 
Recommendation of the Board
 
  THE BOARD HAS APPROVED THE PLAN OF RECAPITALIZATION AND HAS DETERMINED THAT
THE RECAPITALIZATION IS FAIR TO THE HOLDERS OF OLD SHARES. THE BOARD RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PLAN OF RECAPITALIZATION AND THE RELATED MATTERS
IDENTIFIED IN CLAUSES (II) THROUGH (VII) UNDER "PURPOSE OF THE MEETING" ABOVE.
 
  The Board noted that the Recapitalization permits the holders of Old Shares
to receive in exchange for each Old Share $25.80 in cash, $31.10 in principal
amount of Debentures and $31.10 in liquidation value of Public Preferred Stock,
while retaining a significant ongoing equity interest in the Company. In
approving the Plan of Recapitalization, the Board also considered that the
majority equity position of the employee stock ownership trusts is designed to
provide additional incentives for the Company's employees to promote the
success of the Company, which should, in part, inure to the benefit of the
holders of shares of Common Stock of the Company.
 
                                      xii

<PAGE>
 
 
  In reaching its decision to approve the Plan of Recapitalization, its
determination that the Recapitalization is fair to the holders of Old Shares
and its decision to recommend that the holders of Old Shares vote for approval
and adoption of the Plan of Recapitalization and related matters, the Board
consulted with its legal and financial advisors as well as the Company's
management, and considered numerous factors, including, but not limited to: (i)
the business, operations, earnings, properties and prospects of the Company and
United and the perceived need for the Company to obtain a reduction of wages
and benefits and work-rule changes in order to permit United to compete
effectively in the aviation marketplace, (ii) the alternatives potentially
available to the Company to achieve a reduction of wages and benefits and work-
rule changes, as well as a comparison of the risks that would be associated
with the Recapitalization and with such other alternatives, (iii) the terms of
the employee investment contemplated by the Plan of Recapitalization, including
the reduction in cost expense, the favorable tax treatment of ESOP
transactions, the long-term labor contracts which limit salary increases and
the ability to establish U2, (iv) the fact that the Recapitalization will
provide the holders of Old Shares with an opportunity to receive cash,
Debentures and Public Preferred Stock for a portion of the value of their Old
Shares while retaining a significant ongoing equity interest in the Company
through ownership of New Shares, (v) the terms of the proposed corporate
governance structure, which contains both certain provisions required by the
Coalition and certain provisions designed for the protection of the holders of
New Shares, (vi) the identity of the new chief executive officer and the new
Board (especially the Independent Directors), and the Board's assessment of
such individuals, (vii) recent market prices for the Old Shares as well as
market prices for the past several years, (viii) the Federal income tax
consequences of the Recapitalization under existing law and (ix) the opinions
of CS First Boston, a nationally recognized investment banking firm, and the
opinions of Lazard, another nationally recognized investment banking firm,
that, based upon the matters described therein, as of the date of each such
opinion, the consideration to be received by the holders of Old Shares pursuant
to the Recapitalization for each Old Share, taken as a whole, is fair to such
stockholders from a financial point of view. See "SPECIAL FACTORS--Opinions of
the Financial Advisors to the Board," "--Certain Risk Factors" and "--Certain
Revenue and Earnings Scenarios," "THE PLAN OF RECAPITALIZATION" and "MARKET
PRICES OF THE SHARES; DIVIDENDS." The Board also considered (i) the fact that
the repayment of the Debentures and the payment of dividends on the Public
Preferred Stock will be dependent on the Company's operations, assets, credit,
cash flow and earning power, (ii) that, as a result of the Recapitalization,
there will be a significant increase in the Company's long-term indebtedness,
as well as a substantial negative balance in stockholders' equity and a
significant reduction in cash reserves and (iii) the opinion of American
Appraisal with respect to certain solvency and surplus matters. See "SPECIAL
FACTORS--Certain Risk Factors," "THE PLAN OF RECAPITALIZATION" and "UNAUDITED
PRO FORMA FINANCIAL INFORMATION."
 
  In view of the circumstances and the wide variety of factors considered in
connection with this evaluation of the Recapitalization, the Board did not find
it practicable to assign relative weights to the factors considered in reaching
its decision.
 
 Opinions of the Financial Advisors to the Board
 
   On July 20, 1993, the Company retained CS First Boston to assist it in
evaluating the Coalition proposals. By letter dated November 30, 1993, the
Company retained Lazard as an additional financial advisor. On December 22,
1993, March 14, 1994, and March 24, 1994, CS First Boston and Lazard delivered
to the Board their oral opinions (which in the case of the December 22, 1993
and March 24, 1994 opinions were later confirmed to the Board by CS First
Boston and Lazard in writing) that, as of such dates, the consideration to be
received by holders of Old Shares of the Company in connection with the
Recapitalization, taken as a whole, was fair to such holders of Old Shares from
a financial point of view. For further details concerning the engagement of CS
First Boston and Lazard, including fees payable to them, see "SPECIAL FACTORS--
Opinions of Financial Advisors to the Board."
 
                                      xiii

<PAGE>
 
 
  THE FULL TEXT OF THE WRITTEN OPINIONS OF CS FIRST BOSTON AND LAZARD, EACH
DATED MARCH 24, 1994, THAT SET FORTH THE ASSUMPTIONS MADE, THE MATTERS
CONSIDERED AND THE REVIEW UNDERTAKEN WITH REGARD TO EACH SUCH OPINION, ARE
ATTACHED AS ANNEXES I AND II RESPECTIVELY TO THIS PROXY STATEMENT/PROSPECTUS.
STOCKHOLDERS ARE URGED TO READ SUCH OPINIONS IN THEIR ENTIRETY FOR A
DESCRIPTION OF THE PROCEDURES FOLLOWED, MATTERS CONSIDERED, ASSUMPTIONS MADE
AND LIMITATIONS ON THE REVIEW UNDERTAKEN AT SUCH FIRMS. THE OPINIONS ARE
DIRECTED ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY THE
HOLDERS OF OLD SHARES AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF
OLD SHARES AS TO HOW SUCH HOLDER OF OLD SHARES SHOULD VOTE.
 
 Interests of Certain Persons in the Recapitalization
 
  In considering the Plan of Recapitalization, stockholders should be aware
that the executive officers and the Board members have certain interests that
present them with potential conflicts of interest in connection with the
Recapitalization. The Board was aware of these potential conflicts and
considered them among the other matters described under "SPECIAL FACTORS--
Recommendation of the Board." See "SPECIAL FACTORS--Interests of Certain
Persons in the Recapitalization."
 
 Certain Risk Factors
 
  Financial Effects; Delaware Law Considerations. The Recapitalization will
immediately change the Company's capitalization to one that is more highly
leveraged. On a pro forma book basis at December 31, 1993, the Company would
have had approximately $3.482 billion of long-term debt and a deficit of
approximately $302 million of stockholders' equity as compared to the
approximately $2.702 billion of long-term debt and approximately $1.203 billion
of stockholders' equity that was shown on the Company's balance sheet on such
date. In addition, if the Recapitalization had occurred as of January 1, 1993,
the Company would have reported, on a pro forma basis, a loss from continuing
operations of approximately $177 million for the year ended December 31, 1993,
as compared to the approximately $31 million loss from continuing operations
that was reported for such period. See "UNAUDITED PRO FORMA FINANCIAL
INFORMATION."
 
  The DGCL requires that the payments to be made to the holders of Old Shares
in the Recapitalization be made from "surplus." Such payments would not be
permitted if after giving effect to them the Company would not be able to pay
its debts as they become due in the usual course of business. The Board
believes that the Company will be able to pay such debts, based in part on the
revenue and earnings scenarios set forth below under "SPECIAL FACTORS--Certain
Revenue and Earnings Scenarios" and on American Appraisal's opinion referred to
below. See "THE PLAN OF RECAPITALIZATION--Terms and Conditions," and "UNAUDITED
PRO FORMA FINANCIAL INFORMATION." Given the more leveraged financial structure
of the Company following the Recapitalization, certain airline industry risks
could have a greater adverse impact on the Company after the Recapitalization
than prior to the Recapitalization.
 
  Fraudulent Conveyance. If a court in a lawsuit by an unpaid creditor or
representative of creditors, such as a trustee in bankruptcy, were to find
that, at the time the Company distributed to holders of Old Shares the cash and
Debentures that such holders are to receive in the Recapitalization, the
Company (i) was insolvent, (ii) was rendered insolvent by reason of such
distributions, (iii) was engaged in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital to
carry on its business or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay as such debts matured, such court may
void the distributions to stockholders and require that such holders return the
same (or equivalent amounts) to the Company or to a fund for the benefit of its
creditors. The measure of insolvency for purposes of the foregoing would vary
depending upon the law of the jurisdiction that was being applied. Generally,
the Company would be considered insolvent if at the time of the
 
                                      xiv

<PAGE>
 
Recapitalization the fair value of the Company's assets is less than the amount
of the Company's total debts and liabilities or if the Company has incurred
debt beyond its ability to repay as such debt matures. In order to assist the
Board to determine the solvency of the Company, the Company retained American
Appraisal.
 
  As stated in "SPECIAL FACTORS--Opinion of American Appraisal," the American
Appraisal Opinion stated that, based upon and subject to the conditions and
assumptions contained therein, (a) the fair value of the aggregate assets of
each of the Company (on a consolidated basis) and United (on a consolidated
basis) will exceed their total respective liabilities (including, without
limitation, subordinated, unmatured, unliquidated and contingent liabilities),
(b) the present fair salable value of the aggregate assets of each of the
Company (on a consolidated basis) and United (on a consolidated basis) will be
greater than their respective probable liabilities on their debts as such debts
become absolute and matured, (c) each of the Company (on a consolidated basis)
and United (on a consolidated basis) will be able to pay their respective debts
and other liabilities, including contingent liabilities and other commitments,
as they mature, (d) the capital remaining in each of the Company (on a
consolidated basis) and in United (on a consolidated basis) after consummation
of the Recapitalization will not be unreasonably small for the businesses in
which the Company and United are engaged, as management of the Company and
United has indicated such businesses are conducted and as management has
indicated the businesses are proposed to be conducted following the
consummation of the Recapitalization, and after giving due consideration to the
prevailing practices in the industry in which the Company and United will be
engaged, (e) the excess of the fair value of the total assets of the Company
over the total liabilities, including contingent liabilities, of the Company,
is equal to or exceeds the value of the Recapitalization Consideration to
stockholders plus the stated capital of the Company and (f) the excess of the
fair value of the total assets of United over the total liabilities, including
contingent liabilities, of United, is equal to or exceeds the value of the
stated capital of United.
 
  American Appraisal also indicated that it believed the excess of total assets
over pro forma liabilities was approximately $2.5 billion at December 31, 1993,
compared to approximately $1.203 billion in stockholders' equity as of such
date, determined according to generally accepted accounting principles, so
that, giving effect to the Recapitalization, the indicated excess assets of the
Company for purposes of Delaware law exceeded $1 billion. See "SPECIAL
FACTORS--Certain Risk Factors--Fraudulent Conveyance", "--Certain Revenue and
Earnings Scenarios" and "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
 
  Certain Antitakeover Effects. Certain provisions of the governance structure
will make it extremely difficult to acquire the Company in a transaction that
was not approved by at least one of either the ALPA Director or the IAM
Director (collectively, the "Union Directors") or a 75% vote of the New Shares
and the Voting Preferred Stock, even if such transaction might be beneficial to
the Company's stockholders. See "THE PLAN OF RECAPITALIZATION--Revised
Governance Structure."
 
  Investment Values; Future Investment. Cost savings envisioned by the
agreements with ALPA and the IAM and the anticipated productivity increases
could be difficult to achieve, and, even if all proposed plans for employee
investment are implemented, the value of the reductions in wages and benefits
and work-rule changes and anticipated productivity increases may not be as
significant as currently calculated. Mandated job guarantees may make it
difficult to achieve significant additional productivity improvements, and, if
additional reductions in wages and benefits and work-rule changes become
desirable in management's view, such reductions in wages and benefits and work-
rule changes may be more difficult to achieve in light of the long-term nature
of the revised collective bargaining agreements that constitute elements of the
Recapitalization.
 
  Lack of Consensus. The AFA has declined to participate in the transaction,
certain other employees who will be participating in the wage and benefit
reductions and work-rules changes were not in favor of the transaction, and
certain union organizing activity, based on opposition to certain aspects of
the transaction, has occurred. This lack of consensus may reduce the value of
the productivity improvements that the Company expects to achieve by virtue of
the Recapitalization.
 
                                       xv

<PAGE>
 
 
  Management Change. The new CEO, Mr. Gerald M. Greenwald, will be required to
implement reductions in wages and benefits and work-rule changes that were
negotiated by the current management, certain members of which will retire at
the Effective Time, in an industry in which he has not previously been engaged.
In addition, it is possible that the Company may face attrition by officers and
other members of management and that the Company's new senior management may
face difficulties in implementing the new strategies or attracting additional
management employees.
 
  Reduced Flexibility. The corporate governance structure and collective
bargaining agreements with ALPA and the IAM may inhibit management's ability to
alter strategy in a volatile, competitive industry. Among the more significant
constraints are (i) a prohibition on domestic code sharing in excess of 1% of
domestic block hours, excluding several small existing agreements without
ALPA's consent, (ii) a no layoff guarantee for all currently employed
participating union employees during the five- to six-year investment period
and for pilots while U2 remains in operation, (iii) restrictions on
international code sharing, unless the Company can demonstrate that
international code sharing arrangements do not cause a reduction in
international flying and as long as the Company does not expand code sharing
unless the Company reduces international flying below a certain level and (iv)
an agreement not to sell the Company's Denver pilot training facility and
certain maintenance facilities. In addition, the Restated Certificate contains
significant limitations on the ability of the Company and United to sell assets
and issue equity securities absent certain specified Board or stockholder
approvals. In most circumstances, the issuance of additional equity securities
would not be counted in determining whether the "sunset" (described below under
"--Revised Governance Structure") has occurred.
 
  Implementation of U2. Although the Company expects to develop "an airline
within-an-airline" for short-haul markets at reduced operational costs ("U2")
as an important component of its competitive posture and has ascribed a
significant portion of the value of the transaction to the ability to implement
U2, no assurance can be given that the Company will be able to do so
effectively or to realize the financial benefits expected to be received by the
Company from implementation of U2. See "SPECIAL FACTORS--Implementation of
"Airline Within-an-Airline' (U2)" and "--Certain Risk Factors--Implementation
of U2."
 
  Competitive Response. Even if the Company is able to achieve cost reductions
and productivity enhancements, the Company's higher cost competitors may be
able to achieve comparable agreements with their labor groups and the Company's
low-cost competitors may modify their operations in response to the competitive
threat posed by U2 and thus, in such case, may eliminate or reduce the
competitive gain sought by the Company and lead to reductions in fares and
earnings. If the Company's higher cost competitors were to achieve more
significant reductions in wages and benefits and work-rule changes than those
achieved by the Company, the Company's ability to respond to competition would
be hampered by the fixed long-term nature of the agreements that constitute
elements of the Recapitalization.
 
  Labor Protective Provisions. The Company will continue in effect, or amend to
include, certain provisions of agreements with ALPA and the IAM that (i)
provide certain rights in the event of a change in control of the Company and
(ii) prohibit furloughs, within certain conditions, if the Company disposes of
25 percent or more of its assets or assets which produce 25 percent or more of
its block hours. The revised collective bargaining agreements obligate the
Company to require any carrier purchasing route authority or aircraft that
produce 25 percent or more of the Company's operating revenues or block hours
to hire and integrate an appropriate number of United employees with seniority
credit.
 
  Tax Deductibility of Employee Stock Ownership Plan Contributions and
Dividends. Although the Company has attempted to structure the ESOPs so that
all amounts contributed thereto and dividends paid with respect to the stock
held thereunder will be deductible to the Company for Federal income tax
purposes, there are no regulations governing the deductibility of dividends
paid on the ESOP Preferred Stock and there can be no assurance that one or more
limitations under the Internal Revenue Code of 1986, as amended, will not
adversely impact the deductibility of such amounts and dividends.
 
                                      xvi

<PAGE>
 
 
  Governance Structure. Although the Company has attempted to achieve a
balanced approach to its corporate governance structure after the
Recapitalization, such structure is very unusual in the management of a large,
complex public corporation, and it is not certain that the actual operation of
the corporate governance process will not result in disputes or fail to achieve
results that are in the best interests of the Company or the holders of New
Shares.
 
  Under the terms of the Restated Certificate, the participants in the ESOPs
(and in certain circumstances the ALPA-MEC, the IAM and the Salaried and
Management Director) will continue to hold more than 50% of the voting power of
the Company until the equity interest held by the ESOPs and other employee
benefit plans sponsored by the Company is less than 20% of the value of the
common equity of the Company, all as more fully described in "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure--Nondilution." Under current
actuarial assumptions, the Company estimates that this "sunset" provision will
not become operative until 2016 if additional purchases are not made by
eligible employee benefit plans. However, such plans will have the right, and
may be expected, to make additional purchases, thereby delaying the occurrence
of the "sunset." In addition, the Restated Certificate contains many provisions
which may prevent the Company prior to the "sunset" from acting without the
consent of one or both of the members of the Board elected by ALPA and the IAM
or a 75% vote of holders of New Shares and Voting Preferred Stock. See "THE
PLAN OF RECAPITALIZATION--Revised Governance Structure."
 
  Amendments to Collective Bargaining Agreements; Future Labor
Agreements. There can be no assurance that the new management of the Company in
the future will not agree to amend further the collective bargaining agreements
with ALPA and the IAM in a manner that reduces or eliminates the cost savings
that are the basis for the Recapitalization. However, any such amendment must
be approved by the Labor Committee of the Board (which will not include any
Union Directors). See "THE PLAN OF RECAPITALIZATION--Revised Governance
Structure--Committees." In addition, at the end of the current employee
investment period, there can be no assurance that the Company's labor
agreements will be renegotiated in a manner that continues in subsequent
periods the cost savings that are being sought through the Recapitalization or
that does not reverse the effect of any cost savings that will have been
obtained thereby.
 
  Possible Effect of Organization of Additional Employees. In the event that
any portion of the salaried and management employees who are not currently
represented by a union elects union representation pursuant to the Railway
Labor Act, the Company would be obligated to bargain with such union over the
terms and conditions of employment applicable to such employees, including the
terms, if any, of such employees' continuing participation in the ESOPs. This
obligation to bargain requires the Company to "exert every reasonable effort"
to reach an agreement but does not require it to agree to any change or
particular term or condition sought by the union. During the period of
negotiation, the Company would be entitled to maintain the then-existing terms
of such employees' participation in the ESOPs.
 
  The ESOPs provide that if any group of employees who are not currently
represented by a union becomes covered by a new collective bargaining
agreement, such group of employees will not be covered under the ESOPs unless
the collective bargaining agreement so provides. Whether any new collective
bargaining agreement would provide for continuing participation in the ESOPs by
such group of employees is a matter that would be subject to mutual agreement
between the Company and the applicable union. The ESOPs provide, however, that
if the terms of any employee's employment no longer reflect all of the
reductions in wage and benefits and work-rule changes set forth in the Plan of
Recapitalization, then such employee shall cease to be covered by the ESOPs.
 
  As a result, if any new collective bargaining agreement did not reflect the
reductions in wage and benefits and work-rule changes required by the Plan of
Recapitalization for particular employees, the Company could not agree, without
amending the ESOPs, to allow such employees to participate in the ESOPs. If any
 
                                      xvii

<PAGE>
 
currently unrepresented employees ceased to participate in the ESOPs under such
circumstances, the ESOPs provided, however, that the unrepresented employees
remaining in the ESOPs would receive the shares previously intended for that
newly-represented group. The employment terms, except base pay, for the
unrepresented employees remaining in the ESOPs will be subject to change, at
the Company's discretion, so long as the net economic value of the
unrepresented employees' employment terms is not altered.
 
  Employee Ownership and Influence. No assurance can be given that the Company,
which will be subject to significant influence by employee groups (including
through the right to voting representation in excess of economic equity
ownership, Board and Board committee representation, the requirement of
approval of certain matters by a Union Director or a 75% vote of the holders of
New Shares and Voting Preferred Stock, and participation by Union Directors in
the nomination of the Independent Directors (as such term is defined under "THE
PLAN OF RECAPITALIZATION--Revised Governance Structure")), might not take
actions that are more favorable to such employee groups than might be taken by
a company that was not subject to such influence. The corporate governance
structure after the Recapitalization will not, however, relieve the members of
the Board of their fiduciary obligations under the DGCL.
 
  Effect of Adjustment on Trading. As described under "THE PLAN OF
RECAPITALIZATION--Establishment of ESOP--Additional Shares," the ESOP Preferred
Stock being issued to the ESOPs is initially convertible into approximately 53%
of the New Shares but, based on the trading prices of the New Shares in the
twelve months after the Effective Time (the "Measuring Period"), may be
increased, to up to a maximum of approximately 63% of the New Shares. Such
potential adjustment may adversely limit the trading prices of the New Shares
during the Measuring Period.
 
  Financial Reporting; Market Assessment. The accounting rules governing
employers accounting for employee stock ownership plans require that
compensation expense be recorded for the ESOP Preferred Stock that is
"committed to be released" during an accounting period based on the fair value
of the ESOP Preferred Stock during such period. The difference between the fair
value and the initial recorded cost of the ESOP Preferred Stock "committed to
be released" is recorded as an adjustment to stockholders' equity. The ESOP
Preferred Stock that has been "committed to be released" is considered to be
outstanding in the if-converted earnings per share calculation for primary and
fully diluted earnings per share if the effect is dilutive. The circular
relationship between employee stock ownership plan accounting charge and the
Company's stock price, coupled with the size of the contemplated ESOPs, make
future earnings difficult to forecast. In addition, reported book earnings will
be depressed in early years due to a mismatch between the term of employee
investment (which increase earnings) of from five years, nine months to twelve
years and the shorter period of only six years over which employee stock
ownership plan accounting charges will occur. While it is possible that the
equity research community and investors may look through employee stock
ownership plan accounting charges, it is also possible that the trading price
of the New Shares may be negatively impacted by such accounting treatment.
 
  Liquidity. United is a party to a $500 million commercial paper facility
through agreements with United Airlines First Funding Corporation ("First
Funding") and certain banks. As of the date of this Proxy Statement/Prospectus,
approximately $270 million of commercial paper is outstanding under such
facility. As a result of provisions in the Second Amended and Restated Credit
Agreement, dated as of September 20, 1993 (the "Credit Agreement"), among First
Funding, Union Bank as agent and certain other banks, a "change in control" may
be deemed to occur as a result of the Recapitalization, and First Funding may
be restricted from issuing new commercial paper under the Credit Agreement.
Although this will not have an effect on outstanding commercial paper under the
Credit Agreement, the Company will need either to renegotiate the Credit
Agreement or to obtain an alternate funding source to replace such facility
with respect to future fundings. Although the Company does not expect it to be
the case, the Company may not be able to renegotiate or to obtain such
alternate facility, in which case the Company's liquidity may be impaired.
 
  Limitations on asset sales and equity issuances included in the Company's
Restated Certificate might make it more difficult to raise cash, even if
management desired to do so to take advantage of a perceived opportunity.
 
                                     xviii

<PAGE>
 
 
  Complexity. Given the complex nature of the various provisions affecting the
operation of the Company after the Effective Time, it is possible that the
equity research community and investors may find the Company difficult to
evaluate, which may have the effect of reducing the trading price of the New
Shares from levels that might otherwise prevail.
 
  Redistribution. In the Recapitalization, holders of Old Shares (an equity
security) will receive Debentures and shares of Public Preferred Stock in
addition to New Shares and cash. It is expected that there will exist a period,
perhaps of a lengthy duration, during which certain recipients of such
securities, concluding that the characteristics thereof are not consistent with
their investment criteria, distribute such securities into the marketplace.
During such distribution period, the supply of such securities in the market
may exceed levels that might otherwise prevail, which would likely have the
effect of depressing the price of such securities from levels that might
otherwise prevail if such securities were held solely by persons or
institutions for whom such securities satisfied their investment criteria. In
addition, although the Company expects that it will apply for listing of the
Debentures and the Public Preferred Stock on the NYSE, there can be no
assurance that at or following the Effective Time such securities will be
listed on the NYSE or any other securities exchange or that any trading market
for the securities will develop.
 
  Industry Conditions and Competition. The airline industry is highly
competitive and susceptible to price discounting. United's competitors include
both domestic and international carriers some of which have low cost
structures. In addition, airline profit levels are highly sensitive to elements
outside the control of the airline industry such as fuel costs, passenger
demand, taxes and terrorist activities.
 
  Regulatory Matters. In the last several years, the Federal Aviation
Administration (the "FAA") has issued a number of maintenance directives and
other regulations relating to, among other things, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and increased inspection
requirements. The Company expects to continue incurring costs to comply with
the FAA's regulations. Additional laws and regulations have been proposed from
time to time that could significantly increase the cost of airline operations
by, for instance, imposing additional requirements or restrictions on
operations. Laws and regulations have also been considered from time to time
that would prohibit or restrict the ownership and/or transfer of international
airline routes or takeoff and landing slots. Also, the award of international
routes to U.S. carriers (and their retention) is regulated by treaties and
related agreements between the United States and foreign governments, which are
amended from time to time. For example, there are significant aviation issues
between the United States and such foreign governments as Germany, Japan and
the United Kingdom that, depending on their resolution, may significantly
impact the Company's existing operations or curtail potential expansion
opportunities in important regions of the world. The Company cannot predict
what laws and regulations will be adopted or what changes to international air
transportation treaties will be effected, if any, or how they will affect
United.
 
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
 
  The Recapitalization is expected not to be a taxable transaction to the
Company, but will be a taxable transaction to the Company's stockholders. A
summary of certain Federal income tax consequences of the Recapitalization for
stockholders is set forth under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
 
NO APPRAISAL RIGHTS
 
  Stockholders of the Company will not be entitled to appraisal rights in
connection with any of the matters to be voted upon at the Meeting. For a
description of pending litigation related to the Recapitalization, see "THE
PLAN OF RECAPITALIZATION--Litigation."
 
MARKET PRICES OF THE OLD SHARES; DIVIDENDS
 
  The Company's Old Shares are listed and traded, under the symbol UAL, on the
New York Stock Exchange, the Chicago Stock Exchange and the Pacific Stock
Exchange. At March 1, 1994, based on reports
 
                                      xix

<PAGE>
 
by the Company's transfer agent for the Company's Old Shares, there were 18,871
holders of record and as of    (the "Record Date") there were     Old Shares
outstanding held of record by holders. The high and low sales prices per share
for its common stock for each quarterly period during the past two fiscal years
as reported on the NYSE Composite Tape are as follows:

<TABLE>
<CAPTION>
                                                                 HIGH     LOW
                                                               -------- --------
      <S>                                                      <C>      <C>
      1992:
      1st quarter............................................. $159     $139 1/4
      2nd quarter.............................................  143 3/4  111
      3rd quarter.............................................  119 3/4  103
      4th quarter.............................................  128 1/8  106 1/4
      1993:
      1st quarter............................................. $132 1/4 $110 3/4
      2nd quarter.............................................  149 3/4  118
      3rd quarter.............................................  150 1/2  121 5/8
      4th quarter.............................................  155 1/2  135 7/8
      1994:
      1st quarter............................................. $150     $123 3/4
      2nd quarter (through April 8, 1994).....................  129 7/8  124 1/4
</TABLE>

 
  No dividends have been declared on the Old Shares since 1987.
 
  On December 22, 1993, the last trading day prior to the public announcement
of the Agreement in Principle, closing sales price for the Old Shares as
reported on the NYSE Composite Tape was $148 1/2 per share. On March 24, 1994,
the last trading day prior to the public announcement of the execution of the
Plan of Recapitalization, closing price for the Old Shares as reported on the
NYSE Composite Tape was $123 3/4 per share. On        , 1994, the last trading
day prior to the date of this Proxy Statement/Prospectus, the closing sales
price for the Old Shares as reported on the NYSE Composite Tape was $  .
STOCKHOLDERS SHOULD OBTAIN CURRENT MARKET QUOTATIONS FOR THE OLD SHARES AS ONE
OF THE FACTORS RELEVANT TO ASSESSING THE VALUE OF THE NEW SHARES BEFORE VOTING
ON THE PLAN OF RECAPITALIZATION. The New Shares are expected to be listed on
the NYSE.
 
  The Board does not expect to declare the regular dividend for the second
quarter of 1994, and if the Recapitalization is consummated, the Company does
not expect to pay dividends in the foreseeable future on the New Shares. See
"SPECIAL FACTORS--Certain Risk Factors" and "FINANCING OF THE
RECAPITALIZATION."
 
                                       xx

<PAGE>
 
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL POSITION
 
  The following table sets forth the consolidated financial position of the
Company and its subsidiaries at December 31, 1993, and the unaudited pro forma
consolidated financial position of the Company and its subsidiaries after
giving effect to the Recapitalization, the incurrence of indebtedness to
finance the Recapitalization, and the payment of fees and expenses incurred in
connection with the Recapitalization. This table should be read in conjunction
with the selected consolidated financial and operating information, the
unaudited pro forma financial information and the respective related notes
thereto appearing elsewhere herein. See "SELECTED CONSOLIDATED FINANCIAL AND
OPERATING INFORMATION" and "UNAUDITED PRO FORMA FINANCIAL INFORMATION." In
addition, this table should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, as amended, which is
incorporated in this Proxy Statement/Prospectus by reference and which includes
the Company's Consolidated Financial Statements, the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
                               DECEMBER 31, 1993
                      (IN MILLIONS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                   ASSETS                    HISTORICAL ADJUSTMENTS    PRO FORMA
                   ------                    ---------- -----------    ---------
<S>                                          <C>        <C>            <C>
Current assets:
 Cash and cash equivalents..................  $   437     $             $   437
 Short-term investments.....................    1,391       (647)(1a)
                                                            (140)(2)        604
 Other......................................    1,885         62 (3)      1,947
                                              -------     ------        -------
                                                3,713       (725)         2,988
                                              -------     ------        -------
Operating property and equipment............   12,292                    12,292
Less: Accumulated depreciation
 and amortization...........................   (5,086)                   (5,086)
                                              -------     ------        -------
                                                7,206                     7,206
                                              -------     ------        -------
Other assets:
 Other......................................    1,921                     1,921
                                              -------     ------        -------
                                              $12,840     $ (725)       $12,115
                                              =======     ======        =======
<CAPTION>
    LIABILITIES AND SHAREHOLDERS' EQUITY
    ------------------------------------
<S>                                          <C>        <C>            <C>
Current liabilities:
 Short-term borrowings, long-term debt
  maturing within one year and current
  obligations under capital leases..........  $   521     $             $   521
 Other......................................    4,375                     4,375
                                              -------     ------        -------
                                                4,896                     4,896
                                              -------     ------        -------
Long-term debt..............................    2,702        780 (1b)     3,482
                                              -------     ------        -------
Long-term obligations under capital leases..      827                       827
                                              -------     ------        -------
Other liabilities, deferred credits and
 minority interest..........................    3,212                     3,212
                                              -------     ------        -------
Shareholders' equity:
 Series A Preferred Stock, $5 stated value,
  6,000,000 shares issued, $100 liquidation
  value.....................................       30        --              30
 Series B Preferred Stock, $.01 stated
  value, [   ] shares issued, $[  ]
  liquidation value.........................                 --  (1c)       --
 Class 1 ESOP Preferred Stock, $.01 par,
  [12,557,017] shares issued, $210
  liquidation value.........................                 --  (4)        --
 Class 2 ESOP Preferred Stock, $.01 par,
  [3,750,797] shares issued, $210
  liquidation value.........................                 --  (4)        --
 Voting Preferred Stocks, $.01 par, 3 shares
  issued, $.01 liquidation value............                 --  (5)        --
 Common stock, $5 par value, 25,489,745
  shares issued and outstanding--historical.      127       (127)(1c)       --
 Common stock, $.01 par value, 13,006,564
  shares issued and outstanding--pro forma..                --   (1c)       --
 Additional capital invested................      932       (152)(1c)
                                                           3,425 (4)
                                                              40 (6)      4,245
 Retained earnings (deficit)................      249     (1,148)(1)
                                                            (139)(7)     (1,038)
 Pension liability adjustment...............      (53)                      (53)
 Unearned compensation......................      (17)        17 (8)        --
 Unearned ESOP shares.......................              (3,425)(4)     (3,425)
 Common stock held in treasury, 920,808
  shares--historical, 435,404 shares--pro
  forma ....................................      (65)         4 (9)        (61)
                                              -------     ------        -------
                                                1,203     (1,505)(10)      (302)
                                              -------     ------        -------
                                              $12,840     $ (725)       $12,115
                                              =======     ======        =======
</TABLE>

 
    See the accompanying notes to Pro Forma Consolidated Financial Position.
 
                                      xxi

<PAGE>
 
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL POSITION
 
(1)  To record the Recapitalization (as described in "THE PLAN OF
     RECAPITALIZATION--Terms and Conditions"). The entries assume that (i) all
     in-the-money employee stock options are vested and exercised at the
     Effective Time using a cashless exercise mechanism, (ii) treasury stock
     held by the Company immediately prior to the Effective Time will convert
     into New Shares that remain outstanding after the Recapitalization and
     (iii) Convertible Company Securities (as defined below) that are
     outstanding immediately prior to the Effective Time will not convert into
     the Recapitalization Consideration at the Effective Time.
 
     (a) To record the cash payment of $25.80 per share to holders of Old Shares
         upon the redemption of the Redeemable Preferred Stock.
 
     (b) To record the issuance of $15.55 principal amount of Series A
         Debentures and $15.55 principal amount of Series B Debentures to
         holders of Old Shares upon the redemption of the Redeemable Preferred
         Stock.
 
     (c) To record the reclassification of Old Shares into New Shares, Public
         Preferred Stock (Series B Preferred Stock), and Redeemable Preferred
         Stock. (The pro forma adjustments do not reflect the issuance of
         Redeemable Preferred Stock because such shares are redeemed for cash
         and Debentures immediately after issuance. In addition, the pro forma
         adjustments do not reflect the Public Preferred Stock and Redeemable
         Preferred Stock issued to the Company upon reclassification of the
         treasury stock because such shares are surrendered for cancellation
         immediately after issuance.)
 
(2)  To record the cash impact of the estimated fees and transaction expenses,
     including expenses for the Company, ALPA and the IAM, severance payments to
     terminated officers and flight kitchen employees and payments relating to
     the employment agreement with Mr. Greenwald.
   
(3)  To record the tax effects relating to nonrecurring charges recognized as a
     result of the Recapitalization.
   
(4)  To record the issuance of shares of Class 1 ESOP Convertible Preferred
     Stock to the Qualified Trust (as defined below) and shares of Class 2 ESOP
     Convertible Preferred Stock to the Supplemental ESOP (as defined below) for
     an aggregate purchase price of $3.425 billion.
   
(5)  To record the issuance at par of one share of Class P ESOP Voting Preferred
     Stock, one share of Class M Voting Preferred Stock, and one share of Class
     S ESOP Voting Preferred Stock to the Qualified ESOP. The remaining Voting
     Preferred Stock will be issued when it is contributed to the Qualified ESOP
     and the Supplemental ESOP.
   
(6)  To account for the cashless exercise of options in the event of the
     Recapitalization. (Amount of the entry is based on an estimate of the Old
     Share price at the Effective Time of $163 per share.)
   
(7)  Represents the offset to entries (2), (3), (6), (8) and (9).
   
(8)  To record the vesting of the unvested restricted stock as a result of the
     Recapitalization.
   
(9)  To record 25,000 restricted shares to Mr. Greenwald that will vest at the
     Effective Time.
 
(10) Does not reflect the issuance of four shares of Class I Junior Preferred
     Stock, one share of Class Pilot MEC Junior Preferred Stock, one share of
     Class IAM Junior Preferred Stock, and three shares of Class SAM Junior
     Preferred Stock. These stocks have a $.01 par value and nominal economic
     value.
 
  Note: Pro forma financial information for United, which will reflect, among
other things, the issuance of the Debentures, is currently being prepared and
will be contained in an amended Proxy Statement/Prospectus.
 
                                      xxii

<PAGE>
 
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA OPERATING INFORMATION
 
  The following consolidated financial information has been derived from the
Company's consolidated financial statements, for each of the fiscal years in
the five year period ended December 31, 1993, which statements have been
audited by Arthur Andersen, independent public accountants, as indicated in
their reports incorporated by reference herein. Reference is made to said
reports for the years 1993 and 1992 which include an explanatory paragraph
with respect to the changes in methods of accounting for income taxes and
postretirement benefits other than pensions as discussed in the notes to the
consolidated financial statements. The table also sets forth certain
information on a pro forma basis giving effect to the Recapitalization. The
following should be read in conjunction with the consolidated financial and
operating information, unaudited the pro forma financial statements and the
related notes thereto appearing elsewhere herein. See "SELECTED CONSOLIDATED
FINANCIAL AND OPERATING INFORMATION" and "UNAUDITED PRO FORMA FINANCIAL
INFORMATION." In addition, this table should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1993, as
amended, which is incorporated in this Proxy Statement/Prospectus by reference
and which includes the Company's Consolidated Financial Statements, the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 

<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                         -------------------------------------------------------
                            1993
                          PRO FORMA   1993     1992     1991     1990     1989
                         ----------- -------  -------  -------  -------  -------
                         (UNAUDITED)
                                        (DOLLARS IN MILLIONS)
<S>                      <C>         <C>      <C>      <C>      <C>      <C>
STATEMENT OF CONSOLI-
 DATED OPERATIONS DATA:
  Operating revenues....   $14,483   $14,511  $12,890  $11,663  $11,037  $ 9,794
  Earnings (loss) from
   operations...........       127       263     (538)    (494)     (36)     465
  Earnings (loss) before
   extraordinary item
   and cumulative effect
   of accounting
   changes..............      (177)      (31)    (417)    (332)      94      324
  Net earnings (loss)...      N.A.       (50)    (957)    (332)      94      324
STATEMENT OF CONSOLI-
 DATED FINANCIAL POSI-
 TION DATA (at end of
 year):
  Total assets..........   $12,115   $12,840  $12,257  $ 9,876  $ 7,983  $ 7,194
  Total long-term debt
   and capital lease
   obligations,
   including current
   portion..............     4,515     3,735    3,783    2,531    1,327    1,405
  Shareholders' equity..      (302)    1,203      706    1,597    1,671    1,564
OTHER DATA:
  Ratio of earnings to
   fixed charges(b).....        (a)       (a)      (a)      (a)    1.16     1.95
UNITED OPERATING DATA:
  Revenue passengers
   (millions)...........        70        70       67       62       58       55
  Average length of a
   passenger trip in
   miles................     1,450     1,450    1,390    1,327    1,322    1,269
  Revenue passenger
   miles (millions).....   101,258   101,258   92,690   82,290   76,137   69,639
  Available seat miles
   (millions)...........   150,728   150,728  137,491  124,100  114,995  104,547
  Passenger load factor.      67.2%     67.2%    67.4%    66.3%    66.2%    66.6%
  Break even passenger
   load factor..........      66.3%     65.6%    70.4%    69.5%    66.5%    63.0%
  Revenue per passenger
   mile.................      12.5c     12.5c    12.2c    12.5c    12.6c    12.2c
  Cost per available
   seat mile............       9.4c      9.3c     9.6c     9.8c     9.6c     8.9c
  Average price per gal-
   lon of jet fuel......      63.6c     63.6c    66.4c    71.6c    80.4c    63.6c
</TABLE>

- --------
(a) Earnings were inadequate to cover fixed charges and preferred stock
    dividends by $99 million in 1993, by $748 million in 1992 and by $599
    million in 1991. On a pro forma basis, earnings were inadequate to cover
    fixed charges by $334 million in 1993.
(b) The ratio of earnings to fixed charges and the ratio of earnings to fixed
    charges and preferred stock dividends were the same in each period
    presented.
 
                                     xxiii

<PAGE>
 
                       PROXY STATEMENT/JOINT PROSPECTUS
 
                               ----------------
 
                                UAL CORPORATION
                            UNITED AIR LINES, INC.
 
                               ----------------
 
                            MEETING OF STOCKHOLDERS
                         TO BE HELD             , 1994
 
                                 INTRODUCTION
 
  This Proxy Statement/Joint Prospectus (the "Proxy Statement/Prospectus") is
being furnished in connection with the solicitation of proxies by the Board of
Directors of UAL Corporation, a Delaware corporation (the "Company"), for use
at the Meeting of Stockholders of the Company to be held on              ,
1994, at       a.m., local time, at                  , and at any adjournment
or postponement thereof (the "Meeting"). This Proxy Statement/Prospectus, the
attached Notice of Meeting and the enclosed form of proxy are being first
mailed to holders of shares of common stock, par value $5 per share, of the
Company ("Old Shares") of the Company on or about             , 1994.
 
PURPOSE OF THE MEETING
 
  The purpose of the Meeting is to consider and vote upon a proposal to
recapitalize the Company as hereinafter described. Holders of Old Shares are
being asked to consider and vote upon (i) the Agreement and Plan of
Recapitalization, dated as of March 25, 1994 (the "Plan of Recapitalization"),
which contemplates certain transactions collectively referred to as the
"Recapitalization," (ii) subject to and conditioned upon approval of the Plan
of Recapitalization, the amendment and restatement of the Company's
Certificate of Incorporation and Bylaws (the "Charter and Bylaw Amendments"),
(iii) subject to and conditioned upon approval of the Plan of Recapitalization
and the Charter and Bylaw Amendments, the approval of the issuance of (a)
shares of Class 1 ESOP Convertible Preferred Stock (the "Class 1 ESOP
Preferred Stock") to State Street Bank and Trust Company ("State Street"), as
trustee of the UAL Corporation Employee Stock Ownership Plan Trust, (b) shares
of Class 2 ESOP Convertible Preferred Stock (the "Class 2 ESOP Preferred
Stock") to State Street, as trustee of the UAL Corporation Supplemental ESOP
Trust, (c) shares of (1) Class P ESOP Voting Junior Preferred Stock, (2) Class
M ESOP Voting Junior Preferred Stock and (3) Class S ESOP Voting Junior
Preferred Stock to State Street, as trustee of the UAL Corporation Employee
Stock Ownership Plan Trust and the UAL Corporation Supplemental ESOP Trust,
(d) shares of Class I Junior Preferred Stock to certain individuals to be
named as directors of the Company, (e) a share of Class Pilot MEC Junior
Preferred Stock to the United Airlines Pilots Master Executive Council ("ALPA-
MEC") of the Air Line Pilots Association, International ("ALPA"), (f) a share
of Class IAM Junior Preferred Stock to the International Association of
Machinists and Aerospace Workers (the "IAM") or its designee and (g) shares of
Class SAM Junior Preferred Stock to an individual to be named as a director of
the Company on behalf of salaried and management employees of the Company (the
"Salaried and Management Employees") and to an additional designated
stockholder (collectively, the "Stock Issuance"), (iv) subject to and
conditioned upon approval of the Plan of Recapitalization and the Charter and
Bylaw Amendments, the election of four "Public Directors" of the Company, (v)
subject to and conditioned upon approval of the Plan of Recapitalization and
the Charter and Bylaw Amendments, the amendment of the Company's 1981
Incentive Stock Program, as amended (the "1981 Stock Program"), (vi) subject
to and conditioned upon approval of the Plan of Recapitalization and the
Charter and Bylaw Amendments, the amendment of the Company's 1988 Restricted
Stock Plan (the "1988 Restricted Stock Plan"), (vii) subject to and
conditioned upon approval of the Plan of Recapitalization, the amendment of
the Company's Incentive Compensation Plan (the "Incentive Plan"), (viii) three
stockholder proposals, (ix) ratification of the selection of Arthur Andersen &
Co. ("Arthur Andersen") as the Company's independent accountants for the year
ending December 31, 1994 and (x) to transact such other business as may
properly come before the Meeting or any adjournment or postponement thereof.
See "BACKGROUND OF THE
 
                                       1

<PAGE>
 
PLAN OF RECAPITALIZATION" and "THE PLAN OF RECAPITALIZATION." A copy of the
Plan of Recapitalization and copies of the proposed Amended and Restated
Certificate of Incorporation of the Company (the "Restated Certificate") and
the Amended and Restated Bylaws of the Company have been filed as exhibits to
the Registration Statements of which this Proxy Statement/Prospectus is a part
and are incorporated herein by reference.
 
  The approval of matters (ii) through (vii) will be subject to the approval of
the Plan of Recapitalization, and the approval of matters (iii) through (vi)
will be subject to the approval of the Charter and Bylaw Amendments.
 
  The Plan of Recapitalization provides, among other things, that the Old
Shares will be reclassified. As a result of the reclassification, each Old
Share outstanding at the consummation of the Recapitalization (the "Effective
Time"), including each share of restricted stock issued pursuant to the 1988
Restricted Stock Plan (which will vest upon the Effective Time if not vested
prior thereto), together with up to 1,000,000 Old Shares held by the Company as
treasury stock or owned by any wholly-owned subsidiary of the Company
immediately prior to the Effective Time, will be reclassified as, and converted
into, one-half (0.5) of a new share of common stock, par value $.01 per share,
of the Company (the "New Shares"), $31.10 liquidation value of Series B
Preferred Stock, without par value, of the Company (the "Public Preferred
Stock") and one one-thousandth of a share of Series D Redeemable Preferred
Stock, without par value, of the Company (the "Redeemable Preferred Stock"),
which will be redeemed immediately after issuance for $25.80 in cash, $15.55
principal amount of Series A Debentures due 2004 (the "Series A Debentures") of
United Air Lines, Inc., a Delaware corporation and a wholly-owned subsidiary of
the Company ("United"), and $15.55 principal amount of Series B Debentures due
2014 of United (the "Series B Debentures" and, together with the Series A
Debentures, the "Debentures"). The New Shares, the cash, the Public Preferred
Stock and the Debentures that will be received upon reclassification of the Old
Shares and the redemption of the Redeemable Preferred Stock are referred to
collectively herein as the "Recapitalization Consideration." The terms of the
Debentures and the Public Preferred Stock are described under "DESCRIPTION OF
SECURITIES--The Debentures" and "--The Public Preferred Stock." Under the Plan
of Recapitalization, the interest rate on the Series A Debentures has been
fixed provisionally at 9.00%, the interest rate on the Series B Debentures has
been fixed provisionally at 9.70% and the dividend rate on the Public Preferred
Stock has been fixed provisionally at 10.25%. Under the Plan of
Recapitalization, the interest rates on the Debentures and the dividend rate on
the Public Preferred Stock will be adjusted not less than five nor more than
ten days before the date of the Meeting to rates (which in each case, if there
is an upward adjustment, may not be more than 1.125% higher than the respective
provisional rates) that, in the opinion of certain financial advisors to the
Company and the Unions and in the case of a deadlock, Salomon Brothers Inc,
would permit the Debentures and the Public Preferred Stock to trade at par on
such date on a fully distributed basis. See "THE PLAN OF RECAPITALIZATION--
Terms and Conditions--Pricing the Securities."
 
  Each share of Series A Convertible Preferred Stock of the Company ("Series A
Preferred Stock") and each of the Air Wis Services, Inc. 7 3/4% Convertible
Subordinated Debentures Due 2010 and the Air Wis Services, Inc. 8 1/2%
Convertible Subordinated Notes Due 1995 outstanding immediately prior to the
Effective Time (each, a "Convertible Company Security") will remain
outstanding, and each holder of any such Convertible Company Security will have
the right to receive from and after the Effective Time the Recapitalization
Consideration with respect to each Old Share that such holder would have been
entitled to receive had such holder converted such Convertible Company Security
in full immediately prior to the Effective Time.
 
  At the Effective Time, each outstanding employee stock option of the Company
granted under the 1981 Stock Program or the Air Wis Services, Inc. 1987 Non-
Qualified Stock Option Plan will remain outstanding, each such option then held
by active employees and officers (including persons who were officers of the
Company or United as of July 1993) will become fully vested and exercisable at
the Effective Time and each such option will thereafter represent the right to
receive, until the expiration thereof in accordance with its
 
                                       2

<PAGE>
 
terms, in exchange for the aggregate exercise price for such option, the
Recapitalization Consideration with respect to each Old Share that such holder
would have been entitled to receive had such holder exercised such option in
full immediately prior to the Effective Time.
 
VOTING RIGHTS AND PROXY INFORMATION
 
  The Board of Directors of the Company has fixed the close of business on
            , 1994 as the record date (the "Record Date") for determining which
holders of Old Shares are entitled to notice of and to vote at the Meeting.
Accordingly, only holders of record of Old Shares at the close of business on
the Record Date will be entitled to vote at the Meeting. At the close of
business on the Record Date, there were              Old Shares outstanding and
entitled to vote, held by          stockholders of record. As of the close of
business on the Record Date, there were also           Old Shares held as
treasury stock by the Company, which Old Shares will not be voted at the
Meeting. Holders of Series A Preferred Stock will not be entitled to vote at
the Meeting, although such holders may convert their shares of Series A
Preferred Stock into Old Shares prior to the Record Date and vote such Old
Shares at the Meeting.
 
  Each holder of record of Old Shares on the Record Date is entitled to cast
one vote per Old Share, in person or by properly executed proxy, at the
Meeting. The presence in person or by properly executed proxy of the holders of
a majority of the outstanding Old Shares entitled to vote is necessary to
constitute a quorum at the Meeting.
 
  Under Delaware law, the affirmative vote of the holders of a majority of the
Old Shares outstanding on the Record Date will be required to approve and adopt
the Plan of Recapitalization and the Charter and Bylaw Amendments, the
affirmative vote of the holders of a plurality of Old Shares present in person
or represented by proxy at the Meeting will be required to elect each of the
directors and the affirmative vote of the holders of a majority of Old Shares
present in person or represented by proxy at the Meeting will be required to
approve or adopt each of the other matters identified in this Proxy
Statement/Prospectus as being presented to holders of Old Shares at the
Meeting. The Company's directors and executive officers, and their affiliates,
have sole or shared voting power and beneficial ownership with respect to
approximately             of the outstanding Old Shares, which they intend to
vote in favor of the Plan of Recapitalization and the Charter and Bylaw
Amendments. None of the votes described above requires the separate approval by
a majority of the shares held by the Company's unaffiliated stockholders.
 
  All Old Shares that are represented at the Meeting by properly executed
proxies received prior to or at the Meeting and not revoked will be voted at
the Meeting in accordance with the instructions indicated in such proxies. IF
NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE
PLAN OF RECAPITALIZATION, THE CHARTER AND BYLAW AMENDMENTS, THE STOCK ISSUANCE,
THE AMENDMENT OF THE 1981 STOCK PROGRAM, THE AMENDMENT OF THE 1988 RESTRICTED
STOCK PLAN AND THE AMENDMENT OF THE INCENTIVE PLAN; FOR THE ELECTION OF FOUR
PUBLIC DIRECTORS AND FOR THE RATIFICATION OF ARTHUR ANDERSEN AND AGAINST THE
STOCKHOLDER PROPOSALS. The Board of Directors of the Company does not know of
any matters, other than as described in the Notice of Meeting attached to this
Proxy Statement/Prospectus, that are to come before the Meeting. IF A PROXY IS
GIVEN TO VOTE IN FAVOR OF THE PLAN OF RECAPITALIZATION, THE PERSONS NAMED IN
SUCH PROXY WILL HAVE AUTHORITY TO VOTE IN ACCORDANCE WITH THEIR BEST JUDGMENT
ON ANY OTHER MATTER THAT IS PROPERLY PRESENTED AT THE MEETING FOR ACTION,
INCLUDING WITHOUT LIMITATION, ANY PROPOSAL TO ADJOURN THE MEETING OR OTHERWISE
CONCERNING THE CONDUCT OF THE MEETING.
 
  Abstentions will have the effect of a vote against the Plan of
Recapitalization, the Charter and Bylaw Amendments and the other matters
presented for a vote of the stockholders (other than the election of
directors). With respect to abstentions, the Old Shares are considered present
at the Meeting. The abstentions are not, however, affirmative votes for the
matters presented for a vote and, therefore, they will have the
 
                                       3

<PAGE>
 
same effect as votes against any matter presented for a vote of the
stockholders (other than the election of directors). With respect to the
election of directors, abstentions and broker non-votes will be disregarded and
will have no effect on the outcome of the vote. Broker non-votes will have no
effect on the outcome and the vote on any of the matters presented for a vote
of stockholders at the Meeting, other than the Charter and Bylaw Amendments.
With respect to the Charter and Bylaw Amendments, broker non-votes are
considered present and, accordingly, will have the effect of a vote against the
Charter and Bylaws Amendments.
 
  In the event that a quorum is not present at the time the Meeting is
convened, or if for any other reason the Company believes that additional time
should be allowed for the solicitation of proxies, the Company may adjourn the
Meeting with a vote of the stockholders then present. The persons named in the
enclosed form of proxy will vote any Old Shares for which they have voting
authority in favor of such adjournment.
 
  Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, before the polls are closed with respect to
the vote, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a subsequent proxy relating to the same Old Shares and
delivering it to the Secretary of the Company or (iii) attending the Meeting
and voting in person (although attendance at the Meeting will not in and of
itself constitute a revocation of a proxy). Any written notice revoking a proxy
should be sent to: UAL Corporation, P.O. Box 66919, Chicago, Illinois 60666,
Attention: Francesca M. Maher, Secretary.
 
  Stockholders are urged to read this Proxy Statement/Prospectus carefully in
its entirety before deciding how to vote their Old Shares.
 
NO APPRAISAL RIGHTS
 
  Stockholders of the Company will not be entitled to appraisal rights in
connection with any of the matters to be voted upon at the Meeting.
 
                   BACKGROUND OF THE PLAN OF RECAPITALIZATION
 
  In the years following a 29-day strike by ALPA in 1985, relations between the
Company and its principal unions, ALPA, the IAM and the Association of Flight
Attendants ("AFA"), have often been discordant. During this period, a number of
significant events involving a potential change in corporate control or the
sale of substantial assets of the Company have occurred or were proposed, many
of which events involved the participation of one or more of the Company's
unions, including (i) an offer by ALPA to acquire United and the Company's
computerized reservation system for $4.5 billion in April 1987, (ii) a consent
solicitation by a group including Coniston Partners in May 1987, (iii) a
planned recapitalization, announced by the Company in May 1987, that would have
resulted in the Company's stockholders receiving $60 per share while retaining
their shares, (iv) the adoption in June 1987, following the resignation of
Richard J. Ferris as chairman of the Company, of a restructuring plan involving
the sale of the Hertz Company, Westin Hotel Company and Hilton International
Co. and a distribution of cash, which led to such sales through a tender offer
by the Company for its own shares which was completed in March 1988, (v) a
proposal by a pilot-organized entity to acquire the Company for $110 per share
in May 1988, (vi) a proposal from Marvin Davis to acquire the Company for $240
per share in August 1989, (vii) the entry into a merger agreement with Airline
Acquisition Corp. (an entity which was intended to be owned 75% by employee
stock ownership plans for the benefit of the Company's employees, 15% by
British Airways and 10% by the Company's senior management) providing for
consideration of $300 per share, which agreement was entered into in September
1989 and thereafter failed due to an inability to obtain necessary financing,
and (viii) the entry into a merger agreement with United Employee Acquisition
Corp. (an entity formed by ALPA, IAM and AFA) providing for consideration of
$155 per share in cash, $35 per share in Company debt securities and $13 per
share in debt securities of Covia Corp., which agreement was entered into in
April 1990 and terminated in October 1990 due to an inability to obtain
necessary financing following Iraq's invasion of Kuwait.
 
                                       4

<PAGE>
 
  During this period, earnings per share from continuing operations, helped by
both the strength of the global economy and operating improvements undertaken
by the Company, grew from a loss of $3.43 in 1985 to positive earnings of
$20.20 in 1988 and $14.96 in 1989. This improving earnings posture came to a
dramatic halt in 1990 when Iraq's invasion of Kuwait sent fuel prices
skyrocketing while simultaneously dampening consumer demand for air travel.
These events, combined with the downturn in the global economy, led to
disappointing earnings per share of $4.33 in 1990 and a per share loss of
$14.31 in 1991.
 
  In recent years, including during 1992, the Company has noted the emergence
of a fundamental shift in consumer behavior, with an increased focus on the
price/value relationship. Travel preference (of both business and leisure
travellers) has continued to shift to low-cost travel as provided by carriers
such as Southwest Airlines, Inc. ("Southwest"), Morris Air and Reno Air. The
Company believed that this trend was long-term and would continue even if the
weak economic conditions of the early 1990s improved. The Company determined
that its ability to be competitive in such an environment required a
substantial reduction of its operating costs.
 
  Thus, on January 6, 1993, the Company, while recognizing that it had put in
place progressively leaner operating budgets over the prior few years,
nevertheless announced a further $400 million cost reduction program, including
the subcontracting of skycaps and certain janitorial services and the furlough
of 2,800 employees. Additionally, the Company restructured its fleet plan and
aircraft purchase commitments, cancelling firm orders for 49 Boeing aircraft,
deferring acceptance of 14 Airbus aircraft and accelerating the retirement of
25 older aircraft. The net effect of these changes was to reduce the Company's
planned capital spending through 1996 by over $6.2 billion and reduce the size
of the planned 1996 year-end fleet size by over 85 aircraft.
 
  The Company determined that even with these changes it would be necessary to
reduce its single largest expense, labor costs, to be competitive in the
changed environment of the 1990s. Thus, in addition to the subcontracting,
furloughs and the implementation of a 5% salary reduction program for certain
management employees, the Company requested concessions from its three
principal unions on January 14, 1993. AFA rejected such request on January 14,
1993 and the IAM rejected such request on January 19, 1993. ALPA indicated that
it desired to conduct a financial review of the Company.
 
  In light of the unwillingness of the Company's unions to participate in the
Company's cost-cutting efforts, the Company thereafter announced its intention
to undertake various other cost-cutting actions, including selling its flight
kitchens, subcontracting certain ground services, opening a flight attendant
domicile in Taiwan and evaluating the sale of the Denver flight training
center. CS First Boston Corporation ("CS First Boston") was retained February
12, 1993 to assist the Company in connection with the evaluation of a sale of
the United States flight kitchens. The Company also discussed the possibility
of subcontracting its jet repair work, selling its jet engine overhaul
maintenance facility in San Francisco, subcontracting its components business,
subcontracting its ground equipment overhaul business, and computer terminal
technician work and subcontracting its line maintenance work and building
maintenance work.
 
  In March, 1993, Booz . Allen & Hamilton ("BAH") was engaged by the Company to
provide a description of, and outlook for, the U.S. airline industry and
United. The assessment focused on the domestic airline industry as represented
by the thirteen leading carriers, who together represent 99% of the U.S.
airline industry's capacity. At a meeting of the Company's Board of Directors
(the "Board") held on April 28, 1993, BAH presented a report to the Board. In
this report, BAH noted "the U.S. airline industry has historically
underperformed, particularly since deregulation when overall financial returns,
in the aggregate, have been negative. Despite this poor performance, the
industry expanded rapidly after deregulation. However, to fill the rapidly
expanding capacity, the industry had to drop prices almost continuously.
Unfortunately, for a significant portion of the post-deregulation period--most
notable in the last three years--the industry has been unable to reduce costs
as rapidly as prices, which has led to significant industry-wide losses." The
report noted that it seemed unlikely that carriers such as United could achieve
sufficient cost reduction without a major restructuring. The report concluded
that United had to respond to major industry imperatives by
 
                                       5

<PAGE>
 
reducing competitive intensity, through redeploying capacity into core segments
and reducing costs to narrow the gap with its principal low-cost competitors.
BAH advised that to redeploy capacity to defensible segments, United should (i)
identify core capabilities as a basis for market advantage, (ii) focus product,
capacity and resource investments into specific core areas to capitalize on
those advantages, (iii) form partnerships/alliances to serve complementary
segments and (iv) withdraw from non-core activities. In order to reduce its
cost gap, United should (i) reduce controllable costs wherever possible, (ii)
work with labor to achieve wage reductions and productivity improvements and
(iii) pursue alternatives for radical restructuring and product redesign.
 
  In a further presentation to the Board on June 24, 1993, BAH indicated that,
in the absence of labor cooperation, the Company had four options: (i)
restructure and downsize to focus on those markets where United could be
profitable in the long term, (ii) restructure and grow to create a stronger
domestic and international competitive position, (iii) return value to
stockholders by monetizing flying assets, services and/or other hard assets and
(iv) sell the airline in whole or in parts.
 
  On April 19, 1993, the Board received a letter from the United Airlines Union
Coalition (the "Coalition"), a group then composed of ALPA, the IAM and AFA,
expressing concern over asset sales and extensive restructuring. In response,
the Company sent a letter to the Coalition inviting a "shared solution" to the
Company's need to reduce operating costs. On June 2, 1993, Mr. Stephen M. Wolf,
Chairman of the Company, and Mr. Paul George, Senior Vice President--Human
Resources of United, met with Captain Roger D. Hall, Chairman, ALPA-MEC, Ms.
Diane Tucker, then President of the UAL/AFA Master Executive Council, and Mr.
Ken Thiede, President and General Chairman of IAM-District 141. At such
meeting, the Coalition indicated it was working on such a "shared solution". At
the time, the Company was engaged in discussions with potential purchasers of
its United States flight kitchens and final bids were due on July 20, 1993. The
Company agreed to defer any major restructuring action until July 19, 1993 and
requested that the Coalition submit a proposal by that time.
 
 July 16 Proposal
 
  On July 16, 1993, the Board received a letter from the Coalition (the
"Coalition July 16 Proposal") that stated that the Coalition's participation in
a cooperative restructuring was predicated on (i) employee investments by ALPA,
the IAM, AFA and United's salaried and management employees that would be
intended to produce an aggregate of $3.345 billion in employee cost savings
over five years, (ii) joint development over a 12-18 month period of a plan
intended to meet the competitive challenges facing United and projected to
provide at least $100 million in additional operating income in 1995, $200
million in 1996 and $300 million in 1997 and each year thereafter, (iii)
contribution of a substantial majority of the Company's common equity to a
trust or trusts for the benefit of the Company's employees, (iv) a
recapitalization of the Company (without additional external financing) in
which the existing stockholders would receive a substantial minority of the
Company's common stock and other consideration, (v) a balanced corporate
governance structure, (vi) a restructuring that was not dependent on third
parties (i.e., that did not require bank financing, a financial partner or a
strategic partner), (vii) a restructured Company that maintained a substantial
cash balance, (viii) negotiation of collective bargaining provisions intended
to protect the job security and work opportunities of United's employees and
(ix) preservation of the status quo during negotiation of the proposal. The
Coalition July 16 Proposal emphasized that such points were "all essential
elements of the restructuring" and "available only in the context of a
restructuring that meets the other characteristics outlined above."
 
  On July 20, 1993, the Company retained CS First Boston to assist it in its
evaluation of the Coalition program. On July 21, 1993, the Coalition publicly
confirmed that it had provided "several concepts" to the Company with respect
thereto. On the same day, the Company publicly confirmed it was in
communication with the Coalition regarding the concepts provided to the Company
by the Coalition. Thereafter, representatives of the Company and the Coalition
commenced a series of meetings to discuss the Coalition program.
 
                                       6

<PAGE>
 
 August 5 Board Meeting
 
  On August 5, 1993, the Board held a meeting at which it considered a
presentation by BAH and members of Company management concerning ways to
improve the Company's profitability and provide stockholder value, with
specific focus on establishment of one or more domestic short-haul carriers
which would be owned independently of the Company and United and which would
virtually eliminate short-haul flying by United, along with other fundamental
alterations of the Company's business and structure (the "Fundamental
Restructuring Plan"). The Board also received a report on the status of
discussions with the Coalition. The Board discussed the alternative of
proceeding with the Fundamental Restructuring Plan and declining participation
in the program outlined in the Coalition July 16 Proposal, the alternative of
proceeding with the Coalition program and deemphasizing the Fundamental
Restructuring Plan and the alternative of proceeding to develop both the
Coalition program and the Fundamental Restructuring Plan. The Board,
recognizing that the Coalition was offering very substantial concessions but
that significant structural matters limited the ability to provide value to
stockholders, determined both to work with the Coalition and to develop
additional details of the Coalition July 16 Proposal. The Board concluded that
a Coalition proposal should be considered only in light of, among other things,
its valuation compared to the going concern value of the Company not taking
into account any restructuring plan and the value to stockholders of other
alternatives. The Board also instructed management to continue to explore the
alternatives discussed by BAH and to pursue the sale of the United States
flight kitchens.
 
  On August 10, Mr. Wolf and Mr. George met with Captain Hall, Mr. Kevin Lum,
who had replaced Ms. Tucker as President of the UAL/AFA Master Executive
Council, and Mr. Thiede and on August 11 the Company's representatives met with
the Coalition's representatives. At both meetings the Company conveyed the view
that, although the Company had not completed its valuation analysis, after
reviewing the program outlined by the Coalition, particularly the limitations
it imposed, the Company did not see how the program as outlined by the
Coalition permitted the Company to satisfy its key requirement in any
transaction involving the transfer of control: to deliver an appropriate
premium over market to the holders of Old Shares in a transaction that was fair
to such stockholders. At the same time, the Company expressed to the Coalition
the Board's willingness to discuss actively a transaction that involved
majority employee ownership, substantial corporate governance protection and
comprehensive job protection provisions, provided that it also satisfied the
Company's key requirement of providing substantial value to holders of Old
Shares. At the meeting among representatives, some specific approaches were
expressed as to possible areas of modifications to or enhancements of the
Coalition program in order to bridge what appeared to the Company to be a
substantial value gap. See "SPECIAL FACTORS--Certain Revenue and Earnings
Scenarios."
 
 August 25 Board Meeting
 
  In a meeting held on August 25, 1993, the Board reviewed the process that was
being followed and the steps that had been taken to obtain additional details
and evaluate the Coalition proposal. The Board then reviewed in detail the
various alternatives if the Company did not engage in a transaction involving
the sale of a majority of the equity to its employees, including:
 
  . maintaining the "status quo" without undertaking extraordinary actions,
 
  . pursuing an alternative, referred to as the "enhanced status quo"
    alternative, whereby the Company would undertake certain extraordinary
    cost-cutting actions, including, for example, a sale of the flight
    kitchens, designed to enhance stockholder value over the "status quo"
    alternative without undertaking a major restructuring of the Company and
 
  . pursuing the Fundamental Restructuring Plan.
 
  In considering the "status quo" alternative, the Board considered as positive
factors the prospect of labor peace, the possibility that the aviation
environment might improve and the fact that this alternative preserved the
Company's opportunity to carry out a fallback strategy. It considered as
negative factors the fact that this alternative did not address the Company's
fundamental problems (especially the continued expansion of
 
                                       7

<PAGE>
 
low-cost carriers), and would result in continuing unsatisfactory financial
performance, the loss of a "window of opportunity" before labor contracts
reopened, the failure to provide sufficient incentive to the unions to lower
costs and the prospect of a declining price of the Old Shares.
 
  The Board viewed the positive aspects of pursuing the "enhanced status quo"
alternative as improved financial performance versus the "status quo"
alternative and the use of a "window of opportunity" before labor contracts
reopened. It viewed as negative factors the potential labor disruption in the
workplace, the lack of sufficient improvement of financial performance, the
failure to address the low-cost carrier problem and the possibility that United
would be subject to some adverse media/political attention, which factors would
potentially reduce the positive effects on the stock price.
 
  Because the "enhanced status quo" alternative was viewed as preferable to the
"status quo" alternative in all aspects except the potential for labor
disruption, the Board felt the "enhanced status quo" alternative was the
appropriate comparison when evaluating the Fundamental Restructuring Plan and
other alternatives.
 
  In considering the Fundamental Restructuring Plan, the Board noted that
pursuit of such plan would significantly improve financial performance if
successful, significantly improve stock price if successful, and take advantage
of the "window of opportunity" before labor contracts reopened. The Board also
noted that the ability of the Company to implement successfully this
alternative was uncertain and that this alternative had the potential to cause
extreme labor disruption in the workplace, to place severe limits on the
Company's ability to pursue an acceptable fallback strategy, to subject United
to extreme adverse media/political attention and to significantly depress the
Company's stock price if not successful.
 
  The Board also recognized that the Fundamental Restructuring Plan was likely
to be challenged by the Company's unions both in Federal court and in
arbitration under the Railway Labor Act. Such a challenge could involve issues
such as (i) whether the Fundamental Restructuring Plan violated statutory
prohibitions against interference with union rights and/or unilateral carrier
actions, (ii) whether the Fundamental Restructuring Plan violated provisions in
the ALPA or AFA agreements that prohibit the Company from controlling, managing
or holding any equity interest in another carrier, (iii) whether the
Fundamental Restructuring Plan violated a provision in the AFA agreement that
prohibits establishment of an "alter ego" carrier and (iv) whether the
Fundamental Restructuring Plan violated a clause in the ALPA agreement that
restricts marketing agreements with United Express carriers. The Board
recognized that resolution of these issues could delay or prevent
implementation of the Fundamental Restructuring Plan. The Board also considered
the corporate taxation aspects of the Fundamental Restructuring Plan, including
whether the creation of one or more new short-haul carrier entities would
qualify as a tax-free reorganization under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code").
 
  Finally, the Board considered that a strategy involving a sale of a majority
of the Company's equity to employees would be expected to result in labor
peace, provide significant value to the stockholders, potentially address the
low-cost carrier problem and potentially preserve the Company's opportunity to
pursue a fallback strategy. The negative aspects of such a strategy were
determined to include the fact that, if not successful, the Company would lose
some of the "window of opportunity" and that the labor unions might initiate a
destructive public relations campaign coupled with significant disruptive job
action. The Board noted that such a strategy might provide potentially less
value to stockholders than a fully successful Fundamental Restructuring Plan,
although it would likely provide more value than a failed Fundamental
Restructuring Plan.
 
  At the August 25, 1993 Board meeting, CS First Boston made a presentation
summarizing its analyses of three alternatives to the Coalition program:
maintaining the "status quo", implementing the "enhanced status quo"
alternative (consisting of management actions that the Company believed would
increase labor force productivity or reduce labor costs but that would not
require a major restructuring) and implementing the Fundamental Restructuring
Plan, including an overview of the steps that would be required for
 
                                       8

<PAGE>
 
implementation of each. The presentation also included a preliminary valuation
analysis of the "enhanced status quo" alternative and the Fundamental
Restructuring Plan. In order to arrive at a range of values per share of the
Company assuming implementation of the "enhanced status quo" alternative, CS
First Boston used a discounted cash flow analysis to estimate the present value
of the future cash flows that the Company could be expected to produce over a
five-year period from 1994 through 1998 in accordance with management's
forecasts adjusted to reflect the cost reductions of the "enhanced status quo"
alternative. CS First Boston estimated a preliminary value range for the
Company, assuming the implementation of the "enhanced status quo" alternative,
by adding the present value of the five-year unleveraged free cash flows of the
Company under that scenario to the present value of the Company's 1998 terminal
value. The discount rates and terminal multiples reflected then-current market
conditions. This analysis resulted in a preliminary range of values per share
of the Company, assuming the implementation of the "enhanced status quo"
alternative, of from $150 to $180.
 
  CS First Boston's presentation included a preliminary range of values for the
Company assuming implementation of the Fundamental Restructuring Plan. CS First
Boston applied the same discounted cash flow methodology used in the "enhanced
status quo" case to the cash flows that the Company could be expected to
produce over the five-year period from 1994 through 1998 if the Fundamental
Restructuring Plan were adopted. This analysis resulted in a preliminary range
of values per share, if the Fundamental Restructuring Plan were successfully
implemented, of from $225 to $275. CS First Boston noted that this preliminary
range of values must be reduced by the expected costs of the transition to such
plan and the assumed costs of labor disruption related to the implementation of
the Fundamental Restructuring Plan, which were estimated to range from $22 to
$42 per share. After such reduction, this analysis resulted in a preliminary
range of values per share of the Company, if the Fundamental Restructuring Plan
were successfully implemented, of $183 to $253 per share. CS First Boston noted
that this range of values assumed that the transaction would not be taxable to
the Company or its stockholders and must be further reduced by the following
factors, which were not quantified: (i) the ownership share expected to be
retained by the new operators and accordingly not distributed to the Company's
stockholders, (ii) structural inefficiencies, (iii) national labor leadership
response, (iv) government reaction and (v) public relations risk.
 
  CS First Boston also presented a preliminary analysis of a range of values
for the Company if implementation of the Fundamental Restructuring Plan was
attempted by the Company, but was ultimately blocked as a result of legal
action, and the Company subsequently adopted the "enhanced status quo"
alternative described above. CS First Boston assumed for purposes of its
analysis that the Company would have absorbed the transition expenses and labor
disruption costs associated with the Fundamental Restructuring Plan during the
pendency of the legal action. Accordingly, this analysis resulted in a
preliminary range of values per share of the Company, if the "enhanced status
quo" alternative were adopted following an unsuccessful attempt to implement
the Fundamental Restructuring Plan, of from $108 to $158.
 
  For information relating to the qualifications of CS First Boston, the method
of its selection, the nature of, and purpose for, its analyses, the procedures
it followed in connection therewith and the compensation it has received or
will receive, see "SPECIAL FACTORS--Opinions of the Financial Advisors to the
Board."
 
  The Board then further discussed issues concerning the various alternatives,
including their potential impact on the Company and the factors influencing the
potential success of each alternative.
 
  At the conclusion of its deliberations, the Board determined that the Company
should identify for the Coalition a set of possible enhancements to the
Coalition program but at the same time management should proceed with the
development of various restructuring activities as and to the extent management
deemed appropriate.
 
  In a letter to the Coalition dated August 25, 1993, the Company stated that
since August 11, 1993, the Company and its financial advisors "had performed
further analysis which has provided the Company with a clearer view of value,
both as to the Company if no Coalition transaction occurs and as to the value
of the
 
                                       9

<PAGE>
 
Coalition program as reflected in the July 16th letter. The Company's analysis
has confirmed that a substantial value gap exists between the Coalition program
and the inherent value of the Company."
 
  In the August 25th letter, the Company outlined an approach to enhance the
Coalition's program for a majority employee ownership transaction for
consideration by the Coalition. This approach involved the following components
to enhance the Coalition's proposed structure: (i) one or more trusts for the
benefit of the Company employees would acquire 50.1% of the economic and voting
power of the Company's equity, (ii) (a) employee investment as described in the
Coalition July 16 Proposal would be supplemented by additional employee
investment amounting to $120 million in year 1 and growing to $160 million in
year 8, (b) an extension of the duration of the employee investment period by
three years, (c) the entire investment would be by verifiable pay rate/defined
contribution reductions, unless the Company agreed to alternative achievable
work-rule changes of equal value, (d) there would be no "snap-backs" and
contracts would be amendable after 8 years pursuant to Section 6 of the Railway
Labor Act, (e) in each of years 6, 7 and 8 of the investment period, all
employees would be provided a general wage rate increase of 2% per year if the
Company achieved its earnings projections and there would be no other wage
rate, per diem, allowance/premium or benefit increases during the investment
period (other than step, longevity or comparable increases for non-contract
salaried and management employees or status/promotional increases) and (f) a
profit-sharing plan to provide potential for annual lump sum cash payments to
employees if corporate performance targets are met, (iii) contract revisions
allowing the establishment of a low-cost short-haul airline within United or
the Company would be made, (iv) collective bargaining terms designed to provide
reasonable job security provisions acceptable to the Company and to United's
employees, which would not impose additional costs on United, would be agreed
to, (v) upon consummation of the transaction, each existing Old Share would
receive one new share of common stock and $100 in additional consideration,
consisting of approximately $25 in cash and additional "cash equivalent value,"
consisting of approximately $37 in value of debt with specified terms and
approximately $37 in value of preferred stock with specified terms and (vi)
special governance provisions would be applicable to the "new company."
 
  The Company noted that the outlined approach was intended to provide a basis
for discussion and was not intended to be exhaustive and that the Company
"recognized that the [outlined] approach to enhancing the Coalition's program .
. . will require amplification, modification and amendment of various aspects
of the approach."
 
  On September 1, 1993, the Company delivered additional material to the
Coalition on the economics of an "airline-within-an-airline" then described as
"Friendship Express" (and subsequently referred to as "U2").
 
  On September 13, 1993, the Company announced that it had agreed to sell
certain of its United States flight kitchens to Dobbs International Services,
Inc. ("Dobbs") and Caterair International Corp. ("Caterair"). The Company also
stated that it retained the option to terminate such agreements at any time
prior to November 13, 1993.
 
  On September 30, 1993, the AFA announced that it had "terminated its
participation in the negotiations" due to the Company's decision to open a
flight attendant domicile in Taiwan. The Company had previously delayed this
action on several occasions (despite the Company's belief that it would
meaningfully increase the Company's productivity) in order to permit the AFA
time to consider its participation in the transaction. Following such
withdrawal by the AFA, the Company continued to have discussions with
representatives of ALPA and the IAM. All references in this document to the
"Coalition," "Participating Unions" or the "Unions" following September 30,
1993 refer to ALPA and the IAM, but not the AFA.
 
  On November 4, 1993, in response to media reports on the status of its
discussions with the Coalition, the Company announced that no definitive
proposal had been presented to the Company by the Coalition. On November 5,
1993, the Company announced it had sent a letter to the IAM containing a
proposal whereby, among other things, the Company and the IAM would enter into
a new seven-year contract relating
 
                                       10

<PAGE>
 
to United States flight kitchens, in lieu of a sale thereof, that would reduce
the Company's current catering expense.
 
  On November 6, 1993, the Coalition delivered a draft proposal to the Company
with respect to a transaction. On November 8, 1993, a representative of the
Company delivered a response to the Coalition that stated, among other things,
that such draft presented significant deficiencies in addition to reflecting a
substantial shortfall in the level of employee investment.
 
 November 11 Proposal
 
  During the evening of November 11, 1993, the Coalition delivered a formal
proposal to the Company (the "Coalition November 11 Proposal"). The Coalition
November 11 Proposal provided, among other things, for the acquisition by one
or more employee stock ownership plans of securities representing 60% of the
equity interest and voting power of the Company, and receipt by the Company's
existing stockholders of a package comprised of an aggregate of $650 million in
cash paid by the Company, $500 million of debentures of the Company, $750
million of preferred stock of the Company, and common stock representing 40% of
the equity of the Company. The Coalition November 11 Proposal also stated that
it would be immediately withdrawn in the event the Company sold the flight
kitchens.
 
  Under the Coalition November 11 Proposal, ALPA, the IAM and salaried and
management employees would make wage concessions which the Coalition valued at
$3.496 billion in nominal amount, or $2.874 billion in present value (at a 9%
discount rate). Under collective bargaining agreement modifications provided
for in such proposal, the Company would be permitted to establish a unit to
compete with low-cost carriers in the domestic short-haul market. The Coalition
indicated that it believed that the present value (at a 9% discount rate) of
this competitive capability was approximately $2.7 billion and valued its
proposal at $165.67 per Old Share. CS First Boston analyzed the Coalition
November 11 Proposal and, at a Board meeting held on November 12, 1993,
indicated to the Board that it had concluded that the Coalition November 11
Proposal was substantially deficient from the standpoint of providing adequate
value to the Company's stockholders. CS First Boston indicated that, although
it had not completed a full analysis, it had calculated the value of the
Coalition November 11 Proposal as approximately $140 per Old Share.
 
  The Company communicated such conclusion to the Coalition on November 12,
1993 and further responded with a written alternative which sought to provide
"appropriate value" to stockholders while enabling the Coalition to achieve its
goal of majority employee ownership. Among other things, the Company's
alternative extended the employee investment period by two years, required
health insurance contributions and reduced many new hire rates. On November 12,
1993, the Coalition rejected such alternative, stating that it was willing to
continue negotiations subject to certain conditions.
 
  Based upon the Coalition response, the Board thereafter determined that the
interests of the Company's stockholders would be best served by not exercising
the right United had to terminate the flight kitchen sale contracts prior to
November 13, 1993. The Company was then advised by the Coalition that the
Coalition November 11 Proposal was withdrawn.
 
  On November 12, 1993, the Company issued a press release describing the
events of November 11 and 12 described above and stated that it remained
willing to continue to hold discussions with its labor unions and still
believed that a cooperative approach to solving a non-competitive labor cost
structure was in the best interests of all parties.
 
  On November 16, 1993, Mr. Wolf met in New York with Mr. Felix Rohatyn, a
general partner of Lazard Freres & Co. ("Lazard") and a member of the National
Commission to Ensure a Strong Competitive Airline Industry from June 1993
through September 1993, in order to explore the basis for renewed discussions
with the Company's labor unions. Thereafter, the Board authorized the retention
of Lazard. After the retention of Lazard, Lazard and CS First Boston contacted
advisors to the Coalition to see if a "firm basis for continued
 
                                       11

<PAGE>
 
discussion" was possible. On December 1, 1993, Company management and
representatives met with senior Coalition officials and discussed certain
significant issues, including a mechanism designed to help bridge the
difference between the Company and the Coalition of their respective valuations
of the Company after giving effect to the concessions.
 
  Thereafter, numerous meetings were held between representatives of the
Company and representatives of the Coalition to discuss elements of a possible
transaction.
 
 December 16 and 22 Board Meetings
 
  On December 16, 1993, the Board met to discuss the status of a revised
Coalition proposal (the "Revised Coalition Proposal"). The Revised Coalition
Proposal contemplated the acquisition by the employee trusts of a minimum of
53% of the common equity, subject to increase to up to 63% based on stock price
performance in the year after closing, a recapitalization in which the holders
of Old Shares would receive cash, debt and preferred stock valued at $88, and
$4.548 billion net present value of wage and benefits reductions and work-rule
changes relating to the Company's employees. In addition, the Revised Coalition
Proposal contained a mechanism for resolving differences between the Company
and the Coalition over the present value of the employee investment and the
Competitive Action Plan contained in the proposal. The Coalition believed that
the elements of the Revised Coalition Proposal provided a total market value of
$6.9 billion to the Company and its stockholders; applying the same methodology
used by the Coalition, the Company and its outside advisors believed the
elements of the Revised Coalition Proposal represented $5.2 billion in market
value. To resolve this dispute, the Revised Coalition Proposal contemplated an
initial acquisition of 53% of the Company common equity by trusts for the
participating employees based on the Company's valuation of the elements of the
Revised Coalition Proposal at $5.2 billion. However, the proposal also allowed
the trusts for the participating employee groups to obtain additional equity of
the Company, up to 63% in total, if and to the extent the average trading price
of the New Shares over the initial year following the Effective Time exceeded
certain levels. At such meeting, the Board reviewed, among other things, the
amount and terms of the consideration to be received by the public
stockholders, the nature of the employee concessions, other terms of a proposed
Agreement in Principle (as defined below) incorporating such Revised Coalition
Proposal, including proposed conditions, the impact of the proposed transaction
on the Company's access to financing, and other issues related to the structure
of an employee stock ownership plan, tax effects and earnings per share and
other valuation effects. During such meeting, representatives of both CS First
Boston and Lazard indicated that despite the publicity surrounding the proposed
transaction, no third party had indicated interest in acquiring the Company as
an entirety and noted that certain factors, including the state of the
leveraged acquisition market and the fundamental need to address cost factors,
might be responsible for the lack of third party acquisition interest. At the
conclusion of such meeting, the Board instructed the Company's representatives
to continue to negotiate the open issues in the proposed Agreement in Principle
with a view towards having a definitive proposal for presentation at a December
22, 1993 Board meeting.
 
  On December 22, 1993, the Board met again to discuss the substantially
completed Agreement in Principle with respect to the Revised Coalition
Proposal. During such meeting, the Board reviewed, among other things, the
proposed corporate governance structure of the Company going forward, issues
related to management and employee reaction to a transaction and the related
transition, the alternatives available to the Company, including potential
labor disruption (including the effect on public perception and relations with
governmental authorities) if other alternatives were pursued, and the financial
terms of the Revised Coalition Proposal. The Board discussed the requirement of
the unions that Mr. Wolf, Mr. John C. Pope, President, and Mr. Lawrence M.
Nagin, Executive Vice President--Corporate Affairs and General Counsel, retire
at the Effective Time as well as the fact that the majority of the Board would
be replaced, and extensively discussed issues relating to management of the
Company following the transaction.
 
  At the December 22, 1993 Board meeting, CS First Boston and Lazard gave an
overview of the Revised Coalition Proposal, including the improvements from the
Coalition's November 11 Proposal. CS First Boston and Lazard described how the
Revised Coalition Proposal would affect the Company's balance sheet. CS
 
                                       12

<PAGE>
 
First Boston and Lazard also described how the accounting rules applicable to
"stock based compensation" (which require that stock compensation expense for
periodic stock allocations be measured by the then-current market value of the
shares at the time of allocation) would apply to the share allocations in the
employee stock ownership plans contemplated under the Revised Coalition
Proposal, the resulting complexities to forecasting earnings per share and how
the investment community might analyze the situation. CS First Boston and
Lazard discussed certain valuation issues related to the debentures and the
preferred stock proposed to be issued in the Revised Coalition Proposal
(including redistribution issues and, in the case of the preferred stock, the
limited precedent for a security of the size of the contemplated issue). CS
First Boston and Lazard described the possible impact of the proposed
transaction on the Company's credit ratings and the cash flow impact of the
proposed transaction (including the fact that the proposed employee investment
would exceed the incremental fixed charges). CS First Boston and Lazard also
described the structure and operation of the stock ownership adjustment
mechanism contained in the Revised Coalition Proposal that would increase the
employee trusts stock ownership percentage from 53% to a maximum of 63% if the
Company's average closing stock price for one year after the Effective Time
exceeded specified levels.
 
  At such meeting, CS First Boston and Lazard indicated to the Board that, as
of such date, the consideration that would be received by holders of the Old
Shares in connection with the transaction contemplated by the proposed
Agreement in Principle, taken as a whole, was fair to such holders of Old
Shares from a financial point of view. See "SPECIAL FACTORS--Opinions of the
Financial Advisors to the Board." Following the presentations and discussions,
the Board voted (with Dr. Andrew Brimmer dissenting) to approve the Agreement
in Principle.
 
  The Agreement in Principle (the "Agreement in Principle") was executed on
December 22, 1993 and thereafter the parties commenced preparation of
definitive documentation. The Agreement in Principle provided for a
preservation of the "status quo," subject to ratification of the transaction by
the ALPA-MEC and the IAM membership occur by January 31, 1994 and an automatic
termination of the agreement to preserve the "status quo" if definitive
documentation was not completed by March 15, 1994. The IAM membership ratified
the transaction on January 26, 1994 and the ALPA-MEC ratified the transaction
on January 28, 1994.
 
 March 14 Board Meeting
 
  On March 14, 1994, the Board met to discuss the status of the proposed
definitive documentation. At such meeting, the Board received presentations
from management and counsel with respect to such status, including the
documentation, the differences between such documentation and the Agreement in
Principle (including, without limitation, the issuance of the Debentures by
United rather than the Company, the inclusion of other employee plans in
calculating the 20% "Sunset" threshold as described below in "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure--Nondilution" and the provision
for payment of expenses of the Unions if the Plan of Recapitalization were
terminated because of another proposed transaction which was subsequently
consummated), the significant issues which remained unresolved (including,
without limitation, certain issues relating to indemnification of the IAM
relating to certain alleged claims by a former financial advisor, certain
issues relating to expenses of the Unions, certain issues relating to the
retention of a new CEO, certain issues related to the investment by Salaried
and Management Employees, the standard for Unions' review of the proxy, various
issues relating to the pricing of the Debentures and Public Preferred Stock and
to the "treasury stock method" of calculating the number of Outstanding Old
Shares, and certain issues related to the ESOPs) and a discussion of the
employee stock ownership plan contemplated by the Agreement in Principle and
its relationship to the transaction, a presentation from American Appraisal
Associates, Inc. ("American Appraisal") with respect to issues of solvency and
surplus under Delaware law and a financial presentation from CS First Boston
and Lazard.
 
  Subsequent to such Board meeting, the parties continued to discuss various
issues, principally the salaried and management employees' contribution,
adjustments based on variances in share capitalization
 
                                       13

<PAGE>
 
resulting from options and convertible securities, the terms of the employment
agreement for the new chief executive officer and advisory fees. The Board had
telephonic status meetings on March 15 and March 16, where management advised
the Board about developments in the discussions with the Coalition.
 
 March 24 Board Meeting
 
  On March 24, 1994, the Board met telephonically to consider the definitive
Plan of Recapitalization. At such meeting, the Board discussed the proposed
transaction, focusing on issues that had either been resolved since the March
14 Board meeting or that remained unresolved, including the maximum final
pricing of the Debentures and the Public Preferred Stock, the adjustments
necessary to reflect the treasury stock method of calculating fully diluted
shares, the method of pricing a call feature on the Debentures, the nature of
the salaried and management employee concession package and a proposed
indemnity to the IAM against certain alleged claims asserted against the IAM by
a former financial advisor. In addition, the proposed Independent Directors (as
defined below) were identified. After discussion, the Board voted (with Dr.
Andrew Brimmer dissenting) to approve the Plan of Recapitalization. On March
25, 1994, the Plan of Recapitalization was executed by the Company, ALPA and
the IAM.
 
                                SPECIAL FACTORS
 
CERTAIN COMPANY ANALYSES
 
  In connection with the consideration of the Recapitalization, United's
internal financial analysis group prepared an analysis (the "Company Analysis")
of the expected present value of the employee investments. The Company Analysis
estimated the net present value (using a 10% discount rate) of such investment
to be approximately $4.9 billion. The employee investments are expected to be
in the form of wage and benefit reductions, work-rule changes and the startup
of a new short-haul "airline-within-an-airline" referred to herein as "U2" (See
"--Implementation of the "Airline-Within-an-Airline' (U2)").
 
  THE COMPANY ANALYSIS IS BASED UPON A VARIETY OF ASSUMPTIONS THAT MAY NOT BE
REALIZED AND ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES, MANY
OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THE ACTUAL VALUE OF THE EMPLOYEE
INVESTMENTS MIGHT BE HIGHER OR LOWER THAN THE VALUE ESTIMATED IN THE COMPANY
ANALYSIS. NO ASSURANCE CAN BE GIVEN THAT THE ESTIMATED COST SAVINGS IN THE
COMPANY ANALYSIS WILL BE ACHIEVED OR THAT THE U2 OPERATION WILL ACHIEVE THE
POTENTIAL BENEFITS DESCRIBED BELOW. SEE "--CERTAIN RISK FACTORS--INVESTMENT
VALUES, FUTURE INVESTMENTS."
 
  The employee investment relating to wage, benefit and work-rule modifications
was estimated to have a net present value in excess of $3.3 billion, including
modifications associated with U2. While the current contracts for both ALPA and
the IAM become amendable in November 1994, the value of this portion of the
employee investment was not based on any "projected" future wage rates, but
rather using wage scales under the existing contracts. Additionally, the Plan
of Recapitalization specifically does not guarantee any "snap-back" in wages or
benefits at the end of the investment period. Further, the valuation of the
employee investment was reduced by the potential for certain wage adjustments
(that were not contractually guaranteed) beginning in 1997. Despite the absence
of "snap-back" provisions, as these contracts will become amendable at that
time, no valuation was made of the benefit associated with the lack of a "snap-
back" provision in the post-investment period. In addition to the employee
investment relating to wage benefit and work-rule modifications, net benefits
of U2 (excluding labor savings) were estimated to have a net present value of
approximately $1.6 billion.
 
                                ALPA INVESTMENT
 
  The ALPA investment consists of savings that are system-wide in nature and
that will continue for five years, nine months, as well as an additional
investment applicable solely to those pilots in the U2 operation and that will
remain in force for twelve years.
 
                                       14

<PAGE>
 
  The base investment includes the following features:
 
    . Reduction in hourly wages for all pilots of 15.7%
 
    . Reduction in the Company contribution to the defined contribution
      retirement plan from current 9% of wages (ordinary earnings, excluding
      expense reimbursements) to 1% of post-transaction (reduced) wages
 
    . No pay raise during first three years other than existing seniority and
      promotion increases
 
  An additional investment that should assist United in competing against low-
  cost carriers on short-haul routes includes:
 
    . Further reduction of approximately 7.1% in hourly wage rates for B737
      pilots in the U2 operation
 
    . Adjustments in work-rules for U2 pilots to increase productivity vis-
      a-vis the mainline United operation
 
  Partially offsetting these investments were changes to the following contract
  features:
 
    . Increased hourly rates for pilots flying the A320 aircraft
 
    . Potential increase in per diem and potential increase in wages in
      years 4 and 5 under an arbitrated settlement based on the Company's
      profitability, industry wage trends and wages at specified comparable
      carriers
 
  In addition, pilot benefits under the Company's defined benefit pension plan,
disability plan and life insurance plan will continue to be based on pre-
transaction "book" rates without regard to the 15.7% wage rate reduction.
 
                                 IAM INVESTMENT
 
  The IAM base investment will remain in force for six years. In lieu of
creating a separate U2 workforce, the IAM made additional system-wide work-rule
changes to improve productivity and competitiveness in all areas.
 
  The base investment includes the following features:
 
    . Reduction in hourly wage rates for all IAM employees of 9.7%
 
    . Elimination of the contractually provided May 1, 1994 wage increase of
      5%
 
    . No pay raise during first three years other than existing seniority and
      promotion increases
 
  Additional work-rule changes that will remain in place for twelve years:
 
    . Elimination of the half-hour paid lunch period
 
    . Elimination of allowance for paid lunch period on overtime
 
    . Provide United with the ability to outsource up to 20% of maintenance
      work
 
  Partially offsetting these investments were:
 
    . Potential wage increase in years 4 and 5 under an arbitrated
      settlement based on the Company's profitability, industry wage trends
      and wages at specified comparable carriers
 
    . Improved severance package for IAM employees affected by the flight
      kitchen sale, including reemployment incentives
 
    . Increase in pension benefits
 
    . Inefficiencies due to the impact of job security provisions on
      functions with variable workloads
 
    . Reimbursement for relocations caused by involuntary transfers
 
    . Subject to certain conditions and exceptions, provide IAM
      representation for ramp employees at stations with greater than 40
      daily departures
 
                       SALARIED AND MANAGEMENT INVESTMENT
 
  The Salaried and Management Employee investment remains in force for five
years, nine months and consists of salary reductions and work-rule and policy
changes. In lieu of creating a separate U2 workforce, Salaried and Management
Employee investment includes the introduction of a "market-based" new hire
program.
 
                                       15

<PAGE>
 
  The base investment includes the following features:
 
    . Reduction in wage rates of 8.25%
 
    . No pay raise during first three years other than promotion and
      existing progression increases
 
    . Reduction in force of 127 management positions
 
  Additional work-rule changes include:
 
    . Elimination of the half-hour paid lunch period on overtime
 
    . Reduced eligibility for shift differential pay
 
    . Reduction of compensation for extended medical leave
 
    . Reduced reimbursement for certain management relocations
 
    . Four holidays changed to "floating" status to eliminate premium pay
      for such holidays worked
 
    . Reduce salary guarantee for part-time employees
 
  The market-based new-hire program includes the following features:
 
    . Maximum compensation levels reduced to market rates at other
      comparable employers (40-55%  reduction)
 
    . Requirement of 25% employee copayment on medical coverage
 
    . Reductions in vacation, sick leave and dental insurance benefits
 
  Partially offsetting these investments was:
 
    . Potential wage increase in years 4 and 5, based on similar factors to
      those for the ALPA and IAM-represented employees and taking into
      account wage increases, if any, for such represented  employees
 
                              TOTAL LABOR SAVINGS
 
  The changes to salaries, benefits and work-rules discussed above represent
approximately $5.2 billion in estimated savings, with an estimated net present
value of over $3.3 billion:
 
                              TOTAL LABOR SAVINGS*
                                   (MILLIONS)
 

<TABLE>
<CAPTION>
                         1994  1995  1996  1997  1998  1999  2000  2001  2002  2003  2004  2005  2006  TOTAL   NPV**
                         ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ------  ------
<S>                      <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>     <C>
Salary Reduction ....... $190  $396  $420  $433  $452  $488  $204  $ 57  $ 71  $ 87  $105  $125  $ 67  $3,095  $2,150
Benefit Reductions......   62   129   139   149   158   171    78    45    52    59    67    74    39   1,222     801
Potential Midterm
 Increase...............    0     0     0   (32)  (90) (119)  (44)   (3)   (3)   (3)   (3)   (3)   (2)   (302)   (189)
Work-Rule Changes.......   12    39    73   101   120   134   138   148   154   159   165   171    87   1,501     792
Contract Improvements...  (33)  (53)  (41)  (43)  (46)  (47)  (25)   (9)   (9)   (9)   (9)   (9)   (4)   (337)   (240)
                         ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ------  ------
  Total................. $231  $511  $591  $608  $594  $627  $351  $238  $265  $293  $325  $358  $187  $5,179  $3,313
</TABLE>

- --------
 * ESTIMATES PREPARED BY THE COMPANY FOR ANALYSIS PURPOSES. ACTUAL RESULTS MAY
   VARY. SEE "--CERTAIN RISK FACTORS--INVESTMENT VALUES, FUTURE INVESTMENTS."
   ASSUMED CLOSING DATE OF RECAPITALIZATION IS JULY 1, 1994.
** NET PRESENT VALUE BASED ON A DISCOUNT RATE OF 10%.
 
                                       16

<PAGE>
 
                              SHORT-HAUL SAVINGS
 
  With the emergence of low-cost, low-frills carriers such as Southwest,
United's cost structure has not been competitive in certain short-haul
markets. To date, United, burdened by higher costs than these carriers, has
maintained a full-service product in these markets to retain passengers
connecting to long-haul domestic and international flights, which are the core
of United's route network. See "--Implementation of the "Airline-Within-An-
Airline' (U2)".
 
  The employee investments are expected to provide United with wage rates and
work-rules that are believed to be competitive with low-cost carriers. This
should permit United to be more competitive on many short-haul routes. Given
these wage rates and work-rules, United should be able to implement a low-
frills, high-frequency "airline-within-an-airline" that can compete for the
extremely price-sensitive local passenger. Lower labor costs and work-rule
changes are the cornerstones for achieving a variety of related cost saving
actions. The combination of labor, work-rule changes and other cost savings
are intended to allow United to be service, price and cost competitive with
low-frills, low-cost carriers.
 
The U2 operation is expected to have the following features:
 
 . Improved Utilization Through a combination of reducing aircraft turnaround
    times, increasing frequency on existing routes and adding service in new
    markets, U2 is intended to operate with a greatly improved asset
    utilization. These enhancements are expected to allow United to leverage
    its fixed asset base--aircraft, airport space, ground equipment and both
    field and staff personnel--across a greater number of departures, and
    thereby to permit improvement in the profitability of marginal operations.
 
 . Limited Product Product and service levels will be reduced to more closely
    match the service levels offered by the competition on short-haul routes:
    beverage and peanuts service only, limited onboard amenities, streamlined
    reservations and airport check-in processes and a reduced Mileage Plus
    frequent flyer program.
 
 . Reduced Distribution Expense The experience of low-cost carriers has
    demonstrated that offering (and promoting) consistent, believably low
    fares and high-frequency service increases direct airline-to-customer
    ticketing. These and similar strategies employed by low-cost carriers are
    intended to be implemented to reduce distribution costs.
 
                              SHORT-HAUL SAVINGS*
                                  (MILLIONS)
 

<TABLE>
<CAPTION>
                         1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 TOTAL  NPV**
                         ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ ------
<S>                      <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>    <C>
Improved Utilization.... $11  $33  $ 53 $ 70 $ 80  $81 $ 85   95 $103 $115 $127 $140 $ 73 $1,066 $  557
Limited Product.........  10   32    52   67   77   78   82   91  100  111  123  135   70  1,028    538
Reduced Distribution....  10   28    46   60   69   70   73   81   89   99  109  120   63    917    478
                         ---  ---  ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ ------
  Total................. $31  $93  $151 $197 $226 $229 $240 $267 $292 $325 $359 $395 $206 $3,011 $1,573
</TABLE>

- --------
* ESTIMATES PREPARED BY THE COMPANY FOR ANALYSIS PURPOSES. ACTUAL RESULTS MAY
  VARY. SEE "--CERTAIN RISK FACTORS--INVESTMENT VALUES, FUTURE INVESTMENTS."
  ASSUMED CLOSING DATE OF THE RECAPITALIZATION IS JULY 1, 1994.
**NET PRESENT VALUE BASED ON A DISCOUNT RATE OF 10%.
 
                      SUMMARY OF INVESTMENTS AND SAVINGS
 
  In total, the Plan of Recapitalization is estimated to provide United with
approximately $8.2 billion in improved operating earnings over the twelve-year
period, equating to a net present value of approximately $4.9 billion.
Approximately $5.2 billion of the total improvement is expected to arise from
savings in labor costs, with the remaining approximately $3.0 billion expected
to arise from improvements associated with the U2 operation. Of course, future
financial results are inherently subject to significant business, economic
 
                                      17

<PAGE>
 
and competitive uncertainties and contingencies and to future business
decisions taken by corporate management, and no assurance can be given that
the estimated earnings improvement will be achieved.
 
                           SUMMARY OF TOTAL SAVINGS*
                                  (MILLIONS)
 

<TABLE>
<CAPTION>
                         1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 TOTAL  NPV**
                         ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ ------
<S>                      <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>  <C>    <C>
Labor Savings........... $231 $511 $591 $608 $594 $627 $351 $238 $265 $293 $325 $358 $187 $5,179 $3,313
Short-Haul Savings......   31   93  151  197  226  229  240  267  292  325  359  395  206  3,011  1,573
                         ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ ------
  Total Savings......... $262 $604 $742 $805 $820 $856 $591 $506 $557 $618 $684 $753 $393 $8,190 $4,886
</TABLE>

- --------
* ESTIMATES PREPARED BY THE COMPANY FOR ANALYSIS PURPOSES. ACTUAL RESULTS MAY
  VARY. SEE "--CERTAIN RISK FACTORS--INVESTMENT VALUES, FUTURE INVESTMENTS."
  ASSUMED CLOSING DATE FOR THE RECAPITALIZATION IS JULY 1, 1994.
**NET PRESENT VALUE BASED ON A DISCOUNT RATE OF 10%.
 
CERTAIN REVENUE AND EARNINGS SCENARIOS
 
  The Company does not as a matter of course publicly disclose projections or
forecasts as to future revenues or earnings. Management has not updated and
revised and does not intend to update further or otherwise revise the revenue
or earnings scenarios contained herein to reflect circumstances existing or
changes occurring after March 1994.
 
  NONE OF THE COMPANY, BAH OR ANY OTHER PARTY ASSUMES ANY RESPONSIBILITY FOR
THE ACCURACY OF THE REVENUE AND EARNINGS SCENARIOS CONTAINED HEREIN. THESE
REVENUE AND EARNINGS SCENARIOS, WHILE PRESENTED WITH NUMERICAL SPECIFICITY,
ARE BASED UPON A VARIETY OF ASSUMPTIONS RELATING TO THE BUSINESSES OF THE
COMPANY THAT MAY NOT BE REALIZED AND ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES
AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THERE CAN
BE NO ASSURANCE THAT ANY OF THE REVENUE AND EARNINGS SCENARIOS WILL BE
REALIZED, AND ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE SHOWN.
 
  The revenue and earnings scenarios should be read together with the
information contained in "BUSINESS OF THE COMPANY," "SELECTED CONSOLIDATED
FINANCIAL AND OPERATING DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Financial Statements,
all of which are contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 as amended and are incorporated by reference into
this Proxy Statement/Prospectus.
 
  August 1993 Revenue Scenarios. In connection with its negotiations with the
Coalition, the Company delivered in August 1993 certain revenue scenarios to
the Coalition. All of such scenarios assumed that (i) United maintained status
quo operations, (ii) recovering worldwide economies would result in higher
yields and (iii) in the longer term, unit revenue growth would slow,
reflecting a tapering off of the economic recovery and the addition of
incremental capacity in the domestic system, principally due to continued
expansion of low-cost carriers.
 
  Such scenarios, which assume average annual unit revenue growth rates for
the 1993-98 period ranging from 2.0% to 4.2%, were based upon certain
assumptions regarding highly uncertain variables, including but not limited to
sustained world economic upturn, absence of significant non-compensatory
competitive fare actions, absence of fuel price shocks, relatively constant
consumer propensity to spend on air travel and relatively stable industry
capacity growth. The various scenarios differed by the assumed intensity of
the early economic recovery and the severity of later economic slowdowns.
 
  Of the revenue scenarios developed, the Company's management assigned the
highest probability of occurrence to "Scenario C" which assumed medium unit
revenue growth. The other scenarios, which varied
 
                                      18

<PAGE>
 
in assumed economic conditions, growth rates, yields, capacities, and unit
revenue growth were used to test the sensitivity of the various valuations to
revenue changes from the baseline "Scenario C" case. The August 1993 version of
"Scenario C" showed operating profits increasing from $168 million in 1993 to
$620 million in 1998. The highest growth scenario showed operating profit
increasing to $1.182 billion in 1998. The August 1993 scenarios did not provide
for any wage increases other than promotion and progression increases, unless
there existed contractual raises, in which case the contract raise was
included.
 
  "Scenario C" relied upon the following assumptions: (i) passenger unit
revenues growth of 5.5% in 1994 and 4.0% in 1995, reflecting a sustained
economic recovery, (ii) domestic airline industry capacity growth of 1%, (iii)
significant yield increases of 3.0% to 4.5%, reflecting a return of fares to
levels prevailing prior to Value Pricing (a pricing strategy introduced by
American Airlines ("American") in 1992 which led to significant discounting in
the airline industry) and prior to the recession, (iv) moderate traffic
increases of 2% and (v) unit revenue growth to slow to 3.0% in 1996, 2.5% in
1997 and 2.0% in 1998, reflecting industry capacity growth rising to 2% per
year, yield growth moderating to 2.0%, and traffic increases of 2%.
 
  Updated Revenue Scenario C. Subsequent to the initial development of the
revenue scenarios, the Company has continued to update Scenario C from time to
time and to use such scenario in valuations (including the valuations performed
by American Appraisal and Houlihan Lokey Howard & Zukin ("Houlihan Lokey"), the
financial advisor to State Street, the trustee (the "ESOP Trustee") of the
employee stock ownership plans contemplated by the Plan of Recapitalization
(the "ESOPs"); and presentations to rating agencies (including those given to
Standard & Poor's and Moody's). The status quo case ("Status Quo Scenario C")
is based on the assumption that (i) operations continue as they are with no
labor cost reductions and (ii) no salary increases are granted to any labor
group (other than promotion and progression increases) unless there exists
contractual raises in which case the contractual raise was included.
 
  The most recent Status Quo Scenario C model (prepared as of March 29, 1994),
which is subject to various assumptions that may not be realized, and that are
subject to significant uncertainties and contingencies, is shown below:
 
                     STATUS QUO SCENARIO C INCOME STATEMENT
                                   (MILLIONS)
 

<TABLE>
<CAPTION>
                              1994     1995     1996     1997     1998     1999     2000
                             -------  -------  -------  -------  -------  -------  -------
<S>                          <C>      <C>      <C>      <C>      <C>      <C>      <C>
Operating Revenues.........  $14,725  $15,794  $16,970  $17,840  $18,760  $19,684  $20,649
Operating Expenses.........   14,476   15,417   16,468   17,308   18,288   19,148   20,017
                             -------  -------  -------  -------  -------  -------  -------
Operating Income...........      249      377      502      532      472      536      632
Interest Expense...........     (318)    (302)    (288)    (273)    (259)    (243)    (232)
Interest Capitalized.......       51       33       42       27       18       15       15
Interest Income............       73       73       94      113      150      184      225
Other, Net.................      (10)      10       44       52       60       79       41
                             -------  -------  -------  -------  -------  -------  -------
Earnings Before Taxes......       45      191      394      451      441      571      681
Provision For Income Taxes.       17       73      150      171      168      217      259
                             -------  -------  -------  -------  -------  -------  -------
Net Income.................       28      118      244      280      273      354      422
Addback
 Depreciation/Amortization.      745      756      812      872      942      974    1,023
                             -------  -------  -------  -------  -------  -------  -------
Cash From Operations.......  $   773  $   874  $ 1,056  $ 1,152  $ 1,215  $ 1,328  $ 1,445
</TABLE>

 
EFFECT OF THE RECAPITALIZATION ON INCOME STATEMENT, BOOK EQUITY AND CASH FLOW
 
  The effect of the Recapitalization on the Company's equity will be to
immediately reduce it by approximately $1.5 billion due primarily to the cash
and Debenture components of the Recapitalization Consideration provided to
stockholders, vesting of unvested restricted stock and transaction costs. Based
on the Company's analyses, the reduction in book equity is expected to be
earned back in less than three years.
 
                                       19

<PAGE>
 
The reasons for the rapid recovery of the reduction in equity are increases in
net income and the effect of employee stock ownership plan accounting.
Additionally, the Company's cash balance is expected to increase approximately
$4.0 billion from what it would have otherwise been.
 
  The following table sets forth a variance analysis showing changes from the
Status Quo Scenario C model resulting from the anticipated effects of the
Recapitalization.
 
                 CHANGES TO INCOME, BOOK EQUITY AND CASH FLOW*
                                   (MILLIONS)
            RECAPITALIZATION BETTER/(WORSE) THAN STATED QUO SCENARIO
 

<TABLE>
<CAPTION>
                            1994  1995   1996    1997    1998    1999    2000
                            ----  ----  ------  ------  ------  ------  ------
<S>                         <C>   <C>   <C>     <C>     <C>     <C>     <C>
Operating Income........... $(28) $ 16  $  157  $  204  $  192  $  199  $  462
Interest Expense...........  (37)  (73)    (80)    (84)    (84)    (84)    (84)
Interest Income............   (7)   (3)     16      38      62      88     105
                            ----  ----  ------  ------  ------  ------  ------
Earnings Before Taxes......  (72)  (60)     93     158     170     203     483
Income Taxes**.............   27    23     (35)    (60)    (65)    (77)   (183)
                            ----  ----  ------  ------  ------  ------  ------
Net Income.................  (45)  (37)     58      98     105     126     300
Non-Cash Employee Stock
 Ownership Plan Accounting
 Charge***.................  306   626     634     650     673     705     179
Deferred Taxes.............  (36)  (60)    (34)    (24)    (23)    (18)     63
                            ----  ----  ------  ------  ------  ------  ------
Funds From Operations......  225   529     658     724     755     813     542
Series A and B Preferred
 Stock Dividends...........  (40)  (80)    (64)    (55)    (55)    (55)    (55)
                            ----  ----  ------  ------  ------  ------  ------
Net Cash Flow.............. $185  $449  $  594  $  669  $  700  $  758  $  487
Change in Cash Balance
 (cumulative).............. $185  $634  $1,228  $1,897  $2,597  $3,355  $3,842
Change in Book Equity
 (cumulative).............. $221  $730  $1,358  $2,051  $2,774  $3,550  $3,974
</TABLE>

- --------
*  ASSUMES EXISTING SERIES A PREFERRED STOCK IS CONVERTED ON THE FIRST
   REDEMPTION DATE (MAY 1996). EXCLUDES EFFECTS OF NON-RECURRING CHARGES WITH
   THE EXCEPTION OF SEVERANCE BENEFITS PAID TO FLIGHT KITCHEN WORKERS WHICH
   WERE NETTED FROM EMPLOYEE INVESTMENT. SEE "UNAUDITED PRO FORMA FINANCIAL
   INFORMATION." ASSUMED CLOSING DATE OF THE RECAPITALIZATION IS JULY 1, 1994.
** FOR PURPOSES OF THIS ANALYSIS, INCOME TAXES WERE COMPUTED USING THE
   STATUTORY RATES.
***SEE "--CERTAIN RISK FACTORS--FINANCIAL REPORTING; MARKET ASSESSMENT."
 
  As shown above, the Recapitalization is expected to result in an improvement
to cash flow averaging over $550 million per year through the year 2000. This
improvement, aggregating $3.8 billion (excluding the cash consideration
distributed to stockholders as part of the Recapitalization Consideration), is
expected to result from (i) the employee investment which reduces cash expenses
an average of $700 million per year, (ii) favorable tax treatment on ESOP
transactions, which provides on average $500 million in annual tax deductions,
and (iii) partially offsetting the factors described above, the additional
interest expense on the Debentures, dividends on the Public Preferred Stock and
foregone interest on the cash consideration distributed to stockholders in the
Recapitalization. The Company expects that at the Effective Time, taking into
account the distribution of cash in the Recapitalization, it will have an
opening cash balance of approximately $1.5 billion (assuming the Effective Time
occurs on June 30, 1994). Cash generated after the Effective Time is assumed to
accumulate in a cash account; if the available cash was used to repay debt,
free cash flow would improve further.
 
  Due to the accounting rules for stock-based compensation such as the ESOPs,
it is expected to be difficult to compare the financial performance of the
Company to companies without significant stock-based compensation. In addition
to this, since there is a circular relationship between the Company's financial
results and its stock price (See "--Certain Risk Factors--Financial Reporting;
Market Assessment" and "--Opinions of the Financial Advisors to the Board"), it
is expected that certain financial analysts may adjust the way they analyze the
Company's performance. While there can be no assurances the Company's financial
performance will be considered other than as reported under GAAP, the Company
believes that the following analyses are consistent with the manner in which
certain analysts will evaluate the Company's performance.
 
                                       20

<PAGE>
 
                          EARNINGS PER SHARE ANALYSIS*
 

<TABLE>
<CAPTION>
                                                              1995    PER SHARE
                                                           (MILLIONS)  BASIS**
                                                           ---------- ---------
<S>                                                        <C>        <C>
Net Income (Status Quo Scenario C)........................   $  118    $ 3.83
Change in Net Income due to Recapitalization..............      (37)    (1.20)
                                                             ------    ------
Net Income (Post-Recapitalization)........................       81      2.63
Preferred Stock Dividends Requirements***.................      (92)    (2.99)
                                                             ------    ------
Net Income Available to Common............................      (11)    (0.36)
Employee Stock Ownership Plan Accounting Charge (after-
 tax)****.................................................      388     12.62
                                                             ------    ------
Net Income Available to Common (adjusted).................   $  377    $12.26
 
                              CASH FLOW ANALYSIS*
 
<CAPTION>
                                                              1995    PER SHARE
                                                           (MILLIONS)  BASIS**
                                                           ---------- ---------
<S>                                                        <C>        <C>
Net Income (Status Quo Scenario C)........................   $  118    $ 3.83
Addback Depreciation/Amortization.........................      756     24.57
                                                             ------    ------
Cash From Operations (Status Quo Scenario C)..............      874     28.40
Change in Net Cash Flow due to Recapitalization...........      449     14.60
                                                             ------    ------
Cash From Operations (Post-Recapitalization)..............   $1,323    $43.00
</TABLE>

- --------
   * THE FIRST FULL YEAR OF THE RECAPITALIZATION (1995) WAS USED FOR
     ILLUSTRATIVE PURPOSE.
  ** PER SHARE AMOUNTS ASSUMES 30.77 MILLION FULLY DILUTED SHARES.
 *** PREFERRED STOCK DIVIDEND REQUIREMENTS REPRESENT SERIES B PREFERRED STOCK
     WHICH IS NOT CONVERTABLE TO COMMON STOCK.
**** FOR PURPOSES OF THIS ANALYSIS, INCOME TAXES WERE COMPUTED USING STATUTORY
     RATES.
 
IMPLEMENTATION OF THE "AIRLINE-WITHIN-AN-AIRLINE " (U2)
 
 Background
 
  In recent years, low-cost carriers, especially Southwest, have grown rapidly.
These carriers offer the consumer air travel service with frequent departures,
minimal inflight service, and simplified fares that are substantially below
standard industry pricing. The consumer acceptance of such carriers has been
especially strong in short-haul markets (markets under 750 miles) in which
consumers readily opt for reliable, low-priced air transportation over the full
service product (typically at higher prices) traditionally offered by carriers.
 
  Due to its current cost structure, United has experienced difficulty
competing with low-cost carriers in short-haul markets. When a low-cost carrier
enters a short-haul market, it typically does so with fares substantially below
those existing prior to its entry and with the expectation of stimulating
demand and gaining market share. When a low-cost carrier enters a short-haul
market where United operates, United is faced with three choices:
 
  Do Nothing    Continue service and do not match the lower fares. Traffic
                that is connecting to other United flights would be retained.
                However, without competitive fares in the non-stop short-haul
                market, lost market share as well as a decline in revenues
                would occur. As a result, the economics of the segment would
                deteriorate and it almost certainly would become very
                unprofitable.
 
  Abandon       Discontinue service in the market. This would alleviate losses
                on the non-stop, short-haul segment, assuming the aircraft can
                be profitably redeployed or sold. However, it would also
                deprive United of traffic that connects from the short-haul
                segment to the
 
                                       21

<PAGE>
 
                carrier's long-haul operations. The loss of these passengers
                would hurt the profitability of "beyond" segments that rely on
                the connecting traffic. Typically, this decrease in
                profitability on all "beyond" segments more than offsets the
                benefit from abandoning a short-haul market.
 
  Match Fares   Continue service and match the new low fares. Revenue and
                profitability would decline, but the retention of both local
                and connecting traffic would generally result in less
                deterioration to earnings than either the "Do Nothing" or
                "Abandon" choices.
 
  Accordingly, United often elects to remain in markets following the entrance
of low-cost competition and match the lower fares even though doing so results
in operating losses.
 
  While United believes that matching lower fares is the optimal strategy in
the short-run, it recognizes that it cannot suffer losses in these markets
indefinitely. The ideal strategy, which would allow United to compete
profitably in markets with low-cost competition, is an alternative which is not
currently available to United, that is, to compete with low-cost carriers on a
cost basis. This strategy requires a cost structure similar to that of the low-
cost carriers. United would need to reduce both labor and non-labor costs and
increase productivity in order to establish a competitive cost structure that
would allow United to profitably retain and increase market share. In order to
achieve a competitive cost structure productivity increases are important
elements of the Recapitalization.
 
  The Plan of Recapitalization permits the implementation of the low-cost
strategy described above by providing for the establishment of U2, an airline-
within-an-airline. U2 provisions of the labor agreements permit reduced labor
rates and work-rule changes which are expected to lower costs and improve
productivity. To maximize the benefits associated with those provisions, the
Company will establish separate pilot positions for the U2 operation as well as
a set of U2 routes that are intended to fully leverage potential productivity
and cost savings. The product, pricing, and distribution attributes of U2
markets will be altered from United's to resemble those of a low-cost airline.
U2 markets are expected to be flown as a branded product feature of United
bearing its own distinct name. THERE CAN BE NO ASSURANCE THAT THE U2 OPERATION
WILL BE SUCCESSFULLY IMPLEMENTED OR, IF IMPLEMENTED, THAT THE RESPONSES OF
VARIOUS COMPETITORS WILL NOT REDUCE OR ELIMINATE THE BENEFITS SOUGHT TO BE
OBTAINED.
 
 Operations and Route Systems
 
  Key operational elements of U2 are expected to be as follows:
 
    Short-haul missions    U2 will operate within the contiguous United States 
                           in non-stop city pairs of up to 750 nautical miles in
                           "stage length," other than flying between United's  
                           hubs and/or international gateway cities (except for
                           Los Angeles basin to San Francisco bay area service 
                           which may be flown by U2). At least 10% of U2 flying
                           must be in city pairs that United has not served for
                           24 months prior to the introduction of U2 service   
                           into that city pair.                                
                                                                               
    High frequency         One of the key characteristics of an efficient short-
                           haul operation is high frequency scheduling within a
                           market. United intends to schedule U2 to average    
                           approximately ten frequencies per day in most       
                           markets.                                            
                                                                               
    Rapid turn-arounds     United intends to reduce aircraft turn-around time in
                           the U2 operation to 20 minutes as compared to       
                           United's current 40 to 45 minutes. The rapid turn-  
                           around time is expected to be achieved through      
                           product simplification (e.g., reduced food service  
                           deliveries) and the streamlining of customer and ramp
                           service procedures.                                 
                                                                               
    Increased utilization  By combining high frequency with faster turn-arounds,
                           utilization of aircraft, facilities and other       
                           equipment is expected to increase, thereby lowering 
                           unit costs. As compared with United's fleet, the    
                           utilization goal of the U2 fleet is anticipated to  
                           improve 16% to 11.0 hours per day from 9.5 hours per
                           day. The increased utilization should allow more    
                           trips to be flown by the same fleet of aircraft.     
 
                                       22

<PAGE>
 
 Product
 
  U2 is expected to be marketed as a branded product of United with its own
distinct name (such as "Business One" and "Connoisseur Class" are today).
Travel between U2 and United should appear seamless to the consumer. U2 flights
are expected to feed United long-haul domestic and international flights and
connect with United Express flights.
 
  U2 is expected to offer a simplified, lower-frills product as compared to
mainline United service and will be cost competitive with other low-cost
carriers. Key product features that will differentiate U2 from the mainline
product are:
 
  . Reduced food service
 
  . Reduced onboard amenities
 
  . Expedited customer airport check-in
 
  While the U2 product clearly should be different from mainline United, it is
also expected to be distinguishable from other low-cost carriers.
 
  . Unlike some short-haul carriers, U2 currently plans to offer added value
    to the consumer by providing seat assignments
 
  . To help retain high yield connecting traffic to mainline United, U2
    currently plans to offer first class seating
 
  . Capitalizing on United's marketing strength and global route network, U2
    consumers will be able to participate in one of the industry's highest
    rated frequent flyer programs--United's Mileage Plus program. While the
    program may be adjusted somewhat for U2 travel, the program's benefits
    are expected to help to generate a U2 revenue premium over the
    competition.
 
 Fare Structure
 
  In most markets in which U2 is expected to compete, fares have already been
reduced by other low-cost carriers, and United's fares have been reduced to
competitive levels. U2 intends to maintain United's current pricing practice of
matching competitors' low fares, although U2 intends to heavily promote low
fare levels. The objective in maintaining and promoting the low fares is to
build customer trust so that when they purchase a ticket on a U2 flight, they
know they are obtaining competitive value in the market and do not need to shop
the fare.
 
 Distribution
 
  The experience of low-cost carriers has demonstrated that offering and
promoting consistent, believably low fares and high-frequency service increases
direct airline-to-customer ticketing. These and similar strategies employed by
low-cost carriers are expected to be implemented to reduce distribution costs.
 
 Roll-out
 
  The Company expects that U2 will be rolled out no later than four to six
months after the Effective Time and will be implemented in the short-haul
markets as quickly as possible. It is currently expected that by year 5, U2
will operate approximately 130 aircraft and represent approximately 20% of
system "block hours". Block hours is a measure of the time an aircraft is in
motion (i.e. from the time it pushes back from the gate at the departing
airport until it pulls up to the gate upon arrival). Factors affecting the rate
of roll-out include market conditions, pilot attrition, growth of the airline
and changes in the fleet plan.
 
  B737 aircraft are expected to be utilized in the U2 operations. To maximize
fleet efficiency and to have the flexibility of swapping aircraft between the
U2 and United fleet, no changes are expected to be made to livery or interior
configuration.
 
                                       23

<PAGE>
 
UNIT COSTS
 
  Unit cost, a common industry measure of cost effectiveness, measures the cost
of flying one airplane seat one mile. Due principally to the base employee
investments, increased productivity, the U2 labor provisions and the other
savings associated with the U2 operation, U2's unit costs (calculated on an
incremental basis for short-haul markets) are expected to drop by 30% from
United's existing costs on short-haul routes:
 
                            U2 UNIT COST COMPARISON
                           (PER AVAILABLE SEAT MILE)
 

<TABLE>
<CAPTION>
                                                    U2 BETTER/(WORSE) THAN
                                                    ------------------------------
                                      CURRENT
                                      UNITED          UNITED         SOUTHWEST
                                      SHORT-        -------------   --------------
                         SOUTHWEST(1) HAUL(2) U2(2) AMT.    PCT.    AMT.     PCT.
                         ------------ ------- ----- ------  -----   ------   -----
<S>                      <C>          <C>     <C>   <C>     <C>     <C>      <C>
Expense Category
  Wages & Benefits(3)...     2.4c       3.5c   2.6c    0.9c    25%    (0.2)c    (9)%
  Fuel & Oil............     1.1        1.1    1.1     --     --       --      --
  Aircraft Ownership(4).     0.7        0.8    0.7     0.1     16      --      --
  Aircraft Mainte-
   nance(5).............     0.6        0.3    0.2     0.1     22      0.4      64
  Commissions(6)........     0.5        1.0    0.6     0.4     36     (0.1)    (21)
  Advertising...........     0.2        0.2    0.3    (0.1)   (12)    (0.1)    (10)
  Food & Beverage.......     0.0        0.5    0.0     0.5     98      --      --
  Other.................     1.7        3.1    1.9     1.2     41     (0.2)    (11)
                             ---       ----    ---  ------          ------
                             7.2c      10.5c   7.4c    3.1c    30%    (0.2)c    (2)%
</TABLE>

- --------
(1) SOUTHWEST'S RESULTS ARE FOR 1993 (EXCLUDING MORRIS AIR).
(2) UNITED AND U2 STEADY-STATE UNIT COSTS REFLECTING OPERATING ECONOMICS ON
    ROUTES COMPARABLE TO SOUTHWEST'S AND ARE ADJUSTED TO REFLECT AN ALL-COACH
    CONFIGURATION.
(3) U2 WAGES EXCLUDE EMPLOYEE STOCK OWNERSHIP PLAN ACCOUNTING CHARGE.
(4) NORMALIZED TO SOUTHWEST LEVEL.
(5) SOUTHWEST OUTSOURCES A HIGHER PERCENTAGE OF MAINTENANCE WORK THAN UNITED
    DOES. THUS WHILE SOUTHWEST'S AIRCRAFT MAINTENANCE UNIT COST IS MUCH HIGHER
    THAN UNITED'S, ITS UNIT LABOR EXPENSE RELATED TO MAINTENANCE IS LOWER.
(6) FOR COMPARABILITY PURPOSES, UNITED AND U2 COMMISSION EXPENSE EXCLUDES
    INTERNATIONAL "OVERRIDE" COMMISSIONS.
 
                                       24

<PAGE>
 
  System-wide labor unit costs are expected to be reduced by 11% as a result of
the Recapitalization. The impact of this expected reduction is a 4% drop in
United's total unit cost which would result in a unit cost 10% lower than the
industry average.
 
                 UNITED VS. INDUSTRY AVERAGE NET UNIT COSTS(1)
                        (CENTS PER AVAILABLE SEAT MILE)
 

<TABLE>
<CAPTION>
                                                             POST-TRANSACTION
                                                            BETTER/(WORSE) THAN
                                                            ----------------------
                                                   POST-     CURRENT     AVERAGE
                               INDUSTRY CURRENT TRANSACTION ----------  ----------
                               AVERAGE  UNITED   UNITED(2)  AMT.  PCT.  AMT.  PCT.
                               -------- ------- ----------- ----  ----  ----  ----
<S>                            <C>      <C>     <C>         <C>   <C>   <C>   <C>
Expense Category
  Wages & Benefits(3).........   3.3c     3.1c      2.8c    0.3c   11%  0.5c   16%
  Fuel & Oil..................   1.2      1.2       1.2     --    --    --    --
  Rentals & Landing Fees......   1.0      1.0       1.0     --    --    --    --
  Depr. & Amortization........   0.6      0.5       0.5     --    --    0.1    12
  Aircraft Maintenance........   0.3      0.2       0.2     --    --    0.1    29
  Other.......................   1.8      1.7       1.7     --    --    0.1     5
                                 ---      ---       ---     ---   ---   ---   ---
                                 8.2c     7.7c      7.4c    0.3c    4%  0.8c   10%
</TABLE>

- --------
(1) FULL YEAR 1993 RESULTS FOR THE "INDUSTRY" (DEFINED AS AMERICAN, DELTA,
    NORTHWEST, UNITED AND USAIR) BASED ON THE FINANCIAL RESULTS ANNOUNCED BY
    SUCH AIR CARRIERS.
(2) INCLUDES IMPACT OF FIRST FULL YEAR OF EMPLOYEE CONCESSIONS, BUT EXCLUDES
    "OTHER SAVINGS" ASSOCIATED WITH U2.
(3) EXCLUDES EMPLOYEE STOCK OWNERSHIP PLAN ACCOUNTING CHARGE. SEE "--CERTAIN
    RISK FACTORS--FINANCIAL REPORTING; MARKET ASSESSMENT."
 
RECOMMENDATION OF THE BOARD
 
  The Board has approved the Plan of Recapitalization and has determined that
the Recapitalization is fair to the holders of Old Shares. The Board recommends
that stockholders vote FOR the Plan of Recapitalization and the related matters
identified in clauses (ii) through (vii) in the first paragraph under
"INTRODUCTION--Purpose of the Meeting."
 
  The Board noted that the Recapitalization permits the holders of Old Shares
to receive in exchange for each Old Share $25.80 in cash, $31.10 in Debentures
and $31.10 in Public Preferred Stock, while retaining a significant ongoing
equity interest in the Company. In approving the Plan of Recapitalization, the
Board also considered that the majority equity position of the employee stock
ownership plans is designed to provide additional incentives for the Company's
employees to promote the success of the Company, which should, in part, inure
to the benefit of the holders of Old Shares. The Board noted that no third
party had expressed an interest in acquiring the Company as an entirety and
considered the fact that the Plan of Recapitalization would not prevent the
Company from pursuing such an alternative if it arose.
 
  In reaching its decision to approve the Plan of Recapitalization, its
determination that the Recapitalization is fair to the holders of Old Shares
and its decision to recommend that the holders of Old Shares vote for approval
and adoption of the Plan of Recapitalization, the Board consulted with its
legal and financial advisors as well as the Company's management, and
considered numerous factors, including, but not limited to: (i) the business,
operations, earnings, properties and prospects of the Company and United and
the perceived need for the Company to obtain wage concessions and work-rule
changes in order to permit United to compete effectively in the aviation
marketplace, (ii) the alternatives potentially available to the Company to
achieve wage concessions and work-rule changes, as well as a comparison of the
risks that would be associated with the Recapitalization and with such other
alternatives, (iii) the terms of the employee investment contemplated by the
Plan of Recapitalization, including the reduction in cash expense, the
favorable tax treatment of the ESOP transactions, the long-term labor contracts
which limit salary increases and the ability to establish U2, (iv) the fact
that the Recapitalization will provide the holders of Old Shares with an
opportunity to receive cash, Debentures and Public Preferred Stock for a
portion of the value of their Old Shares while retaining a significant ongoing
equity interest in the Company through ownership of
 
                                       25

<PAGE>
 
New Shares, (v) the terms of the proposed corporate governance structure, which
contains both certain provisions required by the Coalition and certain
provisions designed for the protection of the holders of New Shares, (vi) the
identity of the new chief executive officer and the new Board (especially the
Independent Directors), and the Board's assessment of such individuals, (vi)
recent market prices for the Old Shares as well as market prices for the past
several years, (viii) the Federal income tax consequences of the
Recapitalization under existing law and (ix) the opinions of CS First Boston, a
nationally recognized investment banking firm, and the opinions of Lazard,
another nationally recognized investment banking firm, that, based upon the
matters described therein, as of the date of each such opinion, the
consideration to be received by the holders of Old Shares pursuant to the
Recapitalization for each Old Share, taken as a whole, was fair to such
stockholders from a financial point of view. See "--Opinions of the Financial
Advisors to the Board," "--Certain Risk Factors" and "--Certain Revenue and
Earnings Scenarios," "THE PLAN OF RECAPITALIZATION" and "MARKET PRICES OF THE
SHARES; DIVIDENDS." The Board also considered (i) the fact that the repayment
of the Debentures and the payment of dividends on the Public Preferred Stock
will be dependent on the Company's operations, assets, credit, cash flow and
earning power, (ii) that, as a result of the Recapitalization, there will be a
significant increase in the Company's long-term indebtedness, as well as a
substantial negative balance in stockholders' equity and a significant
reduction in cash reserves and (iii) the opinion of American Appraisal with
respect to certain solvency and surplus matters. See "--Certain Risk Factors,"
"THE PLAN OF RECAPITALIZATION" and "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
 
  In view of the circumstances and the wide variety of factors considered in
connection with this evaluation of the Recapitalization, the Board did not find
it practicable to assign relative weights to the factors considered in reaching
its decision.
 
OPINIONS OF THE FINANCIAL ADVISORS TO THE BOARD
 
 Opinion of CS First Boston
 
  On December 22, 1993, March 14, 1994, and March 24, 1994, CS First Boston
delivered to the Board its oral opinion that, as of such dates, the
consideration to be received by holders of Old Shares of the Company in
connection with the Recapitalization, taken as a whole, was fair to such
holders of Old Shares from a financial point of view. On December 22, 1993 and
March 24, 1994, CS First Boston delivered to the Board its written opinions
that, as of such dates, the consideration to be received by holders of Old
Shares in connection with the Recapitalization, taken as a whole, was fair to
such holders of Old Shares from a financial point of view.
 
  THE FULL TEXT OF THE WRITTEN OPINION OF CS FIRST BOSTON DATED MARCH 24, 1994
WHICH SETS FORTH THE ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND THE REVIEW
UNDERTAKEN WITH REGARD TO SUCH OPINION, IS ATTACHED AS ANNEX I TO THIS PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS ARE URGED TO READ SUCH OPINION IN ITS
ENTIRETY. CS FIRST BOSTON'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF OLD SHARES AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF OLD SHARES AS TO HOW SUCH HOLDER
SHOULD VOTE. THE SUMMARY OF THE OPINION OF CS FIRST BOSTON SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION. THE TEXT OF THE WRITTEN OPINION OF CS FIRST BOSTON
DATED DECEMBER 22, 1993 IS SUBSTANTIALLY THE SAME AS THE TEXT OF THE MARCH 24,
1994 OPINION.
 
  In arriving at its opinions, CS First Boston (i) reviewed the Plan of
Recapitalization and its related schedules, (ii) reviewed certain publicly
available business and financial information relating to the Company, (iii)
reviewed certain other information, including financial forecasts, provided to
CS First Boston by the Company and (iv) met with the Company's management to
discuss the business of the Company. CS First Boston also considered certain
financial and stock market data for the Company and compared that data with
similar data for other publicly held companies in businesses similar to those
of the Company, and it considered the financial terms of certain other business
combinations that have recently been effected. CS First Boston also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria that it deemed relevant. CS First
Boston also reviewed the alternative of not effecting the Recapitalization and
of implementing the Fundamental Restructuring Plan described
 
                                       26

<PAGE>
 
under "BACKGROUND OF THE PLAN OF RECAPITALIZATION," which, if fully
implemented, might result in a greater value to stockholders than the
Recapitalization; however, the opinion assumed that the Board determined, in
light of various factors relating to the implementation of the Fundamental
Restructuring Plan and the availability of the Recapitalization, not to pursue
such implementation. CS First Boston did assume, however, for purposes of the
analyses described below, that, if the Recapitalization were not effected, the
Company would implement the "enhanced status quo" alternative described under
"BACKGROUND OF THE PLAN OF RECAPITALIZATION," consisting of a variety of
significant actions to reduce costs and, therefore, to enhance profitability
and stockholder value.
 
  In connection with its review, CS First Boston did not independently verify
any of the foregoing information and CS First Boston relied on such information
being complete and accurate in all material respects. With respect to the
financial forecasts, CS First Boston assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of Company's management as to the future financial performance of the
Company. In addition, CS First Boston did not make an independent evaluation or
appraisal of any of the assets of the Company, nor was it furnished with any
such appraisals. CS First Boston was not requested to, and did not, solicit
third party offers to acquire all or any part of the Company, nor, to CS First
Boston's knowledge, has any interest in making such an offer been presented by
any third party, including in response to the public disclosure regarding
discussions between the Company and the Coalition. CS First Boston assumed that
the results expected by the Company's management to be obtained from the
Recapitalization, including those arising from the employee investment
contemplated by the Plan of Recapitalization, will be realized. CS First
Boston's opinion was necessarily based solely upon information available to it
and business, market, economic and other conditions as they existed on, and
could be evaluated as of, the date of such opinion. CS First Boston's opinion
did not address the Company's underlying business decision to effect the
Recapitalization.
 
  The following is a summary of the analyses that CS First Boston utilized in
arriving at its opinion as to the fairness of the consideration to be received
by the holders of Old Shares of the Company in connection with the
Recapitalization, taken as a whole, from a financial point of view and that CS
First Boston discussed with the Board at the December 22, 1993, March 14, 1994
and March 24, 1994 Board meetings.
 
  Valuation of the Company
 
  For purposes of its opinion as to the fairness of the consideration to be
received by holders of Old Shares in connection with the Recapitalization,
taken as a whole, from a financial point of view, CS First Boston arrived at a
reference range of values for the Company using three principal valuation
methodologies: a discounted cash flow analysis, a publicly traded comparable
company analysis and a comparable acquisitions analysis. At the December 22,
1993 Board meeting, CS First Boston advised the Board that its overall
reference range per share was $160 to $200. CS First Boston did not update its
overall reference range at the March 14, 1994 or March 24, 1994 Board meetings
but it advised the Board at those meetings that if it had updated its reference
range, the updated range would have been somewhat lower than the range given in
December. The methodologies used by CS First Boston, which were described to
the Board at the December 22, 1993 Board meeting but which were not updated for
the Board at the March 14, 1994 or March 24, 1994 Board meetings, are described
below:
 
  Discounted Cash Flow Analysis. Using a discounted cash flow analysis, CS
First Boston estimated the present value of the future cash flows that the
Company could be expected to produce over a five-year period from 1994 through
1998 under various assumptions and in accordance with management's forecasts.
The analysis assumed that the "enhanced status quo" alternative would be
implemented. CS First Boston determined an equity market value reference range
for the Company by adding (i) the present value (using discount rates
determined on the basis of an industry weighted average cost of capital ranging
from 8.0% to 10.0%) of the five-year unleveraged free cash flows of the Company
and (ii) the present value of the Company's 1998 terminal value. The terminal
values were determined by multiplying 1998 projected earnings before interest,
taxes, depreciation and amortization ("EBITDA") and 1998 projected net income
by a range of multiples determined based on comparable companies and comparable
acquisitions (ranging from 3.5 times
 
                                       27

<PAGE>
 
to 5.5 times 1998 EBITDA and 11.0 times to 15.0 times 1998 net income). This
analysis resulted in a range of values per Old Share of the Company of from
$160 to $200.
 
  Publicly Traded Comparable Company Analysis. CS First Boston reviewed and
compared the financial, operating and market performance of the following group
of five domestic commercial airline companies with that of the Company: AMR
Corporation, Continental Airlines, Delta Air Lines, Southwest Airlines and
USAir Group (the "Comparable Group"). CS First Boston examined certain publicly
available or estimated financial data of the Comparable Group, including total
revenue, operating cash flow, operating income, net income to common shares,
earnings per share, depreciation and amortization, interest expense and
capitalized interest, rental expense and net cash flow per share. CS First
Boston also examined and compared various operating ratios and certain
capitalization data. CS First Boston also reviewed market data, including
various trading multiples such as stock price to earnings per share, equity
market capitalization to net cash flow (net income plus depreciation and
amortization) and enterprise value to EBITDA (before and after adjusting for
off-balance sheet operating rental payments). CS First Boston also considered
other financial data (including margins and growth rates) as well as certain
operating information, such as yields and load factors, for the Comparable
Group. This analysis resulted in a range of values per Old Share of the Company
of from $130 to $135.
 
  Comparable Acquisition Analysis. CS First Boston also reviewed selected
acquisitions in the airline industry, including Continental Air/Air Canada,
Trans World Airlines/Carl Icahn and NWA Inc./Wings Holdings, including the
multiples of enterprise value to revenues (ranging from .85 times to 1.10
times) and equity market value to net cash flow (ranging from 1.5 times to 7.6
times) represented by the consideration in those transactions. This analysis
resulted in a range of values per Old Share of the Company of from $120 to
$200.
 
  Recapitalization Consideration
 
  For purposes of its opinion as to the fairness of the consideration to be
received by holders of Old Shares in connection with the Recapitalization,
taken as a whole, from a financial point of view, CS First Boston arrived at a
reference range of values for the consideration to be received by the holders
of Old Shares in the Recapitalization, consisting of cash, Debentures, Public
Preferred Stock and New Shares. The interest rates on the Debentures and the
dividend rate on the Public Preferred Stock were initially set upon the
execution of the Plan of Recapitalization. The interest or dividend rate on
each such security will be reset, as of a date to be determined that is not
fewer than five calendar days and not greater than ten calendar days prior to
the Meeting to the rate required to cause each such security to trade at 100%
of its aggregate principal amount (in the case of the Debentures) or at 100% of
its aggregate liquidation preference (in the case of the Public Preferred
Stock) (collectively, "par"), on a fully distributed basis, as of such date
(subject to a maximum potential increase, in each case, of 112.5 basis points
(1.125 percentage points)). Accordingly, CS First Boston's opinion was based on
the assumption that the final rates to be borne by such securities would be set
so that the Debentures and the Public Preferred Stock would trade, as of such
date, on a fully distributed basis, at par. CS First Boston advised the Board
at the March 24, 1994 meeting that the reduction of the maximum potential
increase in the interest rates on the Debentures and the dividend rate on the
Public Preferred Stock from 150 basis points (1.5 percentage points) (which was
the size of the rate cap arrangement provided for in the Agreement in
Principle) to 112.5 basis points (1.125 percentage points) (the size of the
rate cap arrangement provided for in the Plan of Recapitalization) could reduce
the value of the Debentures and the Public Preferred Stock to be received by
the holders of Old Shares in the Recapitalization by an amount that CS First
Boston advised the Board was not material to the consideration to be received
by the holders of Old Shares in the Recapitalization, taken as a whole. CS
First Boston's opinion does not represent CS First Boston's view as to what the
trading value of the securities actually will be when the securities are issued
to the holders of the Old Shares following consummation of the
Recapitalization. The actual trading values of such securities could be higher
or lower depending upon changes in interest rates, dividend rates, market
conditions, general economic conditions and other factors that generally
influence the price of securities. Because of the large aggregate amount of the
securities (particularly the Public Preferred Stock) being issued to holders of
Old Shares and other factors, such securities may trade initially, and for an
extended period thereafter, at prices below those at which they would trade on
a fully distributed basis. Furthermore, any valuation of securities is only an
approximation, subject to uncertainties and contingencies.
 
                                       28

<PAGE>
 
  Valuation of the New Shares.
 
  The principal valuation methodology used by CS First Boston with respect to
the New Shares to be received by holders of Old Shares in the Recapitalization
was the earnings and cash flow multiple method. A supplemental method referred
to as the "gives/gets" method was also analyzed. These methodologies are
described below:
 
  Earnings and Cash Flow Multiple Method. CS First Boston arrived at a range of
values for the New Shares by reviewing the public market multiples of the
Comparable Group and applying a range of multiples to the Company's estimated
1994 and 1995 earnings per share and net cash flow per share pro forma for the
consummation of the Recapitalization. Because of the way the accounting rules
applicable to "stock based compensation" (which require that stock compensation
expense for periodic stock allocations be measured by the then-current market
value of the shares at the time of allocation) will apply to the share
allocations within the ESOPs, there are complexities as to forecasting future
earnings per share of the Company. The size of the employee stock ownership
plan accounting charge will be affected by the stock price, and the employee
stock ownership plan accounting charge will reduce reported earnings per share
which, in turn, may affect the stock price. In light of this, for purposes of
its analyses, CS First Boston applied a range of multiples to forecasted
results based on two cases: one assuming ratable allocation of the shares
within the ESOPs over the period of the concessions and the other assuming
immediate, full allocation (the latter methodology eliminates the need to
estimate future stock price performance in order to project the Company's
earnings per share). CS First Boston applied a discount to the resulting values
to reflect the potential dilution from the equity collar arrangement, which
will operate to increase the employee trusts' equity ownership from 53% to a
maximum of 63% if the Company's average stock closing price for one year
exceeds certain levels specified in the Plan of Recapitalization. This analysis
resulted in a public market equity value reference range for the portion of a
New Share to be received as part of the Recapitalization Consideration for one
Old Share on December 22, 1993 of $80 to $82 and on March 14, 1994 of $73 to
$77. CS First Boston advised the Board that the change in the reference range
resulted from changes in a number of factors, including, but not limited to,
higher interest rates, lower airline stock prices and updated financial
forecast information. CS First Boston did not update this analysis at the March
24, 1994 Board meeting.
 
  "Gives/Gets" Method.
 
  "Gives/Gets" is a summary valuation methodology whereby the impact of the
employee investment and the distribution of the Debentures and Public Preferred
Stock on the Company's unaffected stock price (i.e., unaffected by the
possibility of an extraordinary transaction) is considered. The "gives/gets"
analysis started with the trading value of Old Shares, reduced by the increase
in the stock price attributable, in CS First Boston's view, to market
speculation about a possible employee investment transaction (minus the present
value of the enhancements contained in the "enhanced status quo" alternative
that the Company would have implemented if it had pursued such alternative but
would not implement if the Recapitalization were effected) and added to this
pre-transaction value the present value of the employee investment and the
incremental value realized on the sale of the flight kitchens to arrive at an
implied total equity value. CS First Boston subtracted from this amount the
cash and securities (other than the New Shares) to be delivered to the holders
of Old Shares to arrive at an implied post-transaction market value. Using this
methodology, CS First Boston arrived at a valuation for the portion of a New
Share to be received as part of the Recapitalization Consideration for one Old
Share on December 22, 1993 of $85, which was presented to the Board primarily
for the purpose of describing the possible adjustment in the percent equity to
be held by the ESOPs based on the trading price of the New Shares during the
first year following the Effective Time (see "THE PLAN OF RECAPITALIZATION--
Establishment of ESOP--Additional Shares"). CS First Boston did not update this
analysis at the March 14, 1994 or March 24, 1994 Board meetings.
 
  In arriving at its written opinions dated December 22, 1993 and March 24,
1994, and in discussing its opinions with the Board, CS First Boston performed
certain financial analyses, portions of which are summarized above. The summary
set forth above does not purport to be a complete description of CS First
Boston's analyses. CS First Boston believes that its analyses must be
considered as a whole and that selecting portions of its analyses could create
an incomplete view of the process underlying the opinions. In addition, CS
First Boston may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations
 
                                       29

<PAGE>
 
resulting from any particular analysis described above should not be taken to
be CS First Boston's view of the actual value of the Company. No company or
transaction used in the publicly traded comparable company analysis or the
comparable acquisition analysis summarized above is identical to the Company or
the Recapitalization. Accordingly, any such analysis of the value of the
Company involves complex considerations and judgments concerning differences in
the potential financial and operating characteristics of the comparable
companies as well as other factors relating to the trading and the acquisition
values of the comparable companies. These and other limitations, including
potential legal restrictions on airline ownership, may detract from the
usefulness of either publicly traded comparable company multiples or purchase
price multiples from prior airline acquisitions as valuation methodologies. In
performing its analyses, CS First Boston made numerous assumptions with respect
to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company and all of which are beyond the control of CS First Boston. The results
of the analyses performed by CS First Boston are not necessarily indicative of
actual values, which may be significantly more or less favorable than suggested
by such analyses.
 
  The analyses described above were prepared solely as part of CS First
Boston's analysis of the fairness of the Recapitalization Consideration to the
holders of Old Shares. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the actual
trading value of the Debentures, the Public Preferred Stock or the New Shares.
 
  CS First Boston is an internationally recognized investment banking firm and
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. The Board
selected CS First Boston to act as its financial advisor on the basis of CS
First Boston's international reputation and CS First Boston's familiarity with
the Company and the airline industry in general and its experience in the
restructuring of other public companies in similar types of transactions. CS
First Boston has previously acted as financial advisor to the Company in
connection with financing and other matters unrelated to the Recapitalization
for which it has received customary compensation. In the course of its
business, CS First Boston actively trades the debt and equity securities of the
Company for its own account and for the accounts of customers. Accordingly, CS
First Boston may at any time hold a long or short position in such securities.
 
  As compensation for rendering the opinion described above and assisting the
Company in evaluating, structuring, planning and negotiating the financial
aspects of the Recapitalization, the Company has paid CS First Boston a
retainer of $250,000 and since January 1994 CS First Boston has been receiving
an advisory fee of $100,000 per month, as well as reimbursement of reasonable
out-of-pocket expenses (including fees and disbursements). While the Company
agreed to pay CS First Boston a fee of $2 million contingent upon consummation
of the Recapitalization, CS First Boston's contingent fee is subject to
adjustment based upon amounts paid to other financial advisors in the
Recapitalization. Accordingly, the aggregate amount that CS First Boston will
receive if the Recapitalization is consummated, including retainer and advisory
fees and expense reimbursements paid by the Company, is $5 million (the success
fee to be paid to Lazard upon consummation of the Recapitalization, as
described below under "--Opinion of Lazard") plus the amount by which CS First
Boston's expense reimbursements exceed Lazard's expense reimbursements. The
Company has agreed to indemnify CS First Boston and its affiliates, their
respective directors, officers, partners, agents and employees and each person,
if any, controlling CS First Boston or any of its affiliates against certain
liabilities, including certain liabilities under the Federal securities laws,
relating to or arising out of its engagement.
 
 OPINION OF LAZARD
 
  On December 22, 1993, March 14, 1994, and March 24, 1994, Lazard delivered to
the Board its oral opinion that, as of such dates, the consideration to be
received by holders of Old Shares in connection with the Recapitalization,
taken as a whole, was fair to such holders of Old Shares from a financial point
of view. On December 22, 1993 and March 24, 1993, Lazard delivered to the Board
its written opinions that, as of such dates, the consideration to be received
by holders of Old Shares in connection with the Recapitalization, taken as a
whole, was fair to such holders of Old Shares from a financial point of view.
 
                                       30

<PAGE>
 
  THE FULL TEXT OF THE WRITTEN OPINION OF LAZARD DATED MARCH 24, 1994, WHICH
SETS FORTH THE ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND THE REVIEW
UNDERTAKEN WITH REGARD TO SUCH OPINION, IS ATTACHED AS ANNEX II TO THIS PROXY
STATEMENT/PROSPECTUS. HOLDERS OF OLD SHARES ARE URGED TO READ SUCH OPINION IN
ITS ENTIRETY. LAZARD'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF OLD SHARES AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF OLD SHARES AS TO HOW SUCH HOLDER
SHOULD VOTE. THE SUMMARY OF THE OPINION OF LAZARD SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION. THE TEXT OF THE WRITTEN OPINION OF LAZARD DATED DECEMBER 22,
1993 IS SUBSTANTIALLY THE SAME AS THE TEXT OF THE MARCH 24, 1994 OPINION.
 
  In arriving at its opinions, Lazard (i) reviewed the Plan of Recapitalization
and its related schedules, (ii) reviewed certain publicly available business
and financial information relating to the Company, (iii) reviewed certain other
information, including financial forecasts, provided to Lazard by the Company
and (iv) met with the Company's management to discuss the business of the
Company. Lazard also considered certain financial and stock market data for the
Company and compared that data with similar data for other publicly held
companies in businesses similar to those of the Company. Lazard also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria that it deemed relevant. Lazard also
reviewed the alternative of not effecting the Recapitalization and of
implementing the Fundamental Restructuring Plan described under "BACKGROUND OF
THE PLAN OF RECAPITALIZATION," which, if fully implemented, might result in a
greater value to stockholders than the Recapitalization; however, the opinion
assumed that the Board determined, in light of various factors relating to the
implementation of the Fundamental Restructuring Plan and the availability of
the Recapitalization, not to pursue such implementation. Lazard did assume,
however, for purposes of the analyses described below, that, if the
Recapitalization were not effected, the Company would implement the "enhanced
status quo" alternative described under "BACKGROUND OF THE PLAN OF
RECAPITALIZATION," consisting of a variety of significant actions to reduce
costs and, therefore, to enhance profitability and stockholder value.
 
  In connection with its review, Lazard did not independently verify any of the
foregoing information and Lazard relied on such information being complete and
accurate in all material respects. With respect to the financial forecasts,
Lazard assumed that they had been reasonably prepared on bases reflecting the
best currently available estimates and judgments of Company's management as to
the future financial performance of the Company. In addition, Lazard did not
make an independent evaluation or appraisal of any of the assets of the
Company, nor was it furnished with any such appraisals. Lazard was not
requested to, and did not, solicit third party offers to acquire all or any
part of the Company, nor, to Lazard's knowledge, has any interest in making
such an offer been presented by any third party, including in response to the
public disclosure regarding discussions between the Company and the Coalition.
Lazard assumed that the results expected by the Company's management to be
obtained from the Recapitalization, including those arising from the employee
investment contemplated by the Plan of Recapitalization will be realized.
Lazard's opinion was necessarily based solely upon information available to it
and business, market, economic and other conditions as they existed on, and
could be evaluated as of, the date of such opinion. Lazard's opinion did not
address the Company's underlying business decision to effect the
Recapitalization.
 
  The following is a summary of the analyses that Lazard utilized in arriving
at its opinion as to the fairness of the consideration to be received by the
holders of Old Shares of the Company in connection with the Recapitalization,
taken as a whole, from a financial point of view and that Lazard discussed with
the Board at the December 22, 1993, March 14, 1994 and March 24, 1994 Board
meetings.
 
  Valuation of the Company
 
  For purposes of its opinion as to the fairness of the consideration to be
received by holders of Old Shares in connection with the Recapitalization,
taken as a whole, from a financial point of view, Lazard arrived at a reference
range of values for the Company using three principal valuation methodologies:
a discounted cash flow analysis, a publicly traded comparable company analysis
and an unaffected trading value analysis. At the December 22, 1993 Board
meeting, Lazard advised the Board that its overall reference range per share
 
                                       31

<PAGE>
 
was $150 to $190. Lazard did not update its overall reference range at the
March 14, 1994 or March 24, 1994 Board meetings but it advised the Board at
those meetings that if it had updated its reference range, the updated range
would have been somewhat lower than the range given in December. The
methodologies used by Lazard, which were described to the Board at the December
22, 1993 Board meeting but which were not updated for the Board at the March
14, 1994 or March 24, 1994 Board meetings, are described below:
 
  Discounted Cash Flow Analysis. Using a discounted cash flow analysis, Lazard
estimated the present value of the future cash flows that the Company could be
expected to produce over a ten-year period from 1994 through 2003 under various
assumptions in accordance with management's forecasts. The analysis assumed
that the "enhanced status quo" alternative would be implemented. Lazard
determined a range of total values for the Company by adding (i) the present
value (using discount rates ranging from 8.0% to 12.0%) of the ten-year
unleveraged free cash flows of the Company and (ii) the present value of the
Company's 2003 terminal value. A range of terminal values was determined by
multiplying 2003 projected net income by a range of multiples determined based
on the trading multiples of selected publicly traded comparable companies (AMR
Corporation, Continental Airlines, Delta Air Lines, Southwest Airlines and
USAir Group (the "Comparable Group")) and other factors (ranging from 11.0
times to 15.0 times 2003 net income). This analysis resulted in a range of
values per Old Share for the Company of from $170 to $210.
 
  Publicly Traded Comparable Company Analysis. Lazard reviewed and compared the
financial, market and operating performance of the companies in the Comparable
Group with that of the Company. Of the companies in the Comparable Group,
Lazard focused its analyses principally on AMR Corporation, Delta Air Lines and
Southwest Airlines. Lazard examined certain publicly available financial data,
including total revenue, EBITDA, earnings before interest and taxes, earnings
per share and net cash flow (net income plus depreciation) per share and
reviewed various trading multiples for the Comparable Group. Lazard also
considered other financial data (including margins and growth rates) as well as
certain operating information (such as yields and load factors) for the
Comparable Group. This analysis resulted in a range of appropriate multiples
for the Company, which, in turn, resulted in a range of values per Old Share of
the Company of from $140 to $180.
 
  Unaffected Trading Value Analysis. Lazard reviewed the history of the trading
prices of the Company's common stock over various periods and at various times
(including prior to the first public disclosure of the Coalition's proposal for
a restructuring of the Company in July 1993) and compared such prices to the
prices of other airline companies over such periods and at such times in order
to estimate a normalized trading value for the Old Shares that would not
reflect a significant premium attributable to the disclosure of, or market
speculation about, a possible employee investment transaction. This analysis
resulted in an unaffected trading range per Old Share of the Company of from
$130 to $135.
 
  Recapitalization Consideration
 
  For purposes of its opinion as to the fairness of the consideration to be
received by holders of Old Shares of the Company in connection with the
Recapitalization, taken as a whole, from a financial point of view, Lazard
arrived at a reference range of values for the consideration to be received by
the holders of Old Shares in the Recapitalization, consisting of cash,
Debentures, Public Preferred Stock and New Shares. The interest rates on the
Debentures and the dividend rate on the Public Preferred Stock were initially
set upon the execution of the Plan of Recapitalization. The interest or
dividend rate on each such security will be reset, as of a date to be
determined that is not fewer than five calendar days and not greater than ten
calendar days prior to the Meeting, to the rate required to cause each such
security to trade at 100% of its aggregate principal amount (in the case of the
Debentures) or at 100% of its aggregate liquidation preference (in the case of
the Public Preferred Stock) (collectively, "par"), on a fully distributed
basis, as of such date (subject to a maximum potential increase, in each case,
of 112.5 basis points (1.125 percentage points)). Accordingly, Lazard's opinion
was based on the assumption that the final rates to be borne by such securities
would be set so that the Debentures and the Public Preferred Stock would trade,
as of such date, on a fully distributed basis, at par. Lazard advised the Board
at the March 24, 1994 meeting that the reduction of the maximum potential
increase in the interest rates on the Debentures and the dividend rate on the
Public Preferred Stock from 150 basis points (1.5 percentage points) (which was
the rate cap provided for in the Agreement in
 
                                       32

<PAGE>
 
Principle) to 112.5 basis points (1.125 percentage points) (the rate cap
provided for in the Plan of Recapitalization) could reduce the value of the
Debentures and the Public Preferred Stock to be received by the holders of Old
Shares in the Recapitalization by an amount that Lazard advised the Board was
not material to the consideration to be received by the holders of Old Shares
in the Recapitalization, taken as a whole. Lazard's opinion does not represent
Lazard's view as to what the trading value of the securities actually will be
when the securities are issued to holders of the Old Shares following
consummation of the Recapitalization. The actual trading values of such
securities could be higher or lower depending upon changes in interest rates,
dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities. Because of the large
aggregate amount of the securities (particularly the Public Preferred Stock)
being issued to holders of Old Shares and other factors, such securities may
trade initially, and for an extended period thereafter, at prices below those
at which they would trade on a fully distributed basis. Furthermore, any
valuation of securities is only an approximation, subject to uncertainties and
contingencies.
 
  Valuation of the New Shares.
 
  The principal valuation methodology used by Lazard with respect to the New
Shares to be received by holders of Old Shares in the Recapitalization was the
earnings and cash flow multiple method. The "gives/gets" method was also
analyzed. These methodologies are described below:
 
  Earnings and Cash Flow Multiple Method. Lazard arrived at a range of values
for the New Shares by reviewing the public market multiples of the Comparable
Group and the Company, and applying a range of multiples to the Company's
estimated 1994 and 1995 earnings per share and net cash flow per share pro
forma for the consummation of the Recapitalization. Because of the way the
accounting rules applicable to "stock based compensation" (which require that
stock compensation expense for periodic stock allocations be measured by the
then-current market value of the shares at the time of allocation) will apply
to the share allocations within the ESOPs, there are complexities to
forecasting future earnings per share of the Company. The size of the employee
stock ownership plan accounting charge will be affected by the stock price, and
the employee stock ownership plan accounting charge will reduce reported
earnings per share which, in turn, may affect the stock price. For purposes of
its analyses, Lazard applied a range of multiples to forecasted results based
on two cases: one assuming ratable allocation of the shares within the ESOPs
over the period of the concessions and the other assuming immediate, full
allocation (the latter methodology eliminates the need to estimate future stock
price performance in order to project the Company's earnings per share). Lazard
applied a discount to the resulting values to reflect the potential dilution
from the equity collar arrangement which will increase the employee trusts'
equity ownership from 53% to a maximum of 63% if the Company's average stock
closing price for one year exceeds certain levels specified in the Plan of
Recapitalization. This analysis resulted in a public market equity value
reference range for the portion of a New Share to be received as part of the
Recapitalization Consideration for one Old Share on December 22, 1993 of $80 to
$82 and on March 14, 1994 of $73 to $77. Lazard advised the Board that the
change in the reference range resulted from changes in a number of factors,
including but not limited to, higher interest rates, lower airline stock prices
and updated financial forecast information. Lazard did not update this analysis
at the March 24, 1994 Board meeting.
 
  "Gives/Gets" Method.
 
  "Gives/Gets" is a summary valuation methodology whereby the impact of the
employee investment and the distribution of the Debentures and Public Preferred
Stock on the Company's unaffected trading value is considered. The "gives/gets"
analysis started with the trading value of Old Shares, reduced by the increase
in the stock price attributable, in Lazard's view, to market speculation about
a possible employee investment transaction (determined as described under "--
Unaffected Trading Value Analysis" above) (minus the present value of the
enhancements contained in the "enhanced status quo" alternative that the
Company would have implemented but would not in the Recapitalization) and added
to this pre-transaction value the present value of the employee investment and
the incremental value realized on the sale of the flight kitchens to arrive at
an implied total equity value. Lazard subtracted from this amount the cash and
securities (other than the New Shares) to be delivered to the holders of the
Old Shares to arrive at an implied post-transaction
 
                                       33

<PAGE>
 
market value. Using this methodology, Lazard arrived at a valuation for the
portion of a New Share to be received as part of the Recapitalization
Consideration for one Old Share on December 22, 1993 of approximately $85,
which was presented to the Board primarily for the purpose of describing the
possible adjustment in the percent equity to be held by the ESOPs based on the
trading price of the New Shares during the first year following the Effective
Time (See "THE PLAN OF RECAPITALIZATION--Establishment of ESOP--Additional
Shares"). Lazard did not update this analysis at the March 14, 1994 or March
24, 1994 Board meetings.
 
  In arriving at its written opinions dated December 22, 1993 and March 24,
1994, and in discussing its opinions with the Board, Lazard performed certain
financial analyses, portions of which are summarized above. The summary set
forth above does not purport to be a complete description of Lazard's analyses.
Lazard believes that its analyses must be considered as a whole and that
selecting portions of its analyses could create an incomplete view of the
process underlying the opinions. In addition, Lazard may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Lazard's view of the actual value of the Company. No company used
in the publicly traded comparable company analysis summarized above is
identical to the Company. Accordingly, any such analysis of the value of the
Company involves complex considerations and judgments concerning differences in
the potential financial and operating characteristics of the comparable
companies as well as other factors relating to the trading values of the
Comparable Group. In performing its analyses, Lazard made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company and all of which are beyond the control of Lazard. The results of
the analyses performed by Lazard are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by
such analyses.
 
  The analyses described above were prepared solely as part of Lazard's
analysis of the fairness of the Recapitalization Consideration to the holders
of Old Shares. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the actual trading value of
the Debentures, the Public Preferred Stock or the New Shares.
 
  Lazard is an internationally recognized investment banking firm and regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions and for other purposes. Lazard was chosen by the
Company to act as financial advisor in connection with the negotiations with
the Coalition and the Recapitalization because of its familiarity with the
Company and the airline industry in general, because of its general experience
in restructuring other public companies in similar types of transactions and
because it was believed that the experience of Mr. Felix Rohatyn, a general
partner of Lazard, who had been on the National Commission to Ensure a Strong
Competitive Airline Industry, would provide additional valuable insight on the
Company's situation and its discussions with the Coalition.
 
  In consideration for Lazard's services, the Company paid Lazard a retainer of
$500,000 in January 1994 and agreed to pay Lazard a financial advisory fee of
$100,000 per month (prorated for any portion of a full month) payable on the
last day of each month beginning January 31, 1994. The Company has agreed to
reimburse Lazard for its out-of-pocket expenses, including reasonable fees and
disbursements of counsel. The Company has also agreed to pay Lazard a success
fee of $5 million upon the completion of the Recapitalization against which the
retainer and financial advisory fees and expense reimbursements will be
credited. The Company has agreed to indemnify Lazard and its affiliates, their
respective directors, officers, partners, agents and employees and each person,
if any, controlling Lazard or any of its affiliates against certain
liabilities, including certain liabilities under the Federal securities laws,
relating to or arising out of its engagement.
 
OPINION OF VALUATION FIRM
 
  In order to assist the Board, the Company retained American Appraisal, a
nationally recognized independent valuation firm. American Appraisal delivered
an oral report to the Board at the March 14, 1994
 
                                       34

<PAGE>
 
meeting and a written opinion to the Board and the Company on March  , 1994
(the "American Appraisal Opinion"). It is a condition to consummation of the
Recapitalization that the Board shall have received an updated opinion from
American Appraisal substantially similar to the American Appraisal Opinion as
of the Effective Time. See "THE PLAN OF RECAPITALIZATION--Terms and
Conditions." The full text of the American Appraisal Opinion, which sets forth
the assumptions made, the matters considered and the review undertaken with
regard to such opinion is filed as an Exhibit to the Registration Statement of
which this Proxy Statement/Prospectus is a part. The summary of the American
Appraisal Opinion set forth in this Proxy Statement/Prospectus is qualified in
its entirety by reference to the full text of such opinion.
 
  In rendering the American Appraisal Opinion, American Appraisal valued the
assets of the Company (on a consolidated basis) and United (on a consolidated
basis), as going concerns, both immediately before and after, and giving effect
to, the Recapitalization. The valuation included the aggregate assets of the
business enterprise of each of the Company (on a consolidated basis) and United
(on a consolidated basis), or total invested capital as represented by the
total net working capital, tangible plant, property and equipment and
intangible assets of the respective business enterprises. American Appraisal
stated that it believed this to be a reasonable basis on which to value the
Company and United and that nothing has come to its attention that caused it to
believe that each of the Company (on a consolidated basis) and United (on a
consolidated basis), before and after the Recapitalization, will not be going
concerns.
 
  The American Appraisal Opinion is subject to the conditions that (i) any sale
of each of the Company (on a consolidated basis) or United (on a consolidated
basis) will be completed as the sale of an ongoing business entity within a
commercially reasonable period and (ii) a "commercially reasonable period" of
time means at least twelve months for a willing buyer and a willing seller to
agree on price and terms, plus the time necessary to complete the sale of the
Company (on a consolidated basis) and United (on a consolidated basis). In
connection with the opinion of the fair value of each of the Company (on a
consolidated basis) and United (on a consolidated basis), American Appraisal
was provided historical and projected operating results. In addition to this
information, American Appraisal was provided other operating data and
information, all of which has been accepted by American Appraisal, without
independent verification, as representing a fair statement of historical and
projected results of each of the Company (on a consolidated basis) and United
(on a consolidated basis) in the opinion of the management of each of the
Company and United. However, the American Appraisal Opinion states that, in the
course of its investigation, nothing has led it to believe that its acceptance
and reliance on such operating data and information was unreasonable.
 
  American Appraisal's determination of the fair value of each of the Company
(on a consolidated basis) and United (on a consolidated basis) was based on the
generally accepted valuation principles used in the market and discounted cash
flow approaches, described as follows:
 
    Market Approach--Based on current stock market prices of publicly held
  companies whose businesses are similar to that of the Company (on a
  consolidated basis) and United (on a consolidated basis) and premiums paid
  over market price by acquirors of total or controlling ownership in such
  businesses.
 
    Discounted Cash Flow Approach--Based on the present value of each of the
  Company's (on a consolidated basis) and United's (on a consolidated basis)
  future debt-free operating cash flow as estimated by the managements of
  each of the Company (on a consolidated basis) and United (on a consolidated
  basis) and contained in Status Quo Scenario C. The present value is
  determined by discounting the projected operating cash flow at a rate of
  return that reflects the financial and business risks of each of the
  Company (on a consolidated basis) and United (on a consolidated basis).
 
  In determining the amount that would be required to pay the total probable
liabilities on the respective dates that the Company's (on a consolidated
basis) and United's (on a consolidated basis) liabilities and contingent
liabilities become absolute and matured, for purposes of their opinion,
American Appraisal applied valuation techniques, including present value
analysis, using appropriate rates over appropriate periods to the amounts that
will be required from time to time to pay such liabilities and contingent
liabilities as they become absolute and matured based on their scheduled
maturities.
 
                                       35

<PAGE>
 
  In the course of its investigation of identified contingent liabilities, the
areas brought to the attention of American Appraisal by the managements of the
Company (on a consolidated basis) and United (on a consolidated basis)
included, (i) environmental matters, (ii) the adequacy of the corporate
insurance program, (iii) tax audit exposure, (iv) the liability for the pension
and welfare benefits program, (v) labor and collective bargaining issues and
(vi) various lawsuits and claims filed and/or pending against the Company (on a
consolidated basis) and United (on a consolidated basis).
 
  Reserves for contingent liabilities have been made in the pro forma
consolidated balance sheet prepared and furnished to American Appraisal by each
of the managements of the Company (on a consolidated basis) and United (on a
consolidated basis), and provisions for the ongoing expenses related to these
issues have been included with the projection of income and expenses presented
in the financial projections, and are considered in American Appraisal's
valuation study as ongoing business operating expenses. American Appraisal has
taken these identified contingent liabilities into account in rendering the
American Appraisal Opinion and has concluded that such liabilities and ongoing
expenses do not require any qualification of the American Appraisal Opinion.
American Appraisal's conclusion is based on: (i) its review of various
acquisition transactions, including leveraged transactions and significant
debt-financed recapitalization transactions, involving corporations engaged in
businesses similar to those of each of the Company (on a consolidated basis)
and United (on a consolidated basis), (ii) the opinion of the managements of
each of the Company (on a consolidated basis) and United (on a consolidated
basis) that the issues concerning various lawsuits, claims and other identified
contingent liabilities do not and are not reasonably likely to have a material
adverse effect on the consolidated financial position of each of the Company
(on a consolidated basis) and United (on a consolidated basis) and (iii) its
discussions with the managements, accountants, consultants and counsel of each
of the Company (on a consolidated basis) and United (on a consolidated basis),
concerning claims and other contingent liabilities and the possible effect of
the foregoing on each of the Company and United as well as its investigation of
the various lawsuits.
 
  American Appraisal assumed that the total liabilities of each of the Company
(on a consolidated basis) and United (on a consolidated basis) will be only
those liabilities set forth in the financial projections and the pro forma
balance sheet of each of the Company (on a consolidated basis) and United (on a
consolidated basis) and the identified contingent liabilities referred to in
the American Appraisal Opinion. The American Appraisal Opinion states that, in
the course of its investigation, nothing came to American Appraisal's attention
that caused American Appraisal to believe such assumptions to be unreasonable.
The pro forma balance sheet is the unaudited pro forma condensed balance sheet
as of December 31, 1993 for each of the Company (on a consolidated basis) and
United (on a consolidated basis), each adjusted to give effect to the planned
financing of the Recapitalization and restated to reflect the fair value of
each of the Company (on a consolidated basis) and United (on a consolidated
basis).
 
  The Company's and United's management has represented to American Appraisal,
and American Appraisal has relied on the representations of the managements of
the Company and United, that no adverse
changes have occurred since the preparation of the Company's and United's pro
forma balance sheet and financial analyses that would materially impact its
content. The American Appraisal Opinion states that nothing has come to
American Appraisal's attention that would lead it to believe that its reliance
on such representations is unreasonable.
 
  In connection with the American Appraisal Opinion, American Appraisal made
such reviews, analyses and inquiries as it has deemed necessary and appropriate
under the circumstances. Among other things, American Appraisal (i) reviewed
the documents related to the Recapitalization and reporting documents filed
with the Commission, (ii) reviewed financial analyses and inquired of
managements of the Company and United as to the foundation for any such
analyses and the basic assumptions made in the preparation of Status Quo
Scenario C relating to the type of business, geographic markets, domestic and
international economic conditions and capital facilities and working capital
requirements, (iii) reviewed audited and unaudited historical income
statements, balance sheets and statements of sources and uses of funds of the
Company and
 
                                       36

<PAGE>
 
United as provided by management and its accountants, (iv) visited the
Company's and United's headquarters and selected facilities to discuss
historical and estimated operating results and industry data, including the
impact of future trends on the industry and the Company and United, as well as
the effects of the Recapitalization, (v) reviewed internal financial analyses
and other internally generated data of the Company and United including asset
valuations, (vi) inquired of managements of the Company and United and their
respective financial advisors as to estimated levels of cash and working
capital required by the Company and United, (vii) reviewed certain publicly
available economic, financial and market information as it relates to the
business operations of the Company and United, (viii) reviewed information
regarding businesses similar to the Company and United and investigated the
financial terms and post-transaction performance of recent acquisitions, (ix)
consulted with industry, economic and statistical experts, as necessary, (x)
discussed all of the foregoing information, where appropriate, with managements
of the Company and United and their respective agents, accountants and
financial advisors and (xi) conducted such other studies, analyses and
investigations as American Appraisal deemed relevant or necessary for purposes
of the opinion.
 
  American Appraisal assumed, without independent verification, that the pro
forma balance sheet and financial analyses provided to American Appraisal have
been reasonably prepared and reflect the best available estimates, at the time
they were prepared, of the future financial results and condition of the
Company and United, and that there has been no material adverse change in the
assets, financial condition, business or prospects of the Company and United
since the date of the most recent financial statements made available to
American Appraisal. American Appraisal stated that nothing has come to its
attention that would lead it to believe that the foregoing assumption is
unreasonable.
 
  Although American Appraisal did not independently verify the accuracy and
completeness of the Status Quo Scenario C and forecasts, or any of the
assumptions, estimates or judgments referred to therein, or the basis therefor,
and although no assurances can be given that such Status Quo Scenario C and
forecasts can be realized or that actual results will not vary materially from
those projected, American Appraisal stated that nothing had come to its
attention during the course of its engagement that lead it to believe that any
information reviewed by it or presented to it in connection with its rendering
of the American Appraisal Opinion is unreasonable or inaccurate in any material
respect or that it was unreasonable for it to utilize and rely upon the
financial analyses, financial statements, assumptions, description of the
business and liabilities, estimates and judgments or statements of the
managements of the Company and United and their respective counsel, accountants
and financial advisors. The American Appraisal Opinion is necessarily based on
business, economic, market and other conditions as they existed at the time of
the opinion and as they could be evaluated by American Appraisal at such time.
 
  The American Appraisal Opinion stated that, based upon and subject to the
conditions and assumptions contained therein, (a) the fair value of the
aggregate assets of each of the Company (on a consolidated basis) and United
(on a consolidated basis) will exceed their total respective liabilities
(including, without limitation, subordinated, unmatured, unliquidated and
contingent liabilities), (b) the present fair salable value of the aggregate
assets of each of the Company (on a consolidated basis) and United (on a
consolidated basis) will be greater than their respective probable liabilities
on their debts as such debts become absolute and matured, (c) each of the
Company (on a consolidated basis) and United (on a consolidated basis) will be
able to pay their respective debts and other liabilities, including contingent
liabilities and other commitments, as they mature, (d) the capital remaining in
each of the Company (on a consolidated basis) and in United (on a consolidated
basis) after consummation of the Recapitalization will not be unreasonably
small for the businesses in which the Company and United are engaged, as
management of the Company and United has indicated such businesses are
conducted and as management has indicated the businesses are proposed to be
conducted following the consummation of the Recapitalization, and after giving
due consideration to the prevailing practices in the industry in which the
Company and United will be engaged, (e) the excess of the fair value of the
total assets of the Company over the total liabilities, including contingent
liabilities, of the Company, is equal to or exceeds the value of the
Reclassification Consideration to stockholders plus the stated capital of the
Company and (f) the excess of the fair value of the total assets of United over
the total liabilities, including contingent liabilities, of United, is equal to
or exceeds the value of the stated capital of United.
 
                                       37

<PAGE>
 
  American Appraisal indicated that it believed the excess of total assets over
pro forma liabilities was approximately $2.5 billion at December 31, 1993,
compared to approximately $1.203 billion in stockholders' equity as of such
date, determined according to generally accepted accounting principles, so
that, giving effect to the Recapitalization, the indicated excess assets of the
Company for purposes of Delaware law exceeded $1 billion.
 
  The American Appraisal Opinion will not be binding on creditors of the
Company. Accordingly, there can be no assurance that a court would value the
Company's assets on a going-concern basis in order to determine whether the
Company was insolvent at the time of the Recapitalization or that, regardless
of the method of valuation, a court would not determine that the Company was
insolvent at such time. The Board and management believe that the Debentures
will be incurred by the Company for proper purposes and in good faith, that the
Company will receive reasonably equivalent value or fair consideration for
incurring such indebtedness and that, based on present forecasts and other
financial information, at the time of the Recapitalization, the Company will be
solvent, will have sufficient capital to carry on its business and will be able
to pay its debts as they mature. See "--Certain Revenue and Earnings Scenarios"
and "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
 
PURPOSE AND STRUCTURE OF THE RECAPITALIZATION
 
  The purpose of the Recapitalization is to recapitalize the Company and
thereby provide the holders of Old Shares with an opportunity to receive cash,
Debentures and Public Preferred Stock for a portion of their Old Shares, while
permitting the holders of Old Shares to retain a significant ongoing equity
interest in a Company that is expected to have a lower cost structure and be
more competitive and to provide performance incentives to the Company's
employees by providing them with significant equity participation in the
Company through the ESOPs. The Recapitalization is being effected at the
present time because the Board believes that it is the best available
alternative to maximize value to the Company's stockholders while achieving
significant wage concessions and work-rule changes that the Board believes are
necessary to position United to compete in the aviation marketplace. See
"BACKGROUND OF THE PLAN OF RECAPITALIZATION" and "--Recommendation of the
Board."
 
  The use of shares of Redeemable Preferred Stock has been chosen in order to
comply with technical aspects of Delaware law that may be applicable to the
Recapitalization. The Company does not intend to send certificates for
Redeemable Preferred Stock to the holders of Old Shares, and, in lieu thereof,
cash and Debentures will be paid based upon the number of shares of Redeemable
Preferred Stock issued in the Reclassification and the redemption price per one
one-thousandth of a share of Redeemable Preferred Stock of $25.80 in cash and
$31.10 principal amount of Debentures.
 
  It is expected that if the Plan of Recapitalization is not approved by the
Company's stockholders, or if the Recapitalization is not consummated for any
other reason, the Company's current management, under the direction of the
Board of Directors, will continue to manage the Company as an ongoing business.
In such event, management would take other actions intended to achieve a lower
cost structure intended to allow the Company to compete effectively in the
global aviation marketplace, which may include actions described in this Proxy
Statement/Prospectus relating to the "enhanced status quo" alternative or
Fundamental Restructuring Plan described under "BACKGROUND OF THE PLAN OF
RECAPITALIZATION."
 
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
 
  In considering the Plan of Recapitalization, stockholders should be aware
that the executive officers and the Board members have certain interests,
described below, that present them with potential conflicts of interest in
connection with the Recapitalization. The Board was aware of these potential
conflicts and considered them among the other matters described under "--
Recommendation of the Board."
 
                                       38

<PAGE>
 
  The transactions contemplated by the Plan of Recapitalization will constitute
a "change in control" under the Employment Agreements (as defined below) with
Messrs. Wolf and Pope, the severance agreements entered into by United with all
other executive officers, the 1988 Restricted Stock Plan, and the 1981 Stock
Program as well as the Retirement Plan for Outside Public Directors (as defined
below) and its related trust. See "CERTAIN INFORMATION CONCERNING THE BOARD OF
DIRECTORS--Compensation of Directors; Effect of "Change in Control' " and
"EXECUTIVE COMPENSATION--Employment Contracts and Change in Control
Arrangements."
 
  The Plan of Recapitalization provides that Messrs. Wolf, Pope and Nagin will
retire from all positions they hold with the Company and all of its
subsidiaries at or immediately prior to the Effective Time and that no other
officer of the Company or United may be terminated for a period of six months
following the Effective Time unless such determination is approved by at least
two Outside Public Directors (as described in "THE PLAN OF RECAPITALIZATION--
Revised Governance Structure--Public Directors") and the Chief Executive
Officer of the Company (Mr. Greenwald).
 
  Pursuant to agreements originally entered into upon the commencement of their
employment in 1987, 1988 and 1988, respectively, with the Company and United as
subsequently amended (the "Officer Agreements"), upon their retirements in
accordance with the Plan of Recapitalization, each of Messrs. Wolf, Pope and
Nagin will be entitled to receive: (1) a cash payment (based on a multiple of
three times current salary and deemed bonus) equal to approximately $4.3
million, $1.8 million and $1.1 million, respectively, (2) lifetime travel
privileges (and reimbursement of related taxes, with certain limitations in Mr.
Nagin's case) on United for each of them and their spouses and other eligible
dependents, (3) continued coverage under United's medical and other welfare
benefit plans (limited to three years in Mr. Pope's case) and (4) certain other
benefits, including certain pension-related benefits, see "EXECUTIVE
COMPENSATION--Pension Plan Table."
 
  The 1988 Restricted Stock Plan provides that all restricted shares awarded
thereunder shall vest upon the occurrence of a "change in control." As of April
1, 1994, Messrs. Wolf, Pope, Nagin, Guyette, O'Gorman and George beneficially
own 15,000, 28,500, 13,800, 12,000, 7,500 and 11,000 restricted shares,
respectively.
 
  Options to acquire Old Shares awarded under the 1981 Stock Program (the
"Options") held by executive officers become exercisable in connection with the
occurrence of a "change in control." Upon consummation of the transactions
contemplated by the Plan, each Option will automatically be converted into an
option to acquire one half (0.5) of a New Share, $31.10 liquidation value of
Public Preferred Stock and one one-thousandth of a share of Redeemable
Preferred Stock, which will be redeemed immediately after issuance for $25.80
in cash, $15.55 principal amount of Series A Debentures and $15.55 principal
amount of Series B Debentures. As of May 31, 1994, Messrs. Wolf, Pope, Nagin,
Guyette, O'Gorman and George hold Options (with an exercise price of $163 or
less) to purchase respectively 200,000 Old Shares (all currently exercisable
and with an average exercise price of $111.70) 170,000 Old Shares, (150,000 of
which are currently exercisable and 20,000 of which will become exercisable
immediately prior to the Effective Time and with an average exercise price
$101.32), 60,000 Old Shares (45,000 of which are currently exercisable and
15,000 of which will become exercisable immediately prior to the Effective Time
and with an average exercise price of $107.85), 82,120 Old Shares (67,120 of
which are currently exercisable and 15,000 of which will become exercisable
immediately prior to the Effective Time and with an average exercise price of
$101.59), 60,500 (37,500 of which are currently exercisable and 22,500 of which
will become exercisable immediately prior to the Effective Time and with an
average exercise price of $134.25) and 56,250 Old Shares (41,250 of which are
currently exercisable and 15,000 of which will become exercisable immediately
prior to the Effective Time and with an average exercise price of $108.69). In
addition, Mr. Wolf has Options to purchase 150,000 Old Shares at prices in
excess of $163 and Mr. Pope has Options to purchase 40,000 Old Shares at prices
in excess of $163.
 
  The Company has amended the 1988 Restricted Stock Plan, the 1981 Stock
Program and the Incentive Plan, in each case, subject to stockholders' approval
and consummation of the transactions contemplated by
 
                                       39

<PAGE>
 
the Plan of Recapitalization. Each of the amendments is intended to permit
awards under the related plan to continue to be deductible by the Company for
Federal income tax purposes under Section 162(m) of the Internal Revenue Code.
In addition, the amendment to the 1981 Stock Program reserves an additional
1,200,000 New Shares (subject to increase in the event of an adjustment
relating to the New Shares described in "THE PLAN OF RECAPITALIZATION--
Establishment of the ESOP--Additional Shares") for issuance upon the exercise
of options granted thereunder, and the amendment to the Incentive Plan permits
each participant to elect to defer all or any portion of any bonus otherwise
payable thereunder.
 
  See "CERTAIN INFORMATION CONCERNING THE BOARD OF DIRECTORS--Compensation of
Directors; Effect of "Change in Control' " for certain information with respect
to the effect of the Recapitalization on benefits provided to members of the
Company's Board.
 
CERTAIN RISK FACTORS
 
  Financial Effects; Delaware Law Considerations. The Recapitalization will
immediately change the Company's capitalization to one that is more highly
leveraged. On a pro forma book basis at December 31, 1993, the Company would
have had approximately $3.482 billion of long-term debt and a deficit of
approximately $302 million of stockholders' equity as compared to the
approximately $2.702 billion of long-term debt and approximately $1.203 billion
of stockholders' equity that was shown on the Company's balance sheet on such
date. In addition, if the Recapitalization had occurred as of January 1, 1993,
the Company would have reported, on a pro forma basis, a loss from continuing
operations of approximately $177 million for the year ended December 31, 1993,
as compared to the approximately $31 million loss from continuing operations
that was reported for such period excluding non-recurring charges related to
the Recapitalization. See "UNAUDITED PRO FORMA FINANCIAL INFORMATION." Given
the more leveraged financial structure of the Company following the
Recapitalization, certain industry risks could have a greater adverse impact on
the Company after the Recapitalization than might have been the case prior to
the Recapitalization.
 
  The Delaware General Corporation Law (the "DGCL") requires that the payments
to holders of Old Shares in the Recapitalization be made from "surplus."
Valuation of the Company's assets at their fair value (as supported by the
American Appraisal Opinion referred to above) would create capital surplus that
under the DGCL may be used for such payments. In addition, such payments would
not be permitted if after giving effect to them the Company would not be able
to pay its debts as they become due in the usual course of business. The Board
believes that the Company will be able to pay such debts, based in part on the
revenue and earnings scenarios set forth above under "--Certain Revenue and
Earnings Scenarios" and on the American Appraisal Opinion referred to above.
See "THE PLAN OF RECAPITALIZATION--Terms and Conditions," and "UNAUDITED PRO
FORMA FINANCIAL INFORMATION."
 
 Fraudulent Conveyance
 
  If a court in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, were to find that, at the time the Company
distributed to holders of Old Shares the cash and Debentures that such holders
are to receive in the Recapitalization, the Company (i) was insolvent, (ii) was
rendered insolvent by reason of such distributions, (iii) was engaged in a
business or transaction for which the assets remaining with the Company
constituted unreasonably small capital to carry on its business or (iv)
intended to incur, or believed that it would incur, debts beyond its ability to
pay as such debts matured, such court may void the distributions to
stockholders and require that such holders return the same (or equivalent
amounts) to the Company or to a fund for the benefit of its creditors.
 
  The measure of insolvency for purposes of the foregoing would vary depending
upon the law of the jurisdiction that was being applied. Generally, however,
the Company would be considered insolvent if at the time of the
Recapitalization the fair value of the Company's assets is less than the amount
of the Company's total debts and liabilities or if the Company has incurred
debt beyond its ability to repay as such debt matures.
 
                                       40

<PAGE>
 
As described in "SPECIAL FACTORS--Opinions of American Appraisal," the American
Appraisal Opinion was rendered orally to the Board at the March 14, 1994
meeting and in writing to the Board and the Company on      , 1994. In
rendering the American Appraisal Opinion, American Appraisal valued the assets
of the Company (on a consolidated basis) and United (on a consolidated basis),
as going concerns, both immediately before and after, and giving effect to, the
Recapitalization. The valuation included the aggregate assets of the business
enterprise of each of the Company (on a consolidated basis) and United (on a
consolidated basis), or total invested capital as represented by the total net
working capital, tangible plant, property and equipment and intangible assets
of the respective business enterprises. American Appraisal stated that it
believed this to be a reasonable basis on which to value the Company and United
and that nothing has come to its attention that caused it to believe that each
of the Company (on a consolidated basis) and United (on a consolidated basis),
before and after the Recapitalization, will not be going concerns.
 
  As stated in "SPECIAL FACTORS--Opinion of American Appraisal," the American
Appraisal Opinion stated that, based upon and subject to the conditions and
assumptions contained therein, (a) the fair value of the aggregate assets of
each of the Company (on a consolidated basis) and United (on a consolidated
basis) will exceed their total respective liabilities (including, without
limitation, subordinated, unmatured, unliquidated and contingent liabilities),
(b) the present fair salable value of the aggregate assets of each of the
Company (on a consolidated basis) and United (on a consolidated basis) will be
greater than their respective probable liabilities on their debts as such debts
become absolute and matured, (c) each of the Company (on a consolidated basis)
and United (on a consolidated basis) will be able to pay their respective debts
and other liabilities, including contingent liabilities and other commitments,
as they mature, (d) the capital remaining in each of the Company (on a
consolidated basis) and in United (on a consolidated basis) after consummation
of the Recapitalization will not be unreasonably small for the businesses in
which the Company and United are engaged, as management of the Company and
United has indicated such businesses are conducted and as management has
indicated the businesses are proposed to be conducted following the
consummation of the Recapitalization, and after giving due consideration to the
prevailing practices in the industry in which the Company and United will be
engaged, (e) the excess of the fair value of the total assets of the Company
over the total liabilities, including contingent liabilities, of the Company,
is equal to or exceeds the value of the Recapitalization Consideration to
stockholders plus the stated capital of the Company and (f) the excess of the
fair value of the total assets of United over the total liabilities, including
contingent liabilities, of United, is equal to or exceeds the value of the
stated capital of United.
 
  American Appraisal also indicated that it believed the excess of total assets
over pro forma liabilities was approximately $2.5 billion at December 31, 1993,
compared to approximately $1.203 billion in stockholders' equity as of such
date, determined according to generally accepted accounting principles, so
that, giving effect to the Recapitalization, the indicated excess assets of the
Company for purposes of Delaware law exceeded $1 billion.
 
 Certain Anti-takeover Effects
 
  Certain provisions of the governance structure will make it extremely
difficult to acquire the Company in a transaction that was not approved by at
least one Union designated director or 75% of the vote of the New Shares and
the Voting Preferred Stock, even if such transaction might be beneficial to the
Company's stockholders. In particular, the "sunset" provision described below
in "--Governance Structure" will prevent the occurrence of an acquisition of
the Company for an extended period following the Effective Time if the holders
of over 90% of the Voting Preferred Stock (as defined below) disapprove such
acquisition.
 
 Investment Values; Future Investments
 
  Cost savings envisioned by the agreements with ALPA and the IAM and the
anticipated productivity increases discussed herein are estimates prepared by
the Company for analytical purposes. Such cost savings and anticipated
productivity increases could be difficult to achieve, and, even if all proposed
plans for employee investments are implemented, the value of the reductions in
wages and benefits and, work-rule
 
                                       41

<PAGE>
 
changes and anticipated productivity increases may not be as significant as
currently calculated. Mandated job guarantees may make it difficult to achieve
significant additional productivity improvements, and, if additional reductions
in wages and benefits and work-rule changes become desirable in management's
view, such reductions in wages and benefits and work-rule changes may be more
difficult to achieve in light of the long-term nature of the revised collective
bargaining agreement with ALPA and the IAM that constitute elements of the
Recapitalization (the "Collective Bargaining Agreements").
 
 Lack of Consensus
 
  Certain employee groups may not be in favor of the instituted changes and may
react in a manner that does not facilitate achievement of the desired results.
For example, the AFA has declined to participate in the transaction, certain
other employees who will be participating in the wage and benefit reductions
and work-rule changes were not in favor of the transaction, and certain union
organizing activity, based on opposition to certain aspects of the transaction,
has occurred. This lack of consensus may reduce the value of the productivity
improvements the Company expects to achieve by virtue of the Recapitalization.
 
 Management Change
 
  The current Chairman and Chief Executive Officer of the Company, Mr. Stephen
M. Wolf, President, Mr. John C. Pope, and Executive Vice President--Corporate
Affairs and General Counsel, Mr. Lawrence M. Nagin, will retire at the
Effective Time. The new chief executive officer selected by ALPA and the IAM,
Mr. Gerald M. Greenwald, will be required to implement reductions in wages and
benefits and work-rule changes that he did not directly negotiate in an
industry in which he has not previously been engaged. In addition, it is
possible that the Company may face attrition by officers and other members of
management and that the Company's new senior management may face difficulties
in implementing strategies or attracting additional management employees.
 
 Reduced Flexibility
 
  The corporate governance structure and Collective Bargaining Agreements with
ALPA and the IAM may inhibit management's ability to alter strategy in a
volatile, competitive industry. Among the more significant constraints are (i)
a prohibition on domestic code sharing in excess of 1% of domestic block hours,
excluding several small existing agreements without ALPA's consent, (ii) a no
layoff promise for all currently employed participating union employees during
the five- to six-year investment period and, for pilots, while U2 remains in
operation (which constraint is ameliorated as normal attrition reduces the
impact of the no-layoff promise), (iii) restrictions on international code
sharing, unless the Company can demonstrate that international code sharing
arrangements do not cause a reduction in international flying and as long as
the Company does not expand code sharing once the Company reduces international
flying below a certain level and (iv) an agreement not to sell the Company's
Denver pilot training facility and certain maintenance facilities. In addition,
the Restated Certificate contains restrictions on the ability of the Company
and United to sell assets and issue equity securities absent certain specified
Board or stockholder approvals. In most circumstances, the issuance of
additional equity securities would not be counted in determining whether the
"sunset" (described below under "--Revised Governance Structure") has occurred.
 
 Implementation of U2
 
  Although the Company expects to develop U2 as an important component of its
competitive posture and has ascribed a significant portion of the value of the
transaction to the ability to implement U2, no assurance can be given that the
Company will be able to do so effectively or to realize the financial benefits
expected to be received by the Company from the implementation of U2. The
success of U2 will be based not only upon the nature of the Company's business
plan but also upon the strategies and plans implemented by existing low-cost
competitors and by new entrants into the low-cost market. In addition, even if
the business concept of U2 is successful, (i) U2 will comprise no more than 20%
of United's system block hours up to
 
                                       42

<PAGE>
 
two million block hours systemwide and no more than 25% of the system block
hours in excess of two million, (ii) U2 can only operate in markets in the
lower 48 states with stage lengths up to 750 nautical miles and cannot fly
between United's hub or international gateway cities except for Los Angeles
basin--San Francisco bay area service, which excludes U2 from such heavily
traveled routes as the transcontinental routes and New York/Chicago,
Chicago/Denver and Chicago/Washington Dulles, (iii) U2 cannot operate aircraft
larger than a B737-300 and (iv) for the first six years, U2 can only operate
up to 90% of monthly block hours in markets previously served (within 24
months) by United. If United's systemwide widebody flying (i.e., flying
performed in B-757 or larger aircraft) falls below (i) 95% of the widebody
block hours projected in the Company's October 1993 fleet plan for any twelve
month period between from the Effective Time through 1999 or (ii) a certain
minimum level for any twelve month period between 2000 and 2006, the total
flying performed in the U2 operation must be reduced by the shortfall in
widebody flying. Even if implemented as planned, U2 will not have costs which
are as low as those of certain low-cost competitors. U2 must rely upon factors
other than lowest cost to secure market share and be successful.
 
 Competitive Response
 
  Even if the Company is able to achieve cost reductions and productivity
enhancements, the Company's higher cost competitors may be able to achieve
comparable agreements with their labor groups and the Company's low-cost
competitors may modify their operations in response to the competitive threat
posed by U2 and thus in each case, may eliminate or reduce the competitive
gain sought by the Company and lead to reductions in fares and earnings. If
the Company's higher cost competitors were to achieve more significant
reductions in wages and benefits and work-rule changes than those achieved by
the Company, the Company's ability to respond to competition would be hampered
by the fixed long-term nature of the agreements that constitute elements of
the Recapitalization.
 
 Labor Protective Provisions
 
  The Company will continue in effect, or amend to include, certain provisions
of agreements with ALPA and the IAM that (i) provide certain rights in the
event of a change in control of the Company and (ii) prohibit furloughs,
within certain conditions, if the Company disposes of 25 percent or more of
its assets or assets which produce 25 percent or more of its block hours. The
revised Collective Bargaining Agreements obligate the Company to require any
carrier purchasing route authority or aircraft that produce 25 percent or more
of the Company's operating revenues or block hours to hire an appropriate
number of United employees with seniority credit.
 
 Tax Deductibility of Employee Stock Ownership Plan Contributions and
Dividends
 
  Although the Company has attempted to structure the ESOPs so that all
amounts contributed thereto and dividends paid with respect to the stock held
thereunder will be deductible to the Company for Federal
income tax purposes, there are no regulations governing the deductibility of
dividends paid on the ESOP Preferred Stock and there can be no assurance that
one or more current or future limitations under the Internal Revenue Code will
not adversely impact the deductibility of such amounts and dividends. The
deductibility of such amounts depends, to some extent, on the conclusions set
forth in an opinion rendered to the ESOP Trustee by Houlihan Lokey and there
can be no assurance that the IRS will agree with the methodology set forth in
such opinion.
 
 Governance Structure
 
  Although the Company has attempted to achieve a balanced approach to its
corporate governance structure after the Recapitalization, such structure is
very unusual in the management of a large, complex public corporation, and it
is not certain that the actual operation of the corporate governance process
will not result in disputes or inability to achieve results that are in the
best interests of the Company or holders of New Shares.
 
                                      43

<PAGE>
 
  Under the terms of the Restated Certificate, the participants in the ESOPs
(and in certain circumstances the ALPA-MEC, the IAM and the Salaried and
Management Director (as defined below)) will continue to hold more than 50% of
the voting power of the Company until the equity interest held by the ESOPs and
other employee benefit plans sponsored by the Company is less than 20% of the
common equity of the Company, all as more fully described in "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure--Nondilution." Under current
actuarial assumptions, the Company estimates that this "sunset" provision will
not become operative until 2016 if additional purchases are not made by
eligible employee benefit plans. However, such plans will have the right, and
may be expected to, make additional purchases, thereby delaying the occurrence
of the "sunset." In addition, the Restated Certificate contains many provisions
which may prevent the Company prior to the "sunset" from acting without the
consent of one or both of the members of the Board elected by ALPA and the IAM
or a 75% vote of holders of New Shares and Voting Preferred Stock. See "THE
PLAN OF RECAPITALIZATION--Revised Governance Structure."
 
 Amendments to Collective Bargaining Agreements; Future Labor Agreements
 
  There can be no assurance that the new management of the Company in the
future will not agree to further amend the collective bargaining agreements
with ALPA and the IAM in a manner that reduces or eliminates the cost savings
that are the basis of the Recapitalization. However, any such amendment must be
approved by the Labor Committee of the Board (which will not include any Union
Director (as defined below)). See "THE PLAN OF RECAPITALIZATION--Revised
Governance Structure--Committees." In addition, at the end of the current
employee investment period, there can be no assurance that the Company's labor
agreements will be renegotiated in a manner that continues in subsequent
periods the cost savings that are being sought through the Recapitalization or
that does not reverse the effect of any cost savings that will have been
obtained thereby.
 
 Possible Effect of Organization of Additional Employees
 
  In the event any portion of the management and salaried employees that are
not currently represented by a union elects union representation pursuant to
the Railway Labor Act, the Company would be obligated to bargain with such
union over the terms and conditions of employment applicable to such employees,
including the terms, if any, of such employees' continuing participation in the
ESOPs. This obligation to bargain requires the Company to "exert every
reasonable effort" to reach an agreement but does not require it to agree to
any change or particular term or condition sought by the union. During the
period of negotiation, the Company would be entitled to maintain the then-
existing terms of such employees' participation in the ESOPs.
 
  The ESOPs provide that if any group of employees that are not currently
represented by a union becomes covered by a new collective bargaining
agreement, such group of employees will not be covered under the ESOPs unless
the collective bargaining agreement so provides. Whether any new collective
bargaining agreement would provide for continuing participation in the ESOPs by
such group of employees is a matter that would be subject to mutual agreement
between the Company and the applicable union. The ESOPs provide, however, that
if the terms of any employee's employment no longer reflect all of the
reductions in wages and benefits and work-rule changes set forth in the Plan of
Recapitalization, then such employee shall cease to be covered by the ESOPs.
 
  As a result, if any new collective bargaining agreement did not reflect the
reductions in wages and benefits and work-rule changes required by the Plan of
Recapitalization for particular employees, the Company could not agree, without
amending the ESOPs, to allow such employees to participate in the ESOPs. If any
currently unrepresented employees ceased to participate in the ESOPs under such
circumstances, the ESOPs provides that the unrepresented employees from the
remaining in the ESOPs would receive the shares previously intended for that
newly-represented group. The employment terms, except base pay, for the
unrepresented employees remaining in the ESOPs will be subject to change, at
the Company's discretion, so long as the net economic value of the
unrepresented employees' employment terms is not altered.
 
                                       44

<PAGE>
 
 Employee Ownership and Influence
 
  No assurance can be given that the Company, which will be subject to
significant influence by employee groups (including through the right to voting
representation in excess of economic equity ownership, Board and Board
committee representation, the requirement of approval of certain matters by a
Union Director or a 75% vote of the holders of New Shares and Voting Preferred
Stock, and participation by Union Directors in the nomination of the
Independent Directors (as such terms are defined under "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure")), might not take actions that
are more favorable to such employee groups than might be taken by a company
that was not subject to such influence. The corporate governance structure
after the Recapitalization will not, however, relieve the members of the Board
of their fiduciary obligations under the DGCL.
 
 Effect of Adjustment on Trading
 
  As described under "THE PLAN OF RECAPITALIZATION--Establishment of ESOP--
Additional Shares," the ESOP Preferred Stock being issued to the ESOPs is
initially convertible into approximately 53% of the New Shares but, based on
the trading prices of the New Shares in the twelve months after the Effective
Time (the "Measuring Period"), may become convertible into up to approximately
63% of the New Shares. Such potential adjustment may adversely limit the
trading prices of the New Shares during the Measuring Period.
 
 Financial Reporting; Market Assessment
 
  The accounting rules governing employers accounting for employee stock
ownership plans require that compensation expense be recorded for the ESOP
Preferred Stock "committed to be released" during an accounting period based on
the fair value of the ESOP Preferred Stock during such period. The difference
between the fair value and the initial recorded cost of the ESOP Preferred
Stock "committed to be released" is recorded as an adjustment to stockholders'
equity. The ESOP Preferred Stock that has been "committed to be released" is
considered to be outstanding in the if-converted earnings per share calculation
for primary and fully diluted earnings per share if the effect is dilutive. The
circular relationship between the employee stock ownership plan accounting
charges and the Company's stock price, coupled with the size of the
contemplated ESOPs, make future earnings difficult to forecast. In addition,
reported book earnings will be depressed in early years due to the mismatch
between the term of concessions (which increase earnings) of from five years,
nine months to twelve years and the shorter period of only six years over which
employee stock ownership plans accounting charges will occur. While it is
possible that the equity research community and investors may look through
employee stock ownership plans accounting charges, it is also possible that the
trading price of the New Shares may be negatively impacted by such accounting
treatment.
 
 Liquidity
 
  United is a party to a $500 million commercial paper facility through
agreements with United Airlines First Funding Corporation ("First Funding") and
certain banks. As of the date of this Proxy Statement/Prospectus, approximately
$270 million of commercial paper is outstanding thereunder. As a result of
provisions in the Second Amended and Restated Credit Agreement, dated as of
September 20, 1993 (the "Credit Agreement"), among First Funding, Union Bank as
agent and certain other banks, a "change in control" may be deemed to occur as
a result of the Recapitalization, and First Funding may be restricted from
issuing new commercial paper under the Credit Agreement. Although this will not
have an effect on outstanding commercial paper under the Credit Agreement, the
Company will need either to renegotiate the Credit Agreement or to obtain an
alternate funding source to replace such facility with respect to future
fundings. Although the Company does not expect it to be the case, the Company
may not be able to renegotiate or to obtain such alternate facility, in which
case the Company's liquidity may be impaired.
 
  Limitations on asset sales and equity issuances included in the Company's
Restated Certificate might make it more difficult to raise cash, even if
management desired to do so to take advantage of a perceived opportunity.
 
                                       45

<PAGE>
 
 Complexity
 
  Given the complex nature of the various provisions affecting the operation of
the Company after the Effective Time, it is possible that the equity research
community and investors may find the Company difficult to evaluate, which may
have the effect of reducing the trading price of the New Shares from levels
that might otherwise prevail. In addition, equity issuances (other than
Permitted Bankruptcy Equity (as defined below)) generally will be disregarded
when calculating the percentage of Common Equity (as defined below) for
"sunset" purposes, which may negatively impact the market value of the New
Shares and other equity of the Company.
 
 Redistribution
 
  In the Recapitalization, holders of Old Shares (an equity security) will
receive Debentures and shares of Public Preferred Stock in addition to New
Shares and cash. It is expected that there will exist a period, perhaps of a
lengthy duration, during which certain recipients of such securities,
concluding that the characteristics thereof are not consistent with their
investment criteria, distribute such securities into the marketplace. During
such distribution period, the supply of such securities in the market may
exceed levels that might otherwise prevail, which would likely have the effect
of depressing the price of such securities from levels that might otherwise
prevail if such securities were held solely by persons or institutions for whom
such securities satisfied their investment criteria. In addition, although the
Company expects that it will apply for listing of the Debentures and the Public
Preferred Stock on the New York Stock Exchange Inc. (the "NYSE") , there can be
no assurance that at or following the Effective Time such securities will be
listed on the NYSE or any other securities exchange or that any trading market
for the securities will develop.
 
 Industry Risks
 
  If the Recapitalization is accomplished, certain risks associated with the
aviation industry will continue to face the Company. Given the more leveraged
financial structure of the Company following the Recapitalization, certain of
these industry risks could have a greater adverse impact on the Company after
the Recapitalization than might have been the case prior to the
Recapitalization.
 
 Industry Conditions and Competition
 
  The airline industry is highly competitive and susceptible to price
discounting. United's competitors include major domestic carriers such as
American, Delta, and Northwest, major international carriers such as British
Airways and Japan Air Lines, and domestic carriers such as Southwest,
Continental and other carriers with lower cost structures. Airline profit
levels are highly sensitive to, and during the last four years have been
significantly impacted by, adverse changes in fuel costs, average yield (fare
levels) and passenger demand. Passenger demand and yields have been adversely
affected by, among other things, the general state of the economy, the Persian
Gulf War and actions taken by carriers with respect to fares. As a result of
this adverse operating environment, from 1990 to 1993 the domestic airline
industry incurred unprecedented losses. During this period, Eastern Air Lines,
Pan American World Airways and Midway Airlines were liquidated, and Continental
Airlines, America West Airlines and Trans World Airlines filed for bankruptcy.
 
  The emergence in recent years of several new carriers, typically with low
cost structures, has further increased the competitive pressures on the major
U.S. airlines. In some cases, the new entrants have initiated or triggered
price discounting. Aircraft, skilled labor and gates at most airports continue
to be readily available to start-up carriers. Although new entrant carriers
generally commence service with only a few city pairs and have a high rate of
failure, the commencement of service by new carriers on United's routes could
negatively impact United's operating results. In addition, certain existing
U.S. domestic carriers compete primarily by offering low-cost air service on
route networks that do not employ hub and spoke systems. These discount air
carriers have significantly affected the yields of major domestic carriers such
as United and, in certain instances, have made certain markets uneconomical for
carriers such as United.
 
 
                                       46

<PAGE>
 
  In the spring of 1992, American introduced a new fare structure followed by a
deeply discounted summer sale, steps that were generally matched by other U.S.
airlines (including United), resulting in substantially depressed industry
yields and significant 1992 losses at all major U.S. airlines (with one
exception). American and the rest of the domestic airline industry have
abandoned that pricing structure, and fare levels have increased in 1993-1994
from 1992 levels. Nonetheless, discounts continue to exist and may be increased
at any time. The introduction of broadly-available, deeply discounted fares by
a major U.S. airline would likely result in lower yields for the entire
industry and could have a material adverse effect on the Company's operating
results.
 
 Aircraft Fuel
 
  Since fuel costs constitute a significant portion of the Company's operating
costs (approximately 12% during 1993), significant changes in fuel costs would
materially affect the Company's operating results. Fuel prices continue to be
susceptible to, among other factors, political events, and the Company cannot
predict near- or longer-term fuel prices. In the event of a fuel supply
shortage resulting from a disruption of imports or otherwise, higher fuel
prices or curtailment of scheduled service could result. A one cent change in
the cost per gallon of fuel (based on 1993 consumption levels) impacts
operating expense by approximately $2.25 million per month.
 
  In August 1993, the United States increased taxes on fuel, including aircraft
fuel, by 4.3c per gallon. Airlines are exempt from this tax increase until
October 1, 1995. When implemented, this new tax will increase the Company's
annual operating expenses by approximately $75 million based on United's 1993
domestic fuel consumption levels.
 
 Regulatory Matters
 
  In the last several years, the Federal Aviation Administration (the "FAA")
has issued a number of maintenance directives and other regulations relating
to, among other things, collision avoidance systems, airborne windshear
avoidance systems, noise abatement and increased inspection requirements. The
Company expects to continue incurring costs to comply with the FAA's
regulations.
 
  Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by, for instance,
imposing additional requirements or restrictions on operations. Laws and
regulations have also been considered from time to time that would prohibit or
restrict the ownership and/or transfer of international airline routes or
takeoff and landing slots. Also, the award of international routes to U.S.
carriers (and their retention) is regulated by treaties and related agreements
between the United States and foreign governments, which are amended from time
to time. For example, there are significant aviation issues between the United
States and such foreign governments as Germany, Japan and the United Kingdom
that, depending on their resolution, may significantly impact the Company's
existing operations or curtail potential expansion opportunities in important
regions of the world. The Company cannot predict what laws and regulations will
be adopted or what changes to international air transportation treaties will be
effected, if any, or how they will affect United.
 
CERTAIN EFFECTS OF THE RECAPITALIZATION
 
  The Recapitalization will significantly increase the Company's long-term
indebtedness, significantly reduce cash reserves and create a substantial
negative balance in stockholders' equity. See "--Certain Risk Factors," "THE
PLAN OF RECAPITALIZATION" and "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
 
  As a result of the Recapitalization, a new corporate governance structure
will be implemented, a new board of directors will be elected and a new chief
executive officer will be appointed. See "--Management Arrangements," "THE PLAN
OF RECAPITALIZATION--Revised Governance Structure" and "ELECTION OF DIRECTORS."
 
                                       47

<PAGE>
 
  The New Shares will be registered under the Exchange Act, which requires,
among other things, that the Company furnish certain information to its
stockholders and to the Commission and comply with the Commission's proxy rules
in connection with meetings of the Company's stockholders. The Recapitalization
will result in the Old Shares becoming eligible for deregistration under the
Exchange Act.
 
  Although the Company will not meet certain normal requirements for NYSE
listing following the Recapitalization, such as the requirement of a minimum
net worth, the NYSE has informed the Company that it will permit listing
(subject to official notice of issuance) of the New Shares immediately
following consummation of the Recapitalization.
 
  Except for the Plan of Recapitalization, there are no present plans or
proposals that would result in any material extraordinary corporate
transaction, such as a merger, reorganization, liquidation, relocation of
operations, or sale or transfer of a material amount of assets involving the
Company or its subsidiaries, or any material change in the Company's corporate
structure, business or composition of its management of which the current Board
is aware.
 
  The Recapitalization will be accounted for as a redemption of shares that is
not subject to purchase accounting and, therefore, assets and liabilities will
be carried at their historical cost and there will be no increase in goodwill
amortization or other purchase accounting effects (such as increased
depreciation charges) resulting from the Recapitalization that would reduce
earnings.
 
MANAGEMENT ARRANGEMENTS
 
  Under a Retention Agreement, dated as of January 1, 1994, ALPA and the IAM
agreed to employ Mr. Gerald Greenwald as a consultant with respect to the
transactions contemplated by the Plan of Recapitalization. Mr. Greenwald, the
former Vice Chairman of Chrysler Corporation, was previously associated with a
transaction proposed in 1990 by an entity controlled by the Company's three
principal unions, which transaction was terminated in October 1990.
 
  Under the Retention Agreement, Mr. Greenwald is entitled to a consulting fee
of $80,000 per month from January 1994 to the Effective Time and if the
Retention Agreement is terminated under certain circumstances (i.e.,
termination by the Unions without cause), an additional $1 million payment at
the Effective Time. The Retention Agreement contemplates that Mr. Greenwald and
the Company will execute a five-year employment agreement (the "Greenwald
Agreement"), which agreement will become effective at the Effective Time.
Pursuant to the Greenwald Agreement, the Company will pay to Mr. Greenwald at
the Effective Time a fee of $1 million. Under the Greenwald Agreement, Mr.
Greenwald will receive a salary of $725,000 per year, reduced by 8.25%
(equivalent to the salaried and management concession) and a non-guaranteed
target bonus of $725,000 per year, which target bonus will be payable if Mr.
Greenwald's performance is "consistent with the applicable Board Committee's
objectives and directions" and the Company's performance "does not compel" a
lesser bonus. In addition, the applicable Board Committee will take into
account (i) airline industry trends and (ii) the Company's financial
performance (including cumulative profitability since the Effective Time) in
determining the extent of Mr. Greenwald's bonus. Pursuant to the Greenwald
Agreement, Mr. Greenwald will receive options to acquire 200,000 New Shares,
with an exercise price equal to the fair market value of the New Shares on the
day following the Effective Time. Fifty percent of such options will vest at
the Effective Time and the remainder will vest over 5 years. All options and
restricted stock vest on any termination of Mr. Greenwald's employment other
than termination by the Company for cause or a voluntary resignation. The
options, to the extent vested, will remain outstanding for 10 years,
notwithstanding termination of Mr. Greenwald's employment for any reason,
including "cause". Mr. Greenwald will also receive 50,000 New Shares of
restricted stock, vesting 50% at the Effective Time and the remaining 50% over
5 years. Additional options and restricted stock will be issued to the extent
the equity adjustment mechanism is triggered.
 
  The Greenwald Agreement also entitles Mr. Greenwald to an annual pension
equal to the greater of the pension that would accrue under Company plans with
credit for 30 years of service or $500,000 per year.
 
                                       48

<PAGE>
 
Such pension is payable at any time elected by Mr. Greenwald following
retirement or termination of employment. Mr. Greenwald's retirement benefit
will continue to be paid to his spouse at 67% of his benefit level under a
joint survivor annuity. The Retention Agreement specifies that benefits under
such pension must be funded in full at the Effective Time through a trust at an
estimated amount of $6.4 million.
 
  If Mr. Greenwald's employment is terminated by the Company without "cause" or
by him for "good reason", his salary and guaranteed $725,000 bonus will
continue for 3 years (or, if greater, the remainder of the 5 year contract
term). Generally, the Company will not be entitled to a deduction for Federal
income tax purposes with respect to the amounts described above to the extent
that such amounts exceed $1 million in any year.
 
                    CERTAIN FEDERAL INCOME TAX CONSEQUENCES
 
  Skadden, Arps, Slate, Meagher & Flom has served as tax counsel to the Company
in connection with the Recapitalization. The following expresses Skadden, Arps,
Slate, Meagher & Flom's opinion to the Company as to the material Federal
income tax consequences that, under currently applicable law, should arise from
the Recapitalization. The following discussion is applicable only to public
stockholders who are citizens or residents of the United States and are not
foreign corporations. The discussion may not be applicable with respect to Old
Shares acquired as compensation, including Old Shares acquired upon the
exercise of options or Old Shares held under the Company's employee benefit
plans, or to Old Shares held as other than capital assets. Moreover, the
discussion is not applicable to public stockholders who hold, or who are
related within the meaning of Section 318 of the Internal Revenue Code to
stockholders who hold, employee stock options of the Company. Furthermore,
state and local tax consequences of the Recapitalization are not addressed in
the discussion. Stockholders should note that the opinions of Skadden, Arps,
Slate, Meagher & Flom are not binding on the Internal Revenue Service or any
court, and the Company has not sought, and does not intend to seek, a ruling
from the Internal Revenue Service as to the Federal income tax consequences of
the Recapitalization.
 
  STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS
WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX
LAWS TO WHICH THEY MAY BE SUBJECT.
 
  1.  The Recapitalization taken as a whole will constitute a
"recapitalization" of the Company within the meaning of Section 368(a)(1)(E) of
the Internal Revenue Code. Accordingly, the Recapitalization will not be a
taxable transaction to the Company, but will be a taxable transaction to the
public stockholders with the consequences described below.
 
  2.  A public stockholder whose Old Shares are exchanged for the
Recapitalization Consideration in the Recapitalization will realize gain or
loss in the Recapitalization measured by the difference, if any, between (i)
the fair market value of the Recapitalization Consideration received by such
stockholder in the Recapitalization, and (ii) such stockholder's tax basis in
the Old Shares exchanged in the Recapitalization. Gain realized by a public
stockholder in the Recapitalization will be recognized, but only to the extent
such gain does not exceed the sum of (i) the fair market value of the
Debentures at the Effective Time and (ii) the amount of cash received by the
stockholder in the Recapitalization. Any gain in excess of the sum of (i) the
fair market value of the Debentures at the Effective Time and (ii) the amount
of cash received by a public stockholder in the Recapitalization, and any loss
realized by a public stockholder in the Recapitalization will not be
recognized.
 
  3.  The character of any gain recognized by a public stockholder in the
Recapitalization will depend upon whether the receipt of Debentures and cash by
the stockholder has the effect of a dividend distribution as to such
stockholder or is treated as a sale or exchange. If the exchange of Old Shares
for Debentures and cash is treated as a sale or exchange, any gain recognized
will be capital gain that, in general, will be long-term
 
                                       49

<PAGE>
 
capital gain if the Old Shares have been held for more than one year at the
Effective Time and short-term capital gain if the Old Shares have been held for
one year or less at such time.
 
  Section 302 of the Internal Revenue Code provides guidance as to whether a
distribution has the effect of the distribution of a dividend. Under Section
302, a distribution will not have the effect of the distribution of a dividend,
and any gain recognized will be capital gain rather than a dividend, if the
distribution is not "essentially equivalent to a dividend" or one of several
other tests is satisfied. Section 318 of the Internal Revenue Code applies to
all of these tests. Under Section 318, a stockholder is deemed to own
constructively Old Shares, New Shares, and shares of Public Preferred Stock
that are actually owned, and in some cases constructively owned, by certain
related individuals and entities or that may be acquired by such stockholder or
such related individuals or entities by option or conversion, including through
employee stock options. Furthermore, the Section 302 tests are applied after
taking into account any related transactions that are part of a single
integrated plan. Thus, the issuance of the ESOP Preferred Stock and Voting
Preferred Stock to the ESOP pursuant to the Recapitalization will be treated as
part of a single integrated recapitalization plan, and it is possible that
dispositions or acquisitions by a public stockholder of Old Shares, New Shares,
or Public Preferred Stock contemporaneous with the Recapitalization may be
considered to be part of the same integrated plan.
 
  A public stockholder that does not acquire additional Old Shares, New Shares,
or Public Preferred Stock in a transaction that may be integrated with the
Recapitalization (a "Qualified Public Stockholder") will be entitled to capital
gain treatment if, under all of the facts and circumstances, the exchange
results in a "meaningful reduction" of the Qualified Public Stockholder's
proportionate stock interest in the Company. Based upon a published ruling of
the Internal Revenue Service, a Qualified Public Stockholder whose relative
stock interest in the Company is "minimal" and who exercises no control over
the affairs of the Company will be eligible for capital gain treatment assuming
that his percentage ownership in the Company decreases as a result of the
Recapitalization.
 
  It is also possible that a public stockholder may satisfy other "safe harbor"
tests that establish whether a distribution does not have the effect of a
dividend and should be treated as a sale or exchange. Public stockholders
should consult their tax advisors as to whether any such "safe harbor" test may
be satisfied.
 
  If an exchange has the effect of a dividend distribution to a public
stockholder, the gain to such stockholder will be treated as a dividend, which
is not in excess of each such stockholder's ratable share of the undistributed
earnings and profits of the Company. The remainder of any gain will be treated
as gain from the exchange of property. A corporate stockholder will generally
be entitled to the 70% dividends received deduction with respect to any such
dividend. However, under the rules for "extraordinary dividends," a corporate
stockholder may be required to reduce its basis in a New Share or share of
Public Preferred Stock immediately before any sale or disposition of such stock
under Section 1059 of the Internal Revenue Code. In general, such basis
reduction must occur if a corporate stockholder has not held its Old Share for
more than two years before the dividend announcement date and the amount of
such dividend equals or exceeds certain threshold percentages of the
stockholder's adjusted basis in the Old Share. Corporate stockholders should
consult their tax advisors with regard to the application and operation of
these rules.
 
  4.  A public stockholder's tax basis in the New Shares and Public Preferred
Stock received in the Recapitalization will be equal to the stockholder's tax
basis in the Old Shares exchanged therefor in the Recapitalization, increased
by the amount of any gain recognized by the stockholder and decreased by the
sum of (i) the fair market value of the Debentures and (ii) the amount of cash
received. The aggregate basis of the New Shares and Public Preferred Stock will
be allocated among the stock received in proportion to the relative fair market
values of the New Shares and Public Preferred Stock at the Effective Time. The
holding period of such New Shares and Public Preferred Stock will include the
holding period of the Old Shares exchanged in the Recapitalization. Gain, loss
and tax basis (determined as described above) must be calculated separately for
each block of Old Shares (i.e., Old Shares acquired at the same time in a
single transaction) held by a public stockholder.
 
                                       50

<PAGE>
 
  5.  Stockholders of Old Shares who receive Debentures in the Recapitalization
will have a basis in such Debentures equal to their fair market value as of the
Effective Time.
 
  6.  The excess of net long-term capital gains over net short-term capital
losses may be taxed at a lower rate than ordinary income for certain non-
corporate taxpayers. A capital gain is long-term if the asset is held for more
than one year and is short-term if the asset is held for one year or less. The
distinction between capital gain or loss and ordinary income or loss is also
relevant for purposes of, among other things, the limitation on the
deductibility of capital losses.
 
  7.  The Public Preferred Stock will not be classified as "Section 306 stock"
because the holders of Public Preferred Stock will not avoid gain recognition
by reason of Section 305(a) of the Internal Revenue Code, the receipt of the
Public Preferred Stock will not be substantially the same as the receipt of a
stock dividend, and the holders of Public Preferred Stock will not have a basis
in such stock which is determined by reference to the basis of Section 306
stock. In addition, the requirements of Section 306(b)(4) of the Internal
Revenue Code may be satisfied by holders of Public Preferred Stock
stockholders, where receipt and subsequent disposition of the Public Preferred
Stock is not pursuant to a plan having as one of its principal purposes the
avoidance of Federal income tax.
 
  8.  Stockholders who receive cash in lieu of fractional New Shares, Public
Preferred Stock and/or Debentures should be treated as having received the cash
in redemption of the fractional security interest. If the cash payment for the
fractional security interest exceeds the adjusted tax basis in the fractional
security interest, a stockholder should realize gain to the extent of the
excess cash. If the cash payment is less than the adjusted basis in the
fractional security interest exchanged, a stockholder should realize a loss.
Such gain or loss should be capital gain or loss, assuming that the Old Share
is held as a capital asset by the stockholder. Stockholders should consult
their tax advisors regarding the appropriate treatment of any cash that is
received in exchange for fractional security interests.
 
  9.  Dividend and interest payments received by a United States Alien (as
defined below) may be subject to United States Federal withholding tax. A
United States Alien holder will not be subject to United States Federal income
or withholding tax on any gain realized on the taxable sale or exchange of the
New Shares, Public Preferred Stock or the Debentures unless either (a) the gain
is derived from sources within the United States and the United States Alien is
an individual who was present in the United States for 183 days or more during
the taxable year or (b) the stock sold or exchanged is a "United States Real
Property Interest" as defined in Section 897(c)(l) of the Internal Revenue Code
at any time during the five years prior to the sale or exchange of the stock or
at any time during the time that the United States Alien held such stock,
whichever time is shorter. The New Shares or the Public Preferred Stock will be
a United States Real Property Interest only if, at any time during the five
years prior to the sale or exchange of such stock or at any time during the
period that the United States Alien held such stock, whichever time is shorter,
the Company is a "United States real property holding corporation" as defined
in Section 897(c)(2) of the Internal Revenue Code and the United States Alien
directly or constructively owned more than 5% of that class of stock of the
Company being sold or exchanged. The Company is not a "United States real
property holding corporation" for Federal income tax purposes.
 
  A "United States Alien" is any person who, for United States Federal income
tax purposes, is a foreign corporation, a nonresident alien individual, a
nonresident alien fiduciary or a foreign estate or trust, or a foreign
partnership that includes as a member any of the foregoing persons.
 
  10.  Certain non-corporate holders of the New Shares, Public Preferred Stock
or Debentures may be subject to backup withholding at a rate of 31% on payment
of dividends or interest on such securities, as the case may be. Backup
withholding will apply only if the holder (i) fails to furnish its Taxpayer
Identification Number ("TIN") which, for an individual, would be his or her
Social Security number, (ii) furnishes an incorrect TIN, (iii) is notified by
the IRS that it has failed to properly report payments of interest or dividends
or (iv) under certain circumstances, fails to certify under penalties of
perjury that it has furnished a correct
 
                                       51

<PAGE>
 
TIN and has not been notified by the IRS that it is subject to backup
withholding for failure to report payments of interest or dividends. These
backup withholding rules may also apply to payments of cash and Debentures by
the Exchange Agent (as defined below) in the Recapitalization (including cash
in lieu of a fractional securities interest). Stockholders should consult their
tax advisors regarding their qualification for exemption from backup
withholding and the procedures for obtaining such an exemption if applicable.
 
  The amount of any backup withholding from a payment to a holder of the New
Shares, Public Preferred Stock or Debentures will be allowed as a credit
against such security holder's Federal income tax liability and may entitle
such security holder to a refund, provided that the required information is
furnished to the IRS.
 
  11.  The Recapitalization will result in an "ownership change" within the
meaning of Federal income tax law provisions dealing with net operating loss
carryforwards, alternative minimum tax credits and other similar tax
attributes. Thus, as a technical matter there will be limitations on the
Company's ability to utilize such carryforwards and credits from periods
predating the Recapitalization. However, as a practical matter, application of
those limitations to the Company is not expected to impair the Company's
ability to use its tax attributes.
 
  THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH STOCKHOLDER SHOULD CONSULT A TAX ADVISOR AS TO THE
PARTICULAR CONSEQUENCES OF THE RECAPITALIZATION THAT MAY BE APPLICABLE TO SUCH
STOCKHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL, AND FOREIGN TAX LAWS.
 
                                   LITIGATION
 
  Two actions are pending in the Court of Chancery of the State of Delaware in
and for New Castle County with respect to the Recapitalization. Both actions
are brought as class actions, purportedly on behalf of a class consisting of
all stockholders of UAL Corporation.
 
  The first action, Kaufman et al. v. Wolf et al., Civil Action No. 13312, was
commenced by three stockholders of the Company on or about December 30, 1993.
Named as defendants, in additional to the Company, ALPA and the IAM, were
Stephen M. Wolf, John C. Pope, Neil A. Armstrong, Andrew F. Brimmer, Richard P.
Cooley, E. Mandell de Windt, John F. McGillicuddy, Harry Mullikin, James J.
O'Connor, Frank A. Olson and Ralph Strangis. The Kaufman complaint alleges,
among other things, that defendants have violated their fiduciary duties to the
Company stockholders in connection with the proposed transaction between the
Company, ALPA and the IAM. The complaint seeks, among other things, an
injunction against the consummation of the Agreement in Principle, an order
rescinding the transaction if it has been consummated and an award of
unspecified damages in favor of plaintiffs and the class.
 
  The second action, Krasner v. UAL Corp. et al., Civil Action No. 13316, was
commenced by a stockholder of the Company on or about January 6, 1994. Named as
defendants in addition to the Company, ALPA and the IAM, were Stephen M. Wolf,
John C. Pope, Neil A. Armstrong, Andrew F. Brimmer, Richard P. Cooley, Carla A.
Hills, Fujio Matsuda, John F. McGillicuddy, Harry Mullikin, James J. O'Connor,
Frank A. Olson, Ralph Strangis and Paul E. Tierney, Jr. The Krasner complaint
alleges, among other things, that defendants have violated their fiduciary
duties in connection with the proposed transaction. It seeks a declaratory
judgment that the individual defendants have breached their fiduciary duties to
the class, an injunction against the consummation of the transaction and
against "the enforcement of any anti-takeover device," an order requiring the
individual defendants to "explor[e] third-party interest" in acquiring the
Company and to "accept [ ] the highest offer obtainable for the public
shareholders or permit [ ] the shareholders to make that decision free from any
coercion" and an award of unspecified damages in favor of plaintiff and the
class.
 
  Both the Kaufman action and the Krasner action are at a preliminary stage.
Defendants have not responded to the complaint in either action, no discovery
has been taken and plaintiffs have not yet moved for class certification.
 
                                       52

<PAGE>
 
                         THE PLAN OF RECAPITALIZATION
 
  The information contained in this Proxy Statement/Prospectus with respect to
the Plan of Recapitalization is qualified in its entirety by reference to the
complete text of the Plan of Recapitalization, a copy of which is filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
is a part and which is incorporated herein by reference.
 
INVESTMENT FOR UNIONIZED EMPLOYEES
 
 Wage and Benefit Adjustments
 
  Employees represented by ALPA and the IAM will receive reductions of 15.7
percent and 9.7 percent, respectively, from basic wage rates in effect at the
Effective Time. A 5 percent increase previously scheduled to take effect for
IAM-represented employees on May 1, 1994 will be eliminated. ALPA employees
participating in U2 will be subject to further wage reductions as described
below. However, the normal increases for seniority steps and promotions will
be maintained.
 
  The reduced wage rates will remain in effect for five years, nine months
following the Effective Time for ALPA, and six years for the IAM, except that
during the fourth and fifth years following the Effective Time each employee
group may receive a wage increase. If the parties are unable to negotiate the
amount of such an increase, a neutral arbitrator will determine the amount, if
any (and not to exceed 5 percent each year), based upon airline industry
trends, profitability of the Company and wage rates for other specified major
air carriers. In addition, the neutral arbitrator may determine the amount of
increase in the ALPA per diem, if any (not to exceed $.25), based upon the
same factors.
 
  Upon the Effective Time, the Company contribution to the self-directed
retirement plan provided for each ALPA-represented pilot will be reduced from
9 percent of wages to 1 percent of wages. In addition, the vacation accrual
schedule for pilots during their first ten years of employment will be reduced
to the vacation accrual schedule for pilots employed by Southwest. For IAM-
represented employees, the current half-hour paid lunch period will be
eliminated and the standard work day increased to eight hours exclusive of the
unpaid lunch period. In addition, the premium for a paid lunch on overtime
also will be eliminated.
 
  All wage and benefit reductions will remain in effect pursuant to the
Railway Labor Act until the effective date of the revised collective
bargaining agreements negotiated and/or arbitrated pursuant to procedures
stated in the Plan of Recapitalization and described in this Proxy
Statement/Prospectus.
 
 AFA Participation
 
  If the AFA and the Company determine that the AFA will participate in the
Recapitalization, flight attendants will incur a combination of wage
reductions, benefit changes and work-rule modifications negotiated between
management and AFA, and determined by management in its sole judgment to equal
$416 million net present value, along with an appropriate agreed upon
contribution associated with the competitive action plan contemplated with
respect to U2 by the Plan of Recapitalization (the "Competitive Action Plan").
If AFA participates on this basis, the duration of wage and benefit reductions
(other than the contribution in respect of the Competitive Action Plan)
applicable to the other employee groups will be reduced by nine months.
 
 Competitive Action Plan
 
  In addition to wage and benefit reductions affecting all employees, ALPA and
IAM have agreed to permit the Company to establish a Competitive Action Plan
pursuant to which United would establish an "airline-within-an-airline"
currently referred to as "U2," which is designed to compete with existing low-
cost carriers in short-haul markets. The Unions will represent U2 employees in
the same class and craft, and United and U2 will have the same seniority lists
and will remain a single carrier for Federal Aviation Act and Railway Labor
 
                                      53

<PAGE>
 
Act purposes. The Company, at its discretion, may establish a distinct U2
corporate division but does not currently plan to establish U2 as a separate
subsidiary of either United or the Company.
 
  The pilot wages and work-rules for the U2 operation are contained in
amendments to the ALPA collective bargaining agreement. These work-rule changes
are designed to facilitate a high-frequency, rapid turn-around, streamlined
service operation. Pursuant to those changes in the ALPA collective bargaining
agreement, ALPA-represented pilots in the U2 operation would receive wage rates
approximately 7.1 percent less than the reduced mainline United rates for
similar equipment in the United operation. Pilots assigned to the U2 operation
will also be expected to fly more hours each month. As a result, pilot staffing
requirements in the U2 operation are expected to be reduced and U2 pilots
should have the opportunity to achieve monthly pay equivalent to comparable
mainline United pilots by flying more hours each month. The U2 operation would
be subject to modified work-rules designed for the U2 operation. The U2
supplement would have an initial term equivalent to the basic agreement; it
would also provide, however, for two renewal periods following the initial
term, for a total of 12 years following the Effective Time. With respect to the
two renewal periods, certain unresolved economic issues would be submitted to
interest arbitration. In such interest arbitrations, the arbitrator would be
required to establish the renewal terms on the basis of wages and work-rules
then in effect at Southwest or such other short-haul carrier as then operates
the largest number of B737 or equivalent aircraft other than American, Delta
Air Lines, Continental Airlines, Northwest Airlines and USAir. ALPA-represented
employees would be barred from striking over the U2 employment terms determined
through interest arbitration under this process.
 
  U2 would be permitted to operate on any non-stop city pair of 750 nautical
miles or less in the contiguous 48 states, using B737-300 or smaller aircraft,
subject to the following restrictions: (a) U2 could not operate between United
hub cities and/or international gateway cities except the Los Angeles basin and
the San Francisco Bay area service, (b) U2 block hours could not exceed 20
percent of United's systemwide block hours up to 2 million block hours per
year, and 25 percent of the systemwide block hours thereafter, provided that in
the sixth through twelfth years following closing, U2 could begin operation
between any city pairs not serviced by United during the prior 24 months, (c)
if system widebody block hours (i.e., block hours flown by B757 or larger
aircraft) fall below (i) 95% of the widebody block hours projected in the
Company's October 1993 fleet plan for any twelve month period from the
Effective Time through 1999 or (ii) a certain minimum level for any twelve
month period between 2000 and 2006, U2 operations must be reduced by the amount
of such shortfall and (d) 10 percent of U2 monthly block hours must be between
city pairs not served by United within the prior 24 months.
 
  To permit rapid implementation of U2, the Competitive Action Plan provides
that United pilots can be involuntarily placed into the U2 operation, but such
employees must be "red-circled" to maintain the monthly income they would have
earned had they remained in their existing positions in the mainline United
operation. United pilots who voluntarily bid into or remain in the U2
operations, and new hires, will not be red-circled.
 
  IAM-represented employees assigned to the U2 operation will be governed by
the same revised Collective Bargaining Agreements as all other IAM-represented
employees. The IAM agreements, governing all IAM- represented employees,
contain certain specific modifications that can not be amended for 12 years.
These include (a) elimination of the paid half-hour lunch period and increasing
hours of service to eight hours exclusive of the unpaid lunch and elimination
of a paid meal period on overtime, (b) a provision that the Company will assign
IAM ramp servicemen at any U.S. station that has a sustained flight level of 40
or more daily departures for a period of six months (and may discontinue such
assignments if the flight activity falls below 30 daily departures on a
sustained level) and may assign no more than 25 percent of such positions to
part-time ramp servicemen and (c) a provision, subject to certain restrictions,
that the Company may contract out up to 20 percent of its maintenance work,
determined annually on a dollar value basis, subject to the condition that
subcontracting will not cause a layoff.
 
                                       54

<PAGE>
 
 Job Security Provisions
 
  The ALPA collective bargaining agreement will be amended to add a new section
that would supersede and supplement several existing job security provisions.
The principal terms of this new section are as follows:
 
    (i)   All commercial flight operations conducted by United, the Company or
  any corporate affiliate must be performed by United pilots under the terms
  of the United-ALPA agreement, except for (a) feeder flying conducted by
  United Express or similar carriers operating small aircraft, (b) certain
  domestic code sharing currently in effect and additional domestic code
  sharing not to exceed 1 percent of the Company's total domestic block hours
  and (c) international code sharing arrangements with foreign carriers so
  long as the arrangements do not cause a reduction in international flying
  and the Company does not expand international code sharing once it reduces
  international flying below a specified minimum level;
 
    (ii)  United may not transfer aircraft or international routes to other
  carriers that will use the assets to provide feed to United pursuant to an
  agreement with United;
 
    (iii) United may not enter into any successorship transaction unless the
  successor agrees to adopt the United-ALPA agreement, to employ United
  pilots pursuant to such agreement, to recognize ALPA and to provide United
  pilots with seniority credit if the successor is an air carrier;
 
    (iv)  The Company will continue in effect, or amend to include, certain
  provisions of a Letter of Agreement that (a) provide ALPA with enumerated
  rights in the event of a change of control of the Company, (b) prohibit
  furloughs, within certain conditions, if the Company disposes of 25 percent
  or more of its assets or assets which produce 25 percent or more of its
  block hours and (c) obligate the Company to require any carrier purchasing
  aircraft or route authority that produce 25 percent or more of the
  Company's operating revenues or block hours to hire an appropriate number
  of United pilots with seniority credit;
 
    (v)   With certain exceptions, the Company may not sell or otherwise
  dispose of its Denver training center or contract with any person or entity
  to conduct or supervise United pilot training;
 
    (vi)  The Company may not establish a pilot domicile outside of the United
  States without ALPA's consent, except for temporary domiciles permitted
  under the existing agreement; and
 
    (vii) Subject to specified exceptions, no pilot employed as of the date
  of closing may be furloughed while the agreement remains in effect.
 
  The IAM collective bargaining agreements will be amended to provide a number
of job security provisions as well. The principal terms of these amendments are
as follows:
 
    (i)   Subject to certain exceptions, no IAM represented employee employed
  as of the date of the Effective Time may be furloughed during the term of
  the agreement;
 
    (ii)  Subject to certain conditions, the Company may not contract out work
  if the subcontract would result in the layoff of any IAM-represented
  employee;
 
    (iii) The Company may not contract out ramp service work at any station
  at which it currently employs IAM-represented ramp servicemen;
 
    (iv)  Subject to certain exceptions, the Company may not sell or otherwise
  dispose of its maintenance facilities in San Francisco, Oakland or
  Indianapolis, its Miami flight kitchen or its four employee cafeterias;
 
    (v)   The Company may not perform any regularly scheduled heavy maintenance
  outside the United States without IAM approval;
 
    (vi)  The Company will transfer dispatch work currently performed in
  London to Chicago-based, IAM-represented dispatchers;
 
    (vii) The IAM agreements will contain change of control provisions,
  successorship and code sharing restrictions similar to those provided to
  ALPA; and
 
    (viii)At least 80% of maintenance work must be performed by United and
  not be outsourced.
 
                                       55

<PAGE>
 
 No Strike Clauses
 
  The ALPA and the IAM revised Collective Bargaining Agreements will contain no
strike clauses, including a prohibition on sympathy strikes in support of other
unions, to be effective until the amendable dates of such agreements.
 
 Other Collective Bargaining Agreement Modifications
 
  Both the ALPA and IAM revised Collective Bargaining Agreements will be
subject to additional amendments, which do not have any material financial
effect, of a type made in the ordinary course of collective bargaining
negotiations.
 
  IAM-represented employees who lose, or have lost, employment with United as a
result of the sale of United flight kitchens to Dobbs and Caterair will receive
labor protective provisions benefits modeled after the Allegheny-Mohawk Labor
Protective Provisions previously utilized by the Civil Aeronautics Board.
 
INVESTMENT FOR SALARIED AND MANAGEMENT EMPLOYEES
 
  United will establish employment terms for the employees of United who
perform the functions currently performed by the management and salaried
employees of United (including any functions that such group of employees begin
performing in the future). The basic cost reduction package for United's U.S.
based Salaried and Management Employees will be in effect for a period of five
years, nine months following the Effective Time, except as noted below. The
components of the basic cost reduction package include pay reductions (base pay
reduced 8.25%, shift differentials redefined, overtime paid lunch eliminated,
four fixed holidays converted to floating holidays for operational employees),
changes in work-rules, sick leave policy and management relocation policy and a
one-time reduction in force of 127 management employees.
 
  The Company's United States Salaried and Management Employees may receive an
appropriate wage rate increase of not more than 5% beginning in the fourth year
(and, if applicable, the fifth year) following the Effective Time through a
program determined by management whose criteria are consistent with certain
specified standards that take into account (i) airline industry trends, (ii)
United's financial performance (including cumulative profitability over the
prior three years) and (iii) the wage rate levels for comparable employees of
American, Delta Air Lines, Inc., USAir and Northwest Airlines.
 
  Salaried employees hired February 1, 1994 and later will be hired in
accordance with a new hire pay and benefit compensation program. In addition,
no wage increase or wage raises, other than increases for legitimate promotions
from one job group to another job group, progression type increases and
increases resulting from the wage adjustment process outlined above, may be
given to Salaried and Management Employees during the basic investment period.
 
  Salaried and management per capita base payroll may not increase by more than
the percentage increase in the IAM per capita base payroll in any investment
year (excluding increases resulting from the mid-term wage adjustment process
for IAM-represented employees) or by 2% in any investment year (except 1.5% in
the fourth and fifth investment years), whichever is less. For the purposes of
the foregoing limitation, increases resulting from the wage adjustment process
outlined above may not be included.
 
  United will modify its United States personnel policies to provide that it is
United's intention to conduct its business so that any salaried employee whose
date of employment is before February 1, 1994 and who is affected when United
declares a surplus in his or her organization will not be laid off
involuntarily, and the Company will make every reasonable effort to offer
surplus employees an opportunity of continued employment in his or her current
work status (i.e., full- or part-time), although it may be in a different
classification and/or location within the United States. Surplus employees who
must relocate in order to continue employment will be eligible for relocation
assistance. These provisions do not apply in the case of an employee who is
discharged for cause or violation of Company rules, codes or articles of
conduct, or in
 
                                       56

<PAGE>
 
the case of surpluses that result from an act of nature, a labor dispute,
government action, revocation of operating certificate, war, unavailability of
fuel, or other circumstances beyond the control of the Company. These
provisions also do not apply to discharges of employees who are in a
probationary period and, unless amended, will not be in effect beyond the five
year period (five year and nine month period if the AFA does not participate)
following the Effective Time.
 
  See "SPECIAL FACTORS--Certain Risk Factors--Possible Effect of Organization
of Additional Employees" with respect to the possible impact of organization of
management and salaried employees.
 
REVISED GOVERNANCE STRUCTURE
 
  The information contained in this Proxy Statement/Prospectus with respect to
the revised governance structure of the Company is qualified in its entirety by
reference to the complete text of the Restated Certificate, a copy of which has
been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part and which is incorporated herein by reference,
and to the other agreements and documents referred to herein that are filed as
exhibits to the Registration Statement of which this Proxy Statement/Prospectus
is a part.
 
 Composition of the Board
 
  Following the consummation of the Recapitalization, subject to the rights of
holders of Series A Preferred Stock and the Public Preferred Stock to elect a
total of two directors in the event of certain dividend arrearages (the
"Preferred Stock Dividend Default Rights") and prior to the Sunset (as defined
below),the Board will consist of 12 directors, who will include (i) five Public
Directors (as defined below), (ii) four Independent Directors, (iii) two Union
Directors and (iv) one Salaried and Management Director (as defined below) (the
Union Directors and the Salaried and Management Director, collectively are
referred to as the "Employee Directors"). For information relating to the
initial nominees for election as Public Directors and certain other persons
chosen to serve as the other directors if the Recapitalization is consummated,
see "ELECTION OF DIRECTORS." Following the Sunset, subject to the Preferred
Stock Dividend Default Rights and the occurrence of either or both of the ALPA
Termination Date and the IAM Termination Date (both as defined below), the
Board will consist of 12 directors of whom nine will be elected by the holders
of the New Shares and three will be Employee Directors.
 
 Public Directors
 
  Until the Sunset, five directors, who are designated as Public Directors (the
"Public Directors") will be elected by holders of the New Shares and will
consist of (a) three individuals who are not and have never been an officer or
employee of, or a provider of professional services to, the Company or any of
its subsidiaries (the "Outside Public Directors") and (b) two substantially
full-time employees of the Company or any of its subsidiaries, one of whom, in
addition, to the fullest extent such additional qualification is permitted by
law, will be, at the time of election, the CEO, and the other of whom, in
addition, to the fullest extent such additional qualification is permitted by
law, will be a senior executive officer of the Company satisfactory to the CEO
(the "Management Public Directors"). Until the Sunset, at the expiration of the
term of each Outside Public Director and to fill vacancies, Outside Public
Directors will be nominated or appointed, as appropriate, by an "Outside Public
Director Nomination Committee" comprised of the Outside Public Directors. Any
amendment or modification of the rights, powers, privileges or qualifications
of the Outside Public Directors or the Outside Public Director Nomination
Committee will, in addition to the approval required by law or as described
below under the Restated Certificate, require the concurrence of all of the
Outside Public Directors or the affirmative vote of at least a majority in
voting power of the outstanding capital stock of the Company entitled to vote
thereon excluding shares held by the ESOP Trustee. In addition, until the
Sunset, Management Public Directors will be nominated or appointed, as
appropriate, by a majority vote of the entire Board.
 
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<PAGE>
 
  Mr. John F. McGillicuddy, Mr. James J. O'Connor and Mr. Paul E. Tierney, Jr.,
who are incumbent members of the Board, have been nominated to be the Outside
Public Directors, and Mr. Gerald M. Greenwald has been nominated to be the
Management Public Director. The second Management Public Director will be
identified prior to or at the Effective Time and will be appointed to the Board
at the Effective Time. For additional information on these individuals, see
"ELECTION OF DIRECTORS--Nominees for Election as Public Directors."
 
 Independent Directors
 
  The four directors designated as Independent Directors (the "Independent
Directors") will be elected by the holders of Class I Preferred Stock (as
defined below), who will be the Independent Directors. Each Independent
Director, upon becoming an Independent Director, acquires a share of Class I
Preferred Stock and becomes a party to the Class I Preferred Stockholders'
Agreement pursuant to which the stockholders will agree to vote their shares to
elect the Independent Directors nominated in accordance with the procedures set
forth below and to refrain from transferring their shares of Class I Preferred
Stock other than to a person who has been elected to serve as an Independent
Director and who agrees to be subject to the provisions of the Class I
Preferred Stockholders' Agreement.
 
  None of the Independent Directors may have, without the consent of both Union
Directors and all of the Public Directors, a current or prior material
affiliation or business relationship with the Company (other than an
affiliation that results from being a member of the Board) or be an officer,
director, trustee or official of any labor organization that serves as a
collective bargaining "representative" under the Railway Labor Act or the
National Labor Relations Act. In addition, generally, at least two of the four
Independent Directors at the time of their initial nomination or appointment to
the Board must (i) be a senior executive officer of a private or public company
with revenues in excess of $1 billion during such company's prior fiscal year
and/or (ii) be a member of the board of directors of at least one other public
company with a market capitalization in excess of $1 billion as of the date of
such company's most recent annual financial statements.
 
  The Independent Directors will be nominated or appointed, as appropriate, by
an "Independent Director Nomination Committee" consisting of the Independent
Directors and the Employee Directors. Approval of such nomination or
appointment requires a majority of the Independent Directors and the
concurrence of at least one Union Director.
 
  ALPA and the IAM have identified Mr. Duane D. Fitzgerald, Mr. Richard D.
McCormick, Mr. John K. Van de Kamp and Mr. Paul A. Volcker as the initial
Independent Directors and such identified persons have agreed to serve as the
Independent Directors. For additional information on these individuals, see
"ELECTION OF DIRECTORS--Other Directors."
 
 Employee Directors
 
  The three Employee Directors will be elected as follows: (i) one director
(the "ALPA Director") will be elected by the holder of the Class Pilot MEC
Junior Preferred Stock, which will be the ALPA-MEC, (ii) one director (the "IAM
Director" and, together with the ALPA Director, the "Union Directors") will be
elected by the holders of the Class IAM Junior Preferred Stock, which will be
the IAM or its designee, and (iii) one director will be elected by the holders
of the Class SAM Preferred Stock (as defined below), who will be the Salaried
and Management Director and an additional designated stockholder (the "SAM
Designated Stockholder"), each selected as described below, voting separately
as a class.
 
  The replacement Salaried and Management Director will be nominated by the
System Roundtable. The System Roundtable will establish a selection committee
of four employees to select the nominee for Salaried and Management Employee
Director from time to time. The SAM Designated Stockholder generally will be
the senior executive of United who has primary responsibility for human
resources. The Salaried and Management Director will acquire two shares of
Class SAM Preferred Stock, and the SAM Designated
 
                                       58

<PAGE>
 
Stockholder will acquire one share of Class SAM Preferred Stock upon becoming
the Salaried and Management Director and the SAM Designated Stockholder,
respectively, and each will become a party to the Class SAM Preferred
Stockholders' Agreement pursuant to which the stockholders will agree to vote
their shares to elect the Salaried and Management Director nominated by the
"System Roundtable" and to refrain from transferring the shares of Class SAM
Preferred Stock other than to a person who has been elected to serve as the
Salaried and Management Director or to the senior executive of United who has
primary responsibility for human resources and, in each case, who agrees to be
subject to the provisions of the Class SAM Preferred Stockholders' Agreement.
The System Roundtable is a body of Salaried and Management Employees empaneled
to review and discuss issues relating to the Company and their effect on
Salaried and Management Employees.
 
  Vacancies of Employee Directors may be filled only by the holder or holders
of the class of stock that elected such director.
 
  The System Roundtable has identified Joseph V. Vittoria as the initial
Salaried and Management Director. For additional information on Mr. Vittoria,
see "ELECTION OF DIRECTORS--Other Directors."
 
  The ALPA Director and the IAM Director have not been identified as of the
date of this Proxy Statement/Prospectus but will be identified prior to the
Effective Time.
 
 Quorum
 
  Until the Sunset, a quorum at a Board meeting will exist only if (a)
directors with at least a majority of the votes entitled to be cast by the
entire Board are present (i.e., seven votes) and (b) unless consented to by the
two Union Directors, if less than all votes are present, the number of votes
constituting a majority of the votes present is no greater than the sum of (i)
two plus (ii) the number of Independent Director votes present at the meeting.
For example, if three Independent Directors are present, the total number of
Directors present may not be more than nine in order for a quorum to be
present.
 
 Required Board Action
 
  Except as may be required by law or as set forth in the Restated Certificate
(including the matters described below under "--Revised Governance Structure--
Extraordinary Matters" or "--Special Voting Provisions with Respect to Purchase
and Sale of Common Stock"), approval of all Board action will require a
majority vote of the total number of director votes present at a meeting at
which a quorum is present. Until the Sunset, in the event of a vacancy of an
Independent Directorship, the remaining Independent Directors will as a group
continue to have four votes (divided equally among the remaining Independent
Directors). Until the Sunset, in the event of a vacancy on the Board of an
Employee Directorship or a Public Directorship, or in the event of a vacancy of
an Independent Directorship that immediately prior to the occurrence of such
vacancy was held by a member of a Board Committee of which only one Independent
Director was a member, then, subject to the fiduciary duties of the remaining
Directors or members of such Board Committee, as the case may be, then in
office, neither the Board nor such Board Committee may take any action (other
than to fill such vacancy) until after the earlier of (i) 20 days following the
occurrence of such vacancy and (ii) the time that such vacancy is filled in
accordance with the Restated Certificate.
 
 Term of Office; Resignation; Removal
 
  Each Director will hold office until the next annual meeting of stockholders
and until his or her successor is elected and qualified, subject to such
Director's earlier death, resignation or removal. In addition, the term of an
Outside Public Director or an Independent Director will automatically terminate
if such Director ceases to meet the qualifications of an Outside Public
Director or Independent Director, as the case may be. Any Director may resign
at any time upon written notice to the Company. Directors may not be removed
from office except (i) without cause, by the class of stockholders that elected
them, or (ii) "for cause" as determined under the DGCL.
 
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<PAGE>
 
 Selection of Management
 
  All decisions to hire or fire members of senior management will be taken by
the Board or pursuant to the authority typically delegated by it to the CEO.
Until the Sunset, hiring a new CEO will require the approval of a majority of
the Board following a recommendation by the Executive Committee, which will act
as the search committee. If, at the first meeting of stockholders following the
hiring of a new CEO (other than the initial CEO following the Effective Time),
such CEO is not elected to the Board as a Public Director by the stockholders
entitled to vote on such election, such CEO will be removed from office and a
successor CEO will be selected. Any successor CEO will be appointed to fill the
Public Directorship vacated by the predecessor CEO. Incumbent officers at the
Effective Time may not be terminated for a period of six months following the
Effective Time unless such termination is approved by two Outside Public
Directors and the CEO. As part of the Recapitalization, certain officers have
agreed to retire at or prior to the Effective Time. See "SPECIAL FACTORS--
Interests of Certain Persons in the Recapitalization."
 
 Stockholder Approval Matters
 
  Stockholder approval will not be a condition to any action of the Company
except as required by DGCL or as described below under "--Extraordinary
Matters" or "--Special Voting Provisions with Respect to Purchase and Sale of
Common Stock". Until the Sunset, except as otherwise required by law or by the
Restated Certificate, the presence in person or by proxy of the holders of
outstanding shares representing at least a majority of the total voting power
of all outstanding shares entitled to vote at a meeting of stockholders will
constitute a quorum at a meeting of stockholders.
 
 ESOP Voting
 
  Allocated shares held by the Qualified ESOP (as defined in "--Establishment
of ESOP--Leveraged ESOP") will be voted by participants, as named fiduciaries
under ERISA, on a confidential pass through basis. ALPA may, by a request that
must be made no later than April 15, 1994, require that the Company amend the
Qualified ESOP to provide that only participants who are employees are entitled
to vote allocated shares on a pass through basis. However, the Company is not
required to amend the Qualified ESOP in the requested manner if it is
determined that such an amendment would not be legally permissible. If the
amendment request would not be legally permissible, then the Company would be
obligated to cooperate with ALPA to attempt to limit pass through voting to
employees by a means other than an amendment to the Qualified ESOP. Unallocated
shares and allocated shares which were not voted by the participants in the
Qualified ESOP will be voted as described below by those ESOP participants who
are employees who choose so to direct State Street. State Street will (except
as may be required by law) vote the unallocated and otherwise unvoted shares in
the proportions directed by participants who give instructions to State Street
with respect to such shares; each participant who is an employee has the right
to give such directions to State Street in the proportion that the
participant's allocated shares bears to the allocated shares of all
participants giving such directions. Shares held by the Supplemental ESOP (as
defined in "--Establishment of ESOP--Non-Qualified ESOP") will be voted as
instructed by the administrative committee appointed under the Supplemental
ESOP. The Supplemental ESOP provides that it shall be amended at the request of
ALPA to provide for pass-through voting by participants. (See "--Establishment
of ESOP"). The foregoing provisions also govern instructions to be given to
State Street in the event of a tender offer (including a Control Transaction,
see "--Establishment of ESOP--Control Transaction").
 
 Extraordinary Matters
 
  Except as provided below, certain matters described below ("Extraordinary
Matters") generally will require, in addition to any voting requirements under
the DGCL, approval of at least either three-quarters of the Board (including
the concurrence of one Union Director) or three-quarters of the shares present
and voting at a stockholder meeting at which a quorum is present. In addition,
the vote of at least 66 2/3% of the outstanding voting stock that is not owned
by an "interested stockholder" will be required to approve a "business
combination" under the DGCL. Extraordinary Matters include:
 
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<PAGE>
 
    (a) Amendments to the Restated Certificate (other than certain technical
  amendments), substantive amendments to the Bylaws and mergers or
  consolidations of the Company or any of its subsidiaries or a sale, lease
  or exchange of all or substantially all of the assets of the Company or
  United involving a person that has been formed by or is an affiliate of one
  or more labor groups representing employees of the Company or any of its
  subsidiaries or a person determined by the Board to be a person in which a
  substantial group of employees of the Company or any of its subsidiaries,
  acting as an organized group, owns a majority ownership interest (a "Labor
  Affiliate") (the Extraordinary Matters described in this paragraph (a)
  require, in addition to the approvals described above, either (i) six
  affirmative votes cast by Directors who are not Employee Directors or (ii)
  the affirmative vote of the majority of the shares of capital stock not
  held by ESOPs);
 
    (b) Mergers or consolidations of the Company or any of its subsidiaries
  or a sale, lease or exchange of all or substantially all of the assets of
  the Company or United involving a person who is not a Labor Affiliate;
 
    (c) Dissolutions;
 
    (d) Entry into any new line of business outside the "airline business"
  (defined generally as the business of operating a domestic air carrier,
  together with any business or activities reasonably related to or in
  support of all of such operations engaged in by the Company or any
  subsidiary at or immediately prior to the Effective Time), or the making of
  any investment (in excess of five percent of the total assets of the
  Company and its subsidiaries on a consolidated basis outside the airline
  business;
 
    (e) The making of any domestic airline acquisition or any material
  investment in another airline including ordinary course investments in
  excess of one half of one percent of the total assets of the Company and
  its subsidiaries on a consolidated basis;
 
    (f) The adoption of any material amendment to the Rights Agreement or
  taking of any material actions, including the redemption of rights, under
  the Rights Agreement;
 
    (g) The sale, lease, exchange, surrender to or at the direction of a
  lessor, or other disposition (a "Disposition") by the Company or any of its
  Subsidiaries of assets for "Gross Proceeds" (defined to exclude taxes and
  sales costs) that, when added to the Gross Proceeds from (i) the
  Disposition of other such assets during the preceding 365 day period
  resulting in Gross Proceeds in excess of $5 million and (ii) the
  Disposition of other such assets during a recently completed preceding
  twelve calendar month period resulting in Gross Proceeds of $5 million or
  less, collectively exceeds $200 million; provided that (A) Gross Proceeds
  will not include Gross Proceeds from any transactions consummated prior to
  the Effective Time and (B) the $5 million set forth in clauses (i) and (ii)
  may be increased by action of the Board on an annual basis based on the
  affirmative vote of at least 75% of the votes entitled to be cast by the
  entire Board, which must include the concurrence of at least one Union
  Director; provided, further, that such approval will not be required for
  certain specified transactions (or count against the $200 million Gross
  Proceeds calculation above) including: (1) secured aircraft financings, (2)
  sale-leaseback and leveraged lease transactions, or sales or similar
  transfers of receivables, for financing purposes, (3) Dispositions of
  assets if replacement assets (consisting of assets of the same class as the
  assets being disposed of) generally have been ordered or acquired within
  the six calendar month period prior to such Dispositions of assets or so
  ordered or acquired within 365 days following the Disposition of assets for
  which no replacement assets had been previously acquired, (4) Disposition
  providing Gross Proceeds in an amount up to 10% of the book value (net of
  depreciation) of the Company's fixed assets at the time of the most recent
  quarterly financial statements of the Company if (A) Directors entitled to
  cast at least 75% of the votes entitled to be cast by the entire Board,
  including all of the Independent Directors, determine by resolution of the
  Board that such asset Disposition is necessary to (I) cure a default under
  material financing agreements binding upon the Company or any of its
  subsidiaries or any of their respective properties, or avoid a default
  thereunder that, absent such Disposition, would be reasonably likely to
  occur within 90 days or (II) remedy a material adverse development in the
  Company's business or condition, and (B) the Gross Proceeds of such asset
  Disposition are used to remedy the condition referred to in clause (A)
  (provided, that the exception afforded by this clause (4) will be available
  not
 
                                       61

<PAGE>
 
  more than once in any consecutive five-year period), (5) certain ordinary
  course Dispositions designed to allow the Company and its subsidiaries to
  continue many of their existing practices without significant restrictions
  that may involve Dispositions of assets, (6) Dispositions of assets (other
  than air frames, engines and related spare parts) if (A) made pursuant to a
  discrete asset management program that provides for the Disposition of not
  more than an aggregate of $25 million of assets and (B) such discrete asset
  management program is approved annually by either the Board or the
  stockholders as an Extraordinary Matter in accordance with the voting
  thresholds outlined above and (7) Dispositions of assets that individually,
  or when aggregated with other assets in the same or related Dispositions,
  are not in excess of a de minimis amount, either with respect to periods
  prior to December 31, 1994 or pursuant to a distinct asset management
  program approved in accordance with the procedures set forth in clause (6)
  above; and
 
    (h) Approval of the issuance of equity or equity equivalent securities
  (including convertible debt, but excluding non-voting, non-convertible
  preferred stock the issuance of which will be permitted without limit) (a
  "Non-Dilutive Issuance"); provided that such issuance shall not constitute
  an Extraordinary Matter if any of the following occur: (A) (I) three
  quarters of the votes entitled to be cast by the entire Board, including
  all the Independent Directors, determine that such issuance is in the best
  interests of the Company, (II) such issuance is subject to the First
  Refusal Agreement (described below under "DESCRIPTION OF SECURITIES--The
  Common Stock, the Series A Preferred Stock and the Junior Participating
  Preferred Stock--Common Stock--Right of First Refusal") and (III) if such
  issuance occurs during the 365-day period commencing on the Effective Time,
  the Board by the affirmative vote of a majority of the votes entitled to be
  cast by the Directors present at a meeting of the Board at which a quorum
  is present, which vote must include the affirmative votes of both Union
  Directors, approves an equitable adjustment to the conversion rate
  applicable to the conversion of the ESOP Preferred Stock into New Shares,
  (B) three-quarters of votes entitled to be cast by the entire Board,
  including all the Independent Directors, determines (I) that the Company is
  bankrupt (or, absent a material positive change in the Company's results of
  operations over the immediately succeeding 90 days from the results
  contained in the Company's regularly prepared projections, that the Company
  will become bankrupt within 90 days), which determination is confirmed by
  written opinions of two nationally recognized investment banking firms that
  further opine (giving effect to the facts and circumstances applicable to
  the Company, including discussions with prospective equity investors) that
  the sale of equity securities is necessary to avoid or remedy such
  insolvency (the "Bankruptcy Opinions") and (II) that, after giving effect
  to the proposed issuance of additional equity securities (the "Permitted
  Bankruptcy Equity"), the Company would no longer be or not become
  "insolvent" in the time frame referred to in the Bankruptcy Opinions (the
  "Solvency Determination") and such issuance of Permitted Bankruptcy Equity
  satisfies the following three conditions: (X) such issuance does not exceed
  the amount determined by the Board to be reasonably necessary to allow the
  Board to make the Solvency Determination, (Y) a binding commitment for the
  sale of such Permitted Bankruptcy Equity is entered into within 90 days of
  the delivery of the Bankruptcy Opinions and (Z) the terms of the First
  Refusal Agreement have been complied with in all material respects by the
  Company, or (C) such issuance is pursuant to (I) the exercise, conversion
  or exchange of equity securities outstanding immediately prior to the
  Effective Time, (II) the Company's 1981 Stock Program, 1988 Restricted
  Stock Plan or Incentive Plan, each as amended in accordance with the Plan
  of Recapitalization, (III) the Director Incentive Plan or (IV) any other
  equity incentive compensation plan approved by the affirmative vote of
  three quarters of the votes entitled to be cast by the entire Board,
  including all the Independent Directors.
 
 Special Voting Provisions with Respect to Purchase and Sale of Common Stock
 
  Until the Sunset, any purchases of New Shares by the Company (other than to
fulfill its obligations to issue or retain New Shares in connection with the
exercise of employee options issued pursuant to employee benefit plans or to
retain New Shares in connection with tax withholding obligations in connection
with the exercise of employee options or restricted stock), or any sale by the
Company of any New Shares to a
 
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<PAGE>
 
Company sponsored pension, retirement or other employee benefit plan for the
account of employees (other than pursuant to the First Refusal Agreement or in
connection with the creation and operation of the ESOPs to which the ESOP
Preferred Stock is issued), whether for cash or non-cash consideration,
including, without limitation, concessions, must be approved by a majority of
the Board, including at least 80% of the votes of the Public Directors.
 
 Rights Plan
 
  The Rights Agreement between the Company and First Chicago Trust Company of
New York, dated as of December 11, 1986, as amended (the "Rights Agreement"),
which currently contains a "flip-in" trigger for the acquisition of 15% or more
of the Old Shares, will be amended to provide that the transactions
contemplated by the Recapitalization Agreement will not result in the Rights
(as defined in the Rights Agreement) being triggered. In addition, effective
immediately prior to the Effective Time, the Rights Agreement will be amended
to provide that the ESOP Preferred Stock will have the same number of attached
Rights associated as would be attached to the same number of New Shares to
which the ESOP Preferred Stock will be convertible.
 
 Nondilution
 
  As described under "DESCRIPTION OF SECURITIES--The Voting Preferred Stock--
Voting Rights," at the Effective Time, the holders of Voting Preferred Stock
will vote as a single class with the New Shares and will represent
approximately 53% of the votes to be cast on matters submitted to the vote of
the New Shares and Voting Preferred Stock (other than the election of
Directors) and such matters for which a vote by separate class is required
under the DGCL. The number of votes represented by such Voting Preferred Stock
is subject to increase at the first anniversary of the Effective Time based on
the market price of the New Shares during the first year following the
Effective Time as described in "--Establishment of ESOP--Additional Shares"
(the "Equity Adjustment"). The Voting Preferred Stock will generally continue
to represent approximately 53% of the aggregate voting power of the New Shares
and the Voting Preferred Stock, as adjusted in accordance with the Equity
Adjustment, until the Sunset.
 
  The "Sunset" will occur when (i) the New Shares issuable upon conversion of
the outstanding, ESOP Preferred Stock, plus (ii) any Common Equity held in the
ESOPs, in any other employee benefit plans sponsored by the Company or any of
its subsidiaries for the benefit of its employees, represent, in the aggregate,
less than 20% of the "Common Equity" of the Company. Common Equity is defined
as, in the aggregate, the New Shares outstanding at the time in question and
the New Shares issuable upon conversion of the ESOP Preferred Stock outstanding
at the time in question, together with the New Shares represented by the
Permitted Bankruptcy Equity outstanding at the time in question, if any, but
excluding any equity or equity equivalent securities (other than Permitted
Bankruptcy Equity) issued in connection with a Non-Dilutive Issuance,
including, without limitation, any equity or equity equivalent securities
outstanding immediately prior to the Effective Time that were not included in
the calculation of the Fully Diluted Old Shares as set forth and defined in "--
Terms and Conditions--General."
 
  If the Sunset occurs, the Company will file a restated certificate of
incorporation providing for more customary corporate governance provisions, the
number of Directors will remain at twelve (of which three will be Employee
Directors), the Outside Public Director Nomination Committee will nominate the
Board's nominees for election of directors (other than the Employee Directors)
to be elected by the stockholders at a meeting which will be held promptly
thereafter and upon the effectiveness of such election the term of the then
incumbent Directors will terminate, and there will be no special director or
voting rights, except that (a) the ALPA Director will be elected by the holder
of the Class Pilot MEC Preferred Stock until there are no longer any persons
represented by ALPA (or any successor organization) employed by the Company or
any affiliate (the "ALPA Termination Date"), the IAM Director will be elected
by the holder of the Class IAM Preferred Stock until there are no longer any
persons represented by the IAM (or any successor organization) employed by the
Company or any affiliate (the "IAM Termination Date") and the Salaried
 
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<PAGE>
 
and Management Director will be elected by the holders of the Class SAM
Preferred Stock until the earlier of the ALPA Termination Date and the IAM
Termination Date, each voting separately in a class, and (b) the Union
Directors would continue to serve on Committees as provided below.
 
  Under current actuarial assumptions, the Company estimates that the Sunset
will occur in the year 2016 if no additional purchases were made by eligible
employee trusts and retirement plans. However, employees have the right to, and
may be expected to, make additional purchases through such trusts and plans
that will have the effect of delaying the Sunset. In certain circumstances
described under "DESCRIPTION OF SECURITIES--The Director Preferred Stock--
Unrestricted Trustee Action," the Sunset may not occur until 2010 even though
the conditions for the Sunset have occurred.
 
 Committees
 
  The Restated Certificate provides that until the Sunset the following
committees will constitute the Board Committees: the Audit Committee, the
Competitive Action Plan ("CAP") Committee, the Compensation Committee, the
Compensation Administration Committee, the Executive Committee, the Independent
Director Nomination Committee, the Labor Committee, the Outside Public Director
Nomination Committee and the Transaction Committee (collectively, the
"Committees"). In addition, the Board may, by resolution passed by the
affirmative vote of 80% of the votes of the entire Board, including the
affirmative vote of at least one Union Director, designate one or more other
committees of the Board. Except as provided below, any act of a Committee will
require the affirmative vote of a majority of the votes entitled to be cast by
the Directors present at a meeting of such Committee and entitled to vote on
the matter in question. The Restated Certificate contains certain provisions
relating to the required quorum for committee action.
 
  The Audit Committee will consist of the four Independent Directors and the
three Outside Public Directors or such fewer number of such Directors (in as
nearly as practicable that same proportion of Independent Directors and Outside
Public Directors) as shall qualify for audit committee membership under
applicable rules of the securities exchanges or other similar trading market on
which the New Shares are traded. The Audit Committee will be primarily
concerned with (i) reviewing the professional services and independence of the
Company's independent auditors and the scope of the annual external audit as
recommended by the independent auditors, (ii) ensuring that the scope of the
annual external audit is sufficiently comprehensive, (iii) reviewing, in
consultation with the independent auditors and the internal auditors, the plan
and results of the annual external audit, the adequacy of the Company's
internal control systems and the results of the Company's internal audits, and
(iv) reviewing, with management and the independent auditors, the Company's
annual financial statements, financial reporting practices and the results of
each external audit. The Audit Committee will also have the authority to
consider the qualifications of the Company's independent auditors, to make
recommendations to the Board as to their selection and to review and resolve
disputes between such independent auditors and management relating to the
preparation of the annual financial statements.
 
  The CAP Committee will consist of eight Directors, including four Public
Directors, two Independent Directors and the two Union Directors. Of the four
Public Directors, three will be Outside Public Directors and one shall be the
CEO (if the CEO is a Public Director). The two Independent Director members
shall be appointed by the Independent Director Nomination Committee which
appointment will require the affirmative vote of all of the votes entitled to
be cast by the Independent Directors. The function of the CAP Committee will be
to oversee implementation of the Company's Competitive Action Plan. The CAP
Committee will have the exclusive authority, acting for and on behalf of the
Board and consistent with the protection of the interests of the holders of New
Shares, to approve on behalf of the Company any and all modifications of or
amendments to the Competitive Action Plan. However, to the extent such
modifications or amendments relate to changes to any provision of the revised
Collective Bargaining Agreements with the IAM and ALPA, the two Union Directors
on the CAP Committee will neither be entitled to vote nor be counted in
determining the presence of a quorum of such committee in connection therewith.
 
                                       64

<PAGE>
 
Notwithstanding the foregoing, only the Labor Committee may approve on behalf
of the Company any such changes to such Collective Bargaining Agreements. In
addition, the CAP Committee will have the exclusive authority, acting for and
on behalf of the Board, to approve on behalf of the Company any and all
modifications of or amendments to the salaried and management employee
investment described in "--Investment for Management and Salaried Employees".
Such modifications or amendments must be approved by the affirmative vote of at
least a majority of the votes of the entire CAP Committee, including at least
two Union Directors and all of the Outside Public Directors.
 
  The Compensation Committee will consist of seven Directors, including two
Independent Directors, two Public Directors and the three Employee Directors.
Of the two Public Directors, one will be an Outside Public Director appointed
by the Outside Public Director Nomination Committee, and one will be the CEO
(if the CEO is a Public Director). The two Independent Directors members will
be appointed by the unanimous approval of the Independent Director Nomination
Committee. The principal functions of the Compensation Committee will be to
review and recommend to the Board the compensation and benefit arrangements to
be established for the officers of the Company and to review general policy
matters relating to compensation and benefit arrangements of non-union
employees of the Company. The Compensation Committee will also administer the
stock option plans and executive compensation programs of the Company,
including bonus and incentive plans applicable to officers and key employees of
the Company. Subject to the final approval of the Compensation Committee
(except as described in the following paragraph) the Compensation Committee may
delegate to the Compensation Administration Committee specific responsibilities
with respect to the compensation of the CEO.
 
  The Compensation Administration Committee will consist of two Independent
Directors and one Outside Public Director, each of whom will be (a) a
"disinterested person" or "disinterested administrator" or any related
successor concept under Rule 16b-3 (or any successor provision) promulgated
pursuant to Section 16 of the Exchange Act and (b) an "outside director" or any
related successor concept under Section 162(m) (or any successor provision) of
the Code. The Outside Public Director will be appointed by the Outside Public
Director Nomination Committee. The two Independent Directors will be appointed
by the Independent Director Nomination Committee, which appointment shall
require the affirmative vote of all the Independent Directors. The principal
function of the Compensation Administration Committee will be to administer the
stock option plans and executive compensation programs of the Company to the
extent such functions cannot or are not appropriate to be performed by the
Compensation Committee in light of any provision of the Internal Revenue Code,
the securities laws, any other applicable law or any regulations promulgated
under any of the foregoing. Any action of the Compensation Administration
Committee must also be approved by the Compensation Committee, unless such
approval would prevent a stock option plan that is intended to qualify under
Rule 16b-3 (or any successor provision) from receiving the benefits of Rule
16b-3 or such approval would prevent an executive compensation program (on a
component thereof) that is intended to qualify for an exception under Section
162(m) (or any successor provision) from qualifying for such exception.
 
  The Executive Committee will be comprised of two Independent Directors, two
Public Directors (the CEO, if the CEO is a Public Director, and one Outside
Public Director) and two Union Directors. Subject to DGCL, the Executive
Committee will have all the powers of the Board to manage the affairs of the
Company except that it would not have the authority to act with respect to any
of the "Extraordinary Matters" discussed above, to take any action as to
matters specifically vested in other Committees or take any action that may be
taken by the Board only with a vote greater than or additional to a majority of
the Board.
 
  The Labor Committee will consist of three or more Directors, including one
Outside Public Director, at least one Independent Director and at least one
other Director, as designated by the Board, but will not include any Employee
Directors. The Labor Committee will have the exclusive authority on behalf of
the Board to approve on behalf of the Company the entering of, or any
modification or amendment to, a collective bargaining agreement to which the
Company or any of its subsidiaries is a party.
 
                                       65

<PAGE>
 
  The Transaction Committee will consist of seven Directors, consisting of the
four Independent Directors and the three Outside Public Directors. The function
of the Transaction Committee will be to evaluate and advise the Board with
respect to any proposed merger or consolidation of the Company or any of its
Subsidiaries with or into, the sale, lease or exchange of all or substantially
all of the Company's or any of its Subsidiaries' property or assets to, or a
significant business transaction with any Labor Affiliate.
 
 Amendment and Restatement of the Bylaws
 
  Pursuant to the Plan of Recapitalization the Company's Bylaws will be amended
and restated (the "Restated Bylaws"). The Restated Bylaws provide that until
the "Sunset" many matters will be governed by the Restated Certificate
including, among others: (i) quorum requirements at any meeting of the
stockholders, the Board or any Board Committee; (ii) number, composition and
term of office of directors; (iii) removal of Directors; (iv) filling of
vacancies on the Board and on Board Committees; (v) designation of Board
Committees; (vi) the composition, function and powers of the Executive
Committee; (vii) the appointment, term of office, filling of vacancies and
removal of officers of the Company; and (viii) any substantive amendment to the
Restated Bylaws. Furthermore, the Restated Bylaws provide that, subject to
certain exceptions, following the "Sunset" many provisions of the existing
Bylaws of the Company will be reinstated.
 
  In addition, the Restated Bylaws provide, among other things, for other
changes to the existing Bylaws including, but not limited to the following: (i)
the ability, until the "Sunset", of any two directors, the CEO or the secretary
of the Company to call a special meeting of the Board; (ii) until the "Sunset",
subject to the fiduciary obligations of the directors, the CEO will be elected
as one of the Management Public Directors; (iii) the term of the CEO (other
than Mr. Greenwald as the initial CEO) will automatically terminate if he is
not elected as Management Public Director by the stockholders at the first
meeting of stockholders for the election of directors at which he is eligible
for nomination as a Management Public Director; and (iv) until the "Sunset",
non-substantive amendments to the Restated Bylaws will be adopted either by a
majority vote of the entire Board or by 75% in the voting power of the stock
entitled to vote at a stockholder meeting in which a quorum is present. In
addition, the Restated Bylaws contain other procedural sections, some of which
operate only until the "Sunset" and some of which become operative only after
the "Sunset".
 
TERMS AND CONDITIONS
 
 General
 
  The Plan of Recapitalization provides for the reclassification of the Old
Shares and other amendments to the Company's Certificate of Incorporation and
Bylaws. Immediately prior to the Effective Time each outstanding Old Share,
including each share of restricted stock issued pursuant to the UAL 1988
Restricted Stock Plan (which will vest upon the Effective Time if not vested
prior thereto), together with up to 1,000,000 Old Shares held by the Company as
treasury stock or owned by any wholly-owned subsidiary of the Company
immediately prior to the Effective Time will, without any further action on the
part of the holder thereof, be reclassified as, and converted into, (i) one
half (0.5) of a New Share, (ii) $31.10 liquidation value of the Public
Preferred Stock and (iii) one one-thousandth of a share of the Redeemable
Preferred Stock, which will be immediately redeemed after issuance for $25.80
in cash, $15.55 principal amount of Series A Debentures and $15.55 principal
amount of Series B Debentures (collectively, the "Recapitalization
Consideration"). The New Shares to be issued in the Recapitalization will
represent an equity interest (based on the "Fully Diluted Old Shares" described
below and taking into account the 0.5 common stock exchange ratio) immediately
after the Recapitalization of 47% of one Old Share's current percentage equity
interest. Such equity interest is subject to adjustment as described below
under "--Establishment of ESOP--Additional Shares."
 
  Fully Diluted Old Shares were calculated as follows: the sum of (i) Old
Shares outstanding (net of unvested restricted shares), (ii) unvested
restricted shares, (iii) net options shares issued assuming the treasury stock
method of accounting (pursuant to which the deemed proceeds to the Company from
the deemed exercise of in-the-money options are applied to repurchase shares
for the treasury at an assumed market price
 
                                       66

<PAGE>
 
per Old Share of $173) and (iv) shares issuable upon conversion of the Series A
Preferred Stock. Due to their high conversion premium, the Air Wis Services,
Inc. 7 3/4% Convertible Subordinated Debentures Due 2010 and Air Wis Services,
Inc. 8 1/2% Convertible Subordinated Notes Due 1995 were not assumed to be
converted and were not included in the calculation of Fully Diluted Old Shares.
The number of Fully Diluted Old Shares, as shown below, is fixed for purposes
of the Plan of Recapitalization and the issuance of shares of ESOP Preferred
Stock to the ESOPs although the actual number of Old Shares that are
reclassified pursuant to the Recapitalization may change due to vesting of
restricted stock and the exercise of options:
 

<TABLE>
     <S>                                                              <C>
     Old Shares (net)................................................ 24,450,896
     Unvested restricted shares......................................    119,643
     Option shares (net).............................................    521,780
     New Shares upon Conversion of Series A Preferred Stock..........  3,833,866
                                                                      ----------
     Fully Diluted Old Shares........................................ 28,926,185
                                                                      ----------
</TABLE>

 
  To the extent necessary to implement the intended terms of the Public
Preferred Stock in accordance with the Restated Certificate, the Company may
issue fewer shares of Public Preferred Stock (each with a proportionately
greater liquidation value) to a depositary on behalf of holders of depository
receipts for depositary shares. In such case, each such depositary share would
represent an interest in a fractional share of Public Preferred Stock that
would have a liquidation value of $25 and the Company would issue depositary
shares only in denominations that represent $25 of liquidation value of the
Public Preferred Stock or integral multiples thereof.
 
 Effective Time
 
  The Recapitalization, the Stock Issuance, the amendments to the 1981 Stock
Program, the 1988 Restricted Stock Plan and the Incentive Plan and the revised
Collective Bargaining Agreements with ALPA and the IAM will become effective at
such time as the Restated Certificate, which provides for the reclassification
of the Old Shares, is duly filed with the Secretary of State of the State of
Delaware or at such later time as may be mutually agreed upon by the Company
and each of ALPA and the IAM and as is specified in the Restated Certificate
(the "Effective Time"). The filing of the Restated Certificate is currently
anticipated to be made as promptly as practicable after the Meeting. Such
filing shall be made, however, only upon satisfaction or, where permissible,
waiver of all conditions contained in the Plan of Recapitalization and provided
that the Plan of Recapitalization has not been terminated. See "--Terms and
Conditions" and "--Termination."
 
 Payment for Shares
 
  As soon as practicable after the Effective Time, the Company will send or
cause First Chicago Trust Company of New York (the "Exchange Agent") to send
and otherwise make available a letter of transmittal to each record holder of
Old Shares as of the Effective Time to be used to transmit a certificate or
certificates that immediately prior to the Effective Time represented Old
Shares (an "Old Certificate" or "Old Certificates") to the Exchange Agent. Such
letter of transmittal will advise the holder of the effectiveness of the
Recapitalization and the procedures for surrendering to the Exchange Agent the
Old Certificate or Certificates for exchange into Recapitalization
Consideration and will specify that the delivery will be effected and the risk
of loss and title will pass, only upon proper delivery of the Old Certificate
or Certificates to the Exchange Agent. Stockholders should surrender the Old
Certificate or Certificates only together with a letter of transmittal.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY
CARD.
 
  Each holder of Old Shares that have been converted into the right to receive
the Recapitalization Consideration, upon surrender to the Exchange Agent of the
Old Certificate or Certificates together with a properly completed letter of
transmittal, will be entitled to receive the Recapitalization Consideration for
each Old Share formerly represented by such Old Certificate. Until so
surrendered, each Old Certificate will, after
 
                                       67

<PAGE>
 
the Effective Time, represent for all purposes only the right to receive such
Recapitalization Consideration. If any payment of the Recapitalization
Consideration is to be made to a person other than the registered holder of the
Old Shares, the Old Certificates so surrendered must be properly endorsed or
otherwise be in proper form for transfer, and any applicable transfer or other
taxes must have been paid to the Exchange Agent by the person requesting such
payment or such person must have established to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
 
  In the event any Old Certificate is lost, stolen or destroyed, based on an
affidavit to that fact by the person claiming such Old Certificate to be lost,
stolen or destroyed, the Company will issue in exchange for such lost, stolen
or destroyed Old Certificate the Recapitalization Consideration deliverable in
respect thereof. When authorizing such issue of the Recapitalization
Consideration in exchange therefor, the Company may, in its discretion and as a
condition precedent to the issuance thereof, require the person claiming
ownership of such lost, stolen or destroyed Old Certificates to give the
Company a bond in such sum as it may direct, or otherwise indemnify the Company
in a manner satisfactory to it, against any claim that may be made against the
Company with respect to the Old Certificates alleged to have been lost, stolen
or destroyed.
 
  After the Effective Time, there will be no further registration of transfers
of Old Shares. If, after the Effective Time, Old Certificates representing Old
Shares are presented to the Company or its transfer agent, such Old
Certificates will be cancelled and exchanged for the Recapitalization
Consideration.
 
  Fractional New Shares, fractional shares of Public Preferred Stock including
depositary shares (based on $25 of liquidation value per whole share) and
fractional Debentures (based on $100 principle amount per whole Debenture) will
not be issued as part of the Recapitalization and such fractional interests
will not entitle the beneficial or record owner thereof to any rights of a
stockholder or creditor of the Company. In lieu of any fractional New Shares,
fractional shares of Public Preferred Stock and fractional Debentures to which
a former holder of Old Shares otherwise would be entitled, such holder will be
entitled to receive from the Exchange Agent a cash payment based on pro-rata
distribution of the proceeds received by the Exchange Agent from the sale of
the aggregate fractional New Shares, fractional shares of Public Preferred
Stock and fractional Debentures. Such cash payments will be made to each such
holder of Old Shares only upon proper surrender of such holder's Old
Certificates formerly representing Old Shares, together with a properly
completed and duly executed transmittal letter and any other required
documents.
 
  All Recapitalization Consideration, including cash in lieu of fractional
interests, if not claimed at the first anniversary of the Effective Time, will
be transferred by the Exchange Agent to the Company, after which time persons
entitled thereto may look, subject to applicable escheat and other similar
laws, only to the Company for payment thereof. No interest will be paid or
accrued on any portion of the Recapitalization Consideration. No dividends or
other distributions declared or made after the Effective Time with respect to
New Shares with a record date after the Effective Time will be paid to the
holder of any unsurrendered Old Certificate or Certificates with respect to the
Recapitalization Consideration that such holder is entitled to receive until
the holder of such Old Certificate or Certificates has properly surrendered the
same.
 
 Stock Options
 
  Upon consummation of the Recapitalization, each outstanding employee stock
option of the Company granted under any employee stock option or compensation
plan or arrangement of the Company will remain outstanding, each such option
then held by employees or former employees of the Company, whether or not then
vested or exercisable immediately prior to the Effective Time, if provided by
the terms thereof (or if accelerated in accordance with the relevant plan) will
become fully vested and exercisable and after the Effective Time each option
will thereafter represent the right to receive, in exchange for the aggregate
exercise price for such option, the Recapitalization Consideration with respect
to each Old Share that such holder would have been entitled to receive had such
holder been vested in such option and exercised such option in full immediately
prior to the Effective Time.
 
                                       68

<PAGE>
 
 Convertible Company Securities
 
  Each share of Series A Preferred Stock and each of the Air Wis Services, Inc.
7 3/4% Convertible Subordinated Debentures Due 2010 and the Air Wis Services,
Inc. 8 1/2% Convertible Subordinated Notes Due 1995 (collectively, the
"Convertible Company Securities") outstanding immediately prior to the
Effective Time will remain outstanding, and each holder of any such Convertible
Company Security will have the right to receive the Recapitalization
Consideration with respect to each Old Share that such holder would have been
entitled to receive had such holder converted such Convertible Company Security
in full immediately prior to the Effective Time.
 
 Treasury Shares
 
  Pursuant to the Plan of Recapitalization, each Old Share held by the Company
as treasury stock or owned by any wholly-owned subsidiary of the Company
immediately prior to the Effective Time (the "Treasury Shares"), up to a
maximum of 1,000,000 Treasury Shares (the "Retained Treasury Shares") will be
reclassified and converted into the Recapitalization Consideration with all
Treasury Shares in excess of 1,000,000 being surrendered for cancellation
immediately prior to the Effective Time and no payment shall be made with
respect thereto. Immediately following the Effective Time, the Company and each
of its wholly owned subsidiaries will surrender for cancellation the Public
Preferred Stock and Public Redeemable Preferred Stock received upon
reclassification of the Retained Treasury Shares and no payment will be made in
respect thereof.
 
 Pricing the Securities
 
  Under the Plan of Recapitalization, the interest rate on the Series A
Debentures has been fixed provisionally at 9.00%, the interest rate on the
Series B Debentures has been fixed provisionally at 9.70% and the dividend rate
on the Public Preferred Stock has been fixed provisionally at 10.25% (the
"Initial Pricing"). On the Trading Day immediately preceding the Announcement
Date (as defined below), CS First Boston (in consultation with Lazard) on
behalf of the Company and Keilin & Bloom (or such other investment banking firm
as may be reasonably selected by the Unions) on behalf of the Unions (the
"Primary Banking Firms") will seek to mutually determine the interest or
dividend rate that each of the Debentures and the Public Preferred Stock should
bear in order to trade at par as of the close of business, New York time, on
the last day on which the NYSE is open for business ("Trading Day") immediately
preceding the Announcement Date, assuming that the Debentures or the Public
Preferred Stock were fully distributed on such Trading Day. If the Primary
Banking Firms are unable to agree on the applicable rate of the Public
Preferred Stock and the Debentures (the "Applicable Rates") with respect to a
specified security, then (i) Salomon Brothers Inc, or such other firm as agreed
in writing by the Primary Banking Firms (the "Deadlock Firm"), will render its
opinion, on the Trading Day immediately preceding the Announcement Date, as to
the Applicable Rate with respect to such securities, and (ii) the Applicable
Rate with respect to such Specified Security or Securities will be the average
of the two closest rates specified in the opinions of the Primary Banking Firms
and the Deadlock Firm, rounded to the nearest one one-hundredth of a percent,
provided, however, that, in no event shall the Applicable Rate with respect to
the Debentures or the Public Preferred Stock exceed the 10.125% in the case of
the Series A Debentures, 10.825% in the case of the Series B Debenture and
11.375% in the case of the Public Preferred Stock. On the Announcement Date,
the Company will issue a press release setting forth the adjusted rate for the
Debentures and the Public Preferred Stock. "Announcement Date" means a Trading
Day that will be not fewer than five calendar days nor more than ten calendar
days preceding the date of the Meeting, such date to be disclosed to the Unions
not fewer than fifteen calendar days prior thereto.
 
  The provisional rates of interest that the Debentures will bear and the
maximum rates of interest that they may bear upon adjustment are based upon the
assumption that the Debentures will not be callable prior to their respective
stated maturities. The Plan of Recapitalization provides that the Unions may
request, a reasonable period of time prior to the Announcement Date, that
either or both of the series of Debentures
 
                                       69

<PAGE>
 
may be callable pursuant to redemption provisions to be established for each of
the Debentures. If so requested, the Primary Banking Firms will establish the
incremental increase in pricing resulting from the addition of the call feature
on either or both of the series of Debentures, as the case may be, above the
Applicable Rate, with any disagreement to be resolved with the assistance of
the Deadlock Firm. The Coalition may withdraw the request for a call feature at
any time up to the issuance of the press release on the Announcement Date.
 
 Record and Payment Dates
 
  The quarterly record dates (and corresponding dividend payment dates) for the
payment of dividends on the Public Preferred Stock will be the same as the
quarterly record dates (and corresponding dividend payment dates) for the
payment of dividends on the Series A Preferred Stock. The semi-annual record
dates (and corresponding interest payment dates) for the payment of interest on
the Debentures will be the same as two of the quarterly record dates (and
corresponding dividend payment dates) for the payment of dividends on the
Series A Preferred Stock.
 
 Representations and Warranties
 
  The Plan of Recapitalization contains various customary representations and
warranties relating to, among other things, (a) on the part of the Company, as
to, (i) organization and similar corporate matters, (ii) authorization,
execution, delivery, performance and enforceability of the Plan of
Recapitalization and related matters, (iii) capital structure, (iv)
subsidiaries, (v) documents filed by the Company with the Commission and the
accuracy of information contained therein, (vi) absence of material changes
with respect to the business of the Company since December 31, 1993, (vii)
generally, subject to certain exceptions, compliance with the "status quo"
provisions of the Agreement in Principle which are substantially similar to the
provisions of the first paragraph under "--Terms and Conditions--Certain
Covenants" during the period from December 22, 1993 until March 25, 1994 and
(viii) the opinion of financial advisors as to the fairness of the
Recapitalization Consideration, and (b) on the part of each of the Unions, as
to, (i) organization and similar matters and (ii) authorization, execution,
delivery, performance and enforceability of the Plan of Recapitalization.
 
 Certain Covenants
 
  Pursuant to the Plan of Recapitalization, the Company agreed that during the
period from the date of the Plan of Recapitalization until the Effective Time,
the Company and its subsidiaries will be subject to certain restrictions on
their conduct and will generally only take actions in the ordinary course of
business consistent with past practice; in particular, the Company and its
subsidiaries may not, among other things, without the prior written consent of
the Unions, subject to certain agreed upon exceptions: (i) issue, sell, dispose
of, pledge or otherwise encumber any equity securities of the Company or any
subsidiary (or securities exercisable into or for such securities), (ii)
reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire
any securities of the Company, (iii) declare or pay any dividend or
distribution on the Old Shares, (iv) increase the compensation of any of its
directors, officers or key employees, or increase its expenses relating to
employee benefits, (v) incur any material amount of long-term indebtedness,
make any material loans, advances or capital contributions to any other person,
mortgage or pledge any of its material assets or (vi) enter into any agreement
or arrangement to do any of the foregoing. The Company also agreed, among other
things, subject to certain exceptions until the Effective Time (i) not to take
any actions that would violate or be inconsistent with the job protection
provisions of the collective bargaining agreements with each of the Unions,
(ii) not to take any action relating to certain matters requiring supermajority
votes under the Restated Certificate (as discussed above under "--Governance
Provisions--Extraordinary Matters") and (iii) not to alter or amend the Board's
resolutions or any of its policies, practices, procedures or employee benefit
plans in any manner that would adversely affect the right or ability of the
employees of the Company or United to purchase equity securities of the
Company. The Company has agreed to restore certain severance benefits to former
employees of United who have been terminated as a result of the sale of
United's flight
 
                                       70

<PAGE>
 
kitchens to Dobbs or Caterair. These severance benefits had been in effect from
December 22, 1993, upon execution of the Agreement in Principle, until March
15, 1994, when the "status quo" provision of the Agreement in Principle
terminated.
 
  In addition to the covenants described above, the Company agreed to take
actions that will facilitate the implementation of the Plan of
Recapitalization. In particular, the Company agreed, among other things, (i)
subject to receipt of updated fairness opinions from CS First Boston and
Lazard, to convene a meeting of stockholders to approve each of the
Recapitalization, the Restated Certificate, the election of the initial Public
Directors to the Board of Directors of the Company and the issuance of the ESOP
Preferred Stock as part of the Recapitalization (the "Shareholder Vote
Matters"), the approval of each such matter will be conditioned on approval of
all such matters, and amendments to the Company's 1981 Incentive Stock Plan and
1988 Restricted Stock Plan and Incentive Compensation Plan (the "Company Plan
Matters"), in connection with which the Company agreed to prepare, file with
the Commission and mail to its stockholders this Proxy Statement, (ii) to
provide each of ALPA and the IAM and their agents with reasonable access to
offices, employees, properties, books and records of the Company and its
Subsidiaries in connection with the Plan of Recapitalization and the
transactions contemplated thereby, (iii) subject to certain exceptions, not to
encourage, solicit, participate in or initiate discussions or negotiations
with, or provide any information to, any other person concerning any merger,
sale of assets, sale of, or tender or exchange offer for, shares of capital
stock or similar transaction, involving a change of control of the Company or
all or substantially all of the assets of the Company (an "Acquisition"), (iv)
to provide each of ALPA and the IAM with notices of certain significant events,
(v) to amend the directed account plans, 401(k) plans and stock purchase plan
maintained by the Company and United (a) to permit employees of the Company and
United following the Effective Time to acquire, in addition to amounts held in
the ESOPs, the following securities: (X) up to the lesser of (1) 30% of the
outstanding New Shares held by persons other than the ESOPs and (2) 20% of the
aggregate number of outstanding New Shares and New Shares issuable upon
conversion of the ESOP Preferred Stock and (Y) except with respect to the
Company's stock purchase plan, up to (1) 20% of the outstanding shares of
Public Preferred Stock, (2) 20% of the outstanding principal amount of Series A
Debentures and (3) 20% of the outstanding principal amount of Series B
Debentures, subject to the following additional limits: (A) no employee group
of the Company or its subsidiaries may individually acquire more than 10% of
any class of securities referred to in clause (X) and (Y) above through such
plans, (B) in the case of the directed account plans, no "Employee Group"
(defined as each of ALPA, the IAM and the salaried and management employees)
may individually acquire more than 2% of any such class of securities in any
monthly subscription period through such plans, (C) no Employee Group may
individually acquire more than 2% of the outstanding New Shares held by persons
other than the ESOPs (in addition to New Shares received in the
Recapitalization) through such plans during the six-month period beginning at
the Effective Time and (D) no New Shares may be acquired through such plans
during the six-month period ending on the last day of the Measuring Period and
(b) to prohibit employees of the Company and United from acquiring any Old
Shares pursuant to the directed account plans, the 401(k) plans and the stock
purchase plans from April 19, 1994 until the earlier of the Effective Time and
the termination of the Plan of Recapitalization in accordance with its terms,
(vi) to cause United to execute and deliver new collective bargaining
agreements or amendments to existing collective bargaining agreements with each
of ALPA and the IAM and to establish and cause United to establish appropriate
employment terms for the employees of the Company and United who perform the
functions currently performed by the salaried and management employees of the
Company and United, (vii) to retain an appraisal firm to provide an opinion in
writing as to whether the Company would have sufficient surplus under the DGCL
to permit the consummation of the Recapitalization (the "Solvency Letter") and
that if the appraisal firm concludes that sufficient surplus is so available,
the Board will take all lawful and appropriate action to revalue the Company's
assets and liabilities to permit consummation of the Recapitalization and
(viii) to execute at the Effective Time the Greenwald Agreement and to perform
all of its obligations under such agreement and to execute and deliver prior to
the Effective Time all the documents and agreements required to be executed and
delivered by the Company pursuant to the Plan of Recapitalization including
documents and agreements relating to the Debentures, the purchase of stock by
the ESOPs, the establishment of the ESOP Trusts, the retention and conduct of
the
 
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Exchange Agent, the subscription agreements relating to the various classes of
stock to be issued as part of the Recapitalization, the amendment to the Rights
Agreement, the Class I Stockholders' Agreement and the Class SAM Stockholders'
Agreement (collectively, the "Closing Agreements").
 
  Pursuant to the Plan of Recapitalization, each of ALPA and the IAM agreed,
among other things, (i) prior to the Effective Time and after any termination
of the Plan of Recapitalization to hold confidential information received from
the Company and its subsidiaries in confidence, (ii) to execute and deliver
prior to the Effective Time the relevant Collective Bargaining Agreement
between each Union and the Company, (iii) not to nominate or cause to be
nominated any Outside Public Director and (iv) to use their best efforts to
cause any Independent Director vacancy to be filled.
 
  Pursuant to the Plan of Recapitalization, each of ALPA and the IAM and the
Company mutually agreed, among other things, (i) to use their best efforts to
consummate the Plan of Recapitalization and (ii) to cooperate in connection
with preparation and filing of documents with any governmental agency or
authority. In addition, if the AFA will agree to provide, in the sole judgment
of the Company, an investment equal to $416 million (present value in January
1994 dollars), then the parties, should an agreement be reached on all aspects
of the AFA's participation (e.g., governance), will revise all applicable
documents to reduce the investment period for ALPA, the IAM and the salaried
and management employees by nine months and to distribute 12.62 percentage
points of the ESOP Preferred Stock to the AFA on the following basis: 5.83
percentage points of the ALPA stock, 4.69 percentage points of the IAM stock,
and 2.10 percentage points of the salaried and management employee stock.
 
 Conditions
 
  Pursuant to the Plan of Recapitalization, the obligation of the Company to
file the Restated Certificate at the Effective Time and the obligations of each
of the Unions to enter into the revised Collective Bargaining Agreements at the
Effective Time are subject to the satisfaction of the following conditions,
among others: (i) the Shareholder Vote Matters have been approved and adopted
by the stockholders of the Company in accordance with the Certificate of
Incorporation and Bylaws of the Company and in accordance with the DGCL, (ii)
any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 relating to the Recapitalization has expired or
terminated, (iii) the Registration Statement has become effective under the
Securities Act and is not the subject of any stop order or governmental
proceedings seeking a stop order, (iv) all material actions by or in respect of
or filings with any governmental body, agency, official, or authority required
to permit the consummation of the Recapitalization have been obtained, (v) the
New Shares issuable as part of the Recapitalization (including New Shares
issuable upon conversion of the ESOP Preferred Stock and upon conversion of the
Convertible Company Securities) have been authorized for listing on the NYSE
subject to official notice of issuance, (vi) there has been no change in the
DGCL enacted or any applicable decision of a court of competent jurisdiction
decided after the date of the Plan of Recapitalization and prior to the
Effective Time that would cause the Restated Certificate or Restated Bylaws to
fail to comply in any material respect with the applicable provisions of the
DGCL, (vii) the ESOP Trustee has received the written opinion of Houlihan
Lokey, to the effect that, as of the Effective Time, the acquisition of the
ESOP Preferred Stock by the ESOPs is fair, from a financial point of view, to
the ESOP participants, (viii) the Board has received an updated Solvency Letter
and (ix) (A) there has not been instituted or pending any action, proceeding,
application, claim, or counterclaim by any United States Federal, state or
local government or governmental authority or agency, including the Department
of Transportation, before any court or governmental regulatory or
administrative agency, authority or tribunal, that (a) restrains or prohibits
or is reasonably likely to restrain or prohibit the making or consummation of,
or is reasonably likely to recover material damages or other relief as a result
of, the Recapitalization, or the receipt by holders of the Old Shares of the
full amount of the Recapitalization Consideration, or restrains or prohibits or
is reasonably likely to restrain or prohibit the performance of, or is
reasonably likely to recover material damages or other relief as a result of,
the Plan of Recapitalization or any of the transactions contemplated thereby or
(b) prohibits or limits or seeks to prohibit or limit the ownership or
operation by either Union, the ESOP Trustee, any of the
 
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<PAGE>
 
ESOPs or any participant therein of all or any substantial portion of the
capital stock, business or assets of the Company or any of its subsidiaries or
compels or seeks to compel either Union, the ESOP Trustee, any of the ESOPs or
any participant therein to dispose of or hold separate all or any substantial
portion of the capital stock, business or assets of the Company or any of its
subsidiaries or imposes or seeks to impose any material limitation on the
ability of either Union, the ESOP Trustee, any of the ESOPs or any participant
therein, to conduct such business or own such assets, (B) there has not been
instituted or be pending any action, proceeding, application, claim or
counterclaim by any other person, before any such body, that is reasonably
likely to result in any of the consequences referred to in clauses (A)(x) or
(A)(y) above, and (C) there has not been any United States Federal, state or
local statute, rule, regulation, decree, order or injunction promulgated,
enacted, entered, or enforced by any United States Federal, state or local
government agency or authority or court, that has any of the effects referred
to in clauses (A)(x) or (A)(y) above, (x) all conditions to the obligations of
the parties to the Closing Agreements to consummate such transactions have been
satisfied or are capable of being satisfied concurrently upon the occurrence of
the Effective Time, (xi) the Closing Agreements will be legal, valid and
binding agreements of the Company and the other parties thereto from and after
the Effective Time, enforceable against the Company and such other parties in
accordance with their term and (xii) Mr. Greenwald (or such other person as
will be proposed by the Unions prior to the Effective Time and not found
unacceptable by the Company) will be ready, willing and able to assume the
office of CEO of the Company and United, or such other person as will be
proposed by the Unions prior to the Effective Time and not found unacceptable
by the Company will be ready, willing and able to assume the office of CEO of
the Company.
 
  Pursuant to the Plan of Recapitalization, the obligations of each of the
Unions to enter into the relevant revised Collective Bargaining Agreements at
the Effective Time are subject to the satisfaction of the following further
conditions, among others: (i) the Company will perform, both individually and
collectively, in all material respects all of its covenants, agreements or
other obligations required to be performed by it under the Plan of
Recapitalization at the times specified and (ii) the representations and
warranties of the Company set forth in the Plan of Recapitalization will be
true and correct, both individually and collectively, in all material respects
at and as of the Effective Time as if made at and as of such time.
 
  Pursuant to the Plan of Recapitalization, the obligation of the Company to
file the Restated Certificate at the Effective Time is subject to the
satisfaction of the following further conditions, among others: (i) each Union
will perform, both individually and collectively, in all material respects, all
of its covenants, agreements or other obligations required to be performed by
it, under the Plan of Recapitalization, at or prior to the Effective Time, (ii)
the representations and warranties of ALPA and the IAM set forth in the Plan of
Recapitalization will be true and correct, both individually and collectively,
in all material respects, at and as of the Effective Time as if made at and as
of such time, (iii) the Board will receive the written opinions of each of CS
First Boston and Lazard, each dated as of the Announcement Date, confirming
their earlier opinions, to the effect that the consideration to be received by
the holders of Old Shares in the Recapitalization taken as a whole is fair from
a financial point of view to the holders of Old Shares, (iv) the revised
Collective Bargaining Agreements have been executed and delivered by ALPA and
the IAM and will be in full force and effect as of the Effective Time, (v) the
Board will receive the written opinions of Skadden, Arps, Slate, Meagher & Flom
relating to the issuance of stock, the ability to revalue surplus under the
DGCL, the absence of violation of certain applicable laws resulting from the
issuance of the ESOP Preferred Stock, the tax treatment to the Company
resulting from the Recapitalization and the deductibility of contributions made
to and dividends paid to the ESOP following the Effective Time and (vi) the
Company will determine that it is reasonably likely to have sufficient earnings
and profits such that, based on the opinion of counsel described in clause (v)
above, the dividends paid on the Class 1 ESOP Preferred Stock that are used to
repay the debt evidenced by a note to be delivered in connection with the
purchase of the ESOP Preferred Stock are reasonably likely to be deductible
under Section 404 of the Internal Revenue Code and (vii) the Company will
determine that the Company will be reasonably likely to have sufficient surplus
(whether revaluation surplus or earned surplus) or net profits under the DGCL
to permit the legal payment of dividends on the ESOP Preferred Stock and the
Public Preferred Stock when due.
 
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<PAGE>
 
 Termination
 
  The Plan of Recapitalization will terminate and the Recapitalization will be
abandoned (notwithstanding any approval of the Shareholder Vote Matters by the
stockholders of the Company) if the Effective Time does not occur by 11:59 p.m.
on August 31, 1994 (the "Outside Termination Time"). In addition, the Plan of
Recapitalization may be terminated and the Recapitalization may be abandoned at
any time prior to the Outside Termination Time and prior to the Effective Time
(notwithstanding any approval of the Shareholder Vote Matters by the
stockholders of the Company) (a) by mutual written consent of each of ALPA and
the IAM and the Company, (b) by either of ALPA and the IAM or the Company if
(i) the stockholders of the Company do not approve the Shareholder Vote Matters
at the Meeting or (ii) any court of competent jurisdiction in the United States
or other United States Federal, state or local governmental body issues an
order, decree or ruling or take any other action restraining, enjoining or
otherwise prohibiting the Recapitalization and such order, decree, ruling or
other action will become final and nonappealable, (c) by either ALPA and the
IAM if (i) the Board withdraws or modifies in a manner materially adverse to
such Union its approval or recommendation of the Recapitalization, or the
Shareholder Vote Matters or recommends, or fails to recommend against, another
Acquisition, (ii) the Board resolves to do any of the foregoing, (iii) the
Company breaches, either individually or collectively, in any material respect
any of its material representations, warranties, covenants or other agreements
contained in the Plan of Recapitalization, (iv) any person acquires "beneficial
ownership" (as defined in the Rights Agreement) or the right to acquire
beneficial ownership of, or any "group" (as such term is defined in Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder)
is formed that beneficially owns, or has the right to acquire beneficial
ownership of, more than 15% of the then outstanding Old Shares, or becomes an
"Acquiring Person" under the Rights Agreement or (v) there occurs a "Share
Acquisition Date" or "Distribution Date" as defined under the Rights Agreement
or (d) by the Company if (i) either ALPA or the IAM breaches, either
individually or collectively, in any material respect, any of their material
representations, warranties, covenants or other agreements contained in the
Plan of Recapitalization or (ii) the Board withdraws or modifies in a manner
adverse to either ALPA or the IAM its approval or recommendation of the
Recapitalization or recommends another Acquisition, or resolves to do any of
the foregoing.
 
  Pursuant to the Plan of Recapitalization, if the Effective Time does not
occur on or before August 12, 1994, the Company may, by written notice to each
of the Unions, terminate its "status quo" obligations described in the first
paragraph of "--Terms and Conditions--Certain Covenants," provided that the
Company's right to so terminate its obligations will not be available in the
event the Company's failure to fulfill any obligation under the Plan of
Recapitalization has been the cause of or resulted in the failure of the
Effective Time to occur on or before such date. In addition, in the event the
Company elects to terminate its obligations in accordance with the preceding
sentence, either of the Unions may terminate the Plan of Recapitalization.
 
  If the Plan of Recapitalization is terminated and abandoned as described in
the two preceding paragraphs, the Plan of Recapitalization, subject to certain
exceptions, will become void and of no effect with no liability on the part of
the Company or either of ALPA or the IAM. However, if the failure of the
Effective Time to occur at or prior to the Outside Termination Time results
from either (i) a material breach of a specific material representation or
warranty contained in the Plan of Recapitalization by one of the parties
thereto under circumstances where the breaching party had actual knowledge at
the date of the Plan of Recapitalization that such representation or warranty
was materially false or misleading or (ii) a material breach of a specific
material covenant (a breach described in clause (i) or (ii) as modified by
proviso (A) hereto, being called a "Willful Breach") and one of the other
parties thereto has established, as determined by a court of competent
jurisdiction, that such Willful Breach has occurred, the breaching party will
be liable to the other parties thereto, for proximate and provable damages
resulting from such Willful Breach (which shall include the reasonable fees and
expenses of such non-breaching parties, including reasonable attorney's fees
and expenses, incurred in connection with the transactions contemplated thereby
other than in connection with any litigation or other dispute between or among
parties thereto); provided (A) to the extent that the material breach of a
specific material covenant is not determinable solely by an objective fact
(e.g.
 
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<PAGE>
 
any best efforts obligation or requirement of reasonableness) such breach will
be actionable thereunder only if the breaching party knew (or demonstrated
reckless disregard for whether) its action or failure to act was in violation
of such covenant and (B) such calculation of damages will not include
consequential or punitive damages and will be the sole and exclusive remedy of
the non-breaching parties in the event of a Willful Breach. With respect to a
Willful Breach, "knowledge" (or any corollary thereof) or "reckless disregard"
will mean the knowledge or reckless disregard of the senior executives or
officials of the Company and United or the Unions, as the case may be, each of
whom will conclusively be deemed to have read the Plan of Recapitalization.
 
 Survival
 
  The representations and warranties and agreements contained in the Plan of
Recapitalization and in any certificate or other writing delivered pursuant
thereto will not survive the Effective Time unless expressly provided in such
agreement. The following agreements will survive the Effective Time: agreements
relating to Recapitalization of Old Shares, redemption of the Redeemable
Preferred Stock, surrender and exchange of the Old Shares, issuance of ESOP
Preferred Stock, treatment of Options, treatment of Convertible Company
Securities, resignation of existing directors and officers of the Company,
amendment to the Restated Certificate of Incorporation of United, restrictions
on the ability of the employees of the Company or United to purchase equity
securities of the Company, amendments to directed account plans, 401(k) plans
and stock purchase plans of the Company or United, employment terms of the
salaried and management employees, the employment of Greenwald and the Closing
Agreements, employee and director benefit plans, agreements, policies and
arrangements of the Company or United, prohibition against nominations of
Public Directors by the Unions, best efforts by the Unions to fill Independent
Director vacancies, certain matters relating to fees and expenses; and certain
agreements relating to indemnification (all such surviving agreements being
referred to herein as the "Express Agreements"). Except with respect to any
Collective Bargaining Agreement with the IAM and ALPA and the Express
Agreements, from and after the consummation of each of the transactions
contemplated to take place at or about the Effective Time, each of the parties
to the Plan of Recapitalization (in their capacities as such) will have fully
released, discharged, waived and renounced (collectively, the "Releases") any
and all claims, controversies, demands, rights, disputes and causes of action
it may have had at or prior to the Effective Time against, and will have agreed
not to initiate any suit, action or other proceeding involving, each of the
other parties thereto, its officials, officers, directors, employees,
accountants, counsel, consultants, advisors and agents and, if applicable,
security holders relating to or arising out of the Plan of Recapitalization or
the transactions contemplated thereby. However, the foregoing Releases do not
apply to any claims, controversies, demands, rights, disputes and causes of
action arising from and after the Effective Time (and based on facts and
circumstances arising from and after the Effective Time) under any of the
documents, instruments or transactions entered into, filed or effected in
connection with the Recapitalization (other than the Plan of Recapitalization,
to the extent provided in this paragraph).
 
 Amendments; No Waivers
 
  The Plan of Recapitalization provides that (a) any provision of the Plan of
Recapitalization may be amended or waived prior to the Effective Time if such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company and each Union or, in the case of a waiver, by the party against
whom the waiver is to be effective; provided that no amendment to or waiver of
an Express Agreement will be effective against a person entitled to enforce
such Express Agreement unless agreed to in writing by such person, and
provided, further, that after the adoption of the Shareholder Vote Matters by
the stockholders of the Company, no such amendment or waiver will, without the
further approval of such stockholders if and to the extent such approval is
required by the DGCL, alter or change (i) the amount or kind of consideration
to be received in connection with the Recapitalization, (ii) any term of the
Restated Certificate or (iii) any of the terms or conditions of the Plan of
Recapitalization if such alteration or change would materially adversely affect
the holders of any shares of capital stock of the Company, and (b) no failure
or delay by any party in exercising any right, power or privilege under the
Plan of Recapitalization will operate as a waiver thereof
 
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<PAGE>
 
nor will any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies provided in the Plan of Recapitalization will be cumulative
and, except as set forth in the Plan of Recapitalization, not exclusive of any
rights or remedies provided by law.
 
 Fees and Expenses; Indemnification
 
  Pursuant to the Plan of Recapitalization, except as agreed by the Company and
the Unions in writing or as set forth below, all fees, costs and expenses
incurred in connection with the Plan of Recapitalization will be paid by the
party incurring such fee, cost or expense. The Company and the Unions agreed
that the fees, costs and expenses of the Deadlock Firm and the Solvency Firm
will be paid by the Company. The Company and the Unions agreed that the fees of
the Company's principal financial and legal advisors to be incurred by the
Company in connection with the transactions contemplated by the Plan of
Recapitalization, will not exceed $25 million. In addition, the Company has
agreed to pay the following fees: (i) up to $4.15 million in fees and expenses
payable to counsel, investment banking firms, experts, consultants or others
relating to the structuring and establishment of the ESOPs or otherwise
benefitting the Company as part of the Recapitalization, (ii) out-of-pocket
expenses and fees paid, payable or reimbursable to others by or pursuant to
agreements with and among either or both of the Unions (the "Coalition Fees"),
subject to the following: (A) prior to the Effective Time, the Company shall
pay up to $7 million to or at the direction of ALPA and up to $3 million to or
at the direction of the IAM in respect of Coalition Fees, which will represent
payment for bona fide services directly related to the transactions
contemplated by the Plan of Recapitalization since January 1, 1993 and will not
exceed the aggregate time or other customary charges together with disbursement
costs of such firms since such date for services of this type and (B) at the
Effective Time the Company will pay the balance of the Coalition Fees, subject
to an overall limit of $45 million (including the amounts set forth in clause
(A)), of which $31.5 million is to be paid to or at the direction of ALPA and
$13.5 million is to be paid to or at the direction of the IAM and (iii) the
fees of an executive search firm and related executive expenses, in the event
the Company and the Unions determine to retain an executive search firm.
 
  The Plan of Recapitalization provides that upon the occurrence of a
Triggering Event (as defined below), the Company will promptly pay to or at the
direction of the Unions any amounts the Company would otherwise have been
required to pay pursuant to the last sentence of the previous paragraph had the
Effective Time occurred at the time of the occurrence of such Triggering Event.
Such amounts would be exclusive of any amounts paid or payable pursuant to
indemnification or contribution arrangements. "Triggering Event" means the
occurrence of any of the following: (i)(A) following the public announcement of
a proposal for an Acquisition, either the stockholders of the Company do not
approve the Shareholder Vote Matters at the Meeting or (B) the Board withdraws
or modifies in a manner materially adverse to ALPA and the IAM its approval or
recommendation of the Recapitalization or the Shareholder Vote Matters or
recommends, or fails to recommend against, another Acquisition, (ii) subsequent
to the stockholder or Board action referred to in clause (i) above, the Plan of
Recapitalization will be terminated (1) by the Company or either Union because
the Stockholders of the Company fails to approve the Shareholder Vote Matters,
(2) by the Company because the Board withdraws or modifies in a manner adverse
to either Union its approval or recommendation of the Recapitalization or
recommends another Acquisition or resolves to do any of the foregoing or (3) by
either Union if the Board withdraws or modifies in a manner materially adverse
to such Union its approval or recommendation of the Plan of Recapitalization or
the Shareholder Vote Matters, or fails to recommend against another acquisition
and (iii) within 12 months of the termination of the Plan of Recapitalization
in accordance with clause (ii) above, an Acquisition is consummated.
 
  Pursuant to the Plan of Recapitalization, the Company agreed, subject to
certain exceptions, to indemnify the Unions, their controlling persons, and
their respective directors, trustees, officers, partners, affiliates, agents,
representatives, advisors and employees (a "Union Indemnified Person") against
and hold each Union Indemnified Person harmless from any and all liabilities,
losses, claims, damages, actions,
 
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<PAGE>
 
proceedings, investigations or threats thereof, including expenses (which will
include reasonable attorneys' fees, disbursements and other charges) incurred
in connection with the defense thereof, based upon, relating to or arising out
of the execution, delivery or performance of the Plan of Recapitalization or
the transactions contemplated thereby. All rights to indemnification existing
in favor of the present or former directors, officers, employees, fiduciaries
and agents of the Company or any of its subsidiaries (collectively, the
"Company Indemnified Persons") as provided in the Company's Restated
Certificate of Incorporation or Bylaws or other agreements or arrangements, or
articles of incorporation or by-laws (or similar documents) or other agreements
or arrangements of any subsidiary as in effect as of the date of the Plan of
Recapitalization with respect to matters occurring at or prior to the Effective
Time will survive the Effective Time and will continue in full force and
effect. In addition, the Company will provide for a period of not less than six
years following the Effective Time, for directors' and officers' liability
insurance for the benefit of directors and officers of the Company immediately
prior to the Effective Time with respect to matters occurring at or prior to
the Effective Time by electing, in its sole discretion, one of the two
alternatives set forth below (which election will be reported to the Unions
prior to the Effective Time): (i) maintain for a period of not less than six
years following the Effective Time, the current policies of directors' and
officers' liability insurance with respect to matters occurring at or prior to
the Effective Time, provided that in satisfying its obligation under this
clause (i), the Company will not be obligated to pay premiums in excess of 150%
of the amount per annum the Company paid for the policy year ending during
calendar year 1994, which amount has been disclosed to the Unions or (ii)
purchase, prior to the Effective Time, run-off coverage for the benefit of
directors and officers of the Company immediately prior to the Effective Time
for matters occurring at or prior to the Effective Time, which coverage will
provide for a separate insurance pool for such directors and officers of at
least $75 million in coverage, provided that in satisfying the obligations
under this clause (ii), the Company will not pay in excess of an amount set
forth in a letter previously delivered by the Company to counsel to the Unions.
The Company will also maintain for a period of not less than six years
following the Effective Time, the current fiduciaries' liability insurance with
respect to matters occurring at or prior to the Effective Time.
 
  In connection with execution of the Plan of Recapitalization, the Company
entered into a letter agreement (the "Indemnity Letter Agreement") with ALPA
and the IAM relating to a claim against the IAM by a former financial advisor
(the "Former Advisor") against the IAM (the "Claims") for compensation in the
event of the occurrence of the Effective Time. The Claims include to the
following: (i) the Former Advisor's claim for compensation based on an
engagement letter between a corporation on behalf of the Former Advisor, on the
one hand, and the IAM and United Employees Acquisition Corp. ("UEAC"), on the
other hand, dated as of January 1, 1990, as amended by letter dated June 21,
1990 (collectively the "Engagement Letter"), (ii) claims relating to services
performed by the Former Advisor pursuant to the Engagement Letter, and (iii)
claims based on any theory of compensation liability relating to facts alleged
to have existed at the time the Engagement Letter was entered into (or
subsequent performance of services originating from or based on such alleged
facts) and relating to services of the same nature and type as contemplated by
the Engagement Letter. The Engagement Letter provided for the payment to the
Former Advisor of a fee in the amount of $11 million, contingent upon the
occurrence of specified circumstances related to the Agreement and Plan of
Merger, between the Company and UEAC, dated as of April 9, 1990 ("1990 Merger
Agreement"), which $11 million fee was not paid as a result of a failure of the
transactions set forth in the 1990 Merger Agreement to occur.
 
  Pursuant to the Indemnity Letter Agreement, the Company has agreed to
indemnify the IAM against the Claims in accordance with the indemnification
provisions set forth in the Plan of Recapitalization described above, subject
to the terms and conditions set forth in the Indemnity Letter Agreement. The
Company's obligation to indemnify the IAM with respect to the Claims is limited
to $5.5 million prior to the Effective Time, subject to increase to a maximum
of $11 million (including the payment or reimbursement of IAM attorney's fees
and disbursements) if the Effective Time occurs. The Company's obligations
under the Indemnity Letter Agreement will be reduced by the amount recoverable
under any insurance policy, fidelity or indemnity bond issued to or for the
benefit of the IAM that may provide insurance or indemnity coverage against any
threatened or asserted claim by the Former Advisor against the IAM.
 
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<PAGE>
 
 Parties in Interest
 
  The Plan of Recapitalization will be binding upon and, other than the
provisions relating to fees, expenses and indemnification, inure solely to the
benefit of the parties thereto, and, except for the Express Agreements, nothing
in the Plan of Recapitalization, express or implied, is intended to confer upon
any other person any rights, benefits or remedies. With respect to the Express
Agreements, the agreements set forth below are for the benefit of, and may be
enforced by, the following parties: (i) the right to receive the
Recapitalization Consideration, the prohibition against nomination of Public
Directors by ALPA and the IAM and their obligation to use their best efforts to
fill Independent Directors vacancies: the holders of New Shares; (ii) treatment
of Options: holders of Options; (iii) treatment of Convertible Company
Securities: holders of Company Convertible Securities; (iv) resignation of
existing officers and directors prior to the Effective Time and the Company's
and United's obligations under their employee and director benefit plans,
agreements, policies and arrangements: officers and directors of the Company
prior to the Effective Time; (v) establishment by the Company appropriate
employment terms for the salaried and management employees: the ESOP Trustee;
the Greenwald Agreement: Mr. Greenwald; (vii) payment of fees and expenses and
indemnification of the Union Indemnified Persons: the Union Indemnified
Persons; and (viii) indemnification of Company Indemnified Persons: Company
Indemnified Persons.
 
 Specific Performance
 
  Prior to the Effective Time or the termination of the Plan of
Recapitalization, the Company and each of the Unions agreed that in the event a
Willful Breach is established by a court of competent jurisdiction, the other
parties thereto will be entitled to specific performance of the terms thereof
that were the subject of such Willful Breach. However, in no event will such
remedy of specific performance in any way extend or modify the Outside
Termination Time. No other remedy will be available prior to the Effective Time
or the termination of the Plan of Recapitalization except that the remedy of
damages will be available if such remedy (including the amount of damages)
would be available after termination as described under "--Terms and
Conditions--Termination."
 
ESTABLISHMENT OF ESOPS
 
 General
 
  As described above under "--Terms and Conditions," preferred stock
representing approximately 53% of the voting and equity interests in the
Company will be delivered to employees through the ESOPs. Trusts established
pursuant to the ESOPs will, as of the Effective Time, acquire non-voting
preferred stock (the "ESOP Preferred Stock") convertible into New Shares
representing (initially) approximately 53% of the Company, on a fully-diluted
basis. (ALPA has the right to elect, prior to April 15, 1994, that certain
shares which would have been purchased as of the Effective Time will instead be
contributed by the Company over the 69-month period following the Effective
Time.) As of the Effective Time, there will also be issued to the ESOP Trustee
shares of three classes of voting preferred stock (the "Voting Preferred
Stock") the outstanding shares of which will represent (initially)
approximately 53% of the voting power of all of the voting stock of the
Company. The ESOP Preferred Stock and Voting Preferred Stock held by the ESOP
will be allocated to the accounts of employees over the 69-month (72-month for
IAM members) period following the Effective Time. Under certain circumstances
described under "--Additional Shares," the equity and voting interests
represented by the ESOP Preferred Stock and the Voting Preferred Stock can be
increased, up to a maximum of 63%.
 
  Generally speaking, New Shares will be distributed to an employee pursuant to
the ESOPs after termination of employment; the New Shares so distributed will
be issued upon conversion of the ESOP Preferred Stock and Voting Preferred
Stock allocated to accounts of such employee in the ESOPs. Prior to the Sunset,
the percentage of the vote controlled by the shares of Voting Preferred Stock
held by the ESOP is initially unaffected by distributions to employees. See "--
Revised Goverance Structure--Sunset" and
 
                                       78

<PAGE>
 
"DESCRIPTION OF SECURITIES--The Voting Preferred Stock--Voting Rights." Because
of certain limitations imposed by the Internal Revenue Code, there are several
ESOPs.
 
  State Street, with the consent of the participating unions, has been retained
to act as the ESOP Trustee. The ESOP Trustee retained Houlihan Lokey as an
independent financial adviser. The ESOP Trustee has entered into an agreement
to purchase the ESOP Preferred Stock at the Effective Time on the terms
described below. See "--Establishment of ESOP--Initial Sale of ESOP Convertible
Preferred Stock." The obligations of the ESOP Trustee are subject to a number
of conditions, including the receipt of an opinion from Houlihan, Lokey that,
as of the Effective Time, the transaction is fair from a financial point of
view to the ESOP participants, the amount to be paid by the ESOP Trustee for
the ESOP Preferred Stock does not exceed the fair market value thereof and the
conversion of the ESOP Preferred Stock is reasonable. In addition, the
obligations of the ESOP Trustee are subject to the determination by the ESOP
Trustee that, as of the Effective Time, the purchase of the ESOP Preferred
Stock is prudent and in the best interests of ESOP participants.
 
 Initial Sale of ESOP Convertible Preferred Stock
 
  At the Effective Time, the Company will sell an aggregate of 16,307,814
shares of Class 1 ESOP Preferred Stock and Class 2 ESOP Preferred Stock to two
trusts established pursuant to the ESOPs.
 
  Leveraged ESOP. Employee benefits consulting firms representing the Company
and ALPA will mutually agree on a number of shares of Class 1 ESOP Preferred
Stock (as defined below) to be sold as of the Effective Time to a trust (the
"Qualified Trust") established under a tax-qualified employee stock ownership
plan (the "Qualified ESOP"). Such shares will be sold to the leveraged portion
(the "Leveraged ESOP") of the Qualified ESOP. The number of such shares sold
will be no fewer than 11,160,000 and no more than 13,640,000; the number of
shares sold will be the highest number possible consistent with certain
limitations of the Internal Revenue Code, and is expected to be approximately
12,500,000. The Qualified Trust will purchase the Class 1 ESOP Preferred Stock
with a combination of cash and a promissory note at the Effective Time. The
cash will be equal to the aggregate par value of the Class 1 ESOP Preferred
Stock ($.01 per share) sold to the Qualified Trust. (The Company will
contribute such cash as a tax-deductible contribution to the Leveraged ESOP at
the Effective Time.) The balance of the purchase price will be paid by a
promissory note issued to the Company by the ESOP Trustee in its capacity as
trustee of the Qualified Trust.
 
  The ESOP Trustee is obligated to purchase the ESOP Preferred Stock for $210
per share if either (i) the New Shares trade on a when-issued basis during the
three consecutive trading days prior to the Effective time at an Average
Closing Price (as defined below) of at least $130 per share, or (ii) if the New
Shares do not trade on a when-issued basis, then the Average Closing Price of
the Old Shares over such three days must be at least $153 per share.
Furthermore, the Company is obligated to sell the ESOP Preferred Stock at $210
per share if either (i) the New Shares trade on a when-issued basis over such
three days at an Average Closing Price not in excess of $156, or (ii) if the
New Shares do not trade on a when-issued basis, the Average Closing Price of
the Old Shares over such three day period does not exceed $166. If the Company
or the ESOP Trustee is not obligated to consummate the sale of the ESOP
Preferred Stock at $210 per share, then it is expected that the Company and the
ESOP Trustee will negotiate to establish an appropriate price.
 
  The shares of Class 1 ESOP Preferred Stock purchased by the Qualified Trust
under the Leveraged ESOP will initially be held in a suspense account and not
allocated to the account of employees. The Company will retain a security
interest in the shares held in the suspense account. The promissory note will
be repaid by the ESOP Trustee using cash received from dividends paid on the
Class 1 ESOP Preferred Stock and contributions to the Qualified Trust to be
made by the Company; the ESOP Trustee will be obligated to use the dividends
and Company contributions to repay the promissory note. It is expected that the
entire amount of the Company contributions and the dividends used by the ESOP
Trustee to repay the promissory note will be deductible by the Company for
Federal income tax purposes, regardless of the portion used to pay interest and
the portion used to pay principal. The Company will recognize income equal to
the interest paid on the promissory note. Accordingly, the net result of the
contributions, dividends and promissory note payments is
 
                                       79

<PAGE>
 
that the Company expects to receive net tax deductions for Federal income tax
purposes equal to the principal amount of the promissory note.
 
  It is anticipated that the principal of the note will be paid in seven annual
payments. The first annual payment will be for the period commencing on the
Effective Time and ending December 31, 1994, the second through sixth payments
will be for the twelve-month periods ending on each December 31 from 1995
through 1999, and the final payment will be for the period from January 1, 2000
until the end of the 69th month after the Effective Time. (The 69-month period
corresponds to the period of system-wide wage reductions for ALPA members, and
roughly corresponds to the 72-month period of base wage reductions for IAM
Members.) The first and seventh payments will be reduced to correspond to the
shorter than full-year periods that such payments represent.
 
  Each calendar year (corresponding to the principal payments), shares of Class
1 ESOP Preferred Stock will be released from the suspense account, and the
Company's security interest in the shares so released will terminate. The
shares released for any year will be a fraction of the shares originally
purchased. The fraction will be the amount of the principal paid that year
divided by the total original principal amount of the loan. Accordingly, it is
anticipated that the shares of Class 1 ESOP Preferred Stock will be released
from the suspense account on a level annual fashion over 69 months, taking into
account the partial periods in 1994 and 2000.
 
  When the shares are released from the suspense account as a result of any
principal payment, they remain in the Qualified Trust but are allocated to
individual accounts of employees established under the Leveraged ESOP. The
Class 1 ESOP Preferred Stock will be allocated to the accounts of employees
such that the shares so allocated when added to the shares allocated under the
Non-Leveraged Qualified ESOP and the Supplemental ESOP (see "--Initial Sales of
ESOP Convertible Preferred Stock--Non-Qualified ESOP"), will equal 46.23% for
the employees who are members of ALPA, 37.13% for employees who are members of
the IAM, and 16.64% for non-union employees. The actual allocations for each
ESOP will be determined prior to the Effective Time. For the shares released
from the suspense account in respect of 1994, allocations within each of these
employee groups will be proportional to the compensation (subject to certain
tax limits) of all of the participants within that group, except that for the
participants who are members of the IAM, the shares will be allocated in
proportion to the amount of each individual employee's wage concession.
However, for subsequent years, shares equal in value to the dividends paid on
shares previously allocated to the accounts of employees will first be
allocated from the released shares to the accounts of such employees. The
remaining shares released from the suspense account in respect of that year
will be allocated to individual employees based upon their relative
compensation (or, in the case of IAM members, their relative wage concessions).
 
  Non-Qualified ESOP. Because of certain limitations imposed by the Internal
Revenue Code, the Qualified Trust will not purchase shares representing the
entire equity interest (initially 53%) represented by the ESOP Preferred Stock.
Accordingly, the ESOP Trustee will purchase as of the Effective Time Class 2
ESOP Preferred Stock to be held in a non-qualified Trust (the "Non-Qualified
Trust") established under a non-qualified employee stock ownership plan. The
number of shares of Class 2 ESOP Preferred Stock will be equal to 16,307,814,
less the number of shares of Class 1 ESOP Preferred Stock sold to the Qualified
ESOP. The purchase will be for a combination of cash equal to the aggregate par
value ($.01 per share) of Class 2 ESOP Preferred Stock sold to the Non-
Qualified Trust (which cash will be contributed by the Company to the Non-
Qualified Trust) and a promissory note issued by the ESOP Trustee to the
Company. The assets of the Non-Qualified Trust will remain available to the
creditors of the Company in the event of the Company's insolvency, and the
Company will not have a security interest in the Class 2 ESOP Preferred Stock.
It is anticipated that all ESOP Stock reserved for allocation to IAM members
will be allocated under the Leveraged ESOP. At any time prior to April 15,
1994, ALPA may elect that, instead of a sale of the Class 2 ESOP Preferred
Stock as of the Effective Time as described above, the Class 2 ESOP Preferred
Stock shall be contributed by the Company to the ESOP over the 69 month period
following the Effective Time.
 
                                       80

<PAGE>
 
  Each year, as a portion of the shares of Class 1 ESOP Preferred Stock are
released from the suspense account under the Leveraged ESOP, the same
proportion of the Class 2 ESOP Preferred Stock will be allocated as described
below. In other words, it is anticipated that the Class 2 ESOP Preferred Stock
will be allocated over the same 69 months that the Class 1 ESOP Preferred is
allocated. To the extent permissible under the Internal Revenue Code, the
shares of Class 2 ESOP Preferred Stock will be transferred to the Qualified
Trust for allocation to employees' accounts under the non-leveraged portion
("Non-Leveraged Qualified ESOP") of the Qualified ESOP. The shares that cannot
be transferred to the Qualified Trust will remain in the Non-Qualified Trust,
and will be allocated to the accounts of employees in the Supplemental ESOP.
Unlike the Qualified ESOP, the Company will be liable for the benefits of
employees under the Supplemental ESOP, although payments from the Non-Qualified
Trust will offset the Company's liability.
 
  In the aggregate, the shares allocated under the Leveraged ESOP, the Non-
Leveraged Qualified ESOP, and the Supplemental ESOP will equal 46.23% for the
employees who are members of ALPA, 37.13% for the employees who are members of
the IAM, and 16.64% for the employees who are not represented by a union (the
"Agreed Percentages").
 
  Allocation of Voting Preferred Stock. When shares of Class 1 ESOP Preferred
Stock are released from the suspense account and allocated to accounts of
employees, and when shares of Class 2 ESOP Preferred Stock are allocated from
the Non-Qualified Trust, the corresponding number of shares of the appropriate
class of Voting Preferred Stock will be issued by the Company and contributed
to the Non-Leveraged Qualified ESOP (or, to the extent limitations of the
Internal Revenue Code require, to the Supplemental ESOP). The additional
issuance of shares of Voting Preferred Stock will not affect the percentage of
voting power of the Company as a whole controlled in the aggregate by the
Voting Preferred Stock, however.
 
  Distributions. Employees will become entitled to distribution of shares upon
termination of employment but can elect to defer distribution until age 70 1/2.
Employees will become entitled to transfer shares from the Leveraged ESOP and
the Non-Leveraged Qualified ESOP to other Company plans prior to termination of
employment upon attainment of age 55 with at least 10 years of participation in
the ESOP. (Because of this requirement of 10 years of participation, the first
such distributions will not be made until 10 years after the Effective Time.)
The transfers prior to termination of employment are required under the
Internal Revenue Code for the purpose of allowing employees to diversify their
investments. Up to 25% of an employee's account may be diversified at age 55,
and an additional 25% may be diversified at age 60. The diversification
distribution for an employee will be made by transferring the appropriate
amount to the tax-qualified 401(k) plan sponsored by the Company in which the
employee participates.
 
  Prior to any distribution, the shares of Class 1 ESOP Preferred Stock and
Class 2 ESOP Preferred Stock (and the corresponding shares of Voting Preferred
Stock) allocated to the employee entitled to the distribution will be converted
into New Shares. The employee may choose to receive the distribution in the
form of the New Shares issued upon conversion or cash, and except for the
diversification distributions described above, the employee may elect to
receive the distribution in a lump sum or annual installments over five years.
Employees who remain employed after age 70 1/2 shall receive annually the
minimum payments required by the Internal Revenue Code. If the employee elects
to receive cash, the ESOP Trustee will sell the New Shares, and pay the net
proceeds of the sale to the employee.
 
  Each share of the Voting Preferred Stock is convertible into one ten-
thousandth of a New Share. Accordingly, when an ESOP participant becomes
entitled to receive a distribution of the Voting Preferred Stock, such shares
will be converted to New Shares and distributed (either as cash or New Shares).
Notwithstanding the conversion of the Preferred Stock upon a distribution or
diversification transfer, however, the remaining shares of the Voting Preferred
Stock continue to command, in the aggregate, the same percentage vote. This
continues as long as the employee plans of the Company contain, in the
aggregate, shares representing the equivalent of at least 20% of the equity
interests in the Company. See "DESCRIPTION OF SECURITIES--The Voting Preferred
Stock--Voting Rights."
 
                                       81

<PAGE>
 
 Additional Shares
 
  If, during the one year "Measuring Period" following the Effective Time, the
average actual closing price of the New Shares (the "Average Closing Price")
exceeds $170, then the conversion ratio with respect to the Class 1 ESOP
Preferred Stock and Class 2 ESOP Preferred Stock will be adjusted to provide
that additional New Shares will be issuable upon conversion of the Class 1 ESOP
Preferred Stock and Class 2 ESOP Preferred Stock so that all the New Shares
issuable upon conversion would exceed approximately 53% of all the New Shares
outstanding, up to a maximum of approximately 63% (the "Equity Adjustment").
The following table illustrates the extent to which the conversion ratio will
change, based upon the amount by which the Average Closing Price exceeds $170:
 

<TABLE>
<CAPTION>
                AVERAGE
             CLOSING PRICE         ADJUSTED PERCENTAGE
             -------------         -------------------
               <S>                 <C>
               $171.00............     54.51980598%
                172.00............     55.92834891
                173.00............     57.23741548
                174.00............     58.45718433
                175.00............     59.59649123
                176.00............     60.66304348
                177.00............     61.66359447
                178.00............     62.60408685
                178.44............     63.00000000
</TABLE>

 
  The maximum adjustment of up to 63% will be reached if the Average Closing
Price equals or exceeds $178.44 per share. If the Average Closing Price does
not exceed $170 per share, then no adjustment will be made to the conversion
ratio. The Company, ALPA and the IAM have agreed that the Plan of
Recapitalization and the related documentation will be amended to provide that
if the conversion ratio requires an adjustment because the Average Closing
Price exceeds $170, additional shares of ESOP Preferred Stock will be
transferred to the ESOPs and, to the extent such documentation is amended, no
adjustment will be made to the conversion ratios in respect of the Average
Closing Price.
 
  The aggregate voting power commanded by the Voting Preferred Stock will be
increased automatically as the conversion ratio is adjusted (or as additional
shares of ESOP Preferred Stock are transferred to the ESOPs).
 
 Additional Contributions
 
  If the Company pays a dividend on New Shares while any portion of the
promissory note issued by the ESOP Trustee to purchase Class 1 ESOP Preferred
Stock remains outstanding, the Company will make an additional contribution in
cash to the ESOP. In general the additional contribution would equal the lesser
of (1) the dividend paid on each New Share times the number of New Shares into
which the shares of Class 1 ESOP Preferred Stock are convertible, or (2) the
fixed dividend payable on the Class 1 ESOP Preferred Stock. The additional
contribution would be allocated to the accounts of employees and not used to
repay the promissory note.
 
  The fixed dividends on the Class 1 ESOP Preferred Stock will be used to repay
the promissory note, but any extraordinary dividends received in excess of the
fixed dividend rate will be allocated to the accounts of employees and will not
be used to repay the promissory note.
 
 Control Transactions
 
  In a Control Transaction (as defined below), participants are entitled, as
named fidiciaries under ERISA, to instruct the ESOP Trustee as to whether to
tender, sell, convert or otherwise dispose of shares allocated to their
accounts under the Qualified ESOP. Furthermore, in a Control Transaction each
employee (but not a
 
                                       82

<PAGE>
 
former employee) who is a participant in the Qualified ESOP may direct the ESOP
Trustee whether to tender, sell, convert or otherwise dispose of shares held in
the suspense account under the Qualified Trust and shares for which no
instructions are received; the ESOP Trustee will tender such shares in the
proportion directed by such employees (except when ERISA requires the ESOP
Trustee to disregard such directions). A "Control Transaction" is a tender or
exchange offer, or other opportunity to dispose of or convert shares of the
Company (other than conversions pursuant to distributions to be made under the
ESOP), or any transaction or series of related transactions whereby any person
or group acquires control of the Company of all or substantially all or the
assets of the Company or its subsidiaries.
 
  Shares held by the Supplemental ESOP will be tendered as directed by the
administrative committee thereunder.
 
  If a Control Transaction results in the sale or exchange of any shares held
by the ESOPs, and the proceeds of the sale are (or are used to acquire)
"appropriate securities," as defined below, then the ESOP and the promissory
note under the Leveraged ESOP shall continue as if the Control Transaction had
not occurred. To the extent possible, the proceeds will be used to acquire
"appropriate securities." If "appropriate securities" cannot be obtained, then
the Company and the Unions will make appropriate arrangements reasonably
satisfactory to the Unions to protect the interests of the employees. It is not
the present intention of the Company and the Unions that such arrangements will
include the forgiveness of any portion of the promissory note. "Appropriate
securities" are shares of common stock (or preferred stock which converts into
common stock) that may be held as security for a loan to an employee stock
ownership plan under the applicable Internal Revenue Code requirements, and
that are issued by a public company having a Moody's senior long-term debt
rating at least as good as that of the Company and United.
 
 Participation and Vesting
 
  Members of the ALPA employee group become participants in the ESOPs
immediately upon commencement of employment. IAM and Salaried and Management
Employees who are employed at the Effective Time will immediately become
participants in the ESOPs. All other members of the IAM employee group become
participants upon completing a probationary period of six months. All other
Salaried and Management Employees become participants following a one-year
waiting period. All shares allocated to the accounts of employees under the
ESOP are fully vested.
 
 Federal Income Tax Matters
 
  The Qualified ESOP is intended to be qualified under Sections 401 and 501 of
the Internal Revenue Code, and the Leveraged ESOP is intended to be qualified
under Section 4975 of the Internal Revenue Code. The Company will apply to the
IRS for a determination letter to that effect. As a result of such
qualification, employer contributions to the Qualified ESOP (including
contributions or transfers of shares of Class 2 ESOP Preferred Stock to the
Non-Leveraged Qualified ESOP) are deductible for Federal income tax purposes,
but ESOP participants are not subject to Federal income tax on such
contributions or on income derived from such contributions until distributions
are made from the Qualified ESOP. At the time of distribution, certain
favorable income tax rules may apply to the determination of such participants'
Federal income tax liability with respect to such distribution.
 
  The Supplemental ESOP and Non-Qualified Trust do not constitute a tax-
qualified plan. The Company will not be entitled to a tax deduction until
benefits are paid to participants. Any income earned by the Non-Qualified
Trust, excluding dividends paid on Company securities, will be taxed to the
Company.
 
  It is expected that the dividends payable on the Class 1 ESOP Preferred Stock
will be deductible to the extent used to repay the promissory note issued by
the ESOP Trustee.
 
                                       83

<PAGE>
 
 Plan Administration
 
  The Qualified ESOP will be administered by a committee consisting of three
appointees of ALPA, two appointees of the IAM and one appointee of the Company;
the Supplemental ESOP will be administered by a committee consisting of three
members appointed by ALPA and one member appointed by the Company;
provided that if any IAM member is allocated shares under the Supplemental
ESOP, then two members appointed by the IAM shall, with respect to the IAM
shares, join the committee that administers the Supplemental ESOP. Deadlocks in
votes of the committee will be referred for decision to a neutral arbitrator.
Except for certain decisions concerning the management of the plan's assets,
the member appointed by the Company, the two members appointed by the IAM or a
majority of the members appointed by ALPA can require that any committee
decision be referred to a neutral arbitrator.
 
                             ELECTION OF DIRECTORS
 
NOMINEES FOR ELECTION AS PUBLIC DIRECTORS
 
  If the Recapitalization is approved, the new structure of the Board will be
established and four persons will be eligible for election as "Public
Directors". The fifth person to be a Public Director will be identified at or
prior to the Effective Time and will be appointed to the Board at the Effective
Time.
 
  Except where authority has been withheld by a stockholder, the enclosed proxy
will be voted for the election of the nominees named below for a term of one
year and until the successors are duly elected and qualified.
 
  Each nominee (other than Mr. Greenwald) was previously elected by the
stockholders and has served continuously as a director for the period
succeeding the date of his or her election. In the event any one or more of the
named nominees shall unexpectedly become unavailable before election, votes
will be cast pursuant to authority granted by the enclosed proxy for such
person or persons as may be designated by the Board. No person, other than the
directors of the Company acting solely in that capacity, is responsible for the
naming of the nominees.
 
PUBLIC DIRECTORS
 
  JOHN F. MCGILLICUDDY, 63. Retired Chairman and Chief Executive Officer,
Chemical Banking Corporation (banking and finance). Director since 1984. Mr.
McGillicuddy served as Chairman and Chief Executive Officer of Manufacturers
Hanover Corporation and Manufacturers Hanover Trust Company from 1979 until the
merger of Manufacturers Hanover Corporation and Chemical Banking Corporation on
January 1, 1992. Mr. McGillicuddy is also a director of The Continental
Corporation and USX Corporation.
 
  JAMES J. O'CONNOR, 57. Chairman and Chief Executive Officer, Commonwealth
Edison Company (electric power utility). Director since 1984. Mr. O'Connor is
also a director of American National Can Company, Corning Incorporated, First
Chicago Corporation, the Chicago Stock Exchange, Scotsman Industries, Inc. and
The Tribune Company.
 
  PAUL E. TIERNEY, JR., 51. Managing Director, Gollust, Tierney and Oliver,
Inc. (investment banking). Director since October 18, 1990. Mr. Tierney is also
Chairman of the Board of Directors of Technoserve, Inc., a director of the
Argentine Investment Fund, the Straits Corporation and the Overseas Development
Council and a Governor of the United Nations Association.
 
  GERALD GREENWALD, 58. Chairman, Tatra Truck Company, Czech Republic. Mr.
Greenwald served as Vice Chairman of the Chrysler Corporation from 1989 to
1990. Prior thereto, Mr. Greenwald was employed by Chrysler for approximately
10 years in a number of senior executive positions. In 1990, Mr. Greenwald was
selected to serve as chief executive officer of United Employee Acquisition
Corporation in connection with the proposed 1990 employee acquisition of the
Company. Following the termination of that proposed
 
                                       84

<PAGE>
 
transaction, Mr. Greenwald served as a managing director of Dillon Read & Co.
Inc. (investment banking) in 1991 and as president of Olympia & York
Developments Limited (a real estate development company that was in the process
of a bankruptcy restructuring prior to Mr. Greenwald's agreeing to serve as
president) from April 1992 until March 1993. Mr. Greenwald currently serves as
chairman of the Tatra Truck Company and has served in such capacity since March
1993. Mr. Greenwald previously served for a number of years as a director of
GPA Group PLC (international aircraft financing and leasing). Mr. Greenwald has
not previously served on the Board.
 
INDEPENDENT DIRECTORS
 
  Following is information concerning the other persons who have been chosen to
serve as directors of the Company if the Recapitalization is approved,
including their names, ages, the class pursuant to which they will serve,
principal occupations for the past five years and their directorships with
other corporations:
 
  DUANE D. FITZGERALD, 54. Chairman, President and Chief Executive Officer,
Bath Iron Works Corporation (Shipbuilding). Mr. Fitzgerald has not previously
served on the Board. Mr. Fitzgerald served as Bath Iron Works' President and
Chief Operating Officer from December 1988 until September 1991 when he was
appointed to his current positions. Mr. Fitzgerald is also a director of the
Shipbuilders Council of America and a trustee of the University of Maine System
and of Boston University.
 
  RICHARD D. MCCORMICK, 53. Chairman of the Board, President and Chief
Executive Officer of US West, Inc. (telecommunications) Mr. McCormick has not
previously served on the Board. Mr. McCormick has been Chairman of US West
since May 1992 and President and Chief Executive Officer since 1991. He served
as President and Chief Operating Officer from 1986 to 1991. Mr. McCormick is
also a director of Norwest Corporation and Super Valu Stores, Inc.
 
  JOHN K. VAN DE KAMP, 58. Partner, Dewey Ballantine (law firm). He has not
previously served on the Board. Mr. Van de Kamp served as Attorney General of
the State of California from 1983 until January 1991. He is also a member of
the advisory board of Falcon Classic Cable Companies, Ltd. and a director of
Lawry's Restaurants, Inc. In addition, Mr. Van de Kamp serves on the board of
directors of the following non-profit organizations: Day One, the Eisenhower
World Affairs Institute, the Los Angeles Conservation Corps, the Planning and
Conservation League and the Rockefeller Center for Social Sciences at Dartmouth
College. He is also President of the Board of Governors of the City Club of
Bunker Hill.
 
  PAUL A. VOLCKER, 66. Chairman, James D. Wolfensohn Inc. (investment banking)
and Frederick H. Schultz Professor of International Economic Policy, Princeton
University. Mr. Volcker has not previously served on the Board. Mr. Volcker is
also a director of Nestle S.A., Municipal Bond Assurance Corp. (MBIA), the
American Stock Exchange and Prudential Insurance Co. of America. He is Chairman
of the North American Committee of the Trilateral Commission, the Group of 30,
the Advisory Boards of the Center for Strategic and International Studies and
the Arthritis Foundation; he is co-chairman of the Bretton Woods Committee and
the United States Hong Kong Economic Cooperation Committee. Mr. Volcker is also
associated as trustee or member of the Board of Directors with the Council on
Foreign Relations, the Aspen Institute, the Japan Society, the American Council
on Germany and the American Assembly.
 
  JOSEPH V. VITTORIA, 58. Chairman and Chief Executive Officer, Avis, Inc.
since September 1987 (automobile renting and leasing). Mr. Vittoria has not
previously served on the Board.
 
                                       85

<PAGE>
 
                     MARKET PRICES OF THE SHARES; DIVIDENDS
 
  The Old Shares are traded principally on the NYSE, and are also listed on the
Chicago Stock Exchange and the Pacific Stock Exchange. As of                  ,
there were       Old Shares outstanding held of record by approximately
holders and as of the Record Date, there were       Old Shares outstanding,
held of record by      holders. The following table sets forth for the periods
indicated the high and low closing sale prices per Old Share on the NYSE
Composite Tape.
 

<TABLE>
<CAPTION>
                                                                HIGH    LOW
                                                                ----    ----
      <S>                                                       <C>     <C>
      1992
        First Quarter.......................................... $159     139 1/4
        Second Quarter.........................................  143 3/4 111
        Third Quarter..........................................  119 3/4 103
        Fourth Quarter.........................................  128 1/8 106 1/4
      1993
        First Quarter..........................................  132 1/4 110 3/4
        Second Quarter.........................................  149 3/4 118
        Third Quarter..........................................  150 1/2 121 5/8
        Fourth Quarter.........................................  155 1/2 135 7/8
      1994
        First Quarter..........................................  150     123 3/4
        Second Quarter (through April 8, 1994).................  129 7/8 124 1/4
</TABLE>

 
  On December 22, 1993, the last trading day prior to the public announcement
of the Agreement in Principle, the closing sale price for the Old Shares as
reported on the NYSE composite tape was $148 1/2 per Old Share. On March 24,
1994, the last trading day prior to the public announcement of the Plan of
Recapitalization, the closing sale price for the Old Shares as reported on the
NYSE composite tape was $123 3/4 per Old Share. On                 , the last
trading day prior to the date of this Proxy Statement/Prospectus, the closing
sale price for Old Shares as reported on the NYSE Composite Tape was $     .
HOLDERS OF OLD SHARES SHOULD OBTAIN CURRENT MARKET QUOTATIONS FOR THE OLD
SHARES AS ONE OF THE FACTORS RELEVANT TO ASSESSING THE VALUE OF THE NEW SHARES
BEFORE VOTING ON THE PLAN OF RECAPITALIZATION. The New Shares are expected to
be listed on the NYSE.
 
  The Company has not paid cash dividends on the Old Shares since 1987.
Following consummation of the Recapitalization, it is expected that cash
dividends will not be paid on the New Shares for the foreseeable future.
 
                                       86

<PAGE>
 
           SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
 
  The following consolidated financial information has been derived from the
Company's consolidated financial statements, for each of the fiscal years in
the five year period ended December 31, 1993, which statements have been
audited by Arthur Andersen, independent public accountants, as indicated in
their reports incorporated by reference herein. Reference is made to said
reports for the years 1993 and 1992 which include an explanatory paragraph with
respect to the changes in methods of accounting for income taxes and
postretirement benefits other than pensions as discussed in the notes to the
consolidated financial statements for such years. The table also sets forth
certain information on a pro forma basis giving effect to the Recapitalization.
The following should be read in conjunction with the unaudited pro forma
financial statements and notes related thereto included elsewhere herein and
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993, as
amended, incorporated by reference herein.
 

<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                         -------------------------------------------------------
                            1993
                          PRO FORMA   1993     1992     1991     1990     1989
                         ----------- -------  -------  -------  -------  -------
                         (UNAUDITED)
                                        (DOLLARS IN MILLIONS)
<S>                      <C>         <C>      <C>      <C>      <C>      <C>
STATEMENT OF CONSOLI-
 DATED OPERATIONS DATA:
  Operating revenues....   $14,483   $14,511  $12,890  $11,663  $11,037  $ 9,794
  Earnings (loss) from
   operations...........       127       263     (538)    (494)     (36)     465
  Earnings (loss) before
   extraordinary item
   and cumulative effect
   of accounting
   changes..............      (177)      (31)    (417)    (332)      94      324
  Net earnings (loss)...      N.A.       (50)    (957)    (332)      94      324
STATEMENT OF CONSOLI-
 DATED FINANCIAL POSI-
 TION DATA (at end of
 year):
  Total assets..........   $12,115   $12,840  $12,257  $ 9,876  $ 7,983  $ 7,194
  Total long-term debt
   and capital lease
   obligations,
   including current
   portion..............     4,515     3,735    3,783    2,531    1,327    1,405
  Shareholders' equity..      (302)    1,203      706    1,597    1,671    1,564
OTHER DATA:
  Ratio of earnings to
   fixed charges(b).....        (a)       (a)      (a)      (a)    1.16     1.95
UNITED OPERATING DATA:
  Revenue passengers
   (millions)...........        70        70       67       62       58       55
  Average length of a
   passenger trip in
   miles................     1,450     1,450    1,390    1,327    1,322    1,269
  Revenue passenger
   miles (millions).....   101,258   101,258   92,690   82,290   76,137   69,639
  Available seat miles
   (millions)...........   150,728   150,728  137,491  124,100  114,995  104,547
  Passenger load factor.      67.2%     67.2%    67.4%    66.3%    66.2%    66.6%
  Break even passenger
   load factor..........      66.3%     65.6%    70.4%    69.5%    66.5%    63.0%
  Revenue per passenger
   mile.................      12.5c     12.5c    12.2c    12.5c    12.6c    12.2c
  Cost per available
   seat mile............       9.4c      9.3c     9.6c     9.8c     9.6c     8.9c
  Average price per gal-
   lon of jet fuel......      63.6c     63.6c    66.4c    71.6c    80.4c    63.6c
</TABLE>

- --------
(a) Earnings were inadequate to cover fixed charges and preferred stock
    dividends by $99 million in 1993, by $748 million in 1992 and by $599
    million in 1991. On a pro forma basis, earnings were inadequate to cover
    fixed charges by $334 million in 1993.
(b) The ratio of earnings to fixed charges and the ratio of earnings to fixed
    charges and preferred stock dividends were the same in each period
    presented.
 
                                       87

<PAGE>
 
                   UNAUDITED PRO FORMA FINANCIAL INFORMATION
 
  The following unaudited Pro Forma Condensed Statement of Consolidated
Operations for the year ended December 31, 1993 and unaudited Pro Forma
Condensed Consolidated Statement of Financial Position as of December 31, 1993
have been prepared to reflect the Recapitalization, including: (i)
reclassification of Old Shares into New Shares, Public Preferred Stock and
Redeemable Preferred Stock, (ii) redemption of Redeemable Preferred Stock for
cash and Debentures and (iii) issuance of ESOP Preferred Stock to the ESOP
Trustee for the Qualified ESOP and the Supplemental ESOP. The unaudited Pro
Forma Condensed Statement of Consolidated Operations was prepared as if the
Recapitalization had occurred on January 1, 1993. The unaudited Pro Forma
Condensed Consolidated Statement of Financial Position was prepared as if the
Recapitalization occurred on December 31, 1993.
 
  The unaudited Pro Forma Condensed Statement of Consolidated Operations
includes the recurring charges and credits that are directly attributable to
the Recapitalization, such as the interest expense arising from the Debentures,
the effects of the wage and benefit reductions and work-rule changes resulting
from the employee investment, and the employee stock ownership plan accounting
charge. No adjustments have been made to the pro forma revenues and expenses to
reflect the results of structural changes in operations, such as U2, that might
have been made had the changes been consummated on the assumed effective dates
for presenting pro forma results. The pro forma financial information does not
purport to be indicative of the results of operations or financial position
that may be obtained in the future or that would actually have been obtained
had such transactions occurred during the periods indicated.
 
   The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. In addition, this
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, as amended, which is
incorporated in this Proxy Statement/Prospectus by reference and which includes
the Company's Consolidated Financial Statements and the related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
                                       88

<PAGE>
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
            PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
 
                          YEAR ENDED DECEMBER 31, 1993
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                        HISTORICAL    ADJUSTMENTS      PRO FORMA
                                        ----------    -----------      ---------
<S>                                     <C>           <C>              <C>
Operating revenues.....................  $14,511        $   (28)(1)     $14,483
Operating expenses:
 Salaries and related costs............    4,760           (428)(2)(3)
                                                           (191)(1)       4,141
 Employee Stock Ownership Plan
  accounting charge....................                     596 (4)         596
 Other.................................    9,488            131 (1)       9,619
                                         -------        -------         -------
                                          14,248            108          14,356
                                         -------        -------         -------
Earnings (loss) from operations........      263           (136)            127
                                         -------        -------         -------
Other income (expense):
 Interest, net.........................     (209)           (73)(5)
                                                            (27)(6)        (309)
 Other, net............................     (101)                          (101)
                                         -------        -------         -------
                                            (310)          (100)           (410)
                                         -------        -------         -------
Loss from continuing operations
 before income taxes...................      (47)          (236)           (283)
Provision (credit) for income taxes....      (16)           (90)(7)        (106)
                                         -------        -------         -------
Loss from continuing operations........  $   (31)       $  (146)(8)     $  (177)
                                         =======        =======         =======
Loss per share from continuing
 operations............................  $ (5.28)(9)    $(17.90)(10)    $(23.18)
                                         =======        =======         =======
</TABLE>

 
 
    See accompanying notes to Pro Forma Condensed Statement of Consolidated
                                   Operations
 
                                       89

<PAGE>
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
                          NOTES TO PRO FORMA CONDENSED
                      STATEMENT OF CONSOLIDATED OPERATIONS
 
                      FOR THE YEAR ENDED DECEMBER 31, 1993
 
(1) The Company entered into an agreement to sell its U.S. flight kitchens over
    a period of months beginning in December 1993 through June 1994 and an
    agreement to acquire catering services for a seven year period. This
    adjustment eliminates $28 million of sales revenues and $191 million of
    compensation costs recorded in 1993 relating to the U.S. flight kitchens
    that were sold and adds estimated incremental catering costs of $131
    million.
 
(2) To adjust compensation expense for the pro forma effect of the wage and
    benefit reductions and work-rule changes resulting from the employee
    investment that provide for wage and other compensation savings during the
    approximately six year period beginning at the Effective Time. The pro
    forma adjustment represents the estimated savings in the 12 months assuming
    that such savings had commenced at the beginning of the period. The pro
    forma adjustment does not include any savings related to U2.
 
(3) The following reconciles the labor cost savings included in the Pro Forma
    Condensed Statement of Consolidated Operations to the value of the
    concessions included in the Company Analysis of employee concessions for
    1994 (see "SPECIAL FACTORS--Certain Company Analyses"):
 

<TABLE>
<CAPTION>
                                                                     (MILLIONS)
     <S>                                                             <C>
     Pro Forma adjustment based on 1993 salaries....................    $428
     Estimated compensation savings based on 1994 salaries..........      68
     Estimated benefits of U2 during the first year.................      64
     Estimated additional severance for flight kitchen employees
      during the first year.........................................     (36)
                                                                        ----
       Estimated 1994 concessions...................................    $524
                                                                        ====
       Estimated six months of concessions included in 1994 analy-
        sis.........................................................    $262
                                                                        ====
</TABLE>

 
(4) To record non-cash compensation for shares of ESOP Preferred Stock
    committed to be released to employees during the period based on the
    average fair value of such ESOP Preferred Stock. For purposes of the pro
    forma adjustment, the average fair value of the ESOP Preferred Stock during
    the period is assumed to be $210 per share, the initially agreed upon price
    to be paid by the ESOP Trustee in purchasing the Class 1 ESOP Preferred
    Stock.
 
(5) To record the interest expense on the Series A Debentures at an annual
    estimated interest rate of 9.0% and on the Series B Debentures at an annual
    estimated interest rate of 9.7%. For purposes of the pro forma adjustment,
    the interest rate is based on the first pricing; however, as the actual
    rates will be reset prior to the closing and the reset is limited to an
    additional 112.5 basis points, the additional annual interest expense could
    increase by $9 million.
 
(6) To record foregone interest income due to the reduction in the Company's
    average investment balance resulting from the Recapitalization. The pro
    forma adjustment is based on the Company's average earnings rate during
    1993.
 
(7) To adjust the provision (credit) for income taxes to reflect the tax effect
    of changes to pretax income at the statutory rate in effect during 1993.
    The book and tax employee stock ownership plan compensation charge are
    assumed to be the same.
 
(8) If the Recapitalization is consummated, the Company expects to recognize
    nonrecurring charges of approximately $44 million relating to additional
    severance benefits for employees terminated as a result of the sale of the
    flight kitchens, up to $49.15 million of transaction fees and expenses
    incurred by ALPA, the IAM and certain advisors in connection with the
    structuring and establishment of the ESOPs, $30
 
                                       90

<PAGE>
 
     million for the Company's transaction fees and expenses, $17 million of
     compensation expense relating to vesting the unvested restricted stock as
     a result of the change in control, $40 million of compensation expense
     (based on an estimate of the Old Share price at the Effective Time)
     relating to the vesting of unvested options and the implementation of a
     feature that provides for cashless exercise of options in the event of
     the Recapitalization, and $21 million of payments and benefits to Mr.
     Greenwald and officers that are retiring at the Effective Time. The total
     after-tax effect of the nonrecurring charges is $139 million. Due to the
     nonrecurring nature of these charges, they have been excluded from the
     Pro Forma Condensed Statement of Consolidated Operations.
 
(9)  The historical loss per share from continuing operations has been adjusted
     to reflect the 2:1 reverse stock split occurring as part of the           
     Recapitalization.                                                          
 
(10) The pro forma loss per common share is based on an estimated 12,519,891
     weighted average shares outstanding and is calculated after preferred
     stock dividend requirements of $33.2 million on the Series A Preferred
     Stock and $80.0 million on the Public Preferred Stock. The weighted
     average shares assume the Series A Preferred Stock does not convert during
     the first year of the transaction and that all in-the-money options are
     vested and exercised at the Effective Time using a cashless exercise
     mechanism. The average shares of ESOP Preferred Stock committed to be
     released during the year were not included in the calculation as a common
     stock equivalent because the effect is anti-dilutive. In addition, the pro
     forma calculations assume no dividends are paid on allocated shares of
     ESOP Preferred Stock during the year ended December 31, 1993, and
     accordingly, dividends on ESOP Preferred Stock are not included in the pro
     forma loss per share.
 
                                       91

<PAGE>
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
 
        PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
 
                               DECEMBER 31, 1993
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                   ASSETS                    HISTORICAL ADJUSTMENTS    PRO FORMA
                   ------                    ---------- -----------    ---------
<S>                                          <C>        <C>            <C>
Current assets:
  Cash and cash equivalents.................  $   437     $             $   437
  Short-term investments....................    1,391       (647)(1a)
                                                            (140)(2)        604
  Other.....................................    1,885         62 (3)      1,947
                                              -------     ------        -------
                                                3,713       (725)         2,988
                                              -------     ------        -------
Operating property and equipment............   12,292                    12,292
Less: Accumulated depreciation
    and amortization........................   (5,086)                   (5,086)
                                              -------     ------        -------
                                                7,206                     7,206
                                              -------     ------        -------
Other assets:
  Other.....................................    1,921                     1,921
                                              -------     ------        -------
                                              $12,840     $ (725)       $12,115
                                              =======     ======        =======
<CAPTION>
    LIABILITIES AND SHAREHOLDERS' EQUITY
    ------------------------------------
<S>                                          <C>        <C>            <C>
Current liabilities:
  Short-term borrowings, long-term debt
   maturing within one year and current
   obligations under capital leases.........  $   521     $             $   521
  Other.....................................    4,375                     4,375
                                              -------     ------        -------
                                                4,896                     4,896
                                              -------     ------        -------
Long-term debt..............................    2,702        780 (1b)     3,482
                                              -------     ------        -------
Long-term obligations under capital leases..      827                       827
                                              -------     ------        -------
Other liabilities, deferred credits and
 minority interest..........................    3,212                     3,212
                                              -------     ------        -------
Shareholders' equity:
  Series A Preferred Stock, $5 stated value,
   6,000,000 shares issued, $100 liquidation
   value....................................       30        --              30
  Series B Preferred Stock, $.01 stated
   value, [   ] shares issued, $[  ]
   liquidation value........................                 --  (1c)       --
  Class 1 ESOP Preferred Stock, $.01 par,
   [12,557,017] shares issued, $210
   liquidation value........................                 --  (4)        --
  Class 2 ESOP Preferred Stock, $.01 par,
   [3,750,797] shares issued, $210
   liquidation value........................                 --  (4)        --
  Voting Preferred Stock, $.01 par, 3 shares
   issued, $.01 liquidation value...........                 --  (5)        --
  Common stock, $5 par value, 25,489,745
   shares issued and outstanding--
   historical...............................      127       (127)(1c)       --
  Common stock, $.01 par value, 13,006,564
   shares issued and outstanding--pro forma.                --   (1c)       --
  Additional capital invested...............      932       (152)(1c)
                                                           3,425 (4)
                                                              40 (6)      4,245
  Retained earnings (deficit)...............      249     (1,148)(1)
                                                            (139)(7)     (1,038)
  Pension liability adjustment..............      (53)                      (53)
  Unearned compensation.....................      (17)        17 (8)        --
  Unearned ESOP Preferred Stock.............              (3,425)(4)     (3,425)
  Common stock held in treasury, 920,808
   shares--historical, 435,404 shares--pro
   forma ...................................      (65)         4 (9)        (61)
                                              -------     ------        -------
                                                1,203     (1,505)(10)      (302)
                                              -------     ------        -------
                                              $12,840     $ (725)       $12,115
                                              =======     ======        =======
</TABLE>

 
  See the accompanying notes to Pro Forma Condensed Statement of Consolidated
                              Financial Position.
 
                                       92

<PAGE>
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
 
                          NOTES TO PRO FORMA CONDENSED
                  STATEMENT OF CONSOLIDATED FINANCIAL POSITION
 
                               DECEMBER 31, 1993
 
(1) To record the Recapitalization (as described in "THE PLAN OF
    RECAPITALIZATION--Terms and Conditions"). The entries assume that (i) all
    in-the-money employee stock options are vested and exercised at the
    Effective Time using a cashless exercise mechanism, (ii) treasury stock
    held by the Company immediately prior to the Effective Time will convert
    into New Shares that remain outstanding after the Recapitalization and
    (iii) Convertible Company Securities that are outstanding immediately prior
    to the Effective Time will not convert into the Recapitalization
    Consideration at the Effective Time.
 
    (a) To record the cash payment of $25.80 per share to holders of Old Shares 
        upon the redemption of the Redeemable Preferred Stock.                  
                                                                                
    (b) To record the issuance of $15.55 principal amount of Series A           
        Debentures and $15.55 principal amount of Series B Debentures to        
        holders of Old Shares upon the redemption of the Redeemable Preferred   
        Stock.                                                                  
                                                                                
    (c) To record the reclassification of Old Shares into New Shares, Public    
        Preferred Stock (Series B Preferred Stock), and Redeemable Preferred    
        Stock. (The pro forma adjustments do not reflect the issuance of        
        Redeemable Preferred Stock because such shares are redeemed for cash    
        and Debentures immediately after issuance. In addition, the pro forma   
        adjustments do not reflect the Public Preferred Stock and Redeemable    
        Preferred Stock issued to the Company upon reclassification of the      
        treasury stock because such shares are surrendered for cancellation     
        immediately after issuance.)                          
 
(2) To record the cash impact of the estimated fees and transaction expenses,
    including expenses for the Company, ALPA and IAM, severance payments to
    terminated officers and flight kitchen employees and payments relating to
    the employment agreement with Mr. Greenwald.
 
(3) To record the tax effects relating to nonrecurring charges recognized as a
    result of the Recapitalization.
 
(4) To record the issuance of shares of Class 1 ESOP Preferred Stock to the
    Qualified Trust and shares of Class 2 ESOP Preferred Stock to the Non-
    Qualified Trust for an aggregate purchase price of $3.425 billion.
 
(5) To record the issuance at par of one share of Class P Voting Preferred
    Stock, one share of Class M Voting Preferred Stock and one share of Class S
    Voting Preferred Stock to the ESOP Trusts. The remaining Voting Preferred
    Stock will be issued when it is contributed to Supplemental ESOP Trust.
 
(6) To account for the cashless exercise of options in the event of the
    Recapitalization. (Amount of the entry is based on an estimate of the Old
    Share price at the Effective Time of $163 per share.)
 
(7) Represents the offset to entries (2), (3), (6), (8) and (9).
 
(8) To record the vesting of the unvested restricted stock as a result of the
    Recapitalization.
 
(9) To record 25,000 restricted shares to Mr. Greenwald that will vest at the
    Effective Time.
 
(10)Does not reflect the issuance of four shares of Class I Preferred Stock,
    one share of Class Pilot MEC Preferred Stock, one share of Class IAM
    Preferred Stock, and three shares of Class SAM Preferred Stock. These
    stocks have a $.01 par value and nominal economic value.
 
NOTE: PRO FORMA FINANCIAL INFORMATION FOR UNITED, WHICH WILL REFLECT, AMONG
OTHER THINGS, THE ISSUANCE OF THE DEBENTURES, IS CURRENTLY BEING PREPARED AND
WILL BE CONTAINED IN AN AMENDED PROXY STATEMENT/PROSPECTUS.
 
                                       93

<PAGE>
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
 
                                 CAPITALIZATION
 
  The following table sets forth the consolidated capitalization of the Company
as of December 31, 1993, as adjusted to give effect to the consummation of the
Recapitalization, including (i) reclassification of Old Shares into New Shares,
Public Preferred Stock and Redeemable Preferred Stock, (ii) redemption of the
Redeemable Preferred Stock for cash and Debentures and (iii) the issuance of
ESOP Preferred Stock, Voting Preferred Stock and Director Preferred Stock. The
table should be read in conjunction with the Pro Forma Condensed Statement of
Consolidated Financial Position included elsewhere in this document.
 

<TABLE>
<CAPTION>
                                  DECEMBER 31, 1993
                                ----------------------
                                HISTORICAL  PRO FORMA
                                ---------- -----------
                                           (UNAUDITED)
                                    (IN MILLIONS)
<S>                             <C>        <C>
Short-term borrowings, long-
 term debt maturing within one
 year and current obligations    $   521     $   521
 under capital leases.........   -------     -------
Long-term debt, excluding por-
 tion due within one year:
  Secured notes...............   $ 1,462     $ 1,462
  Deferred purchase certifi-
   cates......................       178         178
  Debentures..................     1,000       1,780
  Convertible debentures......        36          36
  Promissory notes............        41          41
  Unamortized discount on            (15)        (15)
   debt.......................   -------     -------
                                   2,702       3,482
Long-term obligations under          827         827
 capital leases...............   -------     -------
  Total long-term debt and         3,529       4,309
   capital lease obligations..   -------     -------
Shareholders' equity:
  Series A Preferred Stock, $5
   stated value...............        30          30
  Series B Preferred Stock,
   $.01 stated value..........       --          --
  Class 1 ESOP Preferred
   Stock, $.01 par value......       --          --
  Class 2 ESOP Preferred
   Stock, $.01 par value......       --          --
  Class P, M and S Voting Pre-
   ferred Stock, $.01 par val-
   ue.........................       --          --
  Class I, MEC, IAM, and SAM
   Preferred Stock, $.01 par
   value......................       --          --
  Common stock, $5 par value..       127         --
  Common stock, $.01 par val-
   ue.........................       --          --
  Additional capital invested.       932       4,245
  Retained earnings (deficit)...     249      (1,038)
  Pension liability adjust-
   ment.......................       (53)        (53)
  Unearned compensation.......       (17)        --
  Unearned ESOP Preferred
   Stock......................       --       (3,425)
  Common stock held in trea-         (65)        (61)
   sury.......................   -------     -------
    Total shareholders' equi-      1,203        (302)
     ty.......................   -------     -------
      Total capitalization....   $ 5,253     $ 4,528
                                 =======     =======
</TABLE>

 
                                       94

<PAGE>
 
                       BENEFICIAL OWNERSHIP OF SECURITIES
 
FIVE PERCENT BENEFICIAL OWNERS
 
  The following table shows the number of shares of the Company's voting
securities beneficially owned by any person or group known to the Company to be
the beneficial owner of more than five percent of the Company's voting
securities. Number and percent of shares beneficially owned may include Old
Shares issuable upon conversion of Convertible Company Securities, even if not
so indicated. Convertible securities not converted prior to the Record Date may
not be voted at the Meeting.
 

<TABLE>
<CAPTION>
                                                     AMOUNT AND
                                                     NATURE OF
   TITLE OF                                          BENEFICIAL    PERCENT
    CLASS     NAME AND ADDRESS OF BENEFICIAL OWNER   OWNERSHIP     OF CLASS
   --------   ------------------------------------   ----------    --------
 <C>          <S>                                    <C>           <C>
 Common Stock Sanford C. Bernstein & Co., Inc.       1,632,736(1)     6.7%
               One State Street Plaza
               New York, NY 10004
 Common Stock FMR Corp.                              2,301,068(2)    9.28%
              Edward C. Johnson 3rd
               82 Devonshire Street
               Boston, MA 02109
 Common Stock Wellington Management Co.              2,719,750(3)   10.99%
               75 State Street
               Boston, MA 02109
 Common Stock Vanguard/Windsor Funds, Inc.           2,359,200(4)    9.65%
               P.O. Box 823
               Valley Forge, PA 19482
 Common Stock AXA Assurances I.A.R.D. Mutuelle       3,005,010(5)    12.2%
              AXA Assurances Vie Mutuelle
               La Grande Arche
               Pardi Nord
               92044 Paris La Defense France
              Alpha Assurances I.A.R.D. Mutuelle
              Alpha Assurances Vie Mutuelle
               101-100 Terrasse Boieldieu
               92042 Paris La Defense France
              Uni Europe Assurance Mutuelle
               24, Rue Drouot
               75009 Paris France
              AXA
               23, Avenue Matignon
               75008 Paris France
              The Equitable Companies Incorporated
               787 Seventh Avenue
               New York, New York 10019
</TABLE>

 
                                       95

<PAGE>
 
- --------
(1) Based on Schedule 13G dated February 14, 1994, in which the beneficial
    owner reported that as of December 31, 1993, it had sole dispositive power
    over 1,632,736 Old Shares and sole voting power over 882,770 of such Old
    Shares.
(2) Based on an Amendment to Schedule 13G dated April 8, 1994, in which FMR
    Corp. reported that as of March 31, 1994, it had sole voting power for
    58,682 Old Shares and sole dispositive power for all Old Shares
    beneficially owned, and Mr. Edward C. Johnson 3rd reported that as of March
    31, 1994, he had sole voting and sole dispositive power for all Old Shares
    beneficially owned. Includes beneficial ownership of 284,355 Old Shares
    issuable upon conversion of Series A Preferred Stock.
(3) Based on Schedule 13G dated February 10, 1994, in which the beneficial
    owner reported that as of December 31, 1993, it had shared dispositive
    power over 2,719,750 Old Shares and shared voting power over 188,716 of
    such Old Shares. Beneficial ownership of certain of these Old Shares was
    also reported by another entity. See footnote (4) below.
(4) Based on Schedule 13G dated February 10, 1994, in which the beneficial
    owner reported that as of December 31, 1993, it had sole voting power and
    shared dispositive power over 2,359,200 Old Shares. Beneficial ownership of
    some or all of these Old Shares was also reported by another entity. See
    footnote (3) above.
(5) Based on Schedule 13G dated April 8, 1994 in which each of AXA Assurances
    I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I.A.R.D.
    Mutuelle, Alpha Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle, AXA
    and The Equitable Companies Incorporated reported that as of March 31, 1994
    it had sole voting power for 1,738,465 Old Shares and sole dispositive
    power for 3,005,009 Old Shares.
 
SECURITIES BENEFICIALLY OWNED BY DIRECTORS AND EXECUTIVE OFFICERS
 
  The following table sets forth the number of Old Shares beneficially owned as
of April 1, 1994, by each director and executive officer included in the
Summary Compensation Table, and by all directors and executive officers of the
Company, as a group. Unless indicated otherwise by footnote, the owner
exercises sole voting and investment power over the securities (other than
unissued securities, the ownership of which has been imputed to such owner).
 

<TABLE>
<CAPTION>
                                                           NUMBER OF
                                                             SHARES
                                                          BENEFICIALLY  PERCENT
      NAME OF DIRECTOR OR EXECUTIVE OFFICER AND GROUP        OWNED      OF CLASS
      -----------------------------------------------     ------------  --------
      <S>                                                 <C>           <C>
      Neil Armstrong.....................................     1,021(1)     *
      Andrew F. Brimmer..................................       450(2)     *
      Richard P. Cooley..................................     1,300        *
      Carla A. Hills.....................................       300        *
      Fujio Matsuda......................................       422        *
      John F. McGillicuddy...............................     1,300        *
      Harry Mullikin.....................................     1,300        *
      James J. O'Connor..................................       700        *
      Frank A. Olson.....................................       800        *
      John C. Pope.......................................   189,348(3)     *
      Ralph Strangis.....................................       500        *
      Paul E. Tierney, Jr................................   168,559(4)     *
      Stephen M. Wolf....................................   339,985(5)    1.4
      Joseph R. O'Gorman.................................    50,690(6)     *
      James M. Guyette...................................    83,911(7)     *
      Lawrence M. Nagin..................................    62,440(8)     *
      Directors and Executive Officers as a Group (17
       persons)..........................................   959,133(9)    3.7%
</TABLE>

 
                                       96

<PAGE>
 
- --------
   *Less than 1%
(1) Includes 721 Old Shares held by Lorian, Inc. Pension Trust in which Mr.
    Armstrong is beneficiary.
(2) Includes 30 Old Shares owned by Dr. Brimmer's wife.
(3) Includes 150,000 Old Shares which Mr. Pope has the right to acquire within
    60 days of April 1, 1994 by the exercise of stock options.
(4) Includes 16,600 Old Shares held by a trust in which Mr. Tierney is
    administrator, co-trustee and beneficiary; 34,109 Old Shares held by a
    corporation of which he is a director and 50% shareholder and 12,500 Old
    Shares held by a charitable foundation of which he is a director.
(5) Includes 250,000 Old Shares which Mr. Wolf has the right to acquire within
    60 days of April 1, 1994 by the exercise of stock options.
(6) Includes 37,500 Old Shares which Mr. O'Gorman has the right to acquire
    within 60 days of April 1, 1994 by the exercise of stock options.
(7) Includes 67,120 Old Shares which Mr. Guyette has the right to acquire
    within 60 days of April 1, 1994 by the exercise of stock options.
(8) Includes 45,000 Old Shares which Mr. Nagin has the right to acquire within
    60 days of April 1, 1994 by the exercise of stock options.
(9) Includes 572,970 Old Shares which persons in the group have the right to
    acquire within 60 days of April 1, 1994, by the exercise of stock options
    and the 30 Old Shares referred to in note (2) above.
 
                                       97

<PAGE>
 
             CERTAIN INFORMATION CONCERNING THE BOARD OF DIRECTORS
 
  The Board of Directors of the Company held a total of 24 meetings during
1993. During their periods of service all directors attended 75 percent or more
of the total of such meetings and meetings of Board committees of which they
were members, other than Mr. Cooley who attended approximately 74 percent of
such meetings.
 
  The standing committees of the Board of Directors of the Company during 1993
consisted of the Executive, Audit, Compensation, Nominating and Pension and
Welfare Plans Oversight Committees.
 
  Set forth below is a brief description of the functions performed, the names
of the committee members, and the number of meetings held by each committee
during 1993.
 
EXECUTIVE COMMITTEE
 
  The Executive Committee is authorized by the Bylaws of the Company to
exercise the powers of the Board of Directors in the management of the business
and affairs of the Company, with certain exceptions. The Executive Committee
held four meetings in 1993.
 
  The members of the Committee are:
 
  Neil A. Armstrong    Paul E. Tierney, Jr.
  Frank A. Olson        Stephen M. Wolf, Chairman
  Ralph Strangis
 
AUDIT COMMITTEE
 
  The Audit Committee is authorized by the Board to review with the Company's
independent public accountants the annual financial statements of the Company
prior to publication, to review the work of and approve non-audit services
performed by such independent accountants and to make annual recommendations to
the Board for the appointment of independent public accountants for the ensuing
year. The Committee reviews the effectiveness of the financial and accounting
functions, organization, operations and management of the Company and its
subsidiaries and affiliates and the investment policies of the Company. The
Audit Committee held two meetings in 1993.
 
  The members of the Committee are:
 
  James J. O'Connor, Chairman   Fujio Matsuda
  Neil A. Armstrong             Paul E. Tierney, Jr.
  Richard P. Cooley
 
COMPENSATION COMMITTEE
 
  The Compensation Committee reviews and approves the compensation and benefits
of all officers of the Company and the senior officers of its subsidiaries and
reviews general policy matters relating to compensation and benefits of
employees of the Corporation and its subsidiaries. The Committee also
administers the 1981 Stock Program and the 1988 Restricted Stock Plan. The
Compensation Committee held seven meetings in 1993.
 
  The members of the Committee are:
 
  John F. McGillicuddy, Chairman    Harry Mullikin
  Fujio Matsuda
 
 
                                       98

<PAGE>
 
NOMINATING COMMITTEE
 
  The Nominating Committee considers possible candidates for election to the
Board and makes recommendations of nominees to the Board. The Nominating
Committee will consider nominees recommended by stockholders, who may submit
such recommendations by addressing a letter to the Chairman of the Nominating
Committee, UAL Corporation, P.O. Box 66919, Chicago, Illinois 60666. The
Nominating Committee held one meeting in 1993.
 
  The members of the Committee are:
 
  Richard P. Cooley, Chairman   Carla A. Hills       John F. McGillicuddy
  Andrew F. Brimmer             Ralph Strangis
 
PENSION AND WELFARE PLANS OVERSIGHT COMMITTEE
 
  The Pension and Welfare Plans Oversight Committee exercises oversight with
respect to compliance by the Company and its subsidiaries with laws governing
employee benefit plans under the Employees' Retirement Income Security Act of
1974 ("ERISA"). Reports of the subsidiaries concerning ERISA employee benefit
plan matters are reviewed by the Committee and the Committee periodically
reports its actions, findings and recommendations to the Board. The Committee
held one meeting in 1993.
 
  The members of the Committee are:
 
  Harry Mullikin, Chairman    Andrew F. Brimmer
  Carla A. Hills              James J. O'Connor
 
COMPENSATION OF DIRECTORS; EFFECT OF "CHANGE IN CONTROL"
 
  The directors receive an annual retainer of $20,000 and are paid $1,000 for
each meeting attended. The Chairmen of the Audit, Compensation, Nominating and
Pension and Welfare Plans Oversight Committees receive an additional retainer
of $3,000 per year. Each member of a committee receives a fee of $1,000 for
each committee meeting attended. In support of a cost reduction effort
announced in January 1993, directors' compensation as reported above was
reduced 10%. Directors also receive 100 Old Shares annually. Directors who are
officers of the Company or of any subsidiary do not receive any retainer fee,
meeting fee or Old Shares for their service on the Board of Directors or any
committee.
 
  Non-employee directors are eligible to participate in a retirement income
plan (the "Retirement Plan") if they have at least five years of service on the
date of retirement and are not otherwise eligible to receive pension benefits
from the Company or any of its subsidiaries. If a retiring director has at
least ten years of service and is age 70 or over at retirement, he or she is
entitled to a life annuity equal to the greater of $20,000 per year or the
annual retainer fee at retirement. Reduced benefits are available if the
director has less than ten years of service or if retirement occurs before age
70. For these purposes, a director who is a director at the time of a "change
in control" of the Company is credited with three additional years of service,
is deemed to have satisfied the five-year minimum service requirement and is
deemed to be three years older than his or her actual age. Surviving spouse
benefits are available in some cases. A trust (the "Trust") has been created to
serve as a source of payments of benefits under this retirement plan. The Trust
becomes irrevocable upon the occurrence of a "change in control."
 
  Under the Company's travel policy for directors (the "Travel Policy"), each
director of the Company, his or her spouse and their eligible dependent
children are entitled to free transportation on United. The directors are
reimbursed by the Company for additional income taxes resulting from the
taxation of these benefits. The average cost of supplying these benefits for
each director in 1993, including cash payments made in January, 1994 for income
tax liability, was $25,300. The Company also has a policy pursuant to which
each director is entitled to free cargo shipment on United. A director (and his
or her spouse and eligible
 
                                       99

<PAGE>
 
dependent children) serving as such at the time of a "change in control" is
entitled to continue such benefits thereafter for life.
 
  The transactions contemplated by the Plan of Recapitalization will constitute
a "change in control" for purposes of the Travel Policy, the Retirement Plan
and the Trust.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Mr. Strangis is a member of the law firm of Kaplan, Strangis & Kaplan, P.A.,
which has represented, and may continue to represent, the Company and its
affiliates in connection with various legal matters.
 
                             EXECUTIVE COMPENSATION
 
                 UAL CORPORATION COMPENSATION COMMITTEE REPORT
 
PHILOSOPHY
 
  The Company's officer compensation program is designed to attract, retain and
motivate top quality and experienced officers. The program provides industry
competitive compensation opportunities, supports a pay-for-performance culture
and emphasizes pay-at-risk. The program is heavily oriented toward incentive
compensation that is tied to the annual and longer-term financial performance
of the Company and to its longer-term return to stockholders.
 
COMPONENTS
 
  There are two components to the executive compensation program:
 
  . Cash compensation.
 
  .Stock compensation.
 
  The cash compensation program is comprised of base salary and annual cash
incentive compensation. Base salaries are competitive with other large domestic
air carriers, which include the three largest of the five carriers on the
Relative Market Performance Graph below. Base salaries are substantially less
than other corporations of comparable size.
 
  Annual incentive compensation provides an opportunity for additional
earnings. An annual incentive pool is created based upon the Company's
earnings; each year the Compensation Committee approves a schedule of annual
incentive pool funding relative to specified earnings targets. The CEO
recommends to the Committee incentive awards for each officer based upon an
assessment of each such officer's contribution over the preceding year. The
assessment is based on, among other things, an appraisal prepared annually for
each officer on his or her managerial skills and the performance by him or her
of assigned responsibilities. Before making a recommendation, the CEO will
discuss such appraisals with other members of senior management and will
consider these discussions, along with an overall assessment of Company
performance and industry competitive data, in making a recommendation to the
Compensation Committee on incentive awards for each officer. The Compensation
Committee determines the award for the CEO based upon a comparable process and
makes a final determination on incentive awards for all other officers.
 
  The stock compensation program is comprised of stock options and restricted
stock. Stock compensation gives each officer the opportunity to become a
stockholder of the Company. Stock grants are set in consideration of airline
industry practice using the same industry peer group for base salary and annual
incentive compensation. Stock grants are also set in consideration of
individual performance and contribution. The CEO recommends to the Compensation
Committee stock option and/or restricted stock grants for each officer; there
are no specific target award levels or weighting of factors considered in
determining stock grants. The Compensation Committee determines stock awards
for the CEO based upon a comparable process and
 
                                      100

<PAGE>
 
makes a final determination on stock awards for all other officers. Options and
restricted shares typically are granted in alternating years (options in one
year, restricted stock in the next year, etc.).
 
  Stock options may not be granted at less than fair market value on the date
of grant. Stock options carry a ten-year term and have exercise vesting
restrictions that lapse ratably over a four-year period. Restricted shares have
vesting restrictions of up to 5 years.
 
  The officer compensation program in total, although primarily focused on
promoting pay-for-performance and emphasizing pay-at-risk, is heavily oriented
toward stockholder interests through the use of long-term stock incentives that
create a direct linkage between executive rewards and increased stockholder
value. The long-term incentive component, which is comprised totally of stock-
based incentives, represents over half of the total income opportunity for the
officers.
 
CEO COMPENSATION
 
  At Mr. Wolf's request, his salary, upon joining United in 1987, was set at
$575,000, which was $75,000 less than his predecessor was paid. During 1992,
Mr. Wolf's base salary was increased for the first time since joining the
Company in 1987 to $675,000. This increase was based primarily on a qualitative
review of performance factors and his contributions and leadership in among
other things, creating the most comprehensive route structure of any carrier in
the world. Further, additional factors considered were that his salary of
$575,000 approximated the bottom tenth percentile of other chief executive
officers at U.S. companies exceeding $10 billion in annual revenue and that his
salary had not been increased since joining the Company in 1987.
 
  On February 14, 1993, in support of a cost reduction effort, Mr. Wolf
rescinded his raise of $100,000 and returned to his 1987 starting salary of
$575,000. On October 27, 1993, the Compensation Committee approved an increase
in Mr. Wolf's pre-reduction salary by $50,000, to $725,000. This increase was
based primarily on a qualitative review of performance factors and his
continuing contributions and leadership during an extremely difficult time in
the airline industry, and as an attempt to partially close the gap between his
salary and that of CEOs of other large corporations, especially in light of the
fact that he had foregone salary increases during most of his six year tenure
at the Company. On November 1, 1993, Mr. Wolf's salary was reinstated to its
1992 rate of $675,000 per annum, but Mr. Wolf asked the Compensation Committee
to defer his October 1993 increase, which was subsequently implemented on April
1, 1994.
 
  Mr. Wolf received no cash incentive award for 1993 performance. No stock
options or restricted stock were granted to Mr. Wolf during 1993.
 
COMPENSATION FOR THE OTHER NAMED OFFICERS
 
  Base salary rates for the other named executive officers were reduced 5% from
their 1992 levels in February 1993 in support of a cost reduction effort. Base
salaries remained at the reduced levels until September 1993 (November 1993 for
Mr. Pope), at which time they were restored to their 1992 levels. In keeping
with the Compensation Committee's philosophy of providing compensation to
attract, retain and motivate top quality and experienced officers, increases
averaging 6.3% were implemented in recognition of a negative competitive
differential in salary levels at the Company as compared to other large
corporations and because of cost of living increases. None of the other named
executive officers received a cash incentive award for 1993 performance. Each
received a restricted stock grant, subject to the normal restricted stock grant
terms described earlier pursuant to the Company's normal grant schedule, the
amount of which took into consideration the need for a retention mechanism due
to the fact that no payments had been made under the Incentive Plan for three
years.
 
 
                                      101

<PAGE>
 
COMMITTEE ACTIONS REGARDING CHANGES IN CONTROL
 
  As described below under "--Employment Contracts and Change in Control
Arrangements," during 1993 the Compensation Committee, as part of an overall
review and after consultation with an independent compensation and benefits
consultant and with outside counsel, determined to authorize, and the Company
and United thereafter entered into, amendments to the Company's employment
contract with Mr. Wolf (originally entered into in 1987) and to an employment
contract and severance agreements with other named executive officers, new
severance agreements with additional executive officers and amendments to
agreements with Company officers to provide for the automatic vesting of
outstanding stock options, and the confirmation of such treatment for
restricted stock awards, upon a "change in control" of the Company.
 
  These changes were made in connection with the first overall review of these
arrangements in over three years and were intended in part to achieve greater
uniformity in the treatment of the Company's executive officers. The
Compensation Committee believes it is important to take steps to maintain a
stable management team. Revising, amending and adding these various agreements
was an important step in this endeavor. These changes also achieved greater
uniformity in severance and change in control policy than had previously
existed.
 
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
 
  The Compensation Committee reviewed and discussed the impact of Section
162(m) of the Internal Revenue Code on the Company's executive compensation
programs. As a result of this review, the Company, as an integral part of and
conditional upon approval of the Recapitalization, is proposing changes to its
incentive compensation program for named executive officers. These changes will
make the program totally formula-based and will bring the program fully into
compliance with the proposed regulations. The Company is also proposing a
change to its stock incentive compensation program to place a per person cap on
stock grants and to provide performance-based restricted stock awards to the
named executive officers. These changes will cause all future incentive
compensation awards thereunder to be in full compliance with the proposed
regulations.
 
COMPENSATION CONSULTANT AND COMPETITIVE DATA
 
  The Committee consults with independent compensation advisors on executive
compensation matters. The Committee also has access to competitive data on
compensation levels for officer positions.
 
                     UAL CORPORATION COMPENSATION COMMITTEE
 
  John F. McGillicuddy, Chairman    Fujio Matsuda     Harry Mullikin
 
 
                                      102

<PAGE>
 
                           SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                  ANNUAL                         LONG-TERM
                               COMPENSATION                     COMPENSATION
                             ----------------               --------------------
                                              OTHER ANNUAL   RESTRICTED   STOCK      ALL OTHER
  NAME AND PRINCIPAL         SALARY   BONUS   COMPENSATION     STOCK     OPTIONS    COMPENSATION
       POSITION         YEAR   ($)     ($)       ($)(1)     AWARDS($)(2)   (#)         ($)(3)
  ------------------    ---- ------   -----   ------------  ------------ -------    ------------
<S>                     <C>  <C>     <C>       <C>          <C>          <C>          <C>
Stephen M. Wolf--       1993 604,134        0   122,173(4)           0         0       29,821
 Chairman and           1992 625,000        0    25,515              0         0       30,985
 Chief Executive Offi-  1991 575,000        0        --              0   225,000(5)        --
 cer

John C. Pope--          1993 487,846        0    17,235      1,995,000         0       16,651
 President and          1992 458,333        0    12,492              0   110,000(5)    14,599
 Chief Operating Offi-  1991 375,000  140,000        --      1,848,438         0           --
 cer
                                                                               
Joseph R. O'Gorman--    1993 314,348        0     7,548        855,000         0        4,024
 Executive Vice Presi-  1992 300,000        0    18,379              0    30,000        7,094
 dent                   1991 233,385   30,000        --        867,000    30,000           --

James M. Guyette--      1993 310,749        0     5,183        855,000         0       10,708
 Executive Vice Presi-  1992 300,000        0       327              0    30,000        7,874
 dent                   1991 275,000   90,000        --        739,375         0           --

Lawrence M. Nagin--     1993 306,439        0     8,482        855,000         0       10,645
 Executive Vice         1992 290,000        0    21,596              0    30,000        8,187
 President--            1991 265,000   80,000        --      1,035,125         0           --
 Corporate Affairs and
 General Counsel
</TABLE>

- --------
(1) Except as otherwise indicated, amounts specified represent tax gross-ups
    during the fiscal year associated with travel privileges.
(2) The restricted stock granted in 1993 vests 20% per year, from the time of
    grant, over a five year period. All restricted stock granted in 1991 vests
    100% after five years, except that the grant to Mr. O'Gorman vests 25% per
    year, from the time of grant, over a four year period. The number and
    aggregate value, respectively, of restricted holdings at fiscal year-end
    is: Wolf 15,000 Old Shares, $2,190,000; Pope 32,000 Old Shares, $4,672,000;
    O'Gorman 10,500 Old Shares, $1,533,000; Guyette 13,500 Old Shares,
    $1,971,000; Nagin 15,300 Old Shares, $2,233,800. No dividends have been
    paid on these Old Shares, but officers have a right to retain any dividends
    paid on restricted shares.
(3) Amounts represent the total reportable compensation attributable to the
    split-dollar insurance program. None of the above individuals received
    other compensation not reported elsewhere on this statement in excess of
    the lesser of $50,000 or 10% of salary and bonus.
(4) Includes $39,243 attributable to tax gross-ups during the fiscal year
    associated with travel privileges, $16,180 attributable to financial
    planning, travel, certain insurance and automobile benefits, and the
    balance attributable to club membership costs and dues.
(5) The 225,000 Old Share option granted to Mr. Wolf in 1991 and the 110,000
    Old Share option granted to Mr. Pope in 1992 were granted with exercise
    prices in excess of the then current market price. In Mr. Wolf's case,
    75,000 of the Options are exercisable at $147.875 on May 29, 1993, 50,000
    at $170.056 on May 29, 1994, 50,000 at $195.565 on May 29, 1995, and 50,000
    at $224.899 on May 29, 1996. In Mr. Pope's case, 50,000 Options are
    exercisable at $124.00 on April 29, 1994, 20,000 at $142.60 on April 29,
    1995, 20,000 at $163.99 on April 29, 1996, and 20,000 at $188.59 on April
    29, 1997.
 
 
                                      103

<PAGE>
 
              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES
 

<TABLE>
<CAPTION>
                                                NUMBER OF UNEXERCISED   VALUE OF UNEXERCISED IN-
                           SHARES                  OPTIONS/SARS AT      THE-MONEY OPTIONS/SARS AT
                         ACQUIRED ON                  FY-END(#)               FY-END ($)(1)
                          EXERCISE    VALUE   ------------------------- -------------------------
          NAME               (#)     REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
          ----           ----------- -------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>      <C>         <C>           <C>         <C>
Stephen M. Wolf.........       0       N/A      181,250      168,750     6,034,766      966,797
John C. Pope............       0       N/A       87,500      122,500     5,783,594    1,812,531
Joseph R. O'Gorman......       0       N/A       22,500       37,500       187,500      517,500
James M. Guyette........       0       N/A       52,120       30,000     2,764,936      881,719
Lawrence M. Nagin.......       0       N/A       31,250       28,750     1,450,000      838,750
___________
</TABLE>


(1) Market value of the Company's common stock at December 31, 1993, minus
    exercise price of options/SARs.
 
                             PENSION PLAN TABLE
 

<TABLE>
<CAPTION>
                                   YEARS OF SERVICE
               --------------------------------------------------------------
REMUNERATION     15         20         25         30         35         40
- ------------   -------   --------   --------   --------   --------   --------
<S>            <C>       <C>        <C>        <C>        <C>        <C>
  375,000      $90,000   $120,000   $150,000   $180,000   $210,000   $240,000
  425,000      102,000    136,000    170,000    204,000    238,000    272,000
  475,000      114,000    152,000    190,000    228,000    266,000    304,000
  525,000      126,000    168,000    210,000    252,000    294,000    336,000
  575,000      138,000    184,000    230,000    276,000    322,000    368,000
  625,000      150,000    200,000    250,000    300,000    350,000    400,000
  675,000      162,000    216,000    270,000    324,000    378,000    432,000
  725,000      174,000    232,000    290,000    348,000    406,000    464,000
  775,000      186,000    248,000    310,000    372,000    434,000    496,000
  825,000      198,000    264,000    330,000    396,000    462,000    528,000
</TABLE>

 
  The above illustration is based on retirement at age 65 and selection of a
straight life annuity (other annuity options are available, which would reduce
the amounts shown above). The amount of the normal retirement benefit under the
plan is the product of 1.6% times years of credited participation in the plan
times final average compensation (highest five of last ten years of covered
compensation). The retirement benefit amount is not offset by the participant's
Social Security benefit. Compensation covered by the plan includes salary and
cash bonuses. Credited years of participation with the Company and United for
persons named in the cash compensation table are as follows: Mr. Wolf--5 years;
Mr. Pope--5 years; Mr. Guyette--25 years; Mr. O'Gorman--21 years; and Mr.
Nagin--4 years. The amounts shown do not reflect limitations imposed by
Internal Revenue Code on retirement benefits which may be paid under plans
qualified under the Internal Revenue Code. United has agreed to provide under
non-qualified plans the portion of the retirement benefits earned under the
pension plan which would otherwise be subject to Internal Revenue Code
limitations.
 
  The Company has agreed to supplement Messrs. Wolf's and Pope's benefits under
the qualified pension plan and United has agreed to supplement Messrs. Nagin's
and O'Gorman's benefits under the qualified pension plan, in each case by
granting them credit for their prior airline service--22 years for Mr. Wolf, 10
years for Mr. Pope, 6 years for Mr. O'Gorman, and 8 years for Mr. Nagin. Mr.
Wolf's benefit will be offset by retirement benefits he is entitled to under
any of the plans of his prior employers except Tiger International, Inc.
 
  Pursuant to the Officer Agreements, upon their retirements in accordance with
the Plan of Recapitalization, each of Messrs. Wolf, Pope and Nagin will be
entitled to receive a cash payment in an amount calculated to be sufficient to
provide additional annual retirement income commencing at age 56 (age 55 in the
case of Mr. Pope) of approximately $240,000, $12,000 and $32,000, respectively.
 
                                      104

<PAGE>
 
                               UAL CORPORATION
                         RELATIVE MARKET PERFORMANCE
                           TOTAL RETURN 1989--1993
 

                            [GRAPH APPEARS HERE]



<TABLE>
<CAPTION>
                              1988 1989 1990 1991 1992 1993
                              ---- ---- ---- ---- ---- ----
         <S>                  <C>  <C>  <C>  <C>  <C>  <C>
         UAL Corp. .......... 100  156  101  133  115  133
         S&P 500............. 100  132  127  166  179  197
         D-J Airline
          Group(1)........... 100  116   93  125  127  156
</TABLE>

 
                                        Source: Compustat Database
(1) Alaska Air, AMR, Delta, Southwest, USAir.
 
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
 
  The Company and United originally entered into the Officer Agreements with
Mr. Wolf and Mr. Pope when they joined the Company in 1987 and 1988,
respectively, (as subsequently amended and restated, the "Employment
Agreements").
 
  In the event of a change in control of the Company or United followed by the
termination of his employment, Mr. Wolf would be entitled to a payment equal to
from one to three times his salary and anticipated bonus deemed equal to his
salary, depending upon the circumstances of his termination, together with
certain other amounts. In the event of a change in control of the Company or
United followed by a termination of his employment, Mr. Pope would be entitled
to a payment equal to from one to three times his salary and anticipated bonus
of not less than $100,000, depending upon the circumstances of his termination,
together with certain other amounts.
 
  The Employment Agreements also provide for the continuance of certain
specified employee benefits for a period of years equal to the number of years
of compensation included in the severance payment and, depending on the
circumstances applicable to an executive, possibly beyond that time.
 
 
                                      105

<PAGE>
 
  Each other executive officer of United is a party to a severance agreement
(the "Severance Agreements") with United that provides certain benefits if the
executive's employment with United is terminated (1) by the Company without
"cause" (as defined in the Severance Agreements) or (2) by the executive for
"good reason" (as defined in the Severance Agreements) in either case, within
three years following a "change in control" (as defined in the Severance
Agreements). Upon such a termination of employment, the executive officer will
be entitled to receive (1) a cash payment equal to 3 times the sum of (a) the
greater of the executive's base salary as in effect on the date of the change
in control or as in effect on the date his or her employment terminates plus
(b) the average of the greater of the bonuses paid to the executive with
respect to the three years preceding the change in control or the bonuses paid
to the executive with respect to the three years preceding his or her
termination of employment, (2) continuation of travel privileges (and partial
tax reimbursement) on United for the executive and his or her spouse and other
dependents for three years following termination of employment (and for life
thereafter if the executive would have qualified for retiree travel privileges
had his or her employment continued during such three-year period), (3)
coverage under United's medical and other welfare benefits for a period of
three years following the date of termination (and for life thereafter if the
executive would have qualified for retiree medical benefits had his or her
employment continued during such three-year period), (4) a lump sum payment
equal to the value of the pension benefits (including any early retirement
benefits) that the executive officer would have earned under United's pension
plans and arrangements had the executive officer continued to be employed for
an additional three years and (5) a lump sum payment equal to the amounts that
United would have paid on behalf of the executive officer with respect to split
dollar life insurance policies in effect for the executive.
 
  Pursuant to the Officer Agreements, upon their retirements, in accordance
with the Plan of Recapitalization, each of Messrs. Wolf, Pope, and Nagin will
be entitled to receive a cash payment in respect of certain split dollar life
insurance policies in effect for them of approximately $195,000, $160,000 and
$140,000 respectively.
 
  During 1993 the Company amended stock option and restricted stock agreements
with each of the named executive officers to provide for the automatic vesting
of outstanding stock options, and for confirmation of such treatment for
restricted stock awards, upon a change in control.
 
RULE 405 DISCLOSURE
 
  Form 5s for 1993, with respect to one exempt transaction each, were
inadvertently filed late for Messrs. O'Gorman and Wolf due to an error in the
Company's recordkeeping. The Company, and not the individuals, takes
responsibility for effecting these filings.
 
           APPROVAL OF AMENDMENTS TO THE 1981 INCENTIVE STOCK PROGRAM
 
  ON MARCH 25, 1994, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDED, IN
CONNECTION WITH THE APPROVAL OF THE RECAPITALIZATION, THAT THE STOCKHOLDERS
VOTE FOR APPROVAL OF AMENDMENTS (THE "1981 STOCK PROGRAM AMENDMENT") TO THE
1981 INCENTIVE STOCK PROGRAM (THE "1981 STOCK PROGRAM") TO ADD 1,200,000 NEW
SHARES (SUBJECT TO ADJUSTMENT AS HEREINAFTER DESCRIBED) TO THE MAXIMUM NUMBER
OF SHARES WITH RESPECT TO WHICH GRANTS MAY BE MADE UNDER THE 1981 STOCK
PROGRAM.
 
  The full text of the 1981 Stock Program Amendment is filed as an exhibit to
the Registration Statement. The following summary of the 1981 Stock Program is
qualified in its entirety by the full text of the 1981 Stock Program and the
1981 Stock Program Amendment.
 
  ADMINISTRATION. The 1981 Stock Program is administered by the Compensation
Committee of the Board. Upon consummation of the Plan of Recapitalization, the
1981 Stock Program will be administered by the Compensation Committee.
 
  SHARES SUBJECT TO PROGRAM. As initially approved by the stockholders on April
29, 1982, 1,300,000 shares of common stock were issuable under the 1981 Stock
Program. On April 24, 1986 and April 25, 1991,
 
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an additional 2,000,000 and 1,000,000 shares, respectively, were authorized for
issuance under the 1981 Stock Program. The amendments recommended by the Board
would make 1,200,000 (subject to adjustment if additional shares become
issuable to the employee groups in accordance with the Plan of
Recapitalization) New Shares available for issuance under the 1981 Stock
Program. Stock issuable under the 1981 Stock Program may be newly issued or
treasury shares. The Compensation Committee may at any time and from time to
time, in its sole discretion, allocate any or all of such shares for issuance
pursuant to grants of incentive stock options ("ISOs"), under Section 422 of
the Internal Revenue Code, stock options not intended to qualify under Section
422 of the Internal Revenue Code ("NQSOs") and stock appreciation rights
("SARs").
 
  PARTICIPATION. Options and SARs are granted by the Compensation Committee
only to officers and key employees (including officers who may also be
directors) of the Company or any of its subsidiaries. There is currently no
specific limitation on the number of New Shares that may be optioned to any
individual (or made subject to an SAR) under the 1981 Stock Program. The
amendments recommended by the Board would limit the number of New Shares with
respect to which options may be granted under the 1981 Stock Program to any
individual during any two-year period to 125,000 (250,000 with respect to
grants made to any new employee as a condition of employment), subject to
adjustment if additional shares become issuable to the employee groups in
accordance with the Plan of Recapitalization.
 
  STOCK OPTIONS. The option price for ISOs and NQSOs may not be less than 100%
of the fair market value of the common stock on the date of grant. The closing
price of the common stock on the New York Stock Exchange on [      ], 1994 was
$[  ]. The duration of options granted under the 1981 Stock Program cannot
exceed ten years.
 
  STOCK APPRECIATION RIGHTS. SARs may be granted exercisable in cash, or in
common stock, or in a combination of cash and common stock. SARs may be granted
to any participant in the 1981 Stock Program independent of or in tandem with
an NQSO. On exercise of an SAR, the holder will receive up to 100% of the
appreciation in fair market value of the shares subject to the SAR. In the case
of a tandem SAR, the appreciation shall be measured from the option price. All
of the SARs which have been issued under the 1981 Stock Program have been
tandem SARs. Exercise of an SAR reduces the number of shares reserved for
issuance under the 1981 Stock Program by the number of shares with respect to
which the SAR is exercised.
 
  AMENDMENT AND TERMINATION OF PROGRAM. The Board may amend the 1981 Stock
Program from time to time or terminate the 1981 Stock Program at any time, but
may not reduce the then existing amount of any participant's options or SARs or
adversely change the terms and conditions thereof without the participant's
consent. No amendment may without stockholder approval, (i) materially increase
the benefits accruing to participants, (ii) materially increase the number of
shares which may be issued, or (iii) materially modify the requirements as to
eligibility for participation in the 1981 Stock Program. The Plan of
Recapitalization will automatically terminate on December 8, 2001.
 
  FEDERAL INCOME TAX CONSEQUENCES. The Company has been advised by counsel that
the Federal income tax consequences to the participants in the 1981 Stock
Program and the affiliate of the Company employing them under the now
applicable provisions of the Internal Revenue Code and the regulations
thereunder are substantially as follows.
 
  With respect to NQSOs and SARs, an optionee is not deemed to receive any
income at the time an NQSO or SAR is granted nor is his employer entitled to a
deduction at that time. However, when any part of the NQSO or SAR is exercised
the optionee is deemed to have received ordinary income (i) in the case of an
NQSO, in an amount equal to the difference between the option price and the
fair market value of the shares acquired upon such exercise and (ii) in the
case of an SAR, in an amount equal to the sum of the fair market value of the
shares and any cash received. The optionee's employer is entitled to a tax
deduction in an amount equal to the amount of ordinary income realized by the
optionee.
 
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<PAGE>
 
  With respect to ISOs, an optionee is not deemed to receive any income at the
time an ISO is granted or exercised, and his employer is not entitled to any
deduction. If the optionee disposes of the stock prior to the expiration of the
holding period required by Section 422 of the Internal Revenue Code, he will
have ordinary income in the year of disposition equal to the excess of the
amount received for the shares over the option price, and his employer is
entitled to a tax deduction at such time in an amount equal to the amount of
ordinary income realized by the optionee. If the optionee disposes of the stock
after expiration of the holding period required by Section 422 of the Internal
Revenue Code, the excess of the amount received for the shares over the option
price will be taxed as long term capital gain and no deduction will be
available to the employer.
 
  Special rules apply in the case of individuals subject to Section 16(b) of
the Exchange Act. In particular, under current law any shares received pursuant
to the exercise of a stock option or SAR, absent an election by the optionee to
include in his income at the time of exercise the excess of the value of shares
received over the option price, are treated as restricted as to transferability
and subject to a substantial risk of forfeiture for a period of six months
after the date of grant of the option. Accordingly, the amount of ordinary
income recognized, and the amount of the employer's deduction, are determined
as of such later date.
 
  The Board of Directors recommends a vote FOR the approval of the amendments
to the 1981 Stock Program.
 
            APPROVAL OF AMENDMENTS TO THE 1988 RESTRICTED STOCK PLAN
 
  ON MARCH 25, 1994, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDED IN
CONNECTION WITH THE APPROVAL OF THE RECAPITALIZATION THAT THE STOCKHOLDERS VOTE
FOR APPROVAL OF AMENDMENTS (THE "1988 RESTRICTED STOCK PLAN AMENDMENTS") TO THE
1988 RESTRICTED STOCK PLAN (THE "1988 RESTRICTED STOCK PLAN") TO PRESERVE, TO
THE MAXIMUM EXTENT POSSIBLE, THE DEDUCTIBILITY BY THE COMPANY OF AMOUNTS
AWARDED UNDER THE PLAN.
 
  The full text of the 1988 Restricted Stock Plan Amendment is filed as an
exhibit to the Registration Statement. The following summary of the 1988
Restricted Stock Plan is qualified in its entirety by the full text of the 1988
Restricted Stock Plan and the 1988 Restricted Stock Plan Amendment.
 
  SHARES. A maximum of 500,000 Old Shares may be awarded under the 1988
Restricted Stock Plan. Upon consummation of the Plan of Recapitalization, the
Old Shares remaining to be issued under the 1988 Restricted Stock Plan will be
converted into New Shares. Shares awarded under the 1988 Restricted Stock Plan
(the "Restricted Stock") may only be treasury shares. Shares of Restricted
Stock that are forfeited under the 1988 Restricted Stock Plan may subsequently
be awarded to other participants under the 1988 Restricted Stock Plan.
 
  The closing price of the common stock on the NYSE on [     ], 1994 was
[     ].
 
  PARTICIPATION. Restricted Stock may be awarded under the 1988 Restricted
Stock Plan to key employees, including officers, of the Corporation and its
subsidiaries. The 1988 Restricted Stock Plan currently imposes no limit on the
number of officers and other key employees to whom Restricted Stock may be
awarded or on the number of shares that may be granted to any individual. The
1988 Restricted Stock Plan Amendments would limit the number of New Shares that
may be awarded under the 1988 Restricted Stock Plan to any individual during
any two-year period to 30,000 (60,000 with respect to grants made to any new
employee as a condition of employment), subject to adjustment if additional
shares become issuable to the employee groups in accordance with the Plan of
Recapitalization.
 
  ADMINISTRATION. The 1988 Restricted Stock Plan is administered by the
Compensation Committee of the Board. Upon consummation of the Plan of
Recapitalization, the Plan will be administered by the
 
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<PAGE>
 
Compensation Committee of the Board. No member of the Compensation Committee is
an employee of the Company or of any of its subsidiaries. Under the 1988
Restricted Stock Plan, no member of the Compensation Committee shall be
eligible to be selected to participate in the 1988 Restricted Stock Plan at any
time while he is serving on the Compensation Committee.
 
  RESTRICTIONS. Restricted Stock is awarded under the 1988 Restricted Stock
Plan in the discretion of the Compensation Committee. All shares of stock
awarded pursuant to the 1988 Restricted Stock Plan (including any shares
received by the holders thereof as a result of stock dividends, stock splits or
any other forms of recapitalization) shall be subject to the restrictions
specified in the 1988 Restricted Stock Plan. Restricted Stock certificates
shall remain in the custody of the Company and shall bear a legend that such
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire. Restrictions expire ten years after award unless the
Compensation Committee determines in its discretion to accelerate or terminate
the period of restriction. Restrictions expire upon a Change in Control, as
defined in the 1988 Restricted Stock Plan. In addition, the restrictions expire
if the Company is dissolved, or is not the surviving corporation in a merger or
consolidation, unless the surviving corporation agrees to exchange the
Restricted Stock for its shares having an equivalent value. Participants, as
owners of the awarded shares, shall have all other stockholder rights,
including the right to vote shares of Restricted Stock and to receive dividends
and other distributions, if any, during the restriction period. The 1988
Restricted Stock Plan Amendments would permit the Committee to provide that the
"Restricted Period" with respect to any Restricted Shares shall lapse based
upon the attainment by the Company of one or more target levels of pre-tax
income (as determined under generally accepted accounting principles but
without regard to any items (whether gains or losses) otherwise included
therein relating to (1) the ESOPs or the ESOP Trusts, (2) any event or
occurrence that the Committee determines to be either not directly related to
the operations of the Company or not within the reasonable control of the
Company's management, (3) the 1988 Restricted Stock Plan and (4) the Company's
Incentive Compensation Plan (as defined below)). Such target level(s) shall be
determined by the Compensation Committee on or before the allocation of such
Restricted Shares, shall relate to such period or periods of time as the
Compensation Committee shall prescribe and may provide that any period in which
such pre-tax income is less than zero may be disregarded.
 
  AMENDMENT. The 1988 Restricted Stock Plan may be amended, suspended or
terminated by the Board, provided that no such action shall increase the
maximum number of shares that may be awarded pursuant to the Plan of
Recapitalization, render any Compensation Committee member eligible to receive
Restricted Stock while a Compensation Committee member, or adversely affect
awards already made without the participant's consent.
 
  ADJUSTMENTS. In case of a stock split, stock dividend, merger, consolidation,
reorganization, recapitalization or other change in corporate structure of the
Company, appropriate adjustments will be made by the Compensation Committee in
the number and kind of shares subject to the 1988 Restricted Stock Plan.
 
  FEDERAL INCOME TAX CONSEQUENCES. No income will be recognized by a
participant upon receipt of any award of Restricted Stock, unless the
participant files an election with the IRS within 30 days of the award to
recognize such income. If the participant makes such an election, the Company
would be entitled to a deduction for payment of compensation, assuming
compliance with applicable withholding requirements, and the participant would
be required to report as ordinary income, the fair market value of the
Restricted Stock on the award date. In the absence of such an election, the
participant's income and the Company's corresponding deduction are deferred
until the restrictions cease to apply, at which time the amount of the income
and deduction would be based on the fair market value of the shares at the time
the restrictions cease to apply.
 
  Unless the election referred to above is made, dividends received with
respect to Restricted Stock prior to the time the restrictions cease to apply
would be taxed as ordinary income to the participant and would be deductible by
the Company as payment of compensation, assuming compliance with applicable
withholding requirements. Dividends received with respect to shares after such
an election has been made or after the
 
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<PAGE>
 
restrictions cease to apply would be taxed as dividends to the participant and
would not be deductible by the Company.
 
           APPROVAL OF AMENDMENTS TO THE INCENTIVE COMPENSATION PLAN
 
  ON MARCH 25, 1994 THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDED IN
CONNECTION WITH THE APPROVAL OF THE RECLASSIFICATION THAT THE STOCKHOLDERS VOTE
FOR APPROVAL OF AMENDMENTS (THE "INCENTIVE PLAN AMENDMENT") TO THE COMPANY'S
INCENTIVE COMPENSATION PLAN (THE "INCENTIVE PLAN") TO PRESERVE, TO THE MAXIMUM
EXTENT POSSIBLE, THE DEDUCTIBILITY BY THE COMPANY OF AMOUNTS PAID THEREUNDER.
 
  The full text of the Incentive Compensation Amendment is filed as an exhibit
to the Registration Statement. The following summary of the Incentive
Compensation Plan is qualified in its entirety by the full text of the
Incentive Plan and the Incentive Plan Amendment.
 
  Key employees and officers of the Company and its subsidiaries are eligible
to participate in the Incentive Plan. The grant of awards and the size thereof
depends upon the degree to which the Company's financial targets, as approved
by the Compensation Committee, are reached or exceeded and the extent to which
individual performance objectives set by management (or by the Compensation
Committee in the case of the Company's CEO) are attained or exceeded.
Performance is measured annually and awards are vested in the year awarded.
Awards are paid in the year awarded.
 
  Pursuant to the Incentive Plan Amendment, awards under the Incentive Plan
with respect to any participant who is a "covered employee" (as defined in
Section 162(m)(3) of the Internal Revenue Code) with respect to the applicable
award year (i) may not exceed $900,000 and (ii) shall be determined by
reference to a formula which shall define the award by reference to the
attainment by the Company of one or more target levels of pre-tax income (as
determined under generally accepted accounting principles but without regard to
any items (whether gains or losses) otherwise included therein relating to (1)
the ESOPs or the ESOP Trusts, (2) any event or occurrence that the Compensation
Committee determines to be either not directly related to the operations of the
Company or not within the reasonable control of the Company's management, (3)
the Incentive Plan and (4) the Company's 1988 Restricted Stock Plan) for such
award year. Such target level(s) and the formula referred to above shall be
determined by the Compensation Committee prior to the commencement of such
award year (or at such later time as may be permissible under Section 162(m) of
the Internal Revenue Code). Notwithstanding the foregoing, the Compensation
Committee may reduce the award otherwise determined pursuant to such formula in
its sole discretion.
 
  The Incentive Plan Amendment further provides that payment of an award may be
deferred, pursuant to a prior election by a participant, to a period selected
by the participant. The Incentive Plan may be amended, modified or terminated
by the Board in its discretion.
 
  Amounts paid under the Incentive Plan should be taxable as ordinary income to
the participant and deductible by the Company, in each case, in the year in
which the amounts are paid.
 
  The Board of Directors recommends a vote FOR approval of the amendments to
the Incentive Plan.
 
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                           DESCRIPTION OF SECURITIES
 
THE DEBENTURES
 
  The Series A Debentures and the Series B Debentures will be issued under an
Indenture dated as of July 1, 1991 (the "Indenture") between United, as issuer,
and The Bank of New York, as Trustee (the "Indenture Trustee"). A copy of the
Indenture has been filed as an exhibit to the Registration Statement of which
this Proxy Statement/Prospectus is a part. The statements herein relating to
the Debentures and the Indenture are summaries and reference is made to the
provisions of the Indenture, including the definitions therein of certain terms
capitalized in this Proxy Statement/Prospectus. Where the summaries do not make
a distinction between the Series A Debentures and the Series B Debentures, such
summaries refer to either series. Whenever particular Sections or defined terms
of the Indenture are referred to herein, such sections or defined terms are
incorporated herein by reference.
 
 General
 
  The Series A Debentures will bear interest at a rate per annum that has been
fixed provisionally at 9.00%, and the Series B Debentures will bear interest at
a rate per annum that has been fixed provisionally at 9.70%. As provided in the
Plan of Recapitalization, the rates of interest proposed to be borne by the
Series A Debentures and the Series B Debentures may be adjusted in advance of
the Meeting to rates that would permit the Series A Debentures and the Series B
Debentures to trade at par, on a fully distributed basis, as of the date on
which such determination is made, although the interest rates to be borne by
the Debentures may not be adjusted above 10.125% in the case of the Series A
Debentures and 10.825% in the case of the Series B Debentures. The Company will
make a public announcement of the rates of interest to be borne by the Series A
Debentures and the Series B Debentures at least five days in advance of the
Meeting. See "THE PLAN OF RECAPITALIZATION--Terms and Conditions--Pricing the
Securities." The Plan of Recapitalization also provides that, at the request of
the Unions, either or both series of Debentures may be made redeemable prior to
their respective final stated maturity at the option of United. See "--The
Debentures--Redemption." Interest on the Debentures will be paid semi-annually
beginning in 1994 to holders of record on the record date for such payment. The
Series A Debentures will mature in 2004. The Series B Debentures will mature in
2014. Prior to the Effective Time, the Company will establish the semi-annual
interest payment dates, the specific final maturity dates and the maximum
aggregate principal amount of each series of Debenture. The Debentures will
bear interest from the date of their original issuance or the most recent
interest payment date from which interest has been paid.
 
  The Debentures will be unsecured and unsubordinated obligations of United and
will rank on a parity with all other unsecured and unsubordinated indebtedness
of United. As of        , 1994 United had outstanding $             aggregate
principal amount of indebtedness that will rank pari passu with the Debentures
offered hereby. The Indenture does not limit the right of United to incur
additional senior indebtedness. As of      , 1994, senior indebtedness of
United on a consolidated basis aggregated approximately $    .
 
 Redemption
 
  The Debentures will not be subject to any sinking fund or other obligation of
United to redeem or retire the Debentures. The Debentures may not be called for
redemption prior to their respective final stated maturities. The Plan of
Recapitalization provides that either or both series of Debentures may be made
redeemable at the option of United prior to their respective final stated
maturities if the Unions so request a reasonable period of time prior to the
Announcement Date. See "THE PLAN OF RECAPITALIZATION--Terms and Conditions--
Pricing the Securities."
 
 
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<PAGE>
 
 Payment, Registration, Transfer and Exchange
 
  Payments in respect of the Debentures will be made at the office or agency of
United maintained for that purpose as United may designate from time to time,
except that, at the option of United, interest payments, if any, on the
Debentures may be made by checks mailed by the Indenture Trustee to the holders
of Debentures entitled thereto at their registered addresses. (Sections 3.7(a)
and 9.2 of the Indenture.) Payment of any installment of interest on Debentures
will be made to the persons in whose names such Debentures are registered at
the close of business on the regular record date for such interest. (Sections
3.7(a) of the Indenture.)
 
  Debentures will be transferable or exchangeable at the agency of United
maintained for such purpose as designated by United from time to time.
(Sections 3.5 and 9.2 of the Indenture.) Debentures may be transferred or
exchanged without service charge, other than any tax or other governmental
charge imposed in connection therewith. (Section 3.5 of the Indenture.)
 
 Consolidation, Merger or Sale by United
 
  The Indenture provides that United may merge or consolidate with or into any
other corporation or sell, convey, transfer or otherwise dispose of all or
substantially all of its assets to any person, firm or corporation, if (i)(a)
in the case of a merger or consolidation, United is the surviving corporation
or (b) in the case of a merger or consolidation where United is not the
surviving corporation and in the case of such a sale, conveyance or other
disposition, the successor or acquiring corporation is a corporation organized
and existing under the laws of the United States of America or a State thereof
and such corporation expressly assumes by supplemental indenture all the
obligations of United under the Debentures and the Indenture, (ii) immediately
after giving effect to such merger or consolidation, or such sale, conveyance,
transfer or other disposition, no Default or Event of Default has occurred and
is continuing and (iii) certain other conditions are met. In the event a
successor corporation assumes the obligations of United, such successor
corporation will succeed to and be substituted for United under the Indenture
and under the Debentures and all obligations of United will terminate. (Section
7.1 of the Indenture.)
 
 Events of Default, Notice and Certain Rights on Default
 
  The Indenture provides that, if an Event of Default occurs with respect to
the Debentures of either series and is continuing, the Indenture Trustee for
such series or the holders of at least 25% in aggregate principal amount of all
of the outstanding Debentures of that series, by written notice to United (and
to the Indenture Trustee for such series, if notice is given by such holders of
Debentures), may declare the principal of all the Debentures of that series to
be due and payable. (Section 5.2 of the Indenture.)
 
  Events of Default with respect to Debentures of either series are defined in
the Indenture as being: (i) default for 30 days in payment of interest on any
Debentures of that series when due, (ii) default for 10 days in payment of
principal, premium, if any, at its maturity or on redemption or otherwise, of
any Debentures of that series when due, (iii) default for 60 days after notice
to United by the Indenture Trustee for such series, or by the holders of at
least 25% in aggregate principal amount of the Debentures of such series then
outstanding, in the performance of any other agreement in the Debentures of
that series, in the Indenture or in any supplemental indenture, (iv) default
resulting in acceleration of other indebtedness of United for borrowed money
where the aggregate principal amount so accelerated exceeds $100 million and
such acceleration is not rescinded or annulled within 10 days after the written
notice thereof to United by the Indenture Trustee or to United and the
Indenture Trustee by the holders of at least 25% in aggregate principal amount
of the Debentures of such series then outstanding, provided that such Event of
Default will be cured or waived if the default that resulted in the
acceleration of such other indebtedness is cured or waived, and (v) certain
events of bankruptcy, insolvency or reorganization of United. (Section 5.1 of
the Indenture.)
 
 
                                      112

<PAGE>
 
  The Indenture provides that the Indenture Trustee for either series of
Debentures will, within 90 days after the occurrence of a Default with respect
to Debentures of that series, give to the holder of the Debentures of that
series notice of all uncured Defaults known to it; provided that, except in the
case of default in payment on the Debentures of that series, the Indenture
Trustee may withhold the notice if and so long as a committee of its
responsible officers in good faith determines that withholding such notice is
in the interest of the holders of the Debentures of that series. (Section 6.5
of the Indenture.) "Default" means any event that is, or, after notice or
passage of time or both, would be, an Event of Default. (Section 1.1 of the
Indenture.)
 
  The Indenture provides that the holders of a majority in aggregate principal
amount of the Debentures of each series affected (with each such series voting
as a class) may direct the time, method and place of conducting any proceeding
for any remedy available to the Indenture Trustee for such series or exercising
any trust or power conferred on such Indenture Trustee. (Section 5.8 of the
Indenture.)
 
  The Indenture includes a covenant that United will file annually with the
Indenture Trustee a certificate as to United's compliance with all conditions
and covenants of the Indenture. (Section 9.7 of the Indenture.)
 
  The holders of a majority in aggregate principal amount of either series of
Debentures by notice to the Indenture Trustee for such series may waive, on
behalf of the holders of all Debentures of such series, any past Default or
Event of Default with respect to that series and its consequences except a
Default or Event of Default in the payment of the principal of, premium, if
any, or interest on any Debenture and certain other defaults. (Section 5.7 of
the Indenture.)
 
 Modification of the Indenture
 
  The Indenture contains provisions permitting United and the Indenture Trustee
to enter into one or more supplemental indentures without the consent of the
holders of any of the Debentures (i) to evidence the succession of another
corporation to United and the assumption of the covenants of United by a
successor to United, (ii) to add to the covenants of United or surrender any
right or power of United, (iii) to add additional Events of Default with
respect to any series, (iv) to secure the Debentures, (v) to evidence and
provide for successor Indenture Trustees, (vi) to correct or supplement any
inconsistent provisions or to make any other provisions with respect to matters
or questions arising under the Indenture, provided that such action does not
adversely affect the interests of any holder of Debentures of any series issued
under the Indenture, or (vii) to cure any ambiguity or correct any mistake.
(Section 8.1 of the Indenture.)
 
  The Indenture also contains provisions permitting United and the Indenture
Trustee, with the consent of the holders of a majority in aggregate principal
amount of the outstanding Debentures of each series affected by a supplemental
indenture, to execute such supplemental indenture to add any provisions to or
to change or to eliminate any of the provisions of the Indenture or any
supplemental indenture or to modify the rights of the holders of Debentures of
such series, except that no such supplemental indenture may, without the
consent of the holder of each Debenture so affected, (i) change the time for
payment of principal or interest on any Debenture, (ii) reduce the principal
of, or any installment of interest on, any Debenture, (iii) reduce the amount
of premium, if any, payable upon the redemption of any Debenture, (iv) change
the coin or currency in which any Debenture or any premium or interest thereon
is payable, (v) impair the right to institute suit for the enforcement of any
payment on or with respect to any Debenture, (vi) reduce the percentage in
principal amount of the outstanding Debentures of any series the consent of
whose holders is required for modification or amendment of the Indenture or for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, (vii) change the obligation of United to maintain an office
or agency in the places and for the purposes specified in the Indenture or
(viii) modify the provisions relating to waiver of certain defaults or any of
the foregoing provisions. (Section 8.2 of the Indenture.)
 
 Defeasance and Covenant Defeasance
 
  United may elect either (i) to defease and be discharged from any and all
obligations with respect to the Debentures of any series (except as described
below) ("defeasance") or (ii) to be released from its obligations
 
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<PAGE>
 
with respect to certain covenants applicable to the Debentures of any series
("covenant defeasance"), upon the deposit with the Indenture Trustee for such
series (or other qualifying trustee), in trust for such purpose, of money
and/or Government Obligations that through the payment of principal and
interest in accordance with their terms will provide money in the amount
sufficient to pay the principal of, premium, if any, and interest on such
Debentures to their respective final stated maturity or redemption, as the case
may be. Upon the occurrence of a defeasance, United will be deemed to have paid
and discharged the entire indebtedness represented by such Debentures and to
have satisfied all of its other obligations under such Debentures (except for
(i) the rights of holders of such Debentures to receive, solely from the trust
funds deposited to defease such Debentures, payments in respect of the
principal of, premium, if any, and interest on such Debentures when such
payments are due and (ii) certain other obligations as provided in the
Indenture). Upon the occurrence of a covenant defeasance, United will be
released only from its obligations to comply with certain covenants contained
in the Indenture relating to such Debentures, will continue to be obligated in
all other respects under such Debentures and will continue to be contingently
liable with respect to the payment of principal, premium, if any, and interest
with respect to such Debentures.
 
  The conditions to both defeasance and covenant defeasance are as follows: (i)
such defeasance or covenant defeasance must not result in a breach or violation
of, or constitute a Default or Event of Default under, the Indenture, or result
in a breach or violation of, or constitute a default under, any other material
agreement or instrument of United, (ii) certain bankruptcy related Defaults or
Events of Default with respect to United must not have occurred and be
continuing during the period commencing on the date of the deposit of the trust
funds to defease such Debentures and ending on the 91st day after such date,
(iii) United must deliver to the Indenture Trustee an Opinion of Counsel to the
effect that the holders of such Debentures will not recognize income, gain or
loss for Federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at all the same times as would have been the case if such
defeasance or covenant defeasance had not occurred (such Opinion of Counsel, in
the case of defeasance, must refer to and be based upon a ruling of the IRS or
a change in applicable Federal income tax law occurring after the date of the
Indenture) and (iv) United must deliver to the Indenture Trustee an Officers'
Certificate and an Opinion of Counsel with respect to compliance with the
conditions precedent to such defeasance or covenant defeasance and with respect
to certain registration requirements under the Investment Company Act of 1940,
as amended. (Article 4 of the Indenture.) The Indenture requires that a
nationally recognized firm of independent public accountants deliver to the
Indenture Trustee a written certification as to the sufficiency of the trust
funds deposited for the defeasance or covenant defeasance of such Debentures.
The Indenture does not provide the holders of such Debentures with recourse
against such firm. In the event that Government Obligations deposited with the
Indenture Trustee for the defeasance of such Debentures decrease in value or
default subsequent to their being deposited, United will have no further
obligation, and the holders of such Debentures will have no additional recourse
against United, as a result of such decrease in value or default. As described
above, in the event of a covenant defeasance, United remains contingently
liable with respect to the payment of principal, premium, if any, and interest
with respect to such Debentures.
 
  United may exercise its defeasance option with respect to such Debentures
notwithstanding its prior exercise of its covenant defeasance option. If United
exercises its defeasance option, payment of such Debentures may not be
accelerated because of a Default or an Event of Default. If United exercises
its covenant defeasance option, payment of such Debentures may not be
accelerated by reason of a Default or an Event of Default with respect to the
covenants to which such covenant defeasance is applicable. However, if such
acceleration were to occur, the realizable value at the acceleration date of
the money and Government Obligations in the defeasance trust could be less than
the principal and interest then due on such Debentures, in that the required
deposit in the defeasance trust is based upon scheduled cash flow rather than
market value, which will vary depending upon interest rates and other factors.
 
 
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<PAGE>
 
 The Indenture Trustee
 
  The Bank of New York is the Indenture Trustee under the Indenture. United and
the Company also maintain banking and other commercial relationships with The
Bank of New York and its affiliates in the ordinary course of business and The
Bank of New York acts as trustee under several indentures for United and the
Company.
 
THE CAPITAL STOCK OF THE COMPANY
 
  As of the date of this Proxy Statement/Prospectus, the Company's current
Amended and Restated Certificate of Incorporation authorizes the issuance of
125,000,000 shares of Old Shares and 16,000,000 shares of preferred stock. As
of [date] there were outstanding (a)            Old Shares, (b) 6,000,000
shares of Series A Preferred Stock, (c) employee stock options (the "Employee
Stock Options") to purchase an aggregate of            Old Shares (of which
options to purchase an aggregate of            Old Shares were currently
exercisable) and (d) rights to purchase an aggregate of             shares of
Junior Participating Preferred Stock. The Company has designated 1,250,000
shares of a series of preferred stock as Junior Participating Preferred Stock,
which are reserved for issuance upon exercise of certain preferred share
purchase rights associated with each outstanding Old Share (the "Rights"), as
described below.
 
  Upon consummation of the Recapitalization, the authorized capital stock of
the Company will consist of (i) 100,000,000 New Shares, par value $0.01 per
share, (ii) 16,000,000 shares of serial preferred stock, without par value (the
"Serial Preferred Stock"), of which (a) 6,000,000 shares will be designated as
Series A Preferred Stock, (b)            shares will be designated Public
Preferred Stock, (c)            shares will be designated Junior Participating
Preferred Stock and (d)      shares will be designated Redeemable Preferred
Stock, (iii)      shares of Class 1 ESOP Preferred Stock, par value $0.01 per
share, (iv)       shares of Class 2 ESOP Preferred Stock, par value $0.01 per
share, (v) 7,650,000 shares of the Class P Preferred Stock, par value $0.01 per
share, (vi) 6,150,000 shares of the Class M Preferred Stock, par value $0.01
per share, (vii) 2,800,000 shares of the Class S Preferred Stock, par value
$0.01 per share, (ix) ten shares of the Class I Preferred Stock, par value
$0.01 per share, (x) one share of the Class Pilot MEC Preferred Stock, par
value $0.01 per share, (xi) one share of the Class IAM Preferred Stock, par
value $0.01 per share and (xii) ten shares of the Class SAM Preferred Stock,
par value $0.01 per share. The serial preferred stock not otherwise designated
may be issued from time to time in one or more series, without stockholder
approval, with such powers, preferences and relative, participating, optional
or other special rights, and qualifications, limitations, or restrictions
thereof as may be adopted by the Board of Directors or a duly authorized
committee thereof.
 
  Upon consummation of the Recapitalization, assuming that (i) none of the
Employee Stock Options is exercised, (ii) none of the Series A Preferred Stock
is converted and (iii) none of the ESOP Preferred Stock is converted, the
outstanding capital stock of the Company will consist of (a)            New
Shares, (b) 6,000,000 shares of Series A Preferred Stock, (c)            shares
of Public Preferred Stock, (d)           shares of ESOP Preferred Stock, (e)
      shares of Voting Preferred Stock and (f)       shares of Director
Preferred Stock. Upon consummation of the Transaction, assuming that (I) all
the Employee Stock Options are exercised, (II) all the Series A Preferred Stock
is converted and (III) none of the ESOP Preferred Stock is converted, the
outstanding capital stock of the Company will consist of (A)            New
Shares, (B)            shares of Public Preferred Stock, (C)           shares
of ESOP Preferred Stock, (D)       shares of Voting Preferred Stock and (E)
     shares of Director Preferred Stock. In either case, all the shares of
Exchangeable Preferred Stock that are issued will be exchanged for cash and
Debentures immediately upon issuance.
 
THE PUBLIC PREFERRED STOCK
 
  The summary of terms of the Public Preferred Stock contained in this Proxy
Statement/Prospectus does not purport to be complete and is subject to, and is
qualified in its entirety by, the provisions of the Restated Certificate that
will become effective in connection with the consummation of the
Recapitalization. A copy
 
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<PAGE>
 
of the Restated Certificate has been filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus is a part.
 
 General
 
  As part of the Recapitalization, each outstanding Old Share will, without
further action on the part of the holder thereof, be reclassified and converted
into, among other things, $31.10 liquidation value (1.244 shares) of Public
Preferred Stock. To the extent necessary to implement the intended terms of the
Public Preferred Stock in accordance with the Restated Certificate the Company
may issue fewer shares of Public Preferred Stock (each with a proportionately
greater liquidation value) to a depository on behalf of holders of depository
receipts for depository shares. Each such depository share would represent an
interest in a fractional share of Public Preferred Stock that would have a
liquidation value of $25. When issued, the Public Preferred Stock will be
validly issued, fully paid and nonassessable. The holders of the Public
Preferred Stock will not have any preemptive rights with respect to any shares
of capital stock of the Company or any other securities of the Company
convertible into or carrying rights or options to purchase any such shares. The
Public Preferred Stock will not be subject to any sinking fund or other
obligation of the Company to redeem or retire the Public Preferred Stock.
Unless redeemed by the Company, the Public Preferred Stock will have perpetual
maturity.
 
 Ranking
 
  The Public Preferred Stock will rank on a parity with the Series A Preferred
Stock and the Redeemable Preferred Stock and will rank senior to the New
Shares, the ESOP Preferred Stock, the Voting Preferred Stock, the Director
Preferred Stock (as defined below) and any shares of Junior Participating
Preferred Stock (as defined below) issued pursuant to the Rights with respect
to payment of dividends and amounts payable upon liquidation, dissolution or
winding up.
 
  While any shares of Public Preferred Stock are outstanding, the Company may
not authorize the creation or issue of any class or series of stock that ranks
senior to the Public Preferred Stock as to dividends or upon liquidation,
dissolution or winding up without the consent of the holders of 66 2/3% of the
outstanding shares of Public Preferred Stock. The Company may create additional
classes or series of preferred stock or authorize, or increase the authorized
amount of, any shares of any class or series of preferred stock ranking on a
parity with or junior to the Public Preferred Stock without the consent of any
holder of Public Preferred Stock. See "--The Public Preferred Stock--Voting
Rights."
 
 Dividends
 
  Holders of shares of Public Preferred Stock will be entitled to receive,
when, as and if declared by the Board of the Company out of assets of the
Company legally available therefor, cumulative cash dividends at a rate per
annum that has been fixed provisionally at 10.25% of the $25 liquidation value
thereof (or $2.5625 per share) per annum. As provided in the Plan of
Recapitalization, the dividend rate proposed to be borne by the Public
Preferred Stock may be adjusted in advance of the Meeting to a rate that would
permit the Public Preferred Stock to trade at par, on a fully distributed
basis, as of the date such determination is made, although the dividend rate to
be borne by the Public Preferred Stock may not be adjusted above 11.375%. The
Company will make a public announcement of the revised dividend rate at least
five days in advance of the Meeting. See "THE PLAN OF RECAPITALIZATION--Terms
and Conditions--Pricing the Securities." Dividends on the Public Preferred
Stock will be payable quarterly in arrears on February 1, May 1, August 1 and
November 1 of each year, commencing     ,1994 (and, in the case of any accrued
but unpaid dividends, at such additional times and for such interim periods, if
any, as determined by the Board of Directors), at such annual rate. Each such
dividend will be payable to holders of record as they appear on the stock
records of the Company at the close of business on such record dates, which
will not be more than 60 days or less than 10 days preceding the payment dates
corresponding thereto, as may be fixed by the Board of Directors of the Company
or a duly authorized committee thereof. Dividends will accrue from the date of
 
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<PAGE>
 
the original issuance of the Public Preferred Stock (the "Issue Date").
Dividends will be cumulative from such date, whether or not in any dividend
period or periods there are assets of the Company legally available for the
payment of such dividends.
 
  Each share of Public Preferred Stock issued after the Issue Date (whether
issued upon transfer of or in exchange for an outstanding share of Public
Preferred Stock or issued for any other reason) will be entitled to receive,
when, as and if declared by the Board, dividends with respect to each Dividend
Period, starting with the Issue Date, for which full dividends have not been
paid prior to the date upon which such share of Public Preferred Stock was
issued. Any share of Public Preferred Stock that is issued after the record
date with respect to any dividend payment and before such dividend is paid will
not be entitled to receive the dividend paid to holders of Public Preferred
Stock as of such record date.
 
  The regularly quarterly dividend payment dates with respect to Public
Preferred Stock coincide with the regular dividend payment dates on the Series
A Preferred Stock, and two of the dividend payment dates with respect to the
Public Preferred Stock will coincide with the regular semi-annual interest
payment dates on the Debentures. The Plan of Recapitalization provides that the
Company will use the same record date with respect to regular quarterly
dividend payments on the Public Preferred Stock and the Series A Preferred
Stock. It also provides that the Company will use the same record date with
respect to the Public Preferred Stock, the Series A Preferred Stock and the
Debentures when the regular dividend payment dates coincide with the regular
interest payment date.
 
  Accumulations of dividends on shares of Public Preferred Stock will not bear
interest. Dividends payable on the Public Preferred Stock for any period
greater or less than a full dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months. Dividends payable on the
Public Preferred Stock for each full dividend period will be computed by
dividing the annual dividend rate by four.
 
  Except as provided in the next sentence, no dividend will be declared or paid
on any Parity Stock (as defined below) unless full cumulative dividends have
been paid on the Public Preferred Stock for all prior dividend periods. If
accrued dividends on the Public Preferred Stock for all prior dividend periods
have not been paid in full, then any dividend declared on the Public Preferred
Stock for any dividend period and on any Parity Stock will be declared ratably
in proportion to accrued and unpaid dividends on the Public Preferred Stock and
such Parity Stock.
 
  The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Stock or Parity Stock through a sinking fund or otherwise (except by
conversion into or exchange for shares of Junior Stock and other than a
redemption or purchase or other acquisition of New Shares made for purposes of
an employee incentive or benefit plan of the Company or any subsidiary), unless
all accrued and unpaid dividends with respect to the Public Preferred Stock and
any Parity Stock at the time such dividends are payable have been paid or funds
have been set apart for payment of such dividends.
 
  For purposes of the description of the Public Preferred Stock, (i) the term
"dividend" does not include dividends payable solely in shares of Junior Stock
on Junior Stock, or in options, warrants or rights to holders of Junior Stock
to subscribe for or purchase any Junior Stock, (ii) the term "Parity Stock"
means any other class or series of preferred stock ranking on a parity with the
Public Preferred Stock as to the payment of dividends and amounts payable upon
liquidation, dissolution or winding up and (iii) the term "Junior Stock" means
the New Shares, the ESOP Preferred Stock, the Voting Preferred Stock, the
Director Preferred Stock, any shares of Junior Participating Preferred Stock
issued pursuant to the Rights and any other class or series of capital stock of
the Company now or hereafter issued and outstanding that ranks junior as to the
payment of dividends or amounts payable upon liquidation, dissolution or
winding up to the Public Preferred Stock.
 
 
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<PAGE>
 
 Redemption
 
  The Public Preferred Stock is not redeemable prior to the fifth anniversary
of the Issue Date. On and after such date, the Public Preferred Stock is
redeemable at the option of the Company, in whole or in part, at the redemption
price of $25 per share, plus, in each case, all dividends accrued and unpaid on
the Public Preferred Stock up to the date fixed for redemption, upon giving
notice as provided below.
 
  If fewer than all of the outstanding shares of Public Preferred Stock are to
be redeemed, the shares to be redeemed will be determined pro rata or by lot or
in such other manner as is prescribed by the Company's Board.
 
  At least 30 days but not more than 60 days prior to the date fixed for the
redemption of the Public Preferred Stock, a written notice will be mailed to
each holder of record of Public Preferred Stock to be redeemed, notifying such
holder of the Company's election to redeem such shares, stating the date fixed
for redemption thereof and calling upon such holder to surrender to the Company
on the redemption date at the place designated in such notice the certificate
or certificates representing the number of shares specified therein. On or
after the redemption date, each holder of Public Preferred Stock to be redeemed
must present and surrender his certificate or certificates for such shares to
the Company at the place designated in such notice and thereupon the redemption
price of such shares will be paid to or on the order of the person whose name
appears on such certificate or certificates as the owner thereof and each
surrendered certificate will be canceled. Should fewer than all the shares
represented by any such certificate be redeemed, a new certificate will be
issued representing the shares not redeemed.
 
  From and after the redemption date (unless the Company defaults in payment of
the redemption price), all dividends on the shares of Public Preferred Stock
designated for redemption in such notice will cease to accrue, and all rights
of the holders thereof as stockholders of the Company, except the right to
receive the redemption price thereof (including all accrued and unpaid
dividends up to the redemption date), will cease and terminate. Such shares may
not thereafter be transferred (except with the consent of the Company) on the
Company's books, and such shares may not be deemed to be outstanding for any
purpose whatsoever. On the redemption date, the Company must pay any accrued
and unpaid dividends in arrears for any dividend period ending on or prior to
the redemption date. In the case of a redemption date falling after a dividend
payment record date and prior to the related payment date, the holders of
Public Preferred Stock at the close of business on such record date will be
entitled to receive the dividend payable on such shares on the corresponding
dividend payment date, notwithstanding the redemption of such shares following
such dividend payment record date. Except as provided for in the preceding
sentences, no payment or allowance will be made for accrued dividends on any
shares of Public Preferred Stock called for redemption.
 
  At its election, the Company, prior to the redemption date, may deposit the
redemption price of the shares of Public Preferred Stock so called for
redemption in trust for the holders thereof with a bank or trust company, in
which case such notice to holders of the shares of Public Preferred Stock to be
redeemed will (i) state the date of such deposit, (ii) specify the office of
such bank or trust company as the place of payment of the redemption price and
(iii) call upon such holders to surrender the certificates representing such
shares at such place on or after the date fixed in such redemption notice
(which may not be later than the redemption date), against payment of the
redemption price (including all accrued and unpaid dividends up to the
redemption date). Any moneys so deposited which remain unclaimed by the holders
of Public Preferred Stock at the end of two years after the redemption date
will be returned by such bank or trust company to the Company.
 
 Liquidation Preference
 
  The holders of shares of Public Preferred Stock will be entitled to receive,
in the event of any liquidation, dissolution or winding up of the Company, $25
per share plus an amount per share equal to all dividends (whether or not
earned or declared) accrued and unpaid thereon to the date of final
distribution to such
 
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<PAGE>
 
holders (for purposes of the description of the Public Preferred Stock, the
"Liquidation Preference"), and no more.
 
  Until the holders of the Public Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Public Preferred Stock are insufficient to pay in full the Liquidation
Preference and the liquidation preference with respect to any other shares of
Parity Stock, then such assets, or the proceeds thereof, will be distributed
among the holders of shares of Public Preferred Stock and any such Parity Stock
ratably in accordance with the respective amounts that would be payable on such
shares of Public Preferred Stock and any such Parity Stock if all amounts
payable thereon were paid in full. Neither a consolidation or merger of the
Company with another corporation nor a sale or transfer of all or substantially
all of the Company's assets will be considered a liquidation, dissolution or
winding up, voluntary or involuntary, of the Company.
 
 Voting Rights
 
  Except as indicated below, or except as otherwise from time to time required
by applicable law, the holders of shares of Public Preferred Stock will not
have any voting rights, and their consent will not be required for taking any
corporate action. When and if the holders of the Public Preferred Stock are
entitled to vote, each share will be entitled to one vote.
 
  If the equivalent of six quarterly dividends payable on the Public Preferred
Stock have not been declared and paid or set apart for payment, whether or not
consecutive, the number of directors of the Company will be increased by two
and the holders of all Public Preferred Stock and any other series of Serial
Preferred Stock (as defined below) in respect of which such a default exists,
voting as a class without regard to series, will be entitled to elect two
additional directors at the next annual meeting or a special meeting called for
that purpose and each subsequent meeting, until all cumulative dividends have
been paid in full.
 
  The affirmative vote or consent of the holders of 66 2/3% of the outstanding
shares of the Public Preferred Stock will be required for any amendment of the
Restated Certificate that alters or changes the powers, preferences, privileges
or rights of the Public Preferred Stock so as to materially adversely affect
the holders thereof. The affirmative vote or consent of the holders of shares
representing 66 2/3% of the outstanding shares of the Public Preferred Stock
will be required to authorize the creation or issue of, or reclassify any
authorized stock of the Company into, or issue or authorize any obligation or
security convertible into or evidencing a right to purchase, any additional
class or series of stock ranking senior to the Public Preferred Stock.
 
  Except as required by law, the holders of Public Preferred Stock will not be
entitled to vote on any merger or consolidation involving the Company or a sale
of all or substantially all of the assets of the Company.
 
 Transfer Agent, Registrar and Dividend Disbursing Agent
 
  The transfer agent, registrar, dividend disbursing agent and redemption agent
for the shares of Public Preferred Stock will be [First Chicago Trust Company
of New York] (in such capacity, the "Transfer Agent"). First Chicago Trust
Company of New York serves as transfer agent for the Old Shares and the Series
A Preferred Stock and will serve as transfer agent for the New Shares.
 
THE REDEEMABLE PREFERRED STOCK
 
  The summary of terms of the Redeemable Preferred Stock contained in this
Proxy Statement/Prospectus does not purport to be complete and is subject to,
and is qualified in its entirety by, the provisions of the Restated
Certificate.
 
 
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<PAGE>
 
 General
 
  The Redeemable Preferred Stock will be issued in units equal to one one-
thousandth of a share, and as part of the Recapitalization, each outstanding
Old Share will, without further action on the part of the holder thereof, be
reclassified and converted into, among other things, one one-thousandth of a
share of Redeemable Preferred Stock. When issued, the Redeemable Preferred
Stock will be validly issued, fully paid and nonassessable.
 
 Redemption
 
  Each one one-thousandth of a share of Redeemable Preferred Stock will be
redeemable, and immediately upon the issuance thereof the Company will redeem
each one one-thousandth of a share of Redeemable Preferred Stock that is
issued, for (i) $25.80 in cash, (ii) $15.55 principal amount of Series A
Debentures and (iii) $15.55 principal amount of Series B Debentures. Fractional
shares of Redeemable Preferred Stock will be issued, and immediately redeemed,
in the Recapitalization. The Series A Debentures and Series B Debentures will
be issued to holders of Redeemable Preferred Stock only in principal amounts
equal to integral multiples of $100. In lieu of issuing Series A Debentures and
Series B Debentures other than in integral multiples of $100, the Company will
pay to each holder of Redeemable Preferred Stock an amount of cash that is
equal to the portion of the Series A Debentures and Series B Debentures, to
which such holder would be entitled but for the immediately preceding sentence,
that is not an integral multiple of $100. See "THE PLAN OF RECAPITALIZATION--
Terms and Conditions--Payment for Shares." At the time of the redemption, the
rights of all holders of Redeemable Preferred Stock will cease as stockholders
of the Company with respect to such shares (except the right to receive cash
and Debentures as provided above), and the person entitled to receive the cash
and Debentures upon the exchange will be treated for all purposes as the owner
of such cash and the registered holder of such Debentures as of the date of
such exchange.
 
 Ranking
 
  The Redeemable Preferred Stock will rank on a parity with the Series A
Preferred Stock and the Public Preferred Stock and will rank senior to the New
Shares, the ESOP Preferred Stock, the Voting Preferred Stock, the Director
Preferred Stock and any shares of Junior Participating Preferred Stock issued
pursuant to the Rights with respect to amounts payable upon liquidation,
dissolution or winding up.
 
 Dividends
 
  Holders of shares of Redeemable Preferred Stock will not be entitled to
receive any dividends.
 
 Liquidation Preference
 
  The holders of a share of Redeemable Preferred Stock, or any fraction
thereof, will be entitled to receive, in the event of any liquidation,
dissolution or winding up of the Company, for each one one-thousandth of a
share of Redeemable Preferred Stock, $28.50 in cash, $15.55 principal amount of
Series A Debentures and $15.55 principal amount of Series B Debentures (for
purposes of the description of the Redeemable Preferred Stock, the "Liquidation
Preference"), and no more.
 
  Until the holders of the Redeemable Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock (as defined below) upon the liquidation, dissolution or winding up of the
Company. If, upon any liquidation, dissolution or winding up of the Company,
the assets of the Company, or proceeds thereof, distributable among the holders
of the shares of Redeemable Preferred Stock are insufficient to pay in full the
Liquidation Preference and the liquidation preference with respect to any other
shares of Parity Stock (as defined below), then such assets, or the proceeds
thereof, will be distributed among the holders of shares of Redeemable
Preferred Stock and any such Parity Stock ratably in accordance with the
respective amounts that would be payable on such shares of Redeemable Preferred
Stock and any such Parity Stock if all amounts payable thereon were paid in
full. Neither a consolidation or
 
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<PAGE>
 
merger of the Company with another corporation nor a sale or transfer of all or
substantially all of the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
 
  For purposes of the description of the Redeemable Preferred Stock, (i) the
term "Parity Stock" means any other class or series of preferred stock ranking
on a parity with the Redeemable Preferred Stock as to the payment of dividends
and amounts payable upon liquidation, dissolution or winding up and (ii) the
term "Junior Stock" means the New Shares, the ESOP Preferred Stock, the Voting
Preferred Stock, the Director Preferred Stock, any shares of Junior
Participating Preferred Stock issued pursuant to the Rights and any other class
or series of capital stock of the Company now or hereafter issued and
outstanding that ranks junior as to the payment of dividends and amounts
payable upon liquidation, dissolution or winding up to the Redeemable Preferred
Stock.
 
 Voting Rights
 
  Except as otherwise from time to time required by applicable law, the holders
of shares of Redeemable Preferred Stock will not have any voting rights and
their consent will not be required for taking any corporate action. When and if
the holders of the Redeemable Preferred Stock are entitled to vote, each share
will be entitled to one vote.
 
THE ESOP PREFERRED STOCK
 
  The summary of terms of the ESOP Preferred Stock contained in this Proxy
Statement/Prospectus does not purport to be complete and is subject to, and is
qualified in its entirety by, the provisions of the Restated Certificate.
 
 General
 
  The ESOP Preferred Stock will consist of two similar classes of Preferred
Stock of the Company that will be designated as Class 1 ESOP Convertible
Preferred Stock (the "Class 1 ESOP Preferred Stock") and Class 2 ESOP
Convertible Preferred Stock (the "Class 2 ESOP Preferred Stock" and, together
with the Class 1 ESOP Preferred Stock, the "ESOP Preferred Stock"). Where the
summaries do not make a distinction between the Class 1 ESOP Preferred Stock
and the Class 2 ESOP Preferred Stock, such summaries refer to either class.
 
  Up to     shares of Class 1 ESOP Preferred Stock and up to     shares of
Class 2 ESOP Preferred Stock will be issued to the ESOP Trustee in connection
with the Recapitalization. See "THE PLAN OF RECAPITALIZATION--Establishment of
ESOP." The shares of the ESOP Preferred Stock will be convertible into New
Shares as described below. If all the shares of ESOP Preferred Stock to be
issued in connection with the Recapitalization were to be converted into New
Shares immediately upon issuance, such New Shares would constitute
approximately 53% of the New Shares (including New Shares issuable upon
exercise of the ESOP Preferred Stock) that would be outstanding at that time,
on a fully diluted basis based on the treasury stock method. If the New Shares
maintain an average fair market value that exceeds $170 per share during the
year following the Issue Date that is established under the Plan of
Recapitalization, the number of New Shares into which the ESOP Preferred Stock
can be converted will be increased above 53% of the New Shares, (including New
Shares issuable upon exercise of the ESOP Preferred Stock) that would be
outstanding at that time, on a fully diluted basis based on the treasury stock
method, up to a maximum of approximately 63%. It is expected that instead of an
adjustment to the conversion ratio, additional shares may be transferred to the
ESOP's in order to give effect to the increased equity percentage. See "THE
PLAN OF RECAPITALIZATION--Establishment of ESOP--Additional Shares."
 
 
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 Ranking
 
  The ESOP Preferred Stock will rank junior to the Series A Preferred Stock,
the Public Preferred and the Redeemable Preferred Stock and will rank senior to
the New Shares, the Voting Preferred Stock, the Director Preferred Stock and
any shares of Junior Participating Preferred Stock issued pursuant to the
Rights with respect to payment of dividends and amounts upon liquidation,
dissolution or winding up. The Class 1 ESOP Preferred Stock will rank senior to
the Class 2 ESOP Preferred Stock with respect to the payment of Fixed Dividends
(as defined below) and the Class 1 ESOP Preferred Stock will rank on a parity
with the Class 2 ESOP Preferred Stock as to the payment of Participating
Dividends (as defined below) and as to amounts payable upon liquidation,
dissolution or winding up.
 
 Dividends
 
  Holders of Class 1 ESOP Preferred Stock will be entitled to receive, when, as
and if declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, cumulative cash dividends at a rate per
annum of $   per share of Class 1 ESOP Preferred Stock (the "Fixed Dividend").
The Fixed Dividends on the Class 1 ESOP Preferred Stock will cease to accrue on
March 31, 2000. Under certain circumstances, any Fixed Dividends that remain
accrued and unpaid on April 1, 2000 will not prevent the payment of dividends
on any capital stock of the Company that ranks junior to the Class 1 ESOP
Preferred Stock with respect to the payment of dividends, although such accrued
and unpaid Fixed Dividends will remain a part of the Liquidation Preference (as
defined below) payable in respect of the Class 1 ESOP Preferred Stock upon any
liquidation, dissolution or winding up of the Company. In addition, if during
any 12-month period ending on the annual dividend payment date, holders of the
New Shares receive any cash dividends or cash distributions thereon, and the
aggregate amount of such dividends and distributions that would have been
received, during such period, by the holder of a share of Class 1 ESOP
Preferred Stock had such share of Class 1 ESOP Preferred Stock been converted
into New Shares exceeds, the amount of the Fixed Dividend paid on such share of
Class 1 ESOP Preferred Stock, then the holders of the Class 1 ESOP Preferred
Stock will be entitled to receive an additional cash dividend in an amount
equal to such excess (the "Participating Dividend"), although the aggregate
amount of the Fixed Dividend and the Participating Dividend paid on any share
of Class 1 ESOP Preferred Stock with respect to any annual dividend period may
not exceed 12 1/2% of the fair market value of the New Shares into which such
share of Class 1 ESOP Preferred Stock is convertible.
 
  Holders of Class 2 ESOP Preferred Stock will not be entitled to receive any
Fixed Dividend. If during any 12-month period ending on the annual dividend
payment date, holders of the New Shares receive any cash dividends or cash
distributions thereon, then the holders of the Class 2 ESOP Preferred Stock
will be entitled to receive a cash dividend in an amount equal to the dividend
they would have received had their shares of Class 2 ESOP Preferred Stock been
converted into and were outstanding as New Shares at all relevant times,
although the aggregate amount of the dividend paid on any share of Class 2 ESOP
Preferred Stock with respect to any annual dividend period may not exceed 12
1/2% of the fair market value of the New Shares into which it is convertible.
 
  If the holders of the New Shares receive cash dividends and cash
distributions that exceed 12 1/2% of the fair market value of such shares, such
excess will be applied to adjust the Conversion Rate (as defined below) on the
ESOP Preferred Stock.
 
  Except as described above, the Company will not (i) declare, pay or set apart
funds for the payment of any dividend or other distribution with respect to any
Junior Stock (as defined below) or (ii) redeem, purchase or otherwise acquire
for consideration any Junior Stock or Parity Stock (as defined below) through a
sinking fund or otherwise (except by conversion into or exchange for shares of
Junior Stock and other than a redemption or purchase or other acquisition of
New Shares made for purposes of an employee incentive or benefit plan of the
Company or any subsidiary), unless all accrued and unpaid dividends with
respect to the
 
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<PAGE>
 
ESOP Preferred Stock and any Parity Stock at the time such dividends are
payable have been paid or funds have been set apart for payment for payment of
such dividends.
 
  For purposes of the description of the ESOP Preferred Stock, (i) the term
"dividend" does not include dividends payable solely in shares of Junior Stock
on Junior Stock, or in options, warrants or rights to holders of Junior Stock
to subscribe for or purchase any Junior Stock, (ii) the term "Parity Stock"
means any class or series of preferred stock ranking on a parity with the ESOP
Preferred Stock as to payment of dividends (with respect to such dividends) or
amounts payable upon liquidation, dissolution or winding up (with respect to
such amounts) and (iii) the term "Junior Stock" means the New Shares, the
Voting Preferred Stock, the Director Preferred Stock any shares of Junior
Participating Preferred Stock issued pursuant to the Rights and any other class
or series of capital stock of the Company now or hereafter issued and
outstanding that ranks junior as to the payment of dividends (with respect to
such dividends) or amounts payable upon liquidation, dissolution or winding up
(with respect to such amounts) to the ESOP Preferred Stock.
 
 Conversion
 
  The ESOP Preferred Stock will be convertible, in whole or in part, at any
time and from time to time, into New Shares initially at the rate (for purposes
of the description of ESOP Preferred Stock, the "Conversion Rate") of one New
Share for each share of ESOP Preferred Stock converted. The Conversion Rate
will be adjusted if there occurs an Equity Adjustment unless the Additional
Shares are transferred to the ESOP, as described under "THE PLAN OF
RECAPITALIZATION--Establishment of ESOP--Additional Shares." In addition, the
Conversion Rate on the ESOP Preferred Stock will be adjusted upon the
occurrence of variety of events, including, without limitation, a distribution
of capital stock to holders of New Shares, a subdivision, recombination or
reclassification of the New Shares, the issuance to holders of New Shares right
to subscribe for equity securities at a price per New Share that is less than
the fair market value of a New Share, the issuance of New Shares or securities
representing a right to acquire New Shares at a price per New Share that is
less than the fair market value of a New Share, the payment of cash dividends
and cash distributions to holders of New Shares that exceed in the aggregate 12
1/2% of the fair market value of the New Shares, the payment of any non-cash
dividend or distribution to holders of New Shares and certain Pro Rata
Repurchases of New Shares.
 
 Redemption
 
  The ESOP Preferred Stock will not be redeemable.
 
 Liquidation Preference
 
  The holders of shares of ESOP Preferred Stock will be entitled to receive, in
the event of any liquidation, dissolution or winding up of the Company, $  per
share plus an amount per share equal to all dividends (whether or not earned or
declared) accrued and unpaid thereon to the date of final distribution to such
holders, including, without limitation, Fixed Dividends in respect of the Class
1 ESOP Preferred Stock that are accrued and unpaid as of April 1, 2000 (but
that will not prevent the payment of dividends on any capital stock of the
Company that ranks junior to the Class 1 ESOP Preferred Stock with respect to
the payment of dividends) (for purposes of the description of the ESOP
Preferred Stock, the "Liquidation Preference"), and no more.
 
  Until the holders of the ESOP Preferred Stock have been paid the Liquidation
Preference in full, no payment will be made to any holder of Junior Stock upon
the liquidation, dissolution or winding up of the Company. If, upon any
liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
ESOP Preferred Stock are insufficient to pay in full the Liquidation Preference
and the liquidation preference with respect to any other shares of Parity
Stock, then such assets, or the proceeds thereof, will be distributed among the
holders of shares of ESOP Preferred Stock and any such Parity Stock ratably in
accordance with the respective amounts that would be
 
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<PAGE>
 
payable on such shares of ESOP Preferred Stock and any such Parity Stock if all
amounts payable thereon, were paid in full. Neither a consolidation or merger
of the Company with another corporation nor a sale or transfer of all or
substantially all of the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
 
 Voting Rights
 
  Except as otherwise from time to time required by applicable law, the holders
of shares of ESOP Preferred Stock will not have any voting rights, and their
consent will not be required for taking any corporate action. When and if the
holders of ESOP Preferred Stock are entitled to vote, each share will be
entitled to one vote.
 
 Consolidation, Merger, etc.
 
  Upon the occurrence of certain mergers and other similar transactions, the
holders of the ESOP Preferred Stock will be entitled to receive depending on
the circumstances either (i) a preferred stock having the same powers,
preference and relative, participating, optional or other special rights as the
class of ESOP Preferred Stock they held prior to such merger or other
transaction or (ii) the consideration receivable by the holders of the number
of New Shares into which such shares of ESOP Preferred Stock could have been
converted immediately prior to such merger or other transaction.
 
THE VOTING PREFERRED STOCK
 
  The summary of terms of the Voting Preferred Stock contained in this Proxy
Statement/Prospectus does not purport to be complete and is subject to, and is
qualified in its entirety by, the provisions of the Restated Certificate.
 
 General
 
  The Voting Preferred Stock will consist of three similar classes of Preferred
Stock of the Company that will be designated as Class P ESOP Voting Junior
Preferred Stock, which will be allocated to ESOP accounts of employees
represented by ALPA (the "Class P Voting Preferred Stock"), Class M ESOP Voting
Junior Preferred Stock, which will be allocated to ESOP accounts of employees
represented by the IAM (the "Class M Voting Preferred Stock") and Class S ESOP
Voting Junior Preferred Stock, which will be allocated to Salaried and
Management Employee's accounts (the "Class S Voting Preferred Stock" and,
together with the Class P Voting Preferred Stock and the Class M Voting
Preferred Stock, the "Voting Preferred Stock"). Where the summaries do not make
a distinction between the Class M Voting Preferred Stock, the Class P Voting
Preferred Stock and the Class S Voting Preferred Stock, such summaries refer to
any such class.
 
  One share of Class P Voting Preferred Stock, one share of Class M Voting
Preferred Stock and one share of Class S Voting Preferred Stock will be issued
to the ESOP Trustee in connection with the Recapitalization at the Effective
Time. See "THE PLAN OF RECAPITALIZATION--Establishment of ESOP."
 
 Voting Rights
 
  The Voting Preferred Stock will vote with the holders of the New Shares as a
single class on all matters (except as to such matters as to which a separate
class vote may be required by the DGCL), except that until the Termination
Date, holders of the Voting Stock will not be entitled to vote to elect members
of the Board of Directors. Until the Termination Date, the Voting Preferred
Stock will represent the right to cast in the aggregate approximately 53% of
the votes of all classes of capital stock that will vote together with the New
Shares as a single class (other than for the election of members to the Board
of Directors), subject to reduction for the number of New Shares that have been
issued upon conversion of shares of the ESOP Preferred Stock that continue to
be held by the ESOP. If the fair market value of the New Shares exceeds $170
per share
 
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<PAGE>
 
during the year following the Effective Time, the number of votes represented
by the Voting Preferred Stock will be increased above approximately 53% of the
New Shares (including New Shares issuable upon exercise of the ESOP Preferred
Stock that would be outstanding), to up to a maximum of approximately 63%. See
"THE PLAN OF RECAPITALIZATION--Establishment of ESOP--Additional Shares."
 
  The voting power of the Voting Preferred Stock will be held in the Agreed
Percentages. Accordingly, by way of example, assuming that the Voting Preferred
Stock in the aggregate has the right to cast approximately 53% of the voting
power of the Company on a fully diluted basis based on the treasury stock
method, the Class P Voting Preferred Stock will be entitled to cast
approximately 24.5%, the Class M Voting Preferred Stock will be entitled to
cast approximately 19.7%, and the Class S Voting Preferred Stock will be
entitled to cast approximately 8.8%, subject to reduction as noted above.
 
  After the Termination Date, each class of Voting Preferred Stock will
represent the right to cast in the aggregate the number of votes that is equal
to the relevant Agreed Percentage of the number of New Shares into which the
ESOP Preferred Stock can be converted.
 
 Other
 
  The Voting Preferred Stock will not be entitled to receive any dividends. The
Voting Preferred Stock will be convertible into New Shares at the rate of one
ten-thousandth of a New Share for each share of Voting Preferred Stock
converted. All the Voting Preferred Stock will be converted into New Shares
automatically upon the occurrence of an Uninstructed Trustee Action (as defined
below) or at such time when none of the ESOP Preferred Stock remains
outstanding. The Voting Preferred Stock will have a liquidation preference of
$0.01 per share.
 
  Upon the occurrence of certain mergers and other similar transactions, the
holders of the Voting Preferred Stock will be entitled to receive a preferred
stock having the same powers, preference and relative, participating, optional
or other special rights as the class of Voting Preferred Stock they held prior
to such merger or other transaction except that such preferred stock will not
control 53% of the vote.
 
THE DIRECTOR PREFERRED STOCK
 
  The summary of terms of the Director Preferred Stock contained in the Proxy
Statement/Prospectus does not purport to be complete and is subject to, and is
qualified in its entirety by, the provisions of the Restated Certificate.
 
 General
 
  The Director Preferred Stock will consist of four classes of Preferred Stock
of the Company that will be designated as the Class I Junior Preferred Stock
(the "Class I Preferred Stock"), the Class Pilot MEC Junior Preferred Stock
(the "Class Pilot MEC Preferred Stock"), the Class IAM Junior Preferred Stock
(the "Class IAM Preferred Stock") and the Class SAM Junior Preferred Stock (the
"Class SAM Preferred Stock" and, together with the Class I Preferred Stock, the
Class Pilot MEC Preferred Stock and the Class IAM Preferred Stock, the
"Director Preferred Stock"). Where the summaries do not make a distinction
among the several classes of Director Preferred Stock, such summaries refer to
any of them.
 
  Each of the Classes of Director Preferred Stock has the power to elect one or
more members of the Board of Directors. None of the classes of Directors
Preferred Stock will bear dividends. Each class of Director Preferred Stock
will have a liquidation preference of $0.01 per share.
 
  Each of the Class Pilot MEC Preferred Stock, the Class IAM Preferred Stock
and the Class SAM Preferred Stock provides that upon the consolidation, merger
or similar transaction involving the Company or United, pursuant to which the
outstanding New Shares are to be exchanged for or converted into securities of
a successor or resulting company or cash or other property, the Class Pilot MEC
Preferred Stock, the
 
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<PAGE>
 
Class IAM Preferred Stock and the Class SAM Preferred Stock, respectively, will
be converted into, or exchanged for, preferred stock of such successor or
resulting company having, in respect of such company, the same powers,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, that the original the
Class Pilot MEC Preferred Stock, the IAM Preferred Stock and the Class SAM
Preferred Stock had, respectively.
 
 Class I Preferred Stock
 
  The Class I Preferred Stock will be issued initially to Duane D. Fitzgerald,
Richard D. McCormick, John K. Van de Kamp and Paul A. Volcker who will serve as
the Independent Directors of the Company immediately following consummation of
the Recapitalization. The Restated Certificate authorizes the issuance of 10
shares of Class I Preferred Stock, although the Company expects that no more
than four shares will be outstanding at any time. The shares of Class I
Preferred Stock will be issued to the initial holders thereof pursuant to a
subscription agreement for a purchase price that is equal to the $0.01
liquidation value thereof.
 
  The initial holders of the Class I Preferred Stock will enter into a
Stockholder's Agreement among themselves, ALPA, the IAM and the Company (the
"Class I Preferred Stockholder's Agreement"), pursuant to which the holders
agree to vote their shares to elect the Independent Directors nominated
pursuant to the provisions described in "THE PLAN OF RECAPITALIZATION--Revised
Governance Structure-- Independent Directors", and to refrain from transferring
the shares of Class I Preferred Stock other than to a person who has been
elected to serve as one of the Independent Directors and who agrees to be
subject to the provisions of the Class I Preferred Stockholders' Agreement.
Both the Restated Certificate and the Class I Preferred Stockholders' Agreement
provide that the Company will redeem the shares of Class I Preferred Stock held
by any holder thereof who votes contrary to the Class I Preferred Stockholder's
Agreement or who purports to transfer the share of Class I Preferred Stock to
any person other than an Independent Director. Any share of Class I Preferred
Stock redeemed as provided in the immediately prior sentence may be reissued as
provided in the Restated Certificate or the Class I Preferred Stockholders'
Agreement. All shares of the Class I Preferred Stock will be redeemed
automatically upon the occurrence of the Sunset, and following such redemption,
none of the shares of Class I Preferred Stock may be reissued.
 
 Class Pilot MEC Preferred Stock and Class IAM Preferred Stock
 
  The Restated Certificate authorizes the issuance of one share of each of the
Class Pilot MEC Preferred Stock and the Class IAM Preferred Stock. The share of
the Class Pilot MEC Preferred Stock will be issued to the ALPA MEC, and the
share of Class IAM Preferred Stock will be issued to the IAM, each pursuant to
a subscription agreement for a purchase price equal to the $0.01 liquidation
value thereof. Each of the Class Pilot MEC Preferred Stock and the Class IAM
Preferred Stock will have the right to elect one Employee Director, and the
shares of such stock will be redeemed automatically upon the purported transfer
thereof to any person other than the holder thereof authorized under the
Restated Certificate. The Class Pilot MEC Preferred Stock will be redeemed
automatically upon the occurrence of the ALPA Termination Date. The Class IAM
Preferred Stock will be redeemed automatically upon the occurrence of the IAM
Termination Date.
 
 Class SAM Preferred Stock
 
  The Class SAM Preferred Stock will be issued initially to the person
nominated to serve as the Salaried and Management Director of the Company
immediately following consummation of the Recapitalization and to an additional
holder (the "Designated Holder"). The Restated Certificate authorizes the
issuance of ten shares of Class SAM Preferred Stock, although the Company
expects that no more than three shares will be outstanding at any time. Two
shares of Class SAM Preferred Stock will be held by the Salaried and Management
Director, and one share will be issued to the Designated Holder, pursuant to a
subscription agreement for a purchase price that is equal to the $0.01
liquidation value thereof.
 
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<PAGE>
 
  The initial holders of the Class SAM Preferred Stock will enter into a
Stockholders' Agreement among themselves and the Company (the "Class SAM
Preferred Stockholders' Agreement"), pursuant to which the holders agree to
vote their shares to elect the Salaried and Management Director nominated by
the System Roundtable, and to refrain from transferring the shares of Class SAM
Preferred Stock other than to a person who has been elected to serve as the
Salaried and Management Director or another person designated by the System
Roundtable to be the Designated Holder, each of whom must agree to be subject
to the provisions of the Class SAM Preferred Stockholders' Agreement. The Class
SAM Preferred Stockholders' Agreement provides that in most instances the
Designated Holder will be the senior executive of United who has primary
responsibility for human resources. Both the Restated Certificate and the Class
SAM Preferred Stockholders' Agreement provide that the Company will redeem the
shares of Class SAM Preferred Stock of any holder who votes contrary to the
instructions given by the SRT or who purports to transfer the share or shares
of Class SAM Preferred Stock to any person other than the Salaried and
Management Director or another person designated by the System Roundtable. Any
share of Class SAM Preferred Stock that is redeemed as provided in the
immediately prior sentence may be reissued as provided in the Restated
Certificate and the Class SAM Preferred Stockholders' Agreement. All shares of
the Class SAM Preferred Stock will be redeemed automatically upon the earlier
to occur of the ALPA Termination Date and the IAM Termination Date, and
following such redemption, none of the shares of Class SAM Preferred Stock may
be reissued.
 
 Uninstructed Trustee Actions
 
  Under certain circumstances, described below, (i) the Voting Preferred Stock
will cease to vote and (ii) the right to cast the votes that the holder of the
voting Preferred Stocks would otherwise have entitled to cast will be
transferred 46.23% to the holder of the Class Pilot MEC Preferred Stock, 37.13%
to the holder of the Class IAM Preferred Stock and 16.64% to the holders of the
Class SAM Preferred Stock.
 
  In connection with (i) a stockholder vote on a transaction involving a merger
of the Company or United or a change of control of the Company or United, or
(ii) if the trustee under either ESOP enters into a binding commitment with
respect to any such transaction or (iii) if the trustee disposes of 10% or more
of the common equity initially represented by the ESOP Preferred Stocks, (x) if
the trustee either (1) fails to solicit timely instructions from the Plan
participants or the Committees or (2) fails to act in accordance with the
instructions received, (y) if the merger or change of control transaction would
have been approved or if the trustee disposes of 10% of the common equity
initially represented by the ESOP Preferred Stocks and (z) (I) the trustee
solicited instructions, failed to follow them and such transaction would not
have been approved if the trustee had followed the instructions, (II) the
trustee failed to follow instructions and the transaction would not have been
approved had the trustee cast all the votes represented by securities in the
Plan against the transaction or (III) the trustee failed to follow instructions
or to solicit instructions with respect to a matter upon which no vote is
required (the occurrence of the conditions set forth in clauses (x), (y) and
(z) being referred to as an "Uninstructed Trustee Action"), the voting rights
of the Voting Preferred Stocks will be transferred from the Voting Preferred
Stock to the Class Pilot MEC Preferred Stock, the Class IAM Preferred Stock and
the Class SAM Preferred Stock in the proportions referred to above. In
addition, if the trustee fails to solicit instructions or disregards
instructions received in respect of a vote on a transaction which, if
consummated, would constitute an Uninstructed Trustee Action, then the voting
power of the Voting Preferred Stock will shift to the Class Pilot MEC Preferred
Stock, the Class IAM Preferred Stock and the Class SAM Preferred Stock and the
transaction must be approved by the vote of the Class Pilot MEC Preferred
Stock, the Class IAM Preferred stock and the Class SAM Preferred Stock voting
together as a class with the New Shares, in addition to any other vote required
by the Restated Certificate, stock exchange requirements or applicable law.
 
  In addition, if the Termination Date occurs directly or indirectly as a
result of an Uninstructed Trustee Action (or for any reason within one year
after an Uninstructed Trustee Action), the voting power to which the Class
Pilot MEC Preferred Stock, the Class IAM Preferred stock and the Class SAM
Preferred Stock succeed as a result of an Uninstructed Trustee Action will
survive until the anniversary of the Issue Date that occurs in the year 2010.
 
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<PAGE>
 
THE COMMON STOCK, THE SERIES A PREFERRED STOCK AND THE JUNIOR PARTICIPATING
PREFERRED STOCK
 
  The following descriptions do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the more complete descriptions
thereof set forth in the following documents, all of which have been filed as
exhibits to the Registration Statement of which this Proxy Statement/Prospectus
is a part: (i) the Company's current Amended and Restated Certificate of
Incorporation, (ii) its current By-Laws, (iii) the Restated Certificate that
will become effective upon the consummation of the Recapitalization, (iv) the
By-Laws that will become effective upon the consummation of the
Recapitalization and (v) the Rights Agreement, as amended, between the Company
and First Chicago Trust Company of New York, as Rights Agent, pursuant to which
shares of Series C Junior Participating Preferred Stock ("Junior Participating
Preferred Stock") are issuable. Where the descriptions do not make a
distinction between the Old Shares and the New Shares, such descriptions are
applicable to both.
 
 Common Stock
 
  Dividend Rights. Holders of Old Shares are entitled to, and holders of New
Shares will be entitled to, receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor, provided that, so
long as any shares of preferred stock are outstanding, no dividends (other than
dividends payable in common stock) or other distributions may be made with
respect to the Old Shares (or, after the Effective Time, New Shares) unless
full cumulative dividends on the shares of preferred stock have been paid. The
Company has not paid cash dividends on the Old Shares since the third quarter
of 1987.
 
  As a holding company, the Company relies on distributions from United to pay
dividends on its capital stock. There are currently no contractual restrictions
on United's ability to pay dividends to the Company.
 
  Voting Rights. Holders of Old Shares are, and holders of New Shares will be,
entitled to one vote per share in the election of directors and on any question
arising at any stockholders' meeting, voting as a single class. Upon
consummation of the Recapitalization, the holders of the New Shares will be
entitled to vote as a class in the election of Public Directors will not vote
in the election of other Directors and will vote together as a class with the
holders of the Voting Preferred Stock on most other matters. See "--The Voting
Preferred Stock--Voting Rights."
 
  Right of First Refusal. In connection with the Recapitalization, the Company
will enter into a First Refusal Agreement with ALPA, the IAM and the
Salaried/Management Director (solely as the representative of the Salaried and
Management Employees) pursuant to which the Company will agree that, if it
proposes to issue any New Shares or other securities that are exchangeable for
or convertible into New Shares (collectively, the "Equity Securities"), it must
first offer such Equity Securities to ALPA and the IAM on behalf of the
employees represented thereby and to the Salaried and Management Employees on
the same terms and conditions upon which the Company proposes to sell such
Equity Securities to a third party. Under the First Refusal Agreement, the
members of ALPA will be entitled to purchase 46.23% of the Equity Securities
offered, the members of the IAM will be entitled to purchase 37.13% of the
Equity Securities offered and the salaried and management employees will be
entitled to purchase 16.64% of the Equity Securities offered.
 
 Series A Preferred Stock
 
  Dividends. Holders of shares of Series A Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors of the Company out
of assets of the Company legally available therefor, cumulative cash dividends
at the rate per annum of $6.25 per share of Series A Preferred Stock. Dividends
on the Series A Preferred Stock are payable quarterly in arrears. Dividends on
the Series A Preferred Stock are cumulative, and accumulations of dividends on
shares of Series A Preferred Stock do not bear interest.
 
  Except as provided in the next sentence, no dividend will be declared or paid
on any Parity Stock (as defined below) unless full cumulative dividends have
been paid on the Series A Preferred Stock for all prior
 
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<PAGE>
 
dividend periods. If accrued dividends on the Series A Preferred Stock for all
prior dividend periods have not been paid in full then any dividend declared on
the Series A Preferred Stock for any dividend period and any dividend on any
Parity Stock will be declared ratably in proportion to accrued and unpaid
dividends on the Series A Preferred Stock and such Parity Stock.
 
  The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Stock or Parity Stock through a sinking fund or otherwise (except by
conversion into or exchange for shares of Junior Stock and other than a
redemption or purchase or other acquisition of shares of common stock of the
Company made for purposes of an employee incentive or benefit plan of the
Company or any subsidiary), unless all accrued and unpaid dividends with
respect to the Series A Preferred Stock and any Parity Stock at the time such
dividends are payable have been paid or finds have been set apart for payment
of such dividends.
 
  For purposes of the description of the Series A Preferred Stock, (i) the term
"dividend" does not include dividends payable solely in shares of Junior Stock
on Junior Stock, or in options, warrants or rights to holders of Junior Stock
to subscribe for or purchase any Junior Stock, (ii) the term "Parity Stock"
means any class or series of preferred stock ranking on a parity with the
Series A Preferred Stock as to payment of dividends and amounts payable upon
liquidation, dissolution or winding up and (iii) the term "Junior Stock" means
the common stock (Old Shares or New Shares), the ESOP Preferred Stock, the
Voting Preferred Stock, the Director Preferred Stock, any shares of Junior
Participating Preferred Stock issued pursuant to the Rights, and any other
class or series of capital stock of the Company now or hereafter issued and
outstanding that ranks junior as to the payment of dividends or amounts payable
upon liquidation, dissolution or winding up to the Series A Preferred Stock.
 
  Redemption. The Series A Preferred Stock is not redeemable prior to May 1,
1996. On and after such date, the Series A Preferred Stock is redeemable at the
option of the Company, in whole or in part, initially at $104.375 per share and
thereafter at prices declining ratably on each May 1 to $100.00 per share on
and after May 1, 2003, plus, in each case, all accrued and unpaid dividends.
Unless converted by the holders or redeemed by the Company, the Series A
Preferred Stock will have perpetual maturity.
 
  Liquidation Preference. The holders of shares of Series A Preferred Stock
will be entitled to receive, in the event of any liquidation, dissolution or
winding up of the Company, $100 per share plus an amount per share equal to all
dividends (whether or not earned or declared) accrued and unpaid thereon to the
date of final distribution to such holders (for purposes of the description of
the Series A Preferred Stock, the "Liquidation Preference"), and no more.
 
  Until the holders of the Series A Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Series A Preferred Stock are insufficient to pay in full the Liquidation
Preference and the liquidation preference with respect to any other shares of
Parity Stock, then such assets, or the proceeds thereof, will be distributed
among the holders of shares of Series A Preferred Stock and any such Parity
Stock ratably in accordance with the respective amounts which would be payable
on such shares of Series A Preferred Stock and any such Parity Stock if all
amounts payable thereon were paid in full. Neither a consolidation or merger of
the Company with another corporation nor a sale or transfer of all or
substantially all of the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
 
  Voting Rights. Except as indicated below, or except as otherwise from time to
time required by applicable law, the holders of shares of Series A Preferred
Stock will not have any voting rights, and their consent will not be required
for taking any corporate action. When and if the holders of the Series A
Preferred Stock are entitled to vote, each share will be entitled to one vote.
 
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<PAGE>
 
  If the equivalent of six quarterly dividends payable on the Series A
Preferred Stock or any other series of Serial Preferred Stock of the Company
have not been declared and paid or set apart for payment, whether or not
consecutive, the number of directors of the Company will be increased by two
and the holders of all such series in respect of which such a default exists,
voting as a class without regard to series, will be entitled to elect two
additional directors at the next annual meeting and each subsequent meeting,
until all cumulative dividends have been paid in full.
 
  The affirmative vote or consent of the holders of 66 2/3% of the outstanding
shares of the Series A Preferred Stock, voting separately as a class with all
other affected series of Serial Preferred Stock that is also a Parity Stock,
will be required for any amendment of the New Certificate which alters or
changes the powers, preferences, privileges or rights of the Series A Preferred
Stock so as to materially adversely affect the holders thereof. The affirmative
vote or consent of the holders of shares representing 66 2/3% of the
outstanding shares of the Series A Preferred Stock and any other series of
Parity Stock, voting as a single class without regard to series, will be
required to authorize the creation or issue of, or reclassify any authorized
stock of the Company into, or issue or authorize any obligation or security
convertible into or evidencing a right to purchase, any additional class or
series of stock ranking senior to all such series of Parity Stock.
 
  Except as required by law, the holders of Series A Preferred Stock will not
be entitled to vote on any merger or consolidation involving the Company or a
sale of all or substantially all of the assets of the Company.
 
  Conversion Rights. Shares of Series A Preferred Stock are convertible, in
whole or in part, at any time at the option of the holders thereof, into Old
Shares. As of the date of this Proxy Statement/Prospectus, the conversion price
is $156.50 per Old Share (equivalent to a rate of approximately [0.639] Old
Shares for each share of Series A Preferred Stock), subject to adjustment as
set forth in the Restated Certificate ("Conversion Price"). Upon consummation
of the Recapitalization, each share of Series A Preferred Stock will receive,
upon conversion thereof, in respect of each Old Share into which such share of
Series A Preferred Stock was convertible immediately prior to the Effective
time of the Recapitalization, 0.5 New Shares, $28.50 in cash, $15.55 principal
amount of Series A Debentures, $15.55 principal amount of Series B Debentures
and $31.10 liquidation value of Public Preferred Stock. The right to convert
shares of Series A Preferred Stock called for redemption will terminate at the
close of business on the day preceding a redemption date.
 
 Junior Participating Preferred Stock
 
  General. The Company has designated 1,250,000 shares of a series of Serial
Preferred Stock as Junior Participating Preferred Stock and such shares are
reserved for issuance upon exercise of the Rights associated with each share of
Common Stock. See "--The Common Stock, the Series A Preferred Stock and the
Junior Participating Preferred Stock--Preferred Share Purchase Rights." As of
the date of this Proxy Statement/Prospectus, there are no shares of Junior
Participating Preferred Stock outstanding.
 
  Ranking. The Junior Participating Preferred Stock ranks junior to all other
series of preferred stock as to dividends and amounts payable upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company
unless the terms of any such other series shall provide otherwise.
 
  Dividends. Holders of shares of Junior Participating Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company out of funds legally available therefor, cumulative cash dividends
payable quarterly on the fifteenth day of January, April, July and October in
each year (each such date being a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share of fraction of a share of Junior Participating Preferred
Stock, in an amount per share equal to the greater of (a) $10.00 or (b) subject
to certain provisions for adjustment set forth in the Restated Certificate, 100
times the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of common stock or a
subdivision of the outstanding shares of common
 
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<PAGE>
 
stock since the immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Junior Participating Preferred Stock.
 
  The Company must declare a dividend or distribution on the Junior
Participating Preferred Stock immediately after it declares a dividend or
distribution on common stock (other than a dividend payable in shares of common
stock), provided that in the event no dividend or distribution has been
declared on common stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $10.00 per share on the Junior Participating Preferred Stock will
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
 
  The Restated Certificate sets forth certain restrictions imposed upon the
Company whenever quarterly dividends or other distributions payable on Junior
Participating Preferred Stock are in arrears, including, but not limited to,
restrictions on the Company's ability to declare or pay dividends on, make any
other distributions on, redeem or purchase or otherwise acquire for
consideration shares ranking junior to or on a parity with the Junior
Participating Preferred Stock either as to dividends or amounts payable upon
liquidation, dissolution or winding up of the Company.
 
  Redemption. When issued and outstanding, the shares of Junior Participating
Preferred Stock will not be redeemable.
 
  Liquidation Preference. Subject to (a) the rights of holders of preferred
stock of the Company ranking senior to Junior Participating Preferred Stock as
to dividends and amounts payable upon any voluntary or involuntary liquidation,
dissolution or winding up and (b) any other provision of the Restated
Certificate, upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, no distribution shall be made (1) to the holders of
shares of stock ranking junior (either as to dividends or amounts payable upon
any voluntary or involuntary liquidation, dissolution or winding up) to the
Junior Participating Preferred Stock unless, prior thereto, the holders of
shares of Junior Participating Preferred Stock will have received $100.00 per
share, plus accrued and unpaid dividends to the date of such payment, provided
that the holders of shares of Junior Participating Preferred Stock will be
entitled to receive an aggregate amount per share, subject to certain
provisions for adjustment set forth in the Restated Certificate, equal to 100
times the aggregate amount to be distributed per share to holders of common
stock, or (2) to the holders of stock ranking on a parity (either as to
dividends or amounts payable upon any voluntary or involuntary liquidation,
dissolution or winding up) with the Junior Participating Preferred Stock,
except distributions made ratably on Junior Participating Preferred Stock and
all other such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such voluntary or involuntary
liquidation, dissolution or winding up.
 
  Voting Rights. Except as indicated below or as expressly required by
applicable law, the holders of Junior Participating Preferred Stock will not
have voting rights.
 
  Subject to certain provisions for adjustment set forth in the Restated
Certificate, each share of Junior Participating Preferred Stock will entitle
the holder thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Company. Except as indicated below or expressly required by
applicable law, the holders of Junior Participating Preferred Stock and the
holders of shares of common stock will vote together as one class on all
matters submitted to a vote of stockholders of the Company.
 
  If the equivalent of six quarterly dividends payable on the Junior
Participating Preferred Stock or any other series of Serial Preferred Stock of
the Company have not been declared and paid or set aside for payment, whether
or not consecutive, the number of directors of the Company will be increased by
two and the holders of all such series in respect of which such a default
exists, voting as a class without regard to series, will be entitled to elect
two additional directors at the next annual meeting and each subsequent
 
                                      131

<PAGE>
 
meeting, until all cumulative dividends have been paid in full or until
noncumulative dividends have been paid regularly for at least a year.
 
  Consolidation, Merger, Etc. In the event of any consolidation, merger,
combination or other transaction in which shares of common stock are exchanged
for or changed into other stock, securities, cash or other property, each share
of Junior Participating Preferred Stock shall be similarly exchanged or changed
in an amount per share equal to 100 times the aggregate amount of stock,
securities, cash or other property, as the case may be, for or into which each
share of common stock is exchanged or changed.
 
 Preferred Share Purchase Rights
 
  A Right is associated with, and trades with, each Old Share outstanding.
Similarly, a Right will be associated with, and trade with, each New Share
outstanding. As long as the Rights are associated with the New Share, each
newly issued New Share issued by the Company, including New Shares into which
the ESOP Preferred Stock and the Series A Preferred Stock are convertible, will
include one Right. Moreover, the Rights Agreement will be amended such that a
Right will be associated with each share of ESOP Preferred Stock outstanding.
Each Right will entitle its holder to purchase one one-hundredth of a share of
Junior Participating Preferred Stock for $185 (subject to adjustment). Subject
to amendment, the Rights are not exercisable until 10 business days after any
person or group announces its beneficial ownership of 15% or more of the Common
Stock. The Rights Agreement will be amended to provide that the transactions
contemplated by the Recapitalization, including without limitation, the
issuance of the ESOP Preferred Stock and the Voting Preferred Stock to the ESOP
and the Class Pilot MEC Preferred Stock, the Class IAM Preferred Stock and the
Class SAM Preferred Stock to the respective holders thereof, will not cause the
Rights to become exercisable as a result thereof. See "THE PLAN OF
RECAPITALIZATION--Revised Governance Structure--Rights Plan."
 
  If any person or group acquires 15% or more of the New Shares outstanding,
each Right holder (except the acquiring party) has the right to receive, upon
exercise, New Shares (or, under certain circumstances, cash, property or other
Company securities) having a market value of three times the exercise price of
the Right. If, after the Rights become exercisable, the Company is involved in
a merger where it does not survive or survives with a change or exchange of its
New Shares or the Company sells or transfers more than 50% of its assets or
naming power, each Right will be exercisable for common stock of the other
party to such transaction having a market value of three times the exercise
price of the Right. The Company has the right to redeem the Rights for $.05 per
Right prior to the time that they become exercisable. The Rights will expire on
December 31, 1996.
 
  The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors, except pursuant to
an offer conditioned on a substantial number of Rights being acquired. The
Rights should not interfere with any merger or other business combination
approved by the Company's Board of Directors since the Rights may be redeemed
or their terms amended by the Company as described above.
 
                             STOCKHOLDER PROPOSALS
 
PROPOSAL CONCERNING CUMULATIVE VOTING
 
  Ms. Evelyn Y. Davis, Watergate Office Building, 2600 Virginia Avenue, N.W.,
Suite 215, Washington, D.C. 20037, owner of 53 Old Shares, has given notice
that she will introduce the following resolution at the Meeting:
 
    RESOLVED: "That the stockholders of UAL Corp., assembled in Annual
  Meeting in person and by proxy, hereby request the Board of Directors to
  take the necessary steps to provide for cumulative voting in the election
  of directors, which means each stockholder shall be entitled to as many
  votes as
 
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<PAGE>
 
  shall equal the number of shares he or she owns multiplied by the number of
  directors to be elected, and he or she may cast all of such votes for a
  single candidate, or any two or more of them as he or she may see fit."
 
    REASONS: "Many states have mandatory cumulative voting, so do National
  Banks."
 
    "In addition, many corporations have adopted cumulative voting."
 
    "Last year the owners of . . . shares, representing approximately 23.3%
  of shares voting, voted FOR this proposal."
 
    "If you AGREE, please mark your proxy FOR this resolution."
 
       THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST THE PROPOSAL.
 
PROPOSAL CONCERNING CONTINGENT EXECUTIVE COMPENSATION AGREEMENTS
 
  The Board of Trustees of the National Electrical Benefit Fund, 1125 15th
Street, N.W., Washington, D.C. 20005, owner of 14,000 Old Shares, has given
notice that it will introduce the following resolution at the Meeting:
 
    BE IT RESOLVED: That the shareholders of UAL Corporation ("United" or
  "Company") request that the Board of Directors in the future refrain from
  entering into agreements providing executive compensation contingent on a
  change in control of the Company unless such agreements or arrangements are
  specifically submitted to the shareholders for approval.
 
                              SUPPORTING STATEMENT
 
    The Company has contingency employment arrangements with certain senior
  executives, including Messrs. Wolf, Pope, and Nagin, which provide
  compensation contingent upon a change in control of the Company. The
  agreements provide that if an executive's employment is involuntarily
  terminated after a change of control of the Company that executive will be
  entitled to payment of lucrative severance compensation. In the case of Mr.
  Wolf, such payments may amount to several million dollars (approximately
  $3,400,000). Both Mr. Wolf's and Mr. Pope's agreements also provide for
  vesting of unvested stock options, vesting of supplemental retirement
  credits, and certain other benefits of an unspecified nature. Mr. Nagin's
  agreement would provide payment of three times his base salary, as well as
  payment for and the vesting of certain other unspecified benefits. As
  described on pages 19, 23 & 24 of the Company's 1993 Proxy Statement, these
  so-called "golden parachutes" may amount to millions of dollars in
  guaranteed compensation for the affected executives. These employment
  agreements with the "golden parachute" provisions were adopted without
  consideration by the Company's shareholders. Golden parachutes, as defined
  in this proposal, are payments contingent on change in control.
 
    Lucrative severance pay to corporate executives triggered by a change in
  control of the corporation, commonly referred to as "golden parachutes," is
  a controversial matter. Golden parachutes introduce an inappropriate
  element of personal consideration for managers that potentially conflicts
  with their fiduciary responsibility to shareholders. We believe this may
  cause managers to operate in a manner which fails to maximize value for
  shareholders in the event of a potential takeover. Such a situation, we
  believe, is fundamentally unfair to shareholders, the ultimate owners of
  the Company. Moreover, it is our opinion that special compensation
  arrangements for a favored few executives undoubtedly has a corrosive
  impact on the morale and attitude of the remainder of employees who do not
  share such privileged status. Shareholders, as owners concerned with the
  long-term productive and financial performance of the Company, should be
  concerned with this type of disparity.
 
    A study by the United Shareholders Association also provides
  justification for the submission of golden parachute arrangements to
  shareholders for consideration. The study of 1,000 major U.S.
 
                                      133

<PAGE>
 
  corporations found that the average annualized two-year return was 20
  percent higher for the 559 companies without such plans for management.
 
    We believe that the issue of whether the Company should, in the future,
  provide management with golden parachutes is of such critical importance
  that shareholders should make this decision. We believe shareholder
  approval is one of the best ways available to address potential conflicts
  of interest that may arise between the Board and top executives on one
  hand, and shareholders on the other hand, when a change of control is
  threatened.
 
    Accordingly, we urge your approval of this Proposal.
 
       THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST THE PROPOSAL.
 
PROPOSAL CONCERNING CONFIDENTIAL VOTING
 
  The Central Pension Fund of the International Union of Operating Engineers
and Participating Employers, 4115 Cheseapeake Street, N.W., Washington, D.C.
20016, owner of 4,722 Old Shares, has given notice that it will introduce the
following resolution at the Meeting:
 
    BE IT RESOLVED: That the stockholders of United Air Lines Corporation (or
  "Company") recommend that the Board of Directors take the necessary steps
  to adopt and implement a policy of confidential voting at all meetings of
  its stockholders which includes the following provisions:
 
  1. that the voting of all proxies, consents and authorizations be secret,
     and that no such document shall be available for examination nor shall
     the vote or identity of any shareholder be disclosed except to the
     extent necessary to meet the legal requirements, if any, of the
     Company's state of incorporation;
 
  2. that the receipt, certification and tabulation of such votes shall be
     performed by independent election inspectors; and
 
  3. that confidential voting shall be suspended in the case of a proxy
     contest, where non-management groups have access to voting results.
 
                              SUPPORTING STATEMENT
 
    It is the proponents' belief that it is vitally important that a system
  of confidential proxy voting be established at the Company. Confidential
  balloting is a basic tenet of our political electoral process ensuring its
  integrity. The integrity of corporate board elections should also be
  protected against potential abuses given the importance of corporate
  policies and practices to corporate owners and our national economy.
 
    The implementation of a confidential voting system would enhance
  shareholder rights in several ways. First, in protecting the
  confidentiality of the corporate ballot, shareholders would feel free to
  oppose management nominees and issue positions without fear of retribution.
  This is especially important for professional money managers whose business
  relationships can be jeopardized by their voting positions.
 
    The second important benefit of confidential voting would be to
  invigorate the corporate governance process at the Company. We believe that
  shareholder activism would be promoted within the Company. It is our belief
  that shareholders empowered with a free and protected vote would be more
  active in the proposing of corporate policy resolutions and alternate board
  candidates.
 
    Finally, it is our belief that the enhancement of the proxy voting
  process would change the system where too often shareholders vote "with
  their feet" not with their ballots. This change would help to develop a
  long-term investment perspective where corporate assets could be deployed
  and used in a more effective and efficient manner.
 
 
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<PAGE>
 
    Confidential voting is gaining popularity. By 1993, 94 major U.S.
  publicly-traded companies had adopted confidential proxy voting procedures
  for corporate elections, up from 74 in 1992. The list of Fortune 500
  companies with confidential voting includes: AT&T, U.S. West, American
  Express, American Brands, Coca Cola, CitiCorp., Gillette, Exxon, Sara Lee,
  J.P. Morgan, Bear Stearns, General Electric, General Mills, General Motors,
  Colgate-Palmolive, American Home Products, Honeywell, Avon Products, 3M,
  DuPont, Boeing, Lockheed, Rockwell International, Amoco, Mobil, Eastman
  Kodak, IBM, Xerox and many others. It's time for the Company to do the
  same.
 
    For the reasons outlined above, we urge you to VOTE FOR THIS PROPOSAL.
 
       THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST THE PROPOSAL.
 
                               FEES AND EXPENSES
 
  All expenses of the Company and certain expenses of the Coalition (see "THE
PLAN OF RECAPITALIZATION--Terms and Conditions--Fees and Expenses;
Indemnification") incurred in connection with the Recapitalization will be paid
by the Company. The estimated fees and expenses to be incurred in connection
with the Recapitalization are as follows:
 

<TABLE>
   <S>                                                                  <C>
   Coalition expense amounts .......................................... $
   Financial advisory fees and expenses................................
   Accounting fees and expenses........................................
   Legal fees and expenses.............................................
   Commission filing fee...............................................
   Printing and mailing expenses.......................................
   Exchange agent fees and expenses....................................
   Employee stock ownership plan fees and expenses.....................
   Solvency and surplus opinion fees and expenses......................
   Miscellaneous expenses..............................................
                                                                        --------
     Total............................................................. $
                                                                        ========
</TABLE>

 
                         INDEPENDENT PUBLIC ACCOUNTANTS
 
  The Board, at the recommendation of the Audit Committee, has appointed,
subject to approval by the stockholders, the firm of Arthur Andersen & Co., as
independent public accountants, to examine the financial statements of the
Company for the year 1994. It is anticipated that a representative of Arthur
Andersen & Co. will be present at the meeting and will have the opportunity to
make a statement, if he desires to do so, and will be available to respond to
appropriate questions at that time.
 
  The affirmative vote of a majority of Old Shares present at the meeting is
necessary for approval of this proposal. If the stockholders do not approve the
appointment of Arthur Andersen & Co., the selection of independent public
accountants will be reconsidered by the Board.
 
  THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL OF THE APPOINTMENT OF ARTHUR
ANDERSEN & CO. AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE COMPANY FOR 1994.
 
                       DISCRETIONARY AUTHORITY OF PROXIES
 
  The Board of Directors of the Company does not know of any matters, other
than as described in the Notice of Meeting attached to this Proxy
Statement/Prospectus, that are to come before the Meeting. If a
 
                                      135

<PAGE>
 
proxy is given to vote in favor of the Plan of Recapitalization, the persons
named in such proxy will have authority to vote in accordance with their best
judgment on any other matter that is properly presented at the Meeting for
action, including, without limitation, any proposal to adjourn the Meeting or
otherwise concerning the conduct of the Meeting.
 
  In the event that a quorum is not present at the time the Meeting is
convened, or if for any other reason the Company believes that additional time
should be allowed for the solicitation of proxies, the Company may adjourn the
Meeting with a vote of the stockholders. The persons named in the accompanying
form of proxy will vote any Shares for which they have voting authority in
favor of such adjournment. The Company has made no determination whether it
would adjourn the Meeting to allow additional time for the solicitation of
proxies should an insufficient number of favorable votes be received to approve
and adopt the Plan of Recapitalization.
 
 
                                    EXPERTS
 
  The consolidated financial statements and related schedules of the Company
and United as of December 31, 1993 and 1992 and for each of the three years in
the period ended December 31, 1993, incorporated by reference in this Proxy
Statement/Prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen & Co., independent public accountants, as indicated
in their report with respect thereto, and are incorporated by reference herein
in reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report which includes an explanatory paragraph with
respect to the changes in methods of accounting for income taxes and
postretirement benefits other than pensions as discussed in the notes to the
consolidated financial statements.
 
                                 LEGAL OPINION
 
  The validity of the New Shares, Debentures and Public Preferred Stock
issuable pursuant to the Recapitalization will be passed upon by Skadden, Arps,
Slate, Meagher & Flom. Such counsel have assumed that the Company will not be
rendered insolvent as a result of the Recapitalization.
 
                               PROXY SOLICITATION
 
  Proxies are being solicited by and on behalf of the Board. All expenses of
this solicitation including the cost of preparing and mailing this Proxy
Statement/Prospectus will be borne by the Company. In addition to solicitation
by use of the mails, proxies may be solicited by directors, officers and
employees of the Company in person or by telephone, telegram or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for out-of-pocket expenses, in connection
with such solicitation. Arrangements will also be made with custodians,
nominees and fiduciaries for forwarding of proxy solicitation material to
beneficial owners of Old Shares held of record by such persons, and the Company
may reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith. To assure the presence in person or by proxy
of the largest number of stockholders possible, the Company has engaged
Georgeson & Co. to solicit proxies on behalf of the Company. The Company has
agreed to pay such firm a proxy solicitation fee of $          and to reimburse
such firm for its reasonable out-of-pocket expenses.
 
 
                                      136

<PAGE>
 
                       PROPOSALS FOR 1995 ANNUAL MEETING
 
  Stockholder proposals intended to be presented at the 1995 Annual Meeting
must be received by           , by the Secretary of the Company (at the address
set forth on page iii of this Proxy Statement/Prospectus), for inclusion in the
proxy statement and form of proxy relating to that meeting.
 
                                 OTHER MATTERS
 
  The Board does not know of any other business which may be presented for
consideration at the meeting. If any business not described herein should come
before the meeting, the persons named in the enclosed proxy will vote on those
matters in accordance with their best judgment.
 
                                      137

<PAGE>
                                                                       Annex I
March 24, 1994
 
 


Board of Directors
UAL Corporation
1200 East Algonquin Road
Elk Grove Township, IL 60007


Gentlemen and Madam:

You have requested our opinion as to the fairness, from a financial point of
view, to the holders (the "Common Stockholders") of shares of common stock, par
value $5.00 per share ("Old Shares"), of UAL Corporation, a Delaware corporation
("UAL"), of the consideration to be received by such Common Stockholders in
connection with the proposed recapitalization of UAL (the "Transaction"), as set
forth in, and pursuant to the terms of, the Agreement and Plan of
Recapitalization dated as of March 25, 1994 (the "Recapitalization Agreement"),
between UAL and the Airline Pilots Association, International, and the
International Association of Machinists and Aerospace Workers (together with
other participating employees, the "Participating Employees").

We understand that the Transaction, as more specifically set forth in the
Recapitalization Agreement, provides that, in exchange for certain labor
concessions by the Participating Employees, UAL will issue common stock to
certain employee trusts/ESOPs equal to a minimum of 53% and a maximum of 63% of
the common stock of UAL.  We also understand that in the Transaction the current
Common Stockholders of UAL will receive, for each Old Share held, one-half of a
new share of common stock, par value $.01 per share, of UAL (representing an
equity interest immediately after the Transaction of approximately 47% of one
Old Share's current percentage equity interest in UAL, subject to possible
reduction), $31.10 liquidation value of Series B Preferred Stock, without par
value, of UAL, and one-thousandth of a share of redeemable preferred stock of
UAL, which will be redeemed immediately after issuance for $25.80 in cash,
$15.55 principal amount of Series A Debentures due 2004 of United Air Lines,
Inc. ("United") and $15.55 principal amount of Series B Debentures due 2014 of
United.  The Series B Preferred Stock, the Series A Debentures and the Series B
Debentures are referred to herein as the "Securities".

<PAGE>
 
                                                                             2

In arriving at our opinion, we have reviewed and analyzed the Recapitalization
Agreement, as well as certain publicly available business and financial
information relating to UAL.  We have also reviewed certain other information,
including financial forecasts provided to us by UAL.  We have met with UAL's
management to discuss the past and current operations and financial condition
and prospects of UAL.  We have also considered certain financial and stock
market data for UAL and we have compared that data with similar data for other
publicly held companies in businesses similar to those of UAL, and we have
considered the financial terms of certain other business combinations that have
recently been effected.  We also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
that we deemed relevant.  In addition, we have reviewed the alternative of not
effecting a reorganization or similar transaction and UAL implementing various
operating strategies considered by it which, if fully implemented, might result
in a greater value to Common Stockholders than the Transaction; however, we
understand and have assumed for purposes of this opinion that the board of
directors of UAL has determined, in light of various factors relating to the
implementation of such operating strategies and the availability of the
Transaction, not to pursue such implementation.

In connection with our review, we have not independently verified any of the
foregoing information and have relied on its being complete and accurate in all
material respects.  With respect to the financial forecasts, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of UAL's management as to the future financial
performance of UAL.  We express no view as to such forecasts or the assumptions
on which they are based.  We have not made an independent evaluation or
appraisal of the assets or liabilities of UAL, nor have we been furnished with
any such appraisals.  We were not requested to, and did not, solicit third party
offers to acquire all or any part of UAL, nor, to our knowledge, has any
interest in making such an offer been presented by any third party, including in
response to the public disclosure regarding discussions between UAL and the
Participating Employees.  We have assumed that the results expected by UAL's
management to be obtained from the Transaction, including those arising from the
Participating Employees' labor concessions, will be realized.  Our opinion is
necessarily based solely upon information available to us and business, market,
economic and other conditions as they exist on, and can be evaluated as of, the
date hereof.  Our opinion does not address UAL's underlying business decision to
effect the Transaction.

Pursuant to the Recapitalization Agreement, the interest and dividend rates for
the Securities were initially set upon the execution of the Recapitalization
Agreement.  The interest or dividend rate on each such Security will be reset,
as of a date to be determined that is not fewer than five calendar days and not
greater than ten calendar days prior to the meeting of the Common Stockholders
of UAL at which the Transaction will be voted upon, to the rate required to
cause each such security to trade at 100% of its aggregate principal amount (in
the case of the debentures) or at 100% of its aggregate liquidation preference
(in the case of the preferred stock) (collectively, "par"), on a fully
distributed basis, as of such date, subject to a limitation specified in the
Recapitalization Agreement on the amount that such rates can increase.  Our
opinion is based on such final rates being set so that the Securities would
trade, as of such date, on a fully distributed basis, at par.  It should be
noted that our opinion does not represent our view as to

<PAGE>
 
                                                                             3

what the trading value of the Securities actually will be when the Securities
are issued to the Common Stockholders following consummation of the Transaction.
The actual trading value of the Securities could be higher or lower depending
upon changes in interest rates, dividend rates, market conditions, general
economic conditions and other factors that generally influence the price of
securities.  Because of the large aggregate amount of the Securities being
issued to stockholders of UAL and other factors, such Securities may trade
initially, and for an extended period thereafter, at prices below those at which
they would trade on a fully distributed basis.  Furthermore, any valuation of
securities is only an approximation, subject to uncertainties and contingencies
all of which are difficult to predict and beyond our control.

We have acted as financial advisor to UAL in connection with the Transaction and
will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Transaction.  We will also receive a fee
for rendering this opinion and other additional services currently being
rendered to UAL.  In the ordinary course of our business, we actively trade the
debt and equity securities of UAL for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.

It is understood that this opinion is only for the information of the Board of
Directors of UAL.  However, this opinion may be included in its entirety in any
proxy statement from UAL to its Common Stockholders.  This opinion may not,
however, be summarized, excerpted from or otherwise publicly referred to without
our prior written consent, which will not unreasonably be withheld.  In
addition, we may not be otherwise publicly referred to without our prior
consent, which will not unreasonably be withheld.

Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the consideration to be received by the Common Stockholders of UAL in
the Transaction, taken as a whole, is fair to such Common Stockholders from a
financial point of view.


Very truly yours,

CS FIRST BOSTON CORPORATION



By:  
     -------------------------------

<PAGE>
                                                                      Annex II
March 24, 1994
 
 


Board of Directors
UAL Corporation
1200 East Algonquin Road
Elk Grove Township, IL 60007


Gentlemen and Madam:

You have requested our opinion as to the fairness, from a financial point of
view, to the holders (the "Common Stockholders") of shares of common stock, par
value $5.00 per share ("Old Shares"), of UAL Corporation, a Delaware corporation
("UAL"), of the consideration to be received by such Common Stockholders in
connection with the proposed recapitalization of UAL (the "Transaction"), as set
forth in, and pursuant to the terms of, the Agreement and Plan of
Recapitalization dated as of March 25, 1994 (the "Recapitalization Agreement"),
between UAL and the Airline Pilots Association, International, and the
International Association of Machinists and Aerospace Workers (together with
other participating employees, the "Participating Employees").

We understand that the Transaction, as more specifically set forth in the
Recapitalization Agreement, provides that, in exchange for certain labor
concessions by the Participating Employees, UAL will issue common stock to
certain employee trusts/ESOPs equal to a minimum of 53% and a maximum of 63% of
the common stock of UAL.  We also understand that in the Transaction the current
Common Stockholders of UAL will receive, for each Old Share held, one-half of a
new share of common stock, par value $.01 per share, of UAL (representing an
equity interest immediately after the Transaction of approximately 47% of one
Old Share's current percentage equity interest in UAL, subject to possible
reduction), $31.10 liquidation value of Series B Preferred Stock, without par
value, of UAL, and one-thousandth of a share of redeemable preferred stock of
UAL, which will be redeemed immediately after issuance for $25.80 in cash,
$15.55 principal amount of Series A Debentures due 2004 of United Air Lines,
Inc. ("United") and $15.55 principal amount of Series B Debentures due 2014 of
United.  The Series B Preferred Stock, the Series A Debentures and the Series B
Debentures are referred to herein as the "Securities".

<PAGE>
 
                                                                             2


In arriving at our opinion, we have reviewed and analyzed the Recapitalization
Agreement, as well as certain publicly available business and financial
information relating to UAL.  We have also reviewed certain other information,
including financial forecasts provided to us by UAL.  We have met with UAL's
management to discuss the past and current operations and financial condition
and prospects of UAL.  We have also considered certain financial and stock
market data for UAL and we have compared that data with similar data for other
publicly held companies in businesses similar to those of UAL, and we have
considered the financial terms of certain other business combinations that have
recently been effected.  We also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
that we deemed relevant.  In addition, we have reviewed the alternative of not
effecting a reorganization or similar transaction and UAL implementing various
operating strategies considered by it which, if fully implemented, might result
in a greater value to Common Stockholders than the Transaction; however, we
understand and have assumed for purposes of this opinion that the board of
directors of UAL has determined, in light of various factors relating to the
implementation of such operating strategies and the availability of the
Transaction, not to pursue such implementation.

In connection with our review, we have not independently verified any of the
foregoing information and have relied on its being complete and accurate in all
material respects.  With respect to the financial forecasts, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of UAL's management as to the future financial
performance of UAL.  We express no view as to such forecasts or the assumptions
on which they are based.  We have not made an independent evaluation or
appraisal of the assets or liabilities of UAL, nor have we been furnished with
any such appraisals.  We were not requested to, and did not, solicit third party
offers to acquire all or any part of UAL, nor, to our knowledge, has any
interest in making such an offer been presented by any third party, including in
response to the public disclosure regarding discussions between UAL and the
Participating Employees.  We have assumed that the results expected by UAL's
management to be obtained from the Transaction, including those arising from the
Participating Employees' labor concessions, will be realized.  Our opinion is
necessarily based solely upon information available to us and business, market,
economic and other conditions as they exist on, and can be evaluated as of, the
date hereof.  Our opinion does not address UAL's underlying business decision to
effect the Transaction.

Pursuant to the Recapitalization Agreement, the interest and dividend rates for
the Securities were initially set upon the execution of the Recapitalization
Agreement.  The interest or dividend rate on each such Security will be reset,
as of a date to be determined that is not fewer than five calendar days and not
greater than ten calendar days prior to the meeting of the Common Stockholders
of UAL at which the Transaction will be voted upon, to the rate required to
cause each such Security to trade at 100% of its aggregate principal amount (in
the case of the debentures) or at 100% of its aggregate liquidation preference
(in the case of the preferred stock) (collectively, "par"), on a fully
distributed basis, as of such date, subject to a limitation specified in the
Recapitalization Agreement on the amount that such rates can increase.  Our
opinion is based on such final rates being set so that the Securities would
trade, as of such date, on a fully distributed basis, at par.  It should be
noted that our opinion does not represent our view as to

<PAGE>
 
                                                                             3

what the trading value of the Securities actually will be when the Securities
are issued to the Common Stockholders following consummation of the Transaction.
The actual trading value of the Securities could be higher or lower depending
upon changes in interest rates, dividend rates, market conditions, general
economic conditions and other factors that generally influence the price of
securities.  Because of the large aggregate amount of the Securities being
issued to stockholders of UAL and other factors, such Securities may trade
initially, and for an extended period thereafter, at prices below those at which
they would trade on a fully distributed basis.  Furthermore, any valuation of
securities is only an approximation, subject to uncertainties and contingencies
all of which are difficult to predict and beyond our control.

We have acted as financial advisor to UAL in connection with the Transaction and
will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Transaction.  A portion of this fee
relates to the rendering of this opinion.

It is understood that this opinion is only for the information of the Board of
Directors of UAL.  However, this opinion may be included in its entirety in any
proxy statement from UAL to its Common Stockholders.  This opinion may not,
however, be summarized, excerpted from or otherwise publicly referred to without
our prior written consent, which will not unreasonably be withheld.  In
addition, we may not be otherwise publicly referred to without our prior
consent, which will not unreasonably be withheld.

Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the consideration to be received by the Common Stockholders of UAL in
the Transaction, taken as a whole, is fair to such Common Stockholders from a
financial point of view.


Very truly yours,



- -------------------------------
Lazard Freres & Co.

<PAGE>
 

                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  Section 145 of the General Corporation Law of Delaware empowers each of the
Registrants to indemnify, subject to the standards herein prescribed, any
person in connection with any action, suit or proceeding brought or threatened
by reason of the fact that such person is or was a director, officer, employee
or agent of a Registrant or was serving as such with respect to another
corporation or other entity at the request of a Registrant. Article Sixth (b)
of each of the Registrants' Restated Certificates of Incorporation provides
that each person who was or is made a party to (or is threatened to be made a
party to) or is otherwise involved in any action, suit or proceeding by reason
of the fact that such person is or was a director or officer of the applicable
Registrant shall be indemnified and held harmless by the applicable Registrant
to the fullest extent authorized by the General Corporation Law of Delaware
against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred by such person in
connection therewith. The rights conferred by Article Sixth (b) are contractual
rights and include the right to be paid by the applicable Registrant the
expenses incurred in defending such action, suit or proceeding in advance of
the final disposition thereof.
 
  Article SIXTH (a) of each of the Registrants' Restated Certificate of
Incorporation and the proposed Restated Certificate of Incorporation of UAL
provides that the applicable Registrant's directors will not be personally
liable to the applicable Registrant or its stockholders for monetary damages
resulting from breaches of their fiduciary duty as directors except for
liability (a) for any breach of the duty of loyalty to the applicable
Registrant or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the General Corporation Law of Delaware, which makes directors
liable for unlawful dividends or unlawful stock repurchases or redemptions or
(d) for any transaction from which directors derive improper personal benefit.
 
  The Registrants maintain directors and officers liability insurance covering
all directors and officers of the Registrants against claims arising out of the
performance of their duties.
 
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 

<TABLE>
<CAPTION>
   EXHIBIT
     NO.                                DESCRIPTION
   -------                              -----------
   <C>     <S>
     2.1   Agreement and Plan of Recapitalization dated as of March 25, 1994,
            among UAL, Air Line Pilots Association, International UAL-MEC and
            the International Association of Machinists and Aerospace Workers,
            including all schedules and exhibits thereto (filed as Exhibit 10.1
            to UAL's Form 8-K dated March 28, 1994 and incorporated herein by
            reference).
     2.2   Letter agreement dated as of March 25, 1994, among UAL, Air Line
            Pilots Association, International UAL-MEC and the International
            Association of Machinists and Aerospace Workers (filed as Exhibit
            10.2 to UAL's Form 8-K dated March 28, 1994 and incorporated herein
            by reference).
     2.3   Letter agreement dated as of March 25, 1994, between UAL and State
            Street Bank and Trust Company (filed as Exhibit 10.3 to UAL's Form
            8-K dated March 28, 1994 and incorporated herein by reference).
     4.1   UAL's Proposed Restated Certificate of Incorporation, to be filed in
            connection with the consummation of the Recapitalization (filed as
            Schedule 1.1 to Exhibit 10.1 of UAL's Form 8-K dated March 28, 1994
            and incorporated herein by reference).
</TABLE>

 
                                      II-1

<PAGE>
 

<TABLE>
<CAPTION>
   EXHIBIT
     NO.                                DESCRIPTION
   -------                              -----------
   <C>     <S>
     4.2   UAL's Proposed Restated Bylaws, to be adopted in connection with the
            consummation of the Recapitalization (filed as Schedule 2.2 to
            Exhibit 10.1 of UAL's Form 8-K dated March 28, 1994 and
            incorporated herein by reference).
     4.3   Rights Agreement, dated as of December 11, 1986 between UAL and
            Morgan Shareholder Services Trust Company, as Rights Agent (filed
            as Exhibit 4.1 of UAL's Annual Report on Form 10-K for the year
            ended December 31, 1992 and incorporated herein by reference;
            Amendment Nos. 1, 2, 3 and 4 thereto filed, respectively, as (i)
            Exhibit 2 to UAL's Form 8 dated February 26, 1988, (ii) Exhibit 3
            to Registrant's Form 8 dated July 28, 1989, (iii) Exhibit 4 to
            Registrant's Form 8 dated September 26, 1989, and (iv) Exhibit to
            UAL's Form 8 dated February 3, 1993, and each incorporated herein
            by reference; Proposed Amendment No. 5 thereto filed as Schedule
            3.18 to Exhibit 10.1 of UAL's Form 8-K dated March 28, 1994 and
            incorporated herein by reference).
     4.4   Indenture dated as of July 1, 1991 between United and The Bank of
            New York providing for the Issuance of Senior Debt Securities in
            Series (filed as Exhibit 4(a) of United's Registration Statement
            Form S-3 (No. 33-57192) and incorporated by reference herein).
     4.5   Form of Officer's Certificate relating to United's Series A
            Debentures due 2004 and United Series B Debentures due 2014 (filed
            as Schedule 1.3 to Exhibit 10.1 of UAL's Form 8-K dated March 28,
            1994 and incorporated herein by reference).
    *5.1   Opinion of Skadden, Arps, Slate, Meagher & Flom as to the legality
            of the Securities dated as of April  , 1994.
    *8.1   Tax Opinion of Skadden, Arps, Slate, Meagher & Flom dated as of
            April  , 1994.
    12.1   UAL's Calculation of Pro Forma Ratio of Earnings to Fixed Charges.
    12.2   UAL's Calculation of Pro Forma Ratio of Earnings to Fixed Charges
            and Preferred Stock Dividend Requirements.
   *12.3   United's Calculation of Pro Forma Ratio of Earnings to Fixed
            Charges.
    23.1   Consent of Arthur Andersen & Co. dated as of April 11, 1994.
    23.2   Consent of KPMG Peat Marwick dated as of April 11, 1994.
    23.3   Consent of CS First Boston Corporation dated as of April 12, 1994.
    23.4   Consent of Lazard Freres & Co. dated as of April 12, 1994.
    23.5   Consent of American Appraisal Associates, Inc. dated as of April 11,
            1994.
   *23.6   Consent of Skadden, Arps, Slate, Meagher & Flom, included as part of
            Exhibit 5.1.
    23.7   Consent of John F. McGillicuddy
    23.8   Consent of James J. O'Connor
    23.9   Consent of Paul E. Tierney
    23.10  Consent of Gerald Greenwald
    23.11  Consent of Duane D. Fitzgerald
    23.12  Consent of Richard D. McCormick
    23.13  Consent of John K. Van de Kamp
    23.14  Consent of Paul A. Volcker
    23.15  Consent of Joseph V. Vittoria
    24.1   Power of Attorney (See page II-4)
    24.2   Power of Attorney (See page II-6)
   *25.1   Form T-1 Statement of Eligibility under the Trust Indenture Act of
            1939, as amended, by The Bank of New York, as Trustee under the
            Indenture dated as of July 1991 between United and The Bank of New
            York Providing for the Issuance of Senior Debt Securities in
            Series.
    99.1   Opinion of American Appraisal Associates, Inc. dated as of March 14,
            1994 (filed as Schedule 5.9 to Exhibit 10.1 of UAL's Form 8-K dated
            March 28, 1994 and incorporated herein by reference).
    99.2   Retention Agreement dated January 1, 1994 between Air Line Pilots
            Association, International, the International Association of
            Machinists and Aerospace Workers and Gerald Greenwald, attaching
            Employment Agreement between UAL Corporation and Gerald Greenwald
            to be entered into at the Effective Time.
</TABLE>

- --------
* To be filed by amendment.
 
 
                                      II-2

<PAGE>
 
ITEM 22. UNDERTAKINGS
 
  (a) Each of the undersigned Registrants hereby undertakes:
 
    (1) To file, during any period in which offers or sales are being made, a
  post-effective amendment to this Registration Statement:
 
      (i) To include any prospectus required by Section 10(a)(3) of the
    Securities Act of 1933, as amended (the "Securities Act");
 
      (ii) To reflect in the prospectus any facts or events arising after
    the effective date of the Registration Statement (or the most recent
    post-effective amendment thereof) which, individually or in the
    aggregate, represent a fundamental change in the information set forth
    in the Registration Statement;
 
      (iii) To include any material information with respect to the plan of
    distribution not previously disclosed in the Registration Statement or
    any material change of such information in the Registration Statement;
 
    (2) That, for the purpose of determining any liability under the
  Securities Act, each such post-effective amendment shall be deemed to be a
  new Registration Statement relating to the securities offered therein, and
  the offering of such securities at that time shall be deemed to be the
  initial bona fide offering thereof.
 
    (3) To remove from registration by means of post-effective amendment any
  of the securities being registered which remain unsold at the termination
  of the offering.
 
  (b) Each of the undersigned Registrants hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of a
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
 
  (c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the applicable Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
 
  (d) Each of undersigned Registrants hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, 13, or 16 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
 
  (e) Each of the undersigned Registrants hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction that was
not the subject of and included in the Registration Statement when it became
effective.
 
                                      II-3

<PAGE>
 

                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ELK GROVE TOWNSHIP, ILLINOIS, ON THE
12 DAY OF APRIL, 1994.
 
                                          UAL Corporation
 
                                                     
                                          By         /s/ John C. Pope
                                            -----------------------------------
                                                       JOHN C. POPE 
                                               PRESIDENT AND CHIEF OPERATING 
                                                          OFFICER
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES NOTED ON
THIS 12 DAY OF APRIL, 1994.
 
  THE UNDERSIGNED DIRECTORS AND OFFICERS OF UAL CORPORATION HEREBY APPOINT
STEPHEN M. WOLF AND JOHN C. POPE, EACH OF THEM, AS ATTORNEYS FOR THE
UNDERSIGNED, WITH FULL POWER OF SUBSTITUTION FOR AND IN THE NAME, PLACE AND
STEAD OF THE UNDERSIGNED, TO SIGN AND FILE WITH THE COMMISSION ANY AND ALL
AMENDMENTS AND EXHIBITS TO THIS REGISTRATION STATEMENT ON FORM S-4, WITH FULL
POWER AND AUTHORITY TO DO AND PERFORM ANY AND ALL ACTS AND THINGS WHATSOEVER
REQUISITE AND NECESSARY OR DESIRABLE IN CONNECTION THEREWITH.
 
              SIGNATURE                         TITLE                DATE
              ---------                         -----                ----   
 
         /s/ Stephen M. Wolf            Director, and           April 12, 1994
- -------------------------------------    Chairman and Chief
           STEPHEN M. WOLF               Executive Officer
 
          /s/ John C. Pope              Director, and           April 12, 1994
- -------------------------------------    President and Chief
            JOHN C. POPE                 Operating Officer
                                         (principal
                                         accounting officer
                                         and principal
                                         financial officer)
 
                                        Director                April  , 1994
- -------------------------------------
          NEIL A. ARMSTRONG
 
        /s/ Andrew F. Brimmer           Director                April 12, 1994
- -------------------------------------
          ANDREW F. BRIMMER
 
        /s/ Richard P. Cooley           Director                April 12, 1994
- -------------------------------------
          RICHARD P. COOLEY

         /s/ Carla A. Hills 
- -------------------------------------   Director                April 12, 1994
           CARLA A. HILLS
 
          /s/ Fujio Matsuda             Director                April 12, 1994
- -------------------------------------
            FUJIO MATSUDA
 
                                      II-4

<PAGE>
 
             SIGNATURES                         TITLE                DATE
 
      /s/ John F. McGillicuddy          Director                April 12, 1994
- -------------------------------------
        JOHN F. MCGILLICUDDY
 
                                        Director                April  , 1994
- -------------------------------------
           HARRY MULLIKIN
 
        /s/ James J. O'Connor           Director                April 12, 1994
- -------------------------------------
          JAMES J. O'CONNOR
 
         /s/ Frank A. Olson             Director                April 12, 1994
- -------------------------------------
           FRANK A. OLSON
 
         /s/ Ralph Strangis             Director                April 12, 1994
- -------------------------------------
           RALPH STRANGIS
 
      /s/ Paul E. Tierney, Jr.          Director                April 12, 1994
- -------------------------------------
        PAUL E. TIERNEY, JR.
 
 
                                      II-5

<PAGE>
 
                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ELK GROVE TOWNSHIP, ILLINOIS, ON THE
12 DAY OF APRIL, 1994.
 
                                          United Air Lines, Inc.
 
                                                     
                                          By         /s/ John C. Pope
                                            -----------------------------------
                                                        JOHN C. POPE 
                                               PRESIDENT AND CHIEF OPERATING 
                                                           OFFICER
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES NOTED ON
THIS 12 DAY OF APRIL, 1994.
 
  THE UNDERSIGNED DIRECTORS AND OFFICERS OF UNITED AIR LINES, INC. HEREBY
APPOINT STEPHEN M. WOLF AND JOHN C. POPE, EACH OF THEM, AS ATTORNEYS FOR THE
UNDERSIGNED, WITH FULL POWER OF SUBSTITUTION FOR AND IN THE NAME, PLACE AND
STEAD OF THE UNDERSIGNED, TO SIGN AND FILE WITH THE COMMISSION ANY AND ALL
AMENDMENTS AND EXHIBITS TO THIS REGISTRATION STATEMENT ON FORM S-4, WITH FULL
POWER AND AUTHORITY TO DO AND PERFORM ANY AND ALL ACTS AND THINGS WHATSOEVER
REQUISITE AND NECESSARY OR DESIRABLE IN CONNECTION THEREWITH.
 
              SIGNATURE                         TITLE                DATE
              ---------                         -----                ----  
 
         /s/ Stephen M. Wolf            Director, and           April 12, 1994
- -------------------------------------    Chairman and Chief
           STEPHEN M. WOLF               Executive Officer
                                         (principal
                                         executive officer)
 
          /s/ John C. Pope              Director, President     April 12, 1994
- -------------------------------------    and Chief Operating
            JOHN C. POPE                 Officer (principal
                                         financial officer)
 
        /s/ Lawrence M. Nagin           Director, and           April 12, 1994
- -------------------------------------    Executive Vice
          LAWRENCE M. NAGIN              President--
                                         Corporate Affairs
                                         and General Counsel
 
        /s/ James M. Guyette            Director, and           April 12, 1994
- -------------------------------------    Executive Vice
          JAMES M. GUYETTE               President--
                                         Marketing and
                                         Planning
 
         /s/ Paul G. George             Director, and Senior    April 12, 1994
- -------------------------------------    Vice President--
           PAUL G. GEORGE                Human Resources
 
     /s/ Joseph R. O'Gorman, Jr.        Director, and           April 12, 1994
- -------------------------------------    Executive Vice
       JOSEPH R. O'GORMAN, JR.           President--
                                         Operations
 
        /s/ Frederic F. Brace           Vice President--        April 12, 1994
- -------------------------------------    Corporate
          FREDERIC F. BRACE              Development and
                                         Controller
                                         (principal
                                         accounting officer)
 
                                      II-6

<PAGE>
 

                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
 EXHIBIT
   NO.                             DESCRIPTION                             PAGE
 -------                           -----------                             ----
 <C>     <S>                                                               <C>
    2.1  Agreement and Plan of Recapitalization dated as of March 25,
          1994, among UAL, Air Line Pilots Association, International
          UAL-MEC and the International Association of Machinists and
          Aerospace Workers, including all schedules and exhibits
          thereto (filed as Exhibit 10.1 to UAL's Form 8-K dated March
          28, 1994 and incorporated herein by reference).
    2.2  Letter agreement dated as of March 25, 1994, among UAL, Air
          Line Pilots Association, International UAL-MEC and the
          International Association of Machinists and Aerospace Workers
          (filed as Exhibit 10.2 to UAL's Form 8-K dated March 28, 1994
          and incorporated herein by reference).
    2.3  Letter agreement dated as of March 25, 1994, between UAL and
          State Street Bank and Trust Company (filed as Exhibit 10.3 to
          UAL's Form 8-K dated March 28, 1994 and incorporated herein by
          reference).
    4.1  UAL's Proposed Restated Certificate of Incorporation, to be
          filed in connection with the consummation of the
          Recapitalization (filed as Schedule 1.1 to Exhibit 10.1 of
          UAL's Form 8-K dated March 28, 1994 and incorporated herein by
          reference).
    4.2  UAL's Proposed Restated Bylaws, to be adopted in connection
          with the consummation of the Recapitalization (filed as
          Schedule 2.2 to Exhibit 10.1 of UAL's Form 8-K dated March 28,
          1994 and incorporated herein by reference).
    4.3  Rights Agreement, dated as of December 11, 1986 between UAL and
          Morgan Shareholder Services Trust Company, as Rights Agent
          (filed as Exhibit 4.1 of UAL's Annual Report on Form 10-K for
          the year ended December 31, 1992 and incorporated herein by
          reference; Amendment Nos. 1, 2, 3 and 4 thereto filed,
          respectively, as (i) Exhibit 2 to UAL's Form 8 dated February
          26, 1988, (ii) Exhibit 3 to Registrant's Form 8 dated July 28,
          1989, (iii) Exhibit 4 to Registrant's Form 8 dated September
          26, 1989, and (iv) Exhibit to UAL's Form 8 dated February 3,
          1993, and each incorporated herein by reference; Proposed
          Amendment No. 5 thereto filed as Schedule 3.18 to Exhibit 10.1
          of UAL's Form 8-K dated March 28, 1994 and incorporated herein
          by reference).
    4.4  Indenture dated as of July 1, 1991 between United and The Bank
          of New York providing for the Issuance of Senior Debt
          Securities in Series (filed as Exhibit 4(a) of United's
          Registration Statement Form S-3 (No. 33-57192) and
          incorporated by reference herein).
    4.5  Form of Officer's Certificate relating to United's Series A
          Debentures due 2004 and United Series B Debentures due 2014
          (filed as Schedule 1.3 to Exhibit 10.1 of UAL's Form 8-K dated
          March 28, 1994 and incorporated herein by reference).
   *5.1  Opinion of Skadden, Arps, Slate, Meagher & Flom as to the
          legality of the Securities dated as of April  , 1994.
   *8.1  Tax Opinion of Skadden, Arps, Slate, Meagher & Flom dated as of
          April  , 1994.
   12.1  UAL's Calculation of Pro Forma Ratio of Earnings to Fixed
          Charges.
   12.2  UAL's Calculation of Pro Forma Ratio of Earnings to Fixed
          Charges and Preferred Stock Dividend Requirements.
  *12.3  United's Calculation of Pro Forma Ratio of Earnings to Fixed
          Charges.
</TABLE>


<PAGE>
 

<TABLE>
<CAPTION>
 EXHIBIT
   NO.                             DESCRIPTION                             PAGE
 -------                           -----------                             ----
 <C>     <S>                                                               <C>
  23.1   Consent of Arthur Andersen & Co. dated as of April  , 1994.
  23.2   Consent of KPMG Peat Marwick dated as of April 11, 1994.
  23.3   Consent of CS First Boston Corporation dated as of April  ,
          1994.
  23.4   Consent of Lazard Freres & Co. dated as of April  , 1994.
  23.5   Consent of American Appraisal Associates, Inc.
 *23.6   Consent of Skadden, Arps, Slate, Meagher & Flom, included as
          part of Exhibit 5.1.
  23.7   Consent of John F. McGillicuddy.
  23.8   Consent of James T. O'Connor.
  23.9   Consent of Paul E. Tierney.
  23.10  Consent of Gerald Greenwald.
  23.11  Consent of Duane D. Fitzgerald.
  23.12  Consent of Richard D. McCormick.
  23.13  Consent of John K. Van de Kamp.
  23.14  Consent of Paul A. Volcker.
  23.15  Consent of Joseph V. Vittoria.
  24.0   Power of Attorney (See Page II-4)
  24.2   Power of Attorney (See page II-6)
 *25.1   Form T-1 Statement of Eligibility under the Trust Indenture Act
          of 1939, as amended, by The Bank of New York, as Trustee under
          the Indenture dated as of July 1991 between United and The
          Bank of New York Providing for the Issuance of Senior Debt
          Securities in Series.
  99.1   Opinion of American Appraisal Associates, Inc. dated as of
          March 14, 1994 (filed as Schedule 5.9 to Exhibit 10.1 of UAL's
          Form 8-K dated March 28, 1994 and incorporated herein by
          reference).
  99.2   Retention Agreement dated January 1, 1994 between Air Line
          Pilots Association, International, the International
          Association of Machinists and Aerospace Workers and Gerald
          Greenwald, attaching Employment Agreement between UAL
          Corporation and Gerald Greenwald to be entered into at the
          Effective Time.
</TABLE>

- --------
* To be filed by amendment.





<PAGE>
 
                                                                    EXHIBIT 12.1
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
 
          CALCULATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
                             (DOLLARS IN MILLIONS)
 

<TABLE>
<CAPTION>
                                                               TWELVE MONTHS
                                                             ENDED DECEMBER 31,
                                                                    1993
                                                             ------------------
                                                                (PRO FORMA)
<S>                                                          <C>
Earnings:
  Loss before income taxes..................................       $ (283)
  Fixed charges, from below.................................        1,177
  Interest capitalized......................................          (51)
                                                                   ------
  Earnings..................................................       $  843
                                                                   ======
Fixed Charges:
  Interest expense..........................................       $  431
  Portion of rental expense representative of the interest
   factor...................................................          746
                                                                   ------
    Fixed charges...........................................       $1,177
                                                                   ======
Pro forma ratio of earnings to fixed charges................             (a)
                                                                   ======
</TABLE>

- --------
(a) Earnings were inadequate to cover fixed charges by $334 million.





<PAGE>
 
                                                                    EXHIBIT 12.2
 
                    UAL CORPORATION AND SUBSIDIARY COMPANIES
          CALCULATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
                   AND PREFERRED STOCK DIVIDEND REQUIREMENTS
                             (DOLLARS IN MILLIONS)
 

<TABLE>
<CAPTION>
                                                                TWELVE MONTHS
                                                              ENDED DECEMBER 31
                                                                    1993
                                                              -----------------
                                                                 (PRO FORMA)
<S>                                                           <C>
Earnings:
  Loss before income taxes...................................      $ (283)
  Fixed charges, from below..................................       1,359
  Interest capitalized.......................................         (51)
                                                                   ------
    Earnings.................................................      $1,025
                                                                   ======
Fixed Charges:
  Interest expense...........................................      $  431
  Preferred stock dividend requirements......................         182
  Portion of rental expense representative of the interest
   factor....................................................         746
                                                                   ------
    Fixed charges and preferred stock dividend requirements..      $1,359
                                                                   ======
Pro forma ratio of earnings to fixed charges and preferred
 stock dividend requirements.................................            (a)
                                                                   ======
</TABLE>

- --------
(a) Earnings were inadequate to cover fixed charges and preferred stock
    dividend requirements by $334 million.





<PAGE>
 
                                                                    EXHIBIT 23.1
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
  As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated February 23, 1994
included in the UAL Corporation Form 10-K for the year ended December 31, 1993
and the United Air Lines, Inc. Form 10-K for the year ended December 31, 1993,
and to all references to our Firm included in this registration statement.
 
                                          Arthur Andersen & Co.
 
Chicago, Illinois
April 11, 1994





<PAGE>
 
                                                                    EXHIBIT 23.2
 
                         INDEPENDENT AUDITORS' CONSENT
 
The Board of Directors
Galileo International Partnership:
 
  We consent to incorporation by reference in this registration statement on
Form S-4 of UAL Corporation and United Air Lines, Inc. of our reports dated
February 23, 1994 on Covia Partnership for the period January 1, 1993 to
September 15, 1993 and Galileo International Partnership for the period
September 16, 1993 to December 31, 1993, which reports appear in the December
31, 1993 annual report on Form 10-K of UAL Corporation and in the December 31,
1993 annual report on Form 10-K of United Air Lines, Inc.
 
                                          KPMG Peat Marwick
 
Chicago, Illinois
April 11, 1994





<PAGE>
 
                                                                    EXHIBIT 23.3
 
                                     [LOGO]
 
  We hereby consent to the use of our written opinion dated March 24, 1994 to
the Board of Directors of UAL Corporation included as an annex to the Proxy
Statement/Prospectus which forms a part of the Registration Statement on Form
S-4 relating to the proposed recapitalization of UAL Corporation and to the
reference to such opinion in such Proxy Statement/Prospectus. In giving such
consent, we do not admit and we hereby disclaim that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder, nor do we thereby admit that we are experts
with respect to any part of such Registration Statement within the meaning of
the term "experts" as used in the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
 
April 12, 1994
                                          CS First Boston Corporation





<PAGE>
 
                                                                    EXHIBIT 23.4
 
                                     [LOGO]
 
                                                                  April 12, 1994
 
  We hereby consent to the inclusion of our written opinion dated March 24,
1994 to the Board of Directors of UAL Corporation as an annex to the Proxy
Statement/Prospectus which forms a part of the Registration Statement on Form
S-4 relating to the proposed recapitalization of UAL Corporation and to the
reference to such opinion in such Proxy Statement/Prospectus. In giving such
consent, we do not admit and we hereby disclaim that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder, nor do we thereby admit that we are experts
with respect to any part of such Registration Statement within the meaning of
the term "experts" as used in the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
 
                                          Lazard Freres & Co.





<PAGE>
 
                                                                    EXHIBIT 23.5
 
                                     [LOGO]
 
                              CONSENT OF APPRAISER
 
  We hereby consent to the references made to us by UAL Corporation and United
Air Lines, Inc. under the captions "SUMMARY OF THE PLAN OF RECAPITALIZATION--
The Plan of Recapitalization," "SPECIAL FACTORS--Certain Company Analyses," "--
Effect of the Recapitalization on Income Statement, Book Equity and Cash Flow,"
"--Recommendation of the Board," "--Opinions of the Financial Advisors to the
Board" and "--Certain Risk Factors" in the Proxy Statement/Joint Prospectus
constituting a part of this Registration Statement on Form S-4. In addition, we
consent to the filing of our appraisal report referred to therein as an exhibit
to the Registration Statement. In giving such consent, we do not thereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
 
                                          American Appraisal Associates, Inc.
 
                                                   /s/ Ronald M. Goergen
                                          By __________________________________
                                            Name: Ronald M. Goergen
                                            Title: Executive Vice President
 
Milwaukee, Wisconsin
Date: April 11, 1994





<PAGE>
 
                                                                    EXHIBIT 23.7
 
 
  I consent to being named as a nominee for the position of Outside Public
Director of UAL in the Proxy Statement concerning the Employee Investment
Transaction and to serve as a director if elected.
 
                                                /s/ John F. McGillicuddy
                                          -------------------------------------
                                                  John F. McGillicuddy
 
Dated: March 30, 1994





<PAGE>
 
                                                                    EXHIBIT 23.8
 
  I consent to being named as a nominee for the position of Outside Public
Director of UAL in the Proxy Statement concerning the Employee Investment
Transaction and to serve as a director if elected.
 
                                                  /s/ James J. O'Connor
                                          _____________________________________
                                                    James J. O'Connor
 
Dated: March 30, 1994





<PAGE>
 
                                                                    EXHIBIT 23.9
 
  I consent to being named as a nominee for the position of Outside Public
Director of UAL in the Proxy Statement concerning the Employee Investment
Transaction and to serve as a director if elected.
 
                                                   /s/ Paul E. Tierney
                                          -------------------------------------
                                                     Paul E. Tierney
 
Dated: April 5, 1994





<PAGE>
 
                                                                   EXHIBIT 23.10
 
  I consent to being named as a nominee for director of UAL in the Proxy
Statement and to serve as a director if elected.
 
                                                  /s/ Gerald Greenwald
                                          _____________________________________
                                                    Gerald Greenwald
 
Dated: March 29, 1994





<PAGE>
 
                                                                   EXHIBIT 23.11
 
  I consent to being named as a nominee for director of UAL in the Proxy
Statement and to serve as a director if elected.
 
                                                 /s/ Duane D. Fitzgerald
                                          _____________________________________
                                                   Duane D. Fitzgerald
 
Dated: April 4, 1994





<PAGE>
 
                                                                   EXHIBIT 23.12
 
  I consent to being named as a nominee for director of UAL in the Proxy
Statement and to serve as a director if elected.
 
                                                /s/ Richard D. McCormick
                                          -------------------------------------
                                                  Richard D. McCormick
Dated: March 31, 1994





<PAGE>
 
                                                                   EXHIBIT 23.13
 
  I consent to being named as a nominee for director of UAL in the Proxy
Statement and to serve as a director if elected.
 
                                                 /s/ John K. Van de Kamp
                                          _____________________________________
                                                   John K. Van de Kamp
 
Dated: April 5, 1994





<PAGE>
 
                                                                   EXHIBIT 23.14
 
  I consent to being named as a nominee for director of UAL in the Proxy
Statement and to serve as a director if elected.
 
                                                   /s/ Paul A. Volcker
                                          _____________________________________
                                                     Paul A. Volcker
 
Dated: April 5, 1994





<PAGE>
 
                                                                   EXHIBIT 23.15
 
  I consent to being named as a nominee for director of UAL in the Proxy
Statement and to serve as a director if elected.
 
                                                 /s/ Joseph V. Vittoria
                                          _____________________________________
                                                   Joseph V. Vittoria
 
Dated: April 4, 1994





<PAGE>

                                                                  Exhibit 99.2

 
                             RETENTION AGREEMENT
                             -------------------

          THIS AGREEMENT (the "Agreement") has been made and entered into as of
this 1st day of January, 1994, by and among the AIR LINE PILOTS ASSOCIATION,
INTERNATIONAL ("ALPA"), the INTERNATIONAL ASSOCIATION OF MACHINISTS AND
AEROSPACE WORKERS ("IAM" and, together with ALPA, the "Unions") and GERALD
GREENWALD (the "Consultant").

          WHEREAS, simultaneous with the execution of this Agreement, the Unions
have entered into the Agreement and Plan of Recapitalization, dated as of March
__, 1994, by and among the Unions and UAL Corporation (the "Corporation")
("Recapitalization Agreement"), which, among other things, requires the
Corporation, at the Effective Time (as defined in the Recapitalization Agree-
ment), to execute, deliver and perform the Employment Agreement annexed hereto
(the "Employment Agreement"); and

          WHEREAS, the Unions desire to employ the Consultant as a consultant
and the Consultant desires to be employed by the Unions as a consultant prior to
the execution and delivery of the Employment Agreement on the terms and
conditions hereinafter set forth;

          NOW, THEREFORE, in consideration of the foregoing premises, the
mutual covenants herein contained and other good and valuable consideration
 the
receipt of which is hereby acknowledged, the parties hereto hereby agree as
follows:

          1.   Employment.  The Unions hereby employ the Consultant as a
               ----------                                               
consultant and the Consultant hereby accepts employment by the Unions as a
consultant.  The Consultant's duties hereunder shall be to assist the Unions in
effecting the transactions contemplated by the Recapitalization Agreement (the
"Transactions") and the Consultant shall devote as much of his time and
attention to the business and affairs of the Unions in connection with the
Transactions as are reasonably necessary and appropriate.

          2.   Compensation.  During the term of this Agreement, the Unions
               ------------                                                
shall direct the Corporation to pay Consultant a salary of $80,000 per month,
payable in two equal semi-monthly installments on the fifteenth and last

<PAGE>
 
day of each such month and pro-rated for any partial month based upon the number
of days elapsed.  In addition, the Unions shall direct the Corporation to reim-
burse the Consultant for all travel, lodging and related expenses reasonably
incurred by him in the performance of his duties hereunder.  All such directions
shall be made by the Unions pursuant to the Corporation's fee letter with the
Unions dated December 22, 1993, as amended.

          3.   Additional Compensation.  In addition to the compensation set
               -----------------------                                      
forth in Section 2 hereof, if this Agreement is terminated pursuant to
subsection 4(iii) or subsection 4(v) hereof prior to the consummation of the
Transactions, upon the consummation of the Transactions, the Unions shall cause
the Corporation to pay to the Consultant (or his heirs or legal representatives,
as the case may be) the difference, if any, between $1,000,000 and the amount
paid to the Consultant pursuant to Section 4(c) of the Employment Agreement.

          4.   Termination.  This Agreement shall terminate upon the first to
               -----------                                                    
occur of the following:

               (i)  the mutual agreement of the parties hereto;

               (ii)  the execution and delivery of the Employment Agreement by
both the Consultant and the Corporations;

               (iii)  the death or Disability (as defined in the Employment
Agreement) of the Consultant;

               (iv)  notice to the Consultant from the Unions that they are
terminating this Agreement for Cause (as defined in Section 7(d) of the
Employment Agreement);

               (v)   notice to the Unions from the Consultant that he is
terminating this Agreement for Good Reason (as defined in Section 7(e) of the
Employment Agreement); or

               (vi)  the termination of the Recapitalization Agreement.

Except as expressly provided in Section 3 hereof, upon the termination of this
Agreement, the parties shall have

                                      2

<PAGE>
 
no further obligations to each other except for the obligation of the Unions to
direct the Corporation to pay the Consultant any accrued but unpaid salary
pursuant to Section 2 hereof.

          5.   Execution of Employment Agreement.  At the Effective Time, the
               ---------------------------------                             
Consultant shall execute and deliver to the Corporation the Employment
Agreement.

          6.   Miscellaneous.
               ------------- 

               A.  Binding Effect; No Assignment.  This Agreement shall be 
                   -----------------------------
binding upon and inure to the benefit of the parties hereto.  Each of the 
obligations of the parties hereunder may not be assigned.

               B.  Governing Law.  This Agreement shall be governed by the laws
                   -------------
of the State of New York, without regard to principles of conflict of laws.

               C.  Headings.  The headings of the sections of this Agreement
                   --------
are for convenience of reference only and shall have no force or effect.

               D.  Notices.  Notices provided hereunder shall be deemed 
                   -------
provided if provided in accordance with Section 20(b) of the Employment 
Agreement.

               E.  Entire Agreement; Modification.  This Agreement represents 
                   ------------------------------
the entire agreement between the parties hereto with respect to the subject 
matter hereof and may not be amended or modified (i) unless by a written 
agreement executed by the parties hereto and (ii) without the written consent 
of the Corporation.

                                      3

<PAGE>
 
                            EMPLOYMENT AGREEMENT
                            --------------------



          THIS AGREEMENT ("Agreement"), made as of the ______  day of
____________, 1994, by and between UAL CORPORATION, a Delaware corporation
("Employer"), and GERALD GREENWALD ("Employee"),

                                WITNESSETH THAT:

          WHEREAS, the Employer, the Air Line Pilots Association, International
("ALPA"), and the International Association of Machinists and Aerospace Workers
("IAM") have entered into an Agreement and Plan of Recapitalization (the
"Recapitalization Agreement"), dated as of March 25, 1994, subject to various
conditions specified therein, providing for a transaction pursuant to which
employee trusts for the benefit of employees represented by ALPA and IAM and
salaried/management employees of the Employer would acquire, indirectly, a
majority of the equity of the Employer ("Transaction"); and

          WHEREAS, pursuant to the terms of the Recapitalization Agreement, at
the Effective Time (as defined in the Recapitalization Agreement), subject to
provisions regarding fractional shares, each share of the Employer's common
stock, par value $5.00 per share, outstanding immediately prior to the Effective
Time ("Old Common Stock"), will be reclassified as, and converted into, [0.5] of
a share of the

<PAGE>
 
Employer's common stock, par value $0.01 per share ("New Common Stock") and
certain other consideration;

          WHEREAS, the Recapitalization Agreement provides that at the time of
the consummation of the Transaction the Employer will execute this Agreement and
employ the Employee as the Chairman of the Board of Directors and the Chief
Executive Officer of the Employer;

          WHEREAS, the Employer desires to employ the Employee, and the Employee
desires to be employed by the Employer, in accordance with the terms and
conditions of this Agreement; and
          WHEREAS, all conditions to consummation of the Transaction have been
satisfied or waived,

          NOW THEREFORE, in consideration of the mutual covenants set forth
herein, the Employer and the Employee hereby agree as follows:

1.   Employment.  The Employer hereby agrees to employ the Employee, and the
     ----------                                                             
Employee agrees to serve the Employer, in the capacities described herein during
the Period of Employment (as defined in Section 2 of this Agreement), in
accordance with the terms and conditions of this Agreement.

                                       2

<PAGE>
 
2.   Period of Employment.  The term "Period of Employment" shall mean the
     --------------------                                                 
period commencing on the date hereof (the "Closing Date") and ending on the
fifth anniversary of the Closing Date.  In the event that either the Employer or
the Employee desire for the Employee to be employed by the Employer beyond the
Period of Employment, such party shall, at least six months prior to the
expiration of the Period of Employment, notify the other party hereto in writing
(as provided in Section 20(b) of this Agreement) of its or his intention to seek
to negotiate an extension of this Agreement.

3.   Duties During the Period of Employment.
     -------------------------------------- 

     (a)  Duties.  During the Period of Employment, the Employee shall be
          ------                                                         
     employed as the Chairman of the Board and Chief Executive Officer of the
     Employer with overall charge and responsibility for the business and
     affairs of such corporation, and shall perform such duties as the Employee
     shall reasonably be directed to perform by the Board of Directors of the
     Employer.  If so elected, the Employee shall also serve during all or any
     part of the Period of Employment as chairman of the board and chief
     executive officer of any subsidiaries or affiliates of the Employer
     designated by the Employer,

                                       3

<PAGE>
 
     without any compensation therefor other than that specified in this Agree-
     ment.

     (b)  Scope.  During the Period of Employment, and excluding any periods of
          -----                                                                
     vacation and sick leave to which the Employee is entitled, the Employee
     shall devote substantially all of his business time and attention to the
     business and affairs of the Employer; provided, however, that
                                           --------  -------      
     notwithstanding the foregoing, the Employee may satisfy his existing
     obligations with Tetra, a heavy truck manufacturing company located in the
     Czech Republic, consisting principally of the Employee's being located in
     the Czech Republic for one full calendar week out of every six weeks
     through March, 1995, as well as certain ancillary activities involving
     Tetra.  It shall not be a violation of this Agreement for the Employee to
     (i) serve on corporate, civic or charitable boards or committees, (ii)
     deliver lectures, fulfill speaking engagements or teach at educational
     institutions, or (iii) manage personal investments, so long as such
     activities under clauses (i), (ii) and (iii) do not interfere, in any
     substantive respect, with the Employee's responsibilities hereunder.

4.   Compensation and Other Payments.
     ------------------------------- 

                                       4

<PAGE>
 
     (a) Salary.  During the Period of Employment, the Employer shall pay the
         ------                                                              
     Employee a base salary of seven hundred twenty-five thousand dollars
     ($725,000) per annum, payable in equal semi-monthly installments (the "Base
     Salary").

          The Base Salary shall be reviewed annually as of the end of each
     calendar year (the "Applicable Year") during the Period of Employment by
     the Compensation Administration Committee of the Board of Directors of
     Employer (the "Committee").  Each annual review shall be completed by
     January 31 of the calendar year following the Applicable Year.  In perform-
     ing such reviews, the Committee (i) shall give due regard to the
     performance of Employer during the Applicable Year and to salary increases
     given to other chief executive officers by companies of similar size and
     complexity including but not limited to other airlines, and (ii) shall not
     take into consideration any amount payable to the Employee pursuant to
     Section 4(c) hereof.  Based upon such reviews, the Committee may increase,
     but shall not decrease, the Base Salary.  Any increase in Base Salary shall
     not serve to limit or reduce any other obligation to the Employee under
     this Agreement.  Notwithstanding anything contained herein to the contrary,
     the Base Salary shall be reduced by any mandatory wage cut or wage
     concession applicable to all management noncontract employees who are
     participants in the UAL

                                       5

<PAGE>
 
     Corporation Employee Stock Ownership Plan ("ESOP") established pursuant to
     the Recapitalization Agreement, which wage cut is set at 8.25%.  In
     consideration for such mandatory wage cut or wage concession, the Employer
     shall ensure that Employee shall participate in the ESOP to the maximum
     extent permitted by law and if a contribution or allocation is otherwise
     limited as a result of limitations imposed by the Internal Revenue Code of
     1986, as amended (the "Code"), to the UAL Corporation Supplemental ESOP or
     such other vehicle as may be created in order for Employee to receive
     stock.

     (b)  Annual Bonus.  The Committee shall at least annually review the
          ------------                                                   
     Employee's performance under this Agreement.  The Employee shall be
     eligible to receive a target annual bonus of seven hundred and twenty five
     thousand dollars ($725,000)  (the "Target Amount") provided that the
     Committee determines that (i) the Employee's performance during the year in
     question has been consistent with the Committee's objectives and directions
     and (ii) the Employer's performance during such year does not compel a
     lesser bonus.  The Committee shall also take into account airline industry
     trends and the Employer's financial performance (including cumulative
     profitability from the Closing Date).  If the Committee does not

                                       6

<PAGE>
 
     approve a bonus equal to the Target Amount because it is unable to make
     such determinations, then the Committee shall cause Employee to receive a
     bonus, if any, that is appropriate in light of the Employee's and
     Employer's performance during such year.  Nothing contained herein shall
     prevent the Committee from paying a bonus in excess of the Target Amount.
     The bonus shall be paid promptly after the Committee makes its
     determination.

     (c)  Success Fee.  On the Closing Date, the Employer shall pay the Employee
          -----------                                                           
          in cash a fee of $1,000,000, less any fee actually paid to and
          received by Employee pursuant to Section 3 of the Retention Agreement
          made as of January 1, 1994 by and among ALPA, IAM and the Employee.

     (d)  Awards of Stock.  The Employee is hereby granted 50,000 shares of New
          ---------------                                                      
     Common Stock on the Closing Date./*/  The Employer and Employee

- --------------
/*/  It is expressly understood and agreed that the number of shares granted
     herein shall be issued to the Employee based upon an exchange ratio
     pursuant to the Recapitalization Agreement of one (1) share of New Common
     Stock for two (2) shares of Old Common Stock. In the event that the ratio
     changes (1) so that fewer shares of Old Common Stock shall be required to
     be exchanged for one (1) share of New Common Stock, the number of shares
     of New Common Stock granted to the Employee hereunder shall be increased
     to the number of shares calculated by multiplying 50,000 shares by a
     fraction, the numerator of which will be the actual exchange ratio used
     on the Closing Date and expressed as a decimal calculated by dividing the
     number of shares of New Common Stock (or
                                    (continued...)  

                                       7

<PAGE>
 
     shall contemporaneously with the execution of this Agreement execute the
     Restricted Stock Agreement, substantially in the form of the agreement
     annexed hereto as Appendix 1/**/, which Restricted Stock Agreement shall
     govern the terms of such shares.  Pursuant to the terms of such Restricted
     Stock Agreement, fifty percent (50%) of such shares shall be nonforfeitable
     and freely transferable immediately upon the Closing Date and an additional
     ten percent (10%) shall, subject to Section 8, become nonforfeitable and
     freely transferable on the first, second, third, fourth and fifth
     anniversaries of the Closing Date.  Pursuant to the terms of such
     Restricted Stock Agreement all certificates representing all unvested
     shares delivered to the Employee shall be appropriately legended.  Such
     shares (i) shall be registered in accordance with the Securities Act of
     1933, as amended (the "Act"), and (ii) shall not be "restricted securities"
     within the meaning of Rule 144 under

- --------------
/*/(...continued)
     any fraction thereof) received for each share of Old Common Stock and the
     denominator of which shall be 0.5, or (ii) so that a greater number of
     shares of Old Common Stock shall be required to be exchanged for one (1)
     share of New Common Stock, the number of shares of New Common Stock
     granted to the Employee hereunder shall be decreased to the number of
     shares calculated by multiplying 50,000 shares by a fraction, the
     numerator of which will be the actual exchange ratio used on the Closing
     Date and expressed as a decimal calculated by dividing the number of
     shares of New Common Stock (or any fraction thereof) received for each
     share of Old Common Stock and the denominator of which shall be 0.5.


/**/  The Restricted Stock Agreement shall be in form and substance reasonably
     satisfactory to the ALPA, the IAM the Employer, and the Employee.

                                       8

<PAGE>
 
     the Act.  The Employer shall take all steps necessary to satisfy the
     condition for public filing of information by the Employer set forth in
     Rule 144(c) under the Act.

          If subsequent to the recapitalization of the Employer described in the
     Recapitalization Agreement, (i) the outstanding shares of New Common Stock,
     as a whole, are increased, decreased, changed into or exchanged for a
     different number of shares or securities through merger, consolidation,
     combination, exchange of shares, reorganization, recapitalization,
     reclassification, stock dividend or revise stock split, an appropriate
     adjustment shall be made in the number of shares of New Common Stock
     awarded and/or held by the Employee under this Agreement.

          Employee shall be entitled to participate in a tax withholding program
     substantially similar to that maintained by Employer for the benefit of its
     senior executive officers.

          (e)  Stock Options.  Employer and Employee shall contemporaneously
               -------------                                                 
     with the execution of this Agreement execute the Stock Option Agreement
     annexed hereto as Appendix 2/***/ pursuant to which Agreement, the Employer
     shall grant to the Employee, options to purchase 200,000

- ---------------
/***/ The Stock Option Agreement shall be in a form reasonably satisfactory to
      the ALPA, the IAM, the Employer and the Employee.

                                       9

<PAGE>
 
     shares/****/ of the New Common Stock.  The New Common Stock to be acquired
     upon exercise of such options (i) shall be registered in accordance with
     the Act and (ii) shall not be "restricted securities" within the meaning of
     Rule 144 under the Act.  The Employer shall take all steps necessary to
     satisfy the condition for public filing of information by the Employer set
     forth in Rule 144(c) under the Act.  Pursuant to such Stock Option
     Agreement, such options shall, subject to Section 8 vest and be immediately
     exercisable in accordance with to the following schedule:

- -----------------
/****/  It is expressly understood and agreed that the option to acquire 200,000
     shares of common stock granted herein shall be issued to the Employee based
     upon an exchange ratio pursuant to the Recapitalization Agreement of one
     (1) share of New Common Stock for two (2) shares of Old Common Stock.  In
     the event that the ratio changes (1) so that fewer shares of Old Common
     Stock shall be required to be exchanged for one (1) share of New Common
     Stock, the number of shares of New Common Stock subject to options granted
     to the Employee hereunder shall be increased to the number of shares
     calculated by multiplying 200,000 shares by a fraction, the numerator of
     which will be the actual exchange ratio used on the Closing Date and
     expressed as a decimal calculated by dividing the number of shares of New
     Common Stock (or any fraction thereof) received for each share of Old
     Common Stock and the denominator of which shall be 0.5, or (ii) so that a
     greater number of shares of Old Common Stock shall be required to be
     exchanged for one (1) share of New Common Stock, the number of shares of
     New Common Stock subject to options granted to the Employee hereunder shall
     be decreased to the number of shares calculated by multiplying 200,000
     shares by a fraction, the numerator of which will be the actual exchange
     ratio used on the Closing Date and expressed as a decimal calculated by
     dividing the number of shares of New Common Stock (or any fraction thereof)
     received for each share of Old Common Stock and the denominator of which
     shall be 0.5.

                                       10

<PAGE>
 
          .    on the Closing Date, options to acquire 100,000 shares of New
               Common Stock shall, subject to Section 8 vest and be immediately
               exercisable;

          .    on the first anniversary of the Closing Date, options to acquire
               an additional 20,000 shares of New Common Stock shall, subject to
               Section 8 vest and be immediately exercisable;

          .    on the second anniversary of the Closing Date, options to acquire
               an additional 20,000 shares of New Common Stock shall, subject to
               Section 8 vest and be immediately exercisable;

          .    on the third anniversary of the Closing Date, options to acquire
               an additional 20,000 shares of New Common Stock shall, subject to
               Section 8 vest and be immediately exercisable;

          .    on the fourth anniversary of the Closing Date, options to acquire
               an additional 20,000 shares of New Common Stock

                                       11

<PAGE>
 
               shall, subject to Section 8 vest and be immediately exercis-able;
               and

          .    on the fifth anniversary of the Closing Date, options to acquire
               an additional 20,000 shares of New Common Stock shall, subject to
               Section 8 vest and be immediately exercisable.

          The exercise price of the options shall be the average of the high and
     low sale price of the New Common Stock on the first day that the New Common
     Stock is traded on the New York Stock Exchange immediately after the
     Closing Date (the "Exercise Price").

          The Employer may, in its discretion, grant to the Employee options to
     purchase additional shares of New Common Stock subject to such terms and
     conditions, including, without limitation, exercise price and vesting
     schedule, as it may determine.

          In lieu of exercising any of the options, to the extent that the
     Employer has in place a plan or program pursuant to which employees of the
     Employer may effect cashless exercises of stock options, the Employee shall
     be able to avail himself of a cashless exercise plan or program.

                                       12

<PAGE>
 
          In the event (i) the outstanding shares of New Common Stock, as a
     whole, are increased, decreased changed into or exchanged for a different
     number or kind of shares or securities through merger, consolidation,
     combination, exchange of shares, reorganization, recapitalization,
     reclassification, stock dividend, stock split or reverse stock split, an
     appropriate adjustment will be made in the number of shares of stock with
     respect to which options have been granted, as well as the exercise price
     thereof.

     (f)  Reimbursement of Professional Fees.  The Employer shall pay on the
          ----------------------------------                                
     Employee's behalf all bills rendered to the Employee by the Employee's
     attorneys, accountants and other advisors in connection with the
     negotiation and execution of this Agreement and in connection with the
     provision of advice regarding this Agreement after its execution; provided,
                                                                       -------- 
     however, that the amount of professional fees payable hereunder shall not
     -------                                                                  
     exceed $130,000.

     (g)  Increase in Restricted Shares and Stock Options
          -----------------------------------------------
          (i)  For purposes of this Section 4(g), the following terms shall have
          the following meanings:

                                       13

<PAGE>
 
               (A) "Adjusted Percentage", "Average Closing Price" and
               "Measurement Date" shall have the meanings set forth in Article
               FOURTH, Part II of the Employer's Restated Certificate of
               Incorporation.

               (B) "Percentage Differential" shall mean the Adjusted Percentage
               minus 53%.

               (C) "Percentage Increase" shall mean the Percentage Differential
               as a percentage of 53%; provided, however, that the Percentage
               Increase shall not exceed 18.87%.

          (ii)  In the event that the Average Closing Price is greater than
          [$170] then promptly after the Measurement Date, the Employer shall:

               (A)  grant to Employee an additional number of shares of New
               Common Stock pursuant to the Restricted Stock Agreement, such
               number to equal 25,000 multiplied by the Percentage Increase
               (the "New Share Number");

                                       14

<PAGE>
 
               (B)  together with the Employee, amend the Restricted Stock
               Agreement, such that of the New Share Number of shares granted
               pursuant to Section 4(g)(ii)(A), 60% of such shares shall be
               nonforfeitable and freely transferable as of the date of such
               grant and 10% of such shares shall become nonforfeitable and
               freely transferable as of the second, third, fourth and fifth
               anniversaries of the Closing Date;

               (C)  grant to Employee options to purchase an additional number
               of shares of New Common Stock pursuant to the Stock Option
               Agreement, such number to equal 100,000 multiplied by the
               Percentage increase (the "New Option Number");

               (D)  together with the Employee, amend the Stock Option
               Agreement, such that of the New Option Number of shares covered
               by options granted pursuant to Section 4(g)(ii)(C), (i) options
               covering 60% of such shares shall vest and be exercisable for a
               period of nine years from the date of grant, (ii) options
               covering 10% of such shares shall vest one year after

                                       15

<PAGE>
 
               the date of grant and shall be exercisable for a period of eight
               years from such vesting date, (iii) options covering 10% of such
               shares shall vest two years after the date of grant and shall be
               exercisable for a period of seven years from such vesting date,
               (iv) options covering 10% of such shares shall vest three years
               after the date of grant and shall be exercisable for a period of
               six years from such vesting date and (v) options covering 10% of
               such shares shall vest four years after the date of grant and
               shall be exercisable for a period of five years from such vesting
               date; and

               (E)  together with the Employee, amend the Stock Option Agreement
               to provide that the exercise price of the options granted
               pursuant to Section 4(g)(ii)(C) shall equal the Exercise Price.

          (iii)  If, during the period from the day after the Closing Date
          through the Measurement Date, the shares of New Common Stock as a
          whole are increased, decreased, changed into or exchanged for a
          different number of shares or securities through merger, consolida-

                                       16

<PAGE>
 
          tion, combination, exchange of shares, other reorganization, 
          recapitalization, reclassification, stock dividend, stock split or
          reverse stock split, an appropriate adjustment mutually acceptable
          to Employer and Employee shall be made with respect to the
          provisions of this Section 4(g).

5.   Other Employee Benefits.
     ----------------------- 

     (a)  Supplemental Pension Benefit.  Upon his retirement or termination of
          ----------------------------                                        
     employment under this Agreement ("Retirement"), the Employee shall, upon
     written notice to the Employer specifying the date of commencement of
     benefits, be entitled to a supplemental retirement benefit in addition to
     any benefit payable under the terms of the United Air Lines, Inc.
     Management and Salaried Employees' Retirement Plan ("Retirement Plan").
     The Retirement Plan, as in effect on March 1, 1994 and without giving
     effect to any later amendment thereto, even if such amendment is
     retroactively effective to a date preceding the date hereof, shall be
     referred to herein as the "Current Retirement Plan".

          Such supplemental retirement benefit shall be payable in the form of
     a single life annuity if the Employee is not married or is married but
     legally

                                       17

<PAGE>
 
     separated upon the commencement of benefits, and in the form of a joint and
     66 2/3 percent survivor annuity if the Employee is married (and not legally
     separated) upon the commencement of benefits, and shall be equal to (i) the
     greater of (X) $500,000 per year (expressed as a single life annuity), and
     (Y) the benefit described in paragraph (A) below, multiplied by Adjustment
     Factor B described in paragraph (B) below, (ii) adjusted, if the form of
     payment is a joint and 66 2/3% survivor annuity, from a single life annuity
     using the Adjustment Factors contained in Section 16 of the Current
     Retirement Plan, and (iii) reducing the result of (ii) by the amount of any
     vested accrued benefit then payable under the Retirement Plan, referring to
     the Adjustment Factors described in Section 16 of the Current Retirement
     Plan if necessary to convert the form of Retirement Plan benefit to the
     form of supplemental benefit, where:

          (A) the benefit described in this paragraph (A) shall be equal to the
          benefit to which the Employee would have been entitled upon Retirement
          under the Current Retirement Plan in the form of an annuity without
          regard to any limitation on benefits or compensation imposed by the
          Code and taking into account his Years of Participation (in
          determining a Year of Participation, the term of the Employ-

                                       18

<PAGE>
 
          ee's employment under this Agreement from and after the Closing Date
          shall be considered, counting each calendar month in which the
          Employee is employed hereunder as one-twelfth of a Year of
          Participation) and Earnings (which shall be equal to the Base Salary
          paid pursuant to Section 4(a) hereof plus Bonuses paid pursuant to
          Section 4(b) hereof, without including any other compensation or fee
          payable in accordance with this Agreement); provided, however, that
                                                      --------  -------      
          for purposes of this paragraph (A), the Employee shall be credited as
          of the Closing Date with thirty Years of Participation with Earnings
          of $725,000 in each such year.

          (B)  Adjustment Factor.  Adjustment Factor B shall be as follows:  if
               -----------------                                               
               the Employee's employment has been terminated by the Employer
               without Cause, or by the Employee with Good Reason, or upon the
               expiration of this Agreement, or upon Disability, Adjustment
               Factor B shall be equal to 1.0; if the Employee's employment has
               been terminated by the Employer for Cause, or by the Employee
               without Good Reason, Adjustment Factor B shall be equal to the
               applicable factor set forth at page 16-14 of the Current
               Retirement Plan unless the

                                       19

<PAGE>
 
               Employee has attained age sixty when benefits commence, in which
               event Adjustment Factor C shall be equal to 1.0.

               If the Employee dies after the Closing Date but before
               Retirement, the Employer shall, in lieu of any benefit payable
               under the preceding provisions of this Section 5(a), pay his
               surviving spouse (as described in the Current Retirement Plan) a
               survivor annuity for her life equal to the amount which would
               have been payable to the Employee under the preceding provisions
               of this Section 5(a) had he terminated employment for Good Reason
               on the date immediately before his death, reduced by any Pre-
               Retirement Survivor Benefit payable under the Retirement Plan.

     (b)  Regular Reimbursed Business Expenses.  The Employer shall promptly
          ------------------------------------                              
     reimburse the Employee for all expenses and disbursements reasonably
     incurred by the Employee in the performance of his duties hereunder during
     the Period of Employment.

                                       20

<PAGE>
 
     (c) Welfare Benefit Plans.  The Employee shall be entitled to immediately
         ---------------------                                                
     participate in all health benefits, insurance programs (other than life
     insurance programs), pension and retirement plans and other employee
     benefit and compensation arrangements generally available to key executive
     officers of the Employer (each, a "General Benefit"), except that to the
     extent that any of the health benefits, insurance programs, pension and
     retire-ment plans and other employee benefit and compensation arrangements
     presently provided by the Employer (other than benefits and bonuses
     provided by the Employer solely in connection with the initial sign-up of
     employment arrangements) to its chief executive officer (each, a "CEO
     Benefit") are more advantageous than the General Benefit, the Employee
     shall be entitled to such CEO Benefit rather than such General Benefit.  In
     the event that the health insurance policies applicable to the health
     benefits furnished hereunder contain a preexisting conditions clause, the
     Employer shall either obtain a waiver from such clause with respect to the
     Employee or self-insure the Employee with respect to such conditions.
     Anything  contained herein to the contrary notwithstanding, the benefits
     described herein shall not duplicate benefits made available to the
     Employee pursuant to any other provision of this Agreement.

                                       21

<PAGE>
 
     (d) Perquisites.  The Employer shall provide the Employee such perquisites
         -----------                                                           
     as are in accordance with whichever is more advantageous to the Employee
     under (i) the Employer's present policies for providing such benefits to
     the chief executive officer of the Employer, or (ii) the perquisites
     generally available to senior executive officers of the Employer; provided,
                                                                       -------- 
     however, that in all instances the Employer shall furnish the Employee with
     -------                                                                    
     at least two suitable automobiles.

     (e)  Life Insurance.  The Employer shall provide life insurance benefits to
          --------------                                                        
     the Employee on the same terms as life insurance benefits are provided by
     the Employer to its chief executive officer immediately prior to the
     Closing Date and in an amount equal to the sum of the life insurance
     currently provided to the Employer's aforementioned chief executive officer
     plus the Base Salary in effect from time to time, subject to customary
     commercial requirements applicable to the issuance of such insurance.

     (f)  Retirement.  In the event that the Employee remains employed by the
          ----------                                                         
     Employer until the earliest age at which he is entitled to retire under the
     Employer's Current Retirement Plan, the Employer shall, upon the Employee's
     retirement, provide to the Employee life and medical insurance

                                       22

<PAGE>
 
     coverage during retirement on the same terms that the Employer has agreed
     (as of the date hereof) to provide such coverage to its current chief
     executive officer, subject to customary commercial requirements applicable
     to the issuance of such insurance.

     (g)  Other Plans.  The Employee shall be entitled to participate in any
          -----------                                                       
     other stock incentive or benefit plan made available to the senior
     executive officers of the Employer; provided that such plans do not
     duplicate benefits made available to the Employee pursuant to any other
     provision of this Agreement.

     6.   Non-Competition.  Without the consent in writing of the Board of
          ---------------                                                 
Directors of the Employer, upon termination of the Employee's employment
hereunder (unless (i) the Employee's employment is terminated by the Employer
without Cause or by the Employee for Good Reason, (ii) the Employer is in
material breach of its obligations hereunder), the Employee will not, the
greater of (i) a period of two years thereafter, or (ii) the balance of the
Period of Employment, become an officer, employee, agent, partner, director or
substantial stockholder any air carrier or holding company thereof operating in
the United States.

                                       23

<PAGE>
 
     7.   Termination.
          ------------ 

          (a)  Mutual Agreement.  During the Period of Employment, the 
               ---------------- 
          Employee's employment hereunder may be terminated at any time by
          mutual agreement on terms to be negotiated at the time of such
          termination.

          (b)  Expiration.  This Agreement shall terminate upon expiration of 
               ---------- 
          the Period of Employment. Except as otherwise contemplated by
          Sections 5, 6, 8, 10, 11, 12, 13, 14, 15, 16, 17, and 20 hereof, the
          parties' only obliga-tions in such event shall be to perform all
          Accrued Obligations (as defined herein) through the expiration of
          the Period of Employment.

          (c)  Death or Disability.  This Agreement shall terminate 
               -------------------  
          automatically upon the Employee's death. If the Employer determines
          in good faith that the Disability of the Employee has occurred
          (pursuant to the definition of "Disability" set forth below), it may
          give to the Employee written notice of its intention to terminate
          the Employee's employment. In such event, the Employee's employment
          with the Employer shall terminate effective on the thirtieth day
          after receipt by the Employee of such notice given at any time after
          a period of one hundred twenty consecutive days of Disability or a
 
                                      24

<PAGE>
 
          period of one hundred eighty days of Disability within any twelve
          consecu-tive months, and, in either case, while such Disability is
          continuing ("Disability Effective Date"); provided that, within the
          thirty days after such receipt, the Employee shall not have returned
          to full-time performance of the Employee's duties. For purposes of
          this Agreement, "Disability" means the Employee's inability to
          substantially perform his duties hereunder, as evidenced by a
          certificate signed either by a physician mutually acceptable to the
          Employer and the Employee or if the Employer and the Employee cannot
          agree upon a physician, by a physician selected by agreement of a
          physician designated by the Employer and a physician designated by
          the Employee. Until the Disability Effective Date, the Employee
          shall be entitled to all compensation provided for under Section 4
          hereof. It is understood that nothing in this Section 7(c) shall
          serve to limit the Employer's obligations under Section 8(b) hereof.

          (d) Cause. During the Period of Employment after the Closing Date,
              -----                                                     
          the Employer may terminate the Employee's employment for "Cause".
          For purposes of this Agreement, "Cause" shall mean that the Employee
          has (i) committed a significant act of dishonesty or deceit in the
          performance of his duties hereunder, (ii) willfully failed in any
          way to substantially perform his

                                       25

<PAGE>
 
          duties hereunder (unless such failure is curable and is cured within
          thirty days after the Employee receives written notice of such
          failure), or (iii) been convicted of a felony, other than a felony
          predicated upon the Employee's vicarious liability. Notwithstanding
          the foregoing, the Employer may not terminate the Employee's
          employment for Cause unless (i) a determination that Cause exists is
          made and approved by a majority of the Employer's Board of
          Directors, (ii) the Employee is given at least thirty days written
          notice of the Board meeting called to make such determination, and
          (iii) the Employee is given the opportunity to address such meeting.

          (e) Good Reason. During the Period of Employment, the Employee's
              -----------                
     
          employment hereunder may be terminated by the Employee for Good
          Reason. For purposes of this Agreement, "Good Reason" shall mean:

               (i) the assignment of the Employee of any duties inconsistent
               in any respect with the Employee's position, including status,
               offices, titles and reporting relationships, authority, duties
               or responsibilities as contemplated by Section 3 of this
               Agreement, or any other action by the Employer which results in
               a significant diminution in such position, authority, duties or
               responsibilities, excluding for this

                                       26

<PAGE>
 
               Section 7(e) any isolated, immaterial and inadvertent action
               not taken in bad faith and which is remedied by the Employer
               within thirty days after receipt of a notice thereof given by
               the Employee but including (but not by way of limitation of the
               foregoing) the relocation of the Employer's principal office or
               the office of the current chairman and chief executive officer
               of the Employer to a location more than 50 miles from the
               current location of such office;

               (ii) any failure by the Employer to comply with any of the
               provi-sions of Section 4 or 5 of this Agreement other than an
               isolated, immaterial and inadvertent failure not taken in bad
               faith and which is remedied by the Employer promptly after
               receipt of notice thereof given by the Employee;

               (iii) any purported termination by the Employer of the
               Employee's employment otherwise than as expressly permitted by
               this Agreement;

               (iv) any failure by the Employer's Board of Directors to name
               the Employee as the Employer's Chairman of the Board of
               Directors and Chief Executive Officer or any removal of the
               Employee from his

                                       27

<PAGE>
 
               position as the Employer's Chief Executive Officer, unless in
               any such instance the Employer shall have Cause to terminate
               the Employee's employment hereunder; and

               (v) any amendment to the provisions of the Employer's Restated
               Certificate of Incorporation (other than amendments resulting
               from the occurrence of the Termination Date (as defined in the
               Employer's Restated Certificate of Incorporation)) which
               materially changes the manner in which the Employer's
               Independent Directors and Outside Public Directors (as such
               terms are defined in the Employer's Restated Certificate of
               Incorporation) are nominated and elected, except that Good
               Reason shall not result from any such failure if such failure
               relates to a good faith dispute with respect to the amount of
               any bonus to be paid to Employee pursuant to Section 4(b).

          (f) Notice of Termination. Any termination by the Employer for Cause
              ---------------------                             
          or by the Employee for Good Reason shall be communicated by Notice
          of Termination to the other party hereto given in accordance with
          Section 20(b) of this Agreement. For purposes of this Agreement, a
          "Notice of Termination" means a written notice which (i) indicates
          the specific termination

                                       28

<PAGE>
 
     provision in this Agreement relief upon, (ii) sets forth in reasonable
     detail the facts and circumstances claimed to provide a basis for
     termination of the Employee's employment under the provision so indicated,
     and (iii) if the Date of Termination (as defined below) is other than the
     date of receipt of such notice, specifies the termination date (which date
     shall not be less than thirty days after the giving of such notice).  The
     failure by the Employee or Employer to set forth in the Notice of
     Termination any fact or circumstance which contributes to a showing of the
     basis for termination shall not waive any right of such party hereunder or
     preclude such party from asserting such fact or circumstance in enforcing
     his or its rights hereunder.

     (g)  Date of Termination.  "Date of Termination" means the date specified
          -------------------                                                 
     in the Notice of Termination; provided, however, that if the Employee's
                                   --------  -------                        
     employment is terminated by reason of death or Disability, the Date of
     Termination shall be the date of death of the Employee or the Disability
     Effective Date, as the case may be.

8.   Obligations of the Company Upon Termination.
     ------------------------------------------- 

     (a)  Death.  If the Employee's employment is terminated by reason of the
          -----                                                              
     Employee's death, this Agreement shall terminate without further
     obligations

                                       29

<PAGE>
 
     to the Employee's legal representatives under this Agreement, other than
     those obligations accrued or earned and vested (if applicable) by the
     Employee as of the Date of Termination, including, but not necessarily
     limited to, (i) the Employee's full Base Salary through the Date of
     Termination at the rate in effect on the Date of Termination, disregarding
     any reduction in Base Salary in violation of this Agreement ("Highest Base
     Salary"), (ii) the target bonus described in Section 4(b) (i.e., $725,000)
     prorated to the Date of Termination, if the termination date occurs on or
     before the first anniversary of the Closing Date, (iii) the average bonus
     received by or accrued for Employee for each of the twelve month periods
     prior to the twelve month period in which the termination occurs, pro-rated
     to the Date of Termination, if the termination date occurs after the first
     anniversary of the Closing Date (provided that for purposes of this
     calculation, Employee's bonus for each such prior twelve month period shall
     be deemed to be the greater of $362,500 and the actual bonus paid or
     accrued for such period); (iv) all of the options (which shall become
     vested and immediately exercisable) and stock awards (for which the
     restrictions, including vesting restrictions, if any, shall terminate)
     which the Employee was granted under Sections 4(d) and 4(e), and (v) any
     other rights and benefits (including, without limitation, payments due
     pursuant to Section 5(a) of this Agreement)

                                       30

<PAGE>
 
     available to the Employee under employee compensation and benefit
     arrangements of the Employer (without duplication) in which the Employee
     was a participant on the Date of Termination, determined in accordance with
     the applicable terms and provisions of such arrangements (such amounts
     specified in clauses (i) through (v) are hereinafter referred to as
     "Accrued Obligations").

     (b)  Disability.  If the Employee's employment is terminated by reason of
          ----------                                                          
     the Employee's Disability, this Agreement shall terminate without further
     obligations to the Employee, other than those obligations accrued or earned
     and vested (if applicable) by the Employee as of the Date of Termination,
     including, but not necessarily limited to, Accrued Obligations.

     (c)  Cause:  Other than for Good Reason.  If the Employee's employment
          ----------------------------------                               
     shall be terminated by the Employer for Cause or by the Employee other than
     for Good Reason, this Agreement shall terminate without further obligations
     to the Employee, other than those obligations accrued or earned and vested
     (if applicable) by the Employee through the Date of Termination, including,
     but not necessarily limited to, all Accrued Obligations (except for any
     target

                                       31

<PAGE>
 
     bonus that is not payable and/or any award of stock that has not vested
     and/or any options that have not vested).

     (d)  Good Reason;  Other than for Cause, Death or Disability.  If the
          -------------------------------------------------------         
     Employer shall terminate the Employee's employment (other than for Cause or
     Disability and except if the Employee's employment is terminated as a
     result of his death) or if, during the Period of Employment, the Employee
     shall terminate his employment for Good Reason:

          (i)  the Employer shall pay to the Employee (with respect to item "A"
          below, in a lump sum in cash within thirty days after the Date of
          Termination) or, with respect to item "E" below, cause the Employee to
          receive, the aggregate of the following amounts:

               (A)  to the extent not theretofore paid, the Employee's Highest
                    Base Salary and target bonuses previously awarded and not
                    paid through the Date of Termination;

               (B)  each of the remaining Base Salary payments and target
                    bonuses which would have been payable if the Em-

                                       32

<PAGE>
 
                    ployee remained employed hereunder (and each of the target
                    bonuses shall be considered a minimum bonus and shall have
                    been considered to be paid) for the period from the Date of
                    Termination until the later of (i) the last day of the
                    Period of Employment, or (ii) three years from the Date of
                    Termination, such amounts to be payable on such dates as
                    would have been payment dates if the Employee had remained
                    so employed;

               (C)  those other obligations accrued or earned and vested (if
                    applicable) by the Employee as of the Date of Termination,
                    including, but not necessarily limited to, all other Accrued
                    Obligations;

               (D)  any additional amount which would be payable pursuant to
                    Section 5(a) of this Agreement if the Employee's employment
                    did not expire until the expiration of the Period of
                    Employment;

                                       33

<PAGE>
 
               (E)  any options or stock awards (if any) granted pursuant to
                    this Agreement and not yet vested as of the Date of
                    Termination shall be fully vested; and

          (ii)  for the remainder of the Period of Employment, or such longer
          period as any plan, program, practice or policy may provide, the
          Employer shall continue benefits to the Employee and/or the Employee's
          family at least equal to those which would have been provided to them
          in accordance with Section 5(d) of this Agreement if the Employee's
          employment had not been terminated, including health insurance and
          life insurance.

     It is understood that the Employee's rights under this Section 8 are in
lieu of all other rights which the Employee may otherwise have had upon
termination of this Agreement; provided, however, that no provision of this
                               --------  -------                           
Agreement is intended to adversely affect the Employee's rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985.

9.   Trust Arrangement.  Upon the Closing Date, the Employer shall deposit (or
     -----------------                                                        
cause to be deposited) in a trust (the "Trust") such amounts as are reasonably
esti-

                                       34

<PAGE>
 
mated to be necessary to cover the payments to be made after the Closing Date
pursuant to Section 5(a).  The Trust shall be governed by a trust agreement
substantially in the form of Appendix 3 attached to this Agreement./*/  Such
Trust Agreement shall be revocable, but shall become irrevocable upon the
occurrence of the event described in Section 7(e)(iv) hereof.  In the event of
any dispute with respect to the amounts to be deposited in the Trust to cover
the amount payable pursuant to Section 5(a) of this Agreement, such dispute
shall be resolved by an actuary mutually acceptable to the Employer and the
Employee.  Anything contained herein to the contrary notwithstanding the deposit
by the Employer of any amounts to the Trust shall in no way relieve the Employer
from any payments due under this Agreement.  The trustee of the Trust, and the
investment manager to be retained on behalf of such trustee, shall be mutually
acceptable to the Employer and the Employee.

10.  Mitigation.  In no event shall the Employee be obligated to seek other
     ----------                                                            
employment or take any other action by way of mitigation of the amounts payable
to the Employee under any of the provisions of this Agreement; provided,
                                                               -------- 
however, that in the event that the Employee's employment hereunder is
- -------                                                               
terminated by the Employer for Cause or by the Employee without Good Reason, the
Employer shall

/*/  [Appendix 3 shall be in a form reasonably satisfactory to the ALPA, the
IAM, Employer and Employee.]

                                       35

<PAGE>
 
be entitled to reduce the benefits otherwise required to be provided to the
Employee, if any, from the Date of Termination to the date that the Period of
Employment would have expired, to the extent such benefits are actually provided
to the Employee by subsequent employers.

11.  Indemnification.  The Employer shall maintain, for the benefit of the
     ---------------                                                      
Employee, directors and officer liability insurance in form at least as
comprehensive as, and in an amount that is at least equal to, that maintained by
the Employer on March 1, 1994.  In addition, the Employee shall be indemnified
by the Employer against liability as an officer and director of the Employer and
any subsidiary or affiliate of the Employer to the maximum extent permitted by
applicable law.  The Employee's rights under this Section 11 shall continue so
long as he may be subject to such liability, whether or not this Agreement may
have terminated prior thereto.

12.  Confidential Information.  The Employee shall hold in a fiduciary capacity
     ------------------------                                                  
for the benefit of the Employer all secret or confidential information,
knowledge or data relating to the Employer, or any of its subsidiaries,
affiliates and businesses, which shall have been obtained by the Employee
pursuant to his employment by the Employer or any of its subsidiaries and
affiliates and which shall not have become public knowledge (other than by acts
by the Employee or his representatives in

                                       36

<PAGE>
 
violation of this Agreement).  After termination of the Employee's employment
with the Employer, the Employee shall not, without the prior written consent of
the Employer, communicate or divulge any such information, knowledge or data to
anyone other than the Employer and those designated by it.  In no event shall an
asserted violation of the provisions of this Section 12 constitute a basis for
deferring or withholding any amounts otherwise payable to the Employee under
this Agreement.

13.  Remedy for Violation of Section 6 or 12.  The Employee acknowledges that
     ---------------------------------------                                 
the Employer has no adequate remedy at law and will be irreparably harmed if the
Employee breaches or threatens to breach the provisions of Sections 6 or 12 of
this Agreement, and, therefore, agrees that the Employment shall be entitled to
injunctive relief to prevent any breach or threatened breach of either such
Section and that the Employer shall be entitled to specific performance of the
terms of each of such Sections in addition to any other legal or equitable
remedy it may have.  Nothing in this Agreement shall be construed as prohibiting
the Employer from pursuing any other remedies at law or in equity that it may
have or any other rights that it may have under any other agreement.

                                       37

<PAGE>
 
14.  Withholding.  Anything in this Agreement to the contrary notwithstanding,
     -----------                                                              
all payments required to be made by the Employer hereunder to the Employee shall
be subject to withholding of such amounts, at the time payments are actually
made to the Employee and received by him, relating to taxes as the Employer may
reasonably determine it should withhold pursuant to any applicable law or
regulation.  In lieu of withholding such amounts, in whole or in part, the
Employer may, in its sole discretion, accept other provisions for payment of
taxes as required by law, provided that it is satisfied that all requirements of
law affecting its responsibilities to withhold such taxes have been satisfied.

15.  Enforcement.  If either party is required to seek enforcement of this
     -----------                                                          
Agreement, then in addition to all other amounts, the prevailing party shall be
entitled to all costs of enforcement, including reasonably attorneys' fees in an
amount not to exceed the lesser of the attorneys' fees incurred by the
prevailing party and  the attorneys' fees incurred by the party that does not
prevail.

16.  Taxes.  In the event that any payments hereunder constitute excess
     -----                                                             
parachute payments within the meaning of Section 280G of the Code, the Employer
shall indemnify the Employee for any excise taxes imposed upon Employee under
Section 4999 of the Code, or corresponding provision of any successor revenue
law.  Such

                                       38

<PAGE>
 
payment shall be in addition to any other amounts payable herewith by the
Employer, and shall be paid to the Employee as soon as may be practicable after
a final determination is made by the Internal Revenue Service or any court of
appropriate jurisdiction.  Employer and Employee shall mutually and reasonably
determine whether or not such determination has occurred and whether any appeal
to such determination should be made.

17.  Successors.
     ---------- 

     (a)  This Agreement is personal to the Employee and without the prior
     written consent of the Employer shall not be assignable by the Employee
     otherwise than by will or the laws of descent and distribution.  This
     Agreement shall inure to the benefit of and be enforceable by the
     Employee's heirs and legal representatives.

     (b)  This Agreement shall inure to the benefit of and be binding upon the
     Employer and its successors and assigns.

     (c)  As used in this Agreement, the term "Employer" shall include any
     successor to the Employer's business and/or assets as aforesaid which

                                       39

<PAGE>
 
     assumes and agrees to perform this Agreement by operation of law, or
     otherwise.

18.  Representations by the Employee.  The Employee hereby represents and
     -------------------------------                                     
warrants to the Employer that:

     (a)  To the best of his knowledge, the Employee is in good health and is
     not aware of any medical condition that would preclude him from performing
     this Agreement throughout the Period of Employment; and

     (b)  The Employee is not a party to any agreement which will be breached by
     virtue of his executing or performing this Agreement or which will limit in
     any respect the Employee's ability to execute or perform this Agreement.

19.  Representations by the Employer.  The Employer hereby represents and
     -------------------------------                                     
     warrants to the Employee that the execution, delivery and performance by it
     of this Agreement and the consummation by it of the transactions con-
     templated hereby are within its corporate powers and have been duly
     authorized by all necessary corporate action.

                                       40

<PAGE>
 
20.  Miscellaneous.
     ------------- 

     (a)  This Agreement shall be governed by and construed in accordance with
     the laws of the State of New York, without reference to principles of
     conflict of laws.  The captions of this Agreement are not part of the
     provisions hereof and shall have no force or effect.  This Agreement may
     not be amended or modified otherwise than by a written agreement executed
     by the parties hereto or the respective successors and legal
     representatives.

     (b)  All notices and other communications hereunder shall be in writing and
     shall be given by hand delivery to the other party or by registered or
     certified mail, return receipt requested, postage prepaid, addressed as
     follows:

               If to the Employee:

               Mr. Gerald Greenwald
               021 Northway
               Aspen, Colorado 81611

               with a copy to:

               Norman Newman, Esq.
               Winston & Strawn
               175 Water Street
               10th Floor
               New York, New York  10038

                                       41

<PAGE>
 
               If to the Employer:

               UAL Corporation
               1200 East Algonquin Road
               Elk Grove Township, Illinois
               Attn: General Counsel

or to such other address as any of the parties shall have furnished to the other
in writing in accordance herewith.  Notice and communications shall be effective
when actually received by the addressee.

     (c)  None of the provisions of this Agreement shall be deemed to be a
     penalty.

     (d)  The invalidity or unenforceability of any provision of this Agreement
     shall not affect the validity or enforceability of any other provision of
     this Agreement.

     (e)  Either party's failure to insist upon strict compliance with any
     provision hereof shall not be deemed to be a waiver of such provision or
     any other provision hereof.

                                       42

<PAGE>
 
     (f) This Agreement supersedes any prior employment agreement or
     understandings, written or verbal between the Employer and the Employee and
     contains the entire understanding of the Employer and the Employee with
     respect to the subject matter hereof.

     (g)  This Agreement may be executed simultaneously in two or more
     counterparts, each of which shall be deemed an original, but all of which
     together shall constitute one and the same instrument.

          IN WITNESS HEREOF, the parties have executed this Agreement all as of
the day and year first above written.


                              --------------------------------------- 
                              Gerald Greenwald


                              UAL CORPORATION


                              By:
                                 ------------------------------------

                                       43