(1) Summary of Significant Accounting Policies  

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K






[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from           to_________

Commission File No. 1-6033
 
 

UAL CORPORATION
(Exact name of registrant as specified in its charter)


Delaware 
36-2675207
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)

 
Location: 1200 East Algonquin Road, Elk Grove Township, Illinois
60007
Mailing Address: P. O. Box 66919, Chicago, Illinois
60666
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:     (847) 700-4000

Securities registered pursuant to Section 12(b) of the Act:
 


Title of Each Class
Name of Each Exchange
On Which Registered 
   
Common Stock, $.01 par value New York, Chicago and
  Pacific Stock Exchanges
   
Depositary Shares each representing  
1/1,000 of a share of Series B  
Preferred Stock, without par value New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act: None

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

        Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 Yes   X               No ___

        The aggregate market value of voting stock held by non-affiliates of the Registrant was $714,424,428 as of June 28, 2002.  The number of shares of common stock outstanding as of February 28, 2003 was 95,528,119.
 
 


UAL Corporation and Subsidiary Companies Report on Form 10-K
For the Year Ended December 31, 2002


Page
PART I
Item 1.    Business
3
Item 2.    Properties
21
Item 3.    Legal Proceedings
25
Item 4.    Submission of Matters to a Vote of Security Holders
27
   
PART II
Item 5.    Market for the Registrant's Ordinary Shares and Related Stockholder Matters
28
Item 6.    Selected Financial Data
29
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of                          Operations
29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
53
Item 8.    Financial Statements and Supplementary Data
55
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
100
   
PART III
Item 10.  Directors and Executive Officers of the Registrant
101
Item 11.  Executive Compensation
104
Item 12.  Security Ownership of Certain Beneficial Owners and Management
113
Item 13.  Certain Relationships and Related Transactions
119
Item 14.  Controls and Procedures
119
   
PART IV
Item 15.  Exhibits, Financial Statements, Schedules and Reports on Form 8-K
120

 
 
 
 

PART I

ITEM 1.  BUSINESS.

        UAL Corporation ("UAL" or the "Company") was incorporated under the laws of the State of Delaware on December 30, 1968.  The world headquarters of the Company is located at 1200 East Algonquin Road, Elk Grove Township, Illinois 60007.  The Company's mailing address is P.O. Box 66919, Chicago, Illinois 60666.  The telephone number for the Company is (847) 700-4000.

        UAL is a holding company and its principal, wholly owned subsidiary is United Air Lines, Inc., a Delaware corporation ("United").  United's operations, which consist primarily of the transportation of persons, property and mail throughout the U.S. and abroad, accounted for most of the Company's revenues and expenses in 2002.  United is the second largest scheduled passenger airline in the world and for the full year 2002 was the industry leader in domestic on-time performance, according to U.S. Department of Transportation data.

        The Company's web address is www.united.com.  Through the Company's web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available (free of charge) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

This Form 10-K contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to the Company on the date of the filing of this Form 10-K, and are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from those referenced in the forward-looking statements are listed in the last paragraph of the section, "Outlook for 2003" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company disclaims any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.

Bankruptcy Considerations

        On December 9, 2002 (the "Petition Date"), UAL, United and 26 other direct and indirect wholly owned subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, in Chicago (the "Bankruptcy Court") under case numbers 02-B-48191 through 02-B-48218 (the "Chapter 11 Cases"). Specific information pertaining to the bankruptcy filing may be obtained from the website www.pd-ual.com.

        The Debtors are currently operating their business as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders.  In general, as debtors-in-possession, the Debtors are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

        Changes in consumer behavior, particularly the reduction in business travel and the changes in business travel patterns, have led to a significant decline in revenues, yield and revenue passenger miles for United, which in turn have severely impacted the Company's financial condition and United's ability to meet some of its maturing debt obligations. The Company filed for bankruptcy because the Chapter 11 process offered the best available means to facilitate the implementation of necessary changes to the Debtors' business to bring costs and operations in line with the current business environment.  In addition, the protections of the Chapter 11 process offered the Debtors access to capital through debtor-in-possession financing that otherwise would not have been available.

        On the Petition Date, the Bankruptcy Court gave interim approval for an aggregate of up to $1.5 billion in debtor-in-possession secured financing (the "DIP Financing"). The DIP Financing is structured as a $300 million facility from Bank One, NA (the "Bank One Facility") and a $1.2 billion facility provided by a group led by JPMorgan Chase Bank, Citicorp USA, Inc., Bank One, NA and The CIT Group/Business Credit, Inc. (the "Club Facility").  The Company has received commitments of $1.0 billion under the Club Facility following the completion of the syndication process for that facility; the balance is conditioned upon the participation of one or more additional lenders, subject to approval by the existing participants.  The Company currently has access to the entire Bank One Facility and to $500 million of the Club Facility. Access to the balance of the Club Facility is subject to specified terms of that facility.  These terms require that the Company achieve performance milestones under its business plan, which include substantial cost savings in the near term.  Final approval of the DIP Financing was granted by the Bankruptcy Court on December 30, 2002.

         United's DIP Financing requires compliance with a number of financial covenants, including the achievement of specified earnings thresholds.  The adverse economic impact of external events, such as those described below in "Fuel," "Conflict with Iraq" and "Employees - Labor Matters," if not offset by the achievement of savings elsewhere, could lead to the breach of one or more of those covenants and, absent a waiver from the DIP lenders, their foreclosure on substantial assets United needs to operate its business.  For more information on the DIP Financing, see Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code" in the Notes to Consolidated Financial Statements.

        In order to exit Chapter 11 successfully, the Company will need to propose, and obtain confirmation by the Bankruptcy Court of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would resolve, among other things, the Debtors' pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for its corporate governance subsequent to exit from bankruptcy. On March 21, 2003, the Bankruptcy Court approved the extension to October 2003 of the Company's "exclusivity period," during which it is the only party permitted to file a plan of reorganization.  Under certain circumstances, the exclusivity period could be shortened by two months. The timing of filing a plan of reorganization by the Company will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 Cases. Although the Company expects to file a plan of reorganization that provides for its emergence from bankruptcy as a going concern, there can be no assurance at this time that a plan of reorganization will be confirmed by the Bankruptcy Court or that any such plan will be implemented successfully.

        Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect pre-petition indebtedness or to exercise control over the property of the debtor's estate.  Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities are subject to settlement under the plan of reorganization.

        Notwithstanding the preceding general discussion of the automatic stay, the Debtors' rights to possess and operate certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract are governed by a particular provision of the Bankruptcy Code that specifies different treatment. Section 1110 of the Bankruptcy Code ("Section 1110") provides that unless the Debtors take certain action, within 60 days after the Petition Date or such later date as is agreed by the applicable lessor, secured party, or conditional vendor, the contractual rights of such financier to take possession of such equipment and to enforce any of its other rights or remedies under the applicable agreement are not limited or otherwise affected by the automatic stay or any other provision of the Bankruptcy Code. For more information on Section 1110, see "Properties - Flight Equipment" under Item 2 below and Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code" in the Notes to Consolidated Financial Statements.

        Under Section 365 of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain other conditions.  In general, rejection of an unexpired lease or executory contract is treated as a pre-petition breach of the lease or contract in question. Subject to certain exceptions, this rejection relieves the Debtors of performing their future obligations under that lease or contract but entitles the lessor or contract counterparty to a pre-petition general unsecured claim for damages caused by the deemed breach.

        Counterparties to these rejected contracts or leases may file proofs of claim against the Debtors' estate for such damages.  Due to the uncertain nature of many of the potential rejection and abandonment related claims, the Company is unable to project the magnitude of these claims with any degree of certainty at this time.

        Generally, the assumption of an executory contract or unexpired lease requires a debtor to cure most existing defaults under such executory contract or unexpired lease.

        The Bankruptcy Code provides special treatment for collective bargaining agreements ("CBAs"). In particular, Section 1113(c) of the Bankruptcy Code permits the Company to move to reject its collective bargaining agreements if the Company first satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court's approval of the rejection. After bargaining in good faith and sharing relevant information with its unions, the debtor must make proposals to modify its existing CBAs based on the most complete and reliable information available at the time. The proposed modifications must be necessary to permit the reorganization of the debtor and must ensure that all the affected parties are treated fairly and equitably relative to the creditors and the debtor. Ultimately, rejection is appropriate if the unions refuse to agree to the debtors necessary proposals "without good cause" and the balance of the equities favors rejection. See "Employees - Labor Matters" below under this Item 1 and "Labor Matters" under Management's Discussion and Analysis of Financial Condition and Results of Operation.

        The United States Trustee for the Northern District of Illinois (the "U.S. Trustee") has appointed an official committee of unsecured creditors (the "Creditors' Committee").  The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court.  There can be no assurance that the Creditors' Committee will support the Debtors' positions or the Debtors' ultimate plan of reorganization, once proposed, and disagreements between the Debtors and the Creditors' Committee could protract the Chapter 11 Cases, could negatively impact the Debtors' ability to operate during the Chapter 11 Cases and could prevent the Debtors' emergence from Chapter 11.

        At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on the Company's business or when it may emerge from Chapter 11.  The Company's future results depend on the timely and successful confirmation and implementation of a plan of reorganization. The rights and claims of various creditors and security holders will be determined by the plan as well.  No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies, and it is possible that UAL's equity or other securities will be restructured in a manner that will reduce substantially or eliminate any remaining value. Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in any of such securities and claims.

        On February 24, 2003, the Bankruptcy Court entered a preliminary injunction in order to restrict the trading of the Company's common stock and debt interests in the Company. The purpose of the preliminary injunction was to ensure that the Company did not lose the benefit of its net operating loss ("NOL"). Under federal and state income tax law, an NOL can be used to offset future taxable income, and thus is an extremely valuable asset. However, a company can lose the benefit of its NOLs if the company is deemed to undergo an "ownership change" under certain very specific tax rules in the Internal Revenue Code. Excessive trading in a company's stock (or debt when the company is in bankruptcy) can trigger such an "ownership change," and thus the Company sought to restrict the trading of the Company's common stock and debt interests.

        Under the terms of the preliminary injunction, no person can buy or sell UAL stock if that person holds more than 4.8 million shares of UAL common stock or would hold more than 4.8 million shares after the purchase. Any person who holds more than $200 million in debt claims against UAL must register as a "substantial claimholder" with UAL, and no person may acquire debt claims against UAL if the acquisition of the claims would cause them to hold more than $200 million in such claims. See Note 7, "Income Taxes" in the Notes to Consolidated Financial Statements.

Plan for Transformation

        Central to UAL's reorganization and emergence from Chapter 11 is its plan for transformation, which outlines the fundamental changes to United's strategic direction. The plan, which the Company seeks to refine through further collaboration with its employee and creditor constituencies, is intended to lay the foundation for a company that is successful and competitive for the long run. Core objectives of the plan are the reduction of United's labor and non-labor costs and the development of a more comprehensive and compelling portfolio of products. Key operational elements of the plan include: (1) the preservation and enhancement of United's extensive mainline service targeted primarily at the business traveler; (2) the creation of a low-cost offering to compete directly with low-cost carriers for leisure and price-sensitive travelers; (3) the growth of the Company's United Express regional operations and (4) the expansion of United's domestic and international alliances. See Other Information, "Plan for Transformation" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operations

Segments.

        UAL operates its businesses through five reporting segments:  North America, the Pacific, the Atlantic and Latin America, each of which is operated by United, and UAL Loyalty Services, Inc. ("ULS").  Financial information on UAL's operating segments can be found in Note 23, "Segment Information" in the Notes to Consolidated Financial Statements.

        During 2002, United carried approximately 69 million passengers and flew approximately 109 billion revenue passenger miles.  United's network provides comprehensive transportation service within its North American segment and to international destinations within its Pacific, Atlantic and Latin America segments.

       Operating revenues attributed to United's North America segment were $8.8 billion in 2002, $10.7 billion in 2001 and $13.1 billion in 2000.  Operating revenues attributed to United's international segments were $4.7 billion in 2002, $5.4 billion in 2001 and $6.2 billion in 2000.

        North America.  As of March 24, 2003, United serves approximately 83 destinations throughout North America and operates hubs in Chicago, Denver, Los Angeles, San Francisco and Washington, D.C.  United's North America operations accounted for 61.9% of UAL's revenues in 2002.

        Pacific.  Via its Tokyo hub, United provides passenger service between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New York, San Francisco and Seattle) and the Asian cities of Bangkok, Beijing, Hong Kong, Seoul, Singapore and Taipei. United also provides nonstop service between Hong Kong and each of Chicago and San Francisco; between San Francisco and each of Osaka, Shanghai, Sydney and Melbourne (via Sydney); between Los Angeles and Sydney and Melbourne (via Sydney); and between Chicago and Beijing. In 2002, United's Pacific operations accounted for 16.9% of UAL's operating revenues.

        Atlantic.  Washington, D.C. is United's primary gateway to Europe, serving Amsterdam, Brussels, Frankfurt, London, Munich and Paris.  Chicago is United's secondary gateway to Europe, with nonstop service to Frankfurt, London and Paris.  United also provides nonstop service between San Francisco and each of London and Frankfurt; and between London and each of Los Angeles, Newark and New York. In 2002, United's Atlantic operations accounted for 12.9% of UAL's operating revenues.

        Latin America.  United's primary gateway to Latin America is Washington, D.C., providing service from Washington, D.C. to Aruba, Buenos Aires, Rio de Janeiro (one-stop), Sao Paolo, San Juan and St. Thomas.  United also provides service from Mexico City to each of Chicago, Los Angeles, San Francisco, Washington, D.C., and San Jose (Costa Rica).  In addition, United has service from Chicago to Aruba, Montevideo (one-stop), San Juan, Sao Paulo and St. Thomas; between Miami and Buenos Aires and Sao Paulo; between Los Angeles and Guatemala City, San Jose (one-stop) and San Salvador; between New York and San Juan; and between Guatemala City and San Jose. In 2002, United's Latin America operations accounted for 3.4% of UAL's revenues.

        UAL Loyalty Services, Inc.  UAL Loyalty Services, Inc. ("ULS") is the fifth reporting segment of UAL's operations and accounted for 4.9% of UAL's 2002 revenues.  ULS focuses on expanding the non-core marketing businesses of UAL and building customer loyalty for United and others.  ULS operates in four areas:  loyalty programs, travel distribution, direct-to-consumer services and media assets.

        ULS operates substantially all United-branded travel distribution and customer loyalty e-commerce activities, such as united.com, and also owns and manages UAL's interests in various third-party e-commerce enterprises, such as Orbitz and Hotwire.  In addition, as of the first quarter of 2002, ULS owns and operates the Mileage Plus frequent flyer programs and is responsible for certain aspects of it, including member relationships, communications and account management, while United continues to be responsible for the elite frequent flyer aspects of the program, including the Premier, Premier Executive and Premier Executive 1K programs, as well as the air travel accrual and award aspects of the program.  United also retains responsibility for managing the relationship with Mileage Plus' airline partners, while ULS manages relationships with non-airline business partners, such as the Mileage Plus Visa Card, hotels, car rental companies and dining programs. ULS also owns and operates certain other United-branded customer programs as well as the MyPoints.com online loyalty program, under which registered consumers earn points for goods and services purchased from participating vendors.

        United Cargo®.  United Cargo offers both domestic and international shipping through its Small Package Delivery; T.D. Guaranteed; First Freight; International Freight; UA 2-Day service; and United SameDay.  Freight accounts for most of United Cargo's shipments, while mail remains an important component of United's cargo strategy.

        For the year 2002, United Cargo generated approximately $673 million in freight and mail revenue, which represents a 4.4% decrease versus 2001.  Traffic has gradually improved, but volumes remain below pre-September 11, 2001 levels.

        In August 2002, United Cargo opened a new cargo warehouse facility in Chicago, which is presently the largest facility for processing freight and mail in North America.  This completes United Cargo's planned investment in facilities.

        In January of 2003, United Cargo, along with Unisys Corporation and two other cargo carriers, launched Cargo Portal Services, an internet portal that allows freight forwarders to book and manage shipments more easily through the delivery cycle.  By providing enhanced computer-based communications between customers and air carriers, United expects Cargo Portal Services to reduce transaction costs for both United and its customers.

        Fuel.  Fuel is United's second largest cost behind labor.   The Company's fuel costs and consumption for the years 2002, 2001 and 2000 were as follows:
 

 
2002
2001
2000
Gallons consumed (in millions)
2,458
2,861
3,101
Average price per gallon, including tax
78.2¢
86.5¢
81.0¢
Cost (in millions)
$1,921
$2,476
$2,511

       The price and availability of jet fuel significantly affect United's operations. Based on projected 2003 fuel consumption, the Company estimates that every $0.01 change in the average annual price-per-gallon of jet fuel will impact United's 2003 fuel costs by approximately $21 million, absent any fuel hedging arrangements.  Due to the highly competitive nature of the airline industry, United may be unable to pass on to its customers any increased fuel costs that it may encounter.

        To help mitigate against price increases, United in the past has entered into hedging arrangements. In 2002, United hedged 26% of its fuel consumption using crude oil and heating oil swaps.  United had also put in place hedges for 7% of its estimated fuel consumption for the first half of 2003 (the impact of these hedges is included in the total fuel cost shown above).  However, as a result of the filing of the Chapter 11 Cases, the derivatives counterparties terminated all outstanding swap contracts, leaving United completely unhedged.  As market conditions and its economic outlook change, the Company continually evaluates the potential economic benefit of entering into fuel hedging arrangements.

        To ensure adequate supplies of fuel and to provide a measure of control over fuel costs, United ships fuel on major pipelines and stores fuel close to its major hub locations.  Although the Company currently does not anticipate a significant reduction in the availability of jet fuel, a number of factors make accurate predictions impossible, including geopolitical uncertainties in oil-producing nations.  For example, hostilities in Iraq could lead to disruptions in oil production and/or to substantially increased oil prices.  The continuing political turmoil in Venezuela also could have similar effects.

        Insurance.  United carries hull and liability insurance of a type customary in the air transportation industry, in amounts which it deems adequate, covering passenger liability, public liability and damage to United's aircraft and other physical property.  However, as a result of the September 11, 2001 terrorist attacks, the premiums have increased significantly.

        Additionally, after September 11, 2001 commercial insurers cancelled United's liability insurance for losses resulting from war perils (terrorism, sabotage, hijacking and other similar perils), but United obtained replacement coverage through the FAA.  Under the Homeland Security Act, which became effective in February 2003, the FAA is authorized to offer this insurance through August 31, 2003, and it may be extended to December 31, 2003, if the federal government determines such an extension is in the national interest.  Likewise, United maintains hull war risk insurance through the FAA program, which provides worldwide coverage for war and associated perils (including hijacking and confiscation).  There can be no assurance, however, that the FAA insurance will continue to be available.  Should the FAA discontinue this coverage, obtaining it from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all.

        Also, United maintains other types of insurance such as property and casualty, directors and officers, cargo, automobile and the like, with limits and deductibles that are standard within the industry.  Compared to insurance prior to September 11, the premiums are substantially higher with lower limits.

        Civil Reserve Air Fleet Program.  In time of war or certain other national emergencies, the U.S. government can require United and other major air carriers to provide airlift services to the U.S. Military under the Civil Reserve Air Fleet Program ("CRAF").  On February 8, 2003, the U.S. government activated CRAF (for only the second time since the program was established in 1951) because the U.S. military's airlift needs exceeded the military's capabilities in connection with the buildup of troops in the Middle East.  As a result, United, along with other U.S. commercial airlines, is currently participating in the transportation of troops and cargo to the Middle East.  While United's participation in the CRAF program to date has had a positive impact on United's profitability, should United be required to provide a more substantial amount of these services for an extended period, its business could be adversely impacted.

Conflict With Iraq

        In anticipation of the U.S. conflict with Iraq, United conducted extensive contingency preparations and developed a plan to address the likely effects on the airline industry as a whole and on United in particular.  With the initiation of the military campaign on March 19, 2003, United implemented that plan, which included an immediate reduction in capacity of 8% effective April 6, 2003 and placing a number of employees on temporary unpaid leave.

        In addition, United has been working with other carriers, major labor unions, and the Air Transport Association, a trade association of major U.S. airlines, to develop and propose a comprehensive government assistance package for the carriers.  Potential components could include relief from certain taxes, the payment by the federal government of all costs for airport security, opening up the Strategic Oil Reserve and government-provided terrorism insurance for the airlines.  At this time it is impossible to assess the prospects of such legislation and there can be no assurance that Congress or the President will approve this or any other relief for the industry.

        Further, if other relief is insufficient or is unavailable on a timely basis, the Company may seek to implement additional, temporary wage reductions for all employees.

Marketing Strategy

        United seeks to attract customers and create customer preference for United by providing a comprehensive network, an attractive frequent flyer program and enhanced and differentiated product and service offerings.

        Alliances.  United has entered into a number of bilateral and multilateral alliances with other airlines to provide its customers more choices and to participate in markets worldwide that it does not serve directly.  These collaborative marketing arrangements typically include one or more of the following features: joint frequent flyer participation; code sharing of flight operations (whereby one carrier's flights can be marketed under the two-letter airline designator code of another carrier); coordination of reservations, baggage handling and flight schedules; and other resource-sharing activities.

        The most significant of these is the Star AllianceÔ, a global integrated airline network co-founded by United in 1997.  As of December 31, 2002, Star Alliance carriers served approximately 727 destinations in approximately 125 countries with approximately 10,622 daily flights.  Current Star Alliance partners, in addition to United, are Air Canada, Air New Zealand, All Nippon Airways, Asiana, Austrian Airlines, bmi, Lauda Air, Lufthansa, Mexicana, SAS, Singapore Airways, Thai International Airways, Tyrolean and Varig.  Two additional carriers are expected to join in 2003: Spanair as of April 1 and LOT Polish Airlines as of October 26.  United currently holds bilateral antitrust immunity with Air Canada and integrated antitrust immunity with Lufthansa, SAS and the Austrian Airlines Group (which includes Austrian Airlines, Lauda Air and Tyrolean).  United has limited antitrust immunity with bmi subject to completion of an "Open Skies" Agreement between the U.S. and U.K.  For more information on Open Skies and international rights, see "Government Regulation" in this Item 1.

        In July 2002, United announced the development of a marketing partnership with US Airways to include joint frequent flyer participation, joint lounge access and code sharing on certain flights.  Currently, United and US Airways have substantially implemented the first two of those arrangements.  The carriers currently code share on selected flights and expect to complete the implementation of the code sharing element of the partnership by the end of 2003, subject to certain conditions imposed by the U.S. government.  On August 11, 2002, US Airways and certain subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.  That case is still pending before the Bankruptcy Court. Although US Airways has filed a plan of reorganization that has been approved by its creditors and confirmed by the Bankruptcy Court and that provides for its emergence from bankruptcy as a going concern, there can be no assurance that such plan will be implemented successfully.  If US Airways is unable to emerge as a going concern or if it emerges as a significantly smaller or different company, the anticipated benefits to United of the marketing partnership may never materialize and United's business may suffer.

        United has also formed independent marketing agreements with other air carriers, including Aloha, BWIA West Indies Airways, Continental Connection (operated by Gulfstream), Great Lakes Airlines (a regional carrier) and Spanair.  United continually evaluates the need for relationships with these and other carriers and from time to time will change its independent marketing partners as conditions warrant.

        In addition, United operates the United Express® marketing program in North America, under which independent regional carriers serve small and medium-sized cities and link them to United's mainline network.  United Express carriers are Air Wisconsin Airlines, Atlantic Coast Airlines and Sky West Airlines.  On February 27, 2003, United announced that it had entered into an agreement with Mesa Air Group, Inc., pursuant to which Mesa Air will become a United Express carrier on western routes.  As part of the Chapter 11 process, the Company is reevaluating each of the contracts with the three existing United Express carriers and may renegotiate or reject any of these agreements in connection with its reorganization.

        Mileage Plus.  The Mileage Plus frequent flyer program was established to develop passenger loyalty by offering awards and services to frequent travelers.  More than 40 million members have enrolled in Mileage Plus since it began in 1981.  Mileage Plus members earn mileage credit for flights on United, United Express, the Star Alliance carriers and certain other airlines that participate in the program.  Miles also can be earned by purchasing the goods and services of non-airline program participants, such as hotels, car rental companies, and credit card issuers.  Mileage credits can be redeemed for free, discounted or upgraded travel and non-travel awards.  For a detailed description of the treatment of Mileage Plus awards, see "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Distribution Channels.  The overwhelming majority of United's airline inventory continues to be distributed through the traditional channels of travel agencies and global distribution systems ("GDS").  The U.S. Department of Transportation ("DOT") has issued a Notice of Proposed Rulemaking that could significantly change the rules under which carriers deal with the GDS.  These new rules are expected to be finalized in January 2004.

        United uses the Apollo reservation system, which is hosted by Galileo International.  The hosting agreement with Galileo continues through 2004.

Industry Conditions

        Operating Environment.  The air travel business is subject to seasonal fluctuations.  United's operations can be adversely impacted by winter weather and United's first- and fourth-quarter results normally reflect reduced travel demand.  Historically, operating results are better in the second and third quarters.  The events of September 11, 2001, and the recession in the U.S. economy distorted the normal seasonal relationships in 2001 and 2002.  As a result of the U.S. war with Iraq, the typical seasonal fluctuations may continue to be disrupted in 2003.

        Competition.  The airline industry is highly competitive.  In domestic markets, new and existing carriers are free to initiate service on any route.  United's domestic competitors include all of the other major U.S. airlines as well as regional carriers, most of which have lower cost structures than United.  Recently, three of United's largest competitors, Delta Airlines, Continental Airlines and Northwest Airlines, have given notice of their intention to implement a comprehensive code sharing arrangement, subject to certain regulatory approval.  The successful introduction of this arrangement, or of other comparable arrangements by other carriers, likely will further intensify domestic competition.

        In its international service, United competes not only with U.S. airlines, but also with foreign carriers.  United's competition on specified international routes is subject to varying degrees of governmental regulations (see "Government Regulation").  United has advantages over foreign air carriers in the U.S. because of its ability to generate U.S. origin-destination traffic from its integrated domestic route systems, and because foreign carriers are prohibited by U.S. law from carrying local passengers between two points in the U.S.  United experiences comparable restrictions in foreign countries.  In addition, U.S. carriers are often constrained from carrying passengers to points beyond designated international gateway cities due to limitations in air service agreements or restrictions imposed unilaterally by foreign governments.  To compensate for these structural limitations, U.S. and foreign carriers have entered into alliances and marketing arrangements that allow the carriers to provide traffic feed to each other's flights.  See "Marketing Strategy - Alliances."

Government Regulation

        Domestic Regulation.  All carriers engaged in air transportation in the U.S. are subject to regulation by the DOT.  Among its responsibilities, the DOT has authority to issue certificates of public convenience and necessity for domestic air transportation, grant international route authorities, approve international code share agreements, regulate methods of competition and enforce certain consumer protection regulations, such as those dealing with advertising, denied boarding compensation and baggage liability.

        Airlines are also regulated by the FAA, primarily in the areas of flight operations, maintenance and other safety and technical matters.  The FAA has authority to issue air carrier operating certificates and aircraft airworthiness certificates, prescribe maintenance procedures, and regulate pilot and other employee training, among other responsibilities.  The FAA also administers the U.S. air-traffic control system.  From time to time, the FAA issues rules that require air carriers to take certain actions, such as the inspection or modification of aircraft and other equipment, that may cause United to incur substantial, unplanned expenses.

        From time to time, the Company is subject to inquiries by these and other U.S. and international regulatory bodies.  The Company does not believe that any such existing inquiries will have a material effect on its business.

        Access to landing and take-off rights, or "slots," at four U.S. airports historically has been subject to government regulation.  At these airports, O'Hare International in Chicago, John F. Kennedy International and LaGuardia in New York, and Reagan National in Washington, D.C., the FAA has regulated the number of available slots. The Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, enacted in April of 2000, eliminated all slot restrictions at O'Hare in July of 2002 and called for the elimination of slot restrictions at Kennedy and LaGuardia by 2007. The eliminations to date have not had, and the planned eliminations are not expected to have, a material effect on the Company.

        International Regulation. Internationally, the Company is subject to the aviation authorities of the foreign countries that United serves. These authorities may from time to time impose regulations beyond those that apply to United's domestic operations.

        Historically, access to foreign markets has been tightly controlled through bilateral treaties regulating the number of points served, the number of carriers and the frequencies of flights. More recently, the U.S. has pursued a policy of "Open Skies," under which the U.S. government has negotiated a number of bilateral agreements allowing unrestricted access to foreign markets. While a considerable number of foreign governments have agreed to Open Skies, several major markets remain subject to restrictive bilateral agreements. Among them are London and Tokyo, where United has significant operations. Further, United's ability to serve some countries and its expansion into certain others is limited by the absence altogether of aviation agreements between the U.S. and the relevant governments. Shifts in U.S. or foreign government aviation policies can lead to the alteration or termination of air service agreements between the U.S. and other countries.  These changes could diminish the value of United's international route authority because changes in these agreements could curtail or terminate United's international rights in the associated markets.

         During 2002, United sought to expand its access to and presence in Asia.  In response to United's application for additional frequencies under newly negotiated rights in the U.S.-Hong Kong bilateral agreement, the DOT awarded United rights that will allow United to operate a second daily Hong Kong-Tokyo flight.  United also was awarded an additional code share frequency to serve Vietnam, which brings the carrier's current pool of Vietnam code share frequencies to eight.  Although Vietnam holds significant commercial potential, the absence of an air service treaty between the United States and Vietnam prohibits U.S. carriers from serving this market directly.

         The air services agreement between the U.S. and Japan provides an unlimited number of frequencies to certain carriers, including United.  United also holds significant traffic rights from Japan to other locations within the Pacific.  These rights and the 2002 opening of Tokyo's Narita airport's second runway provided United with the opportunity to add service in 2002 between Tokyo and Taipei.

         In connection with its international services, United is required to make regular filings with the DOT and, in some cases, to observe rules establishing the tariffs charged and service provided.  In some cases, fares and schedules also require the approval of the relevant foreign governments.

        The European Union (the "EU") is taking an increasingly active role in regulating international aviation. In October of 2002, the European Commission granted antitrust immunity, subject to certain conditions, to United, Lufthansa and SAS.

        In November 2002, the European Court of Justice issued a ruling that invalidated certain provisions of aviation agreements between the U.S. and the EU.  The governments are committed to ensuring that this ruling does not interrupt existing air service.  This decision paves the way for the EU to negotiate aviation treaties on behalf of EU Member States with other non-EU countries.

        The European Commission continues its attempts to modify the existing regulation that governs slots at EU airports.  The most recent proposal, if accepted, would have the effect of favoring EU airlines and would dramatically alter the manner in which EU slots are held and allocated. The proposed changes threaten to redefine the issue of slot ownership and impede the selling and trading of slots.

        Starting in late 2001 and continuing through March 24, 2002, airport authorities and other regulatory bodies granted United and other international slot holders short-term waivers from an international rule that ordinarily requires a carrier to forfeit any slot that it uses less than 80% of the time in any season.  Separately, the DOT waived through March 31, 2002 its requirement that U.S. carriers in limited-entry international markets return to the DOT frequencies in those markets that they do not use more than 90 days. In light of the current conflict with Iraq, United and other carriers are seeking comparable waivers of the slot and frequency-of-use requirements from domestic and international regulatory bodies and airport authorities.

        Legislation.  The Air Transportation Safety and System Stabilization Act of 2001 (the "Stabilization Act") established the federal Air Transportation Stabilization Board ("ATSB") and made $5 billion in federal grants and $10 billion in loan guarantees conditionally available to the airline industry.  The legislation also provides relief from increased insurance premiums, caps potential liability from the September 11 terrorist attacks, limits liability for any future terrorist events and creates a federal compensation fund for attack victims.  In 2001 and 2002, United received $782 million in grants. On June 24, 2002, UAL submitted an application to the ATSB for a loan guarantee in connection with a contemplated financing.  After discussions with the ATSB and subsequent revision to the application, on December 4, 2002, the ATSB informed the Company that it had not approved the application.  Notwithstanding the denial of the Company's application for a pre-petition loan guaranty, UAL has been continuing to work with the ATSB toward the possible funding of a loan that would provide financing to the Company upon its exit from bankruptcy.

        Separate legislation enacted in November 2001, the Aviation and Transportation Security Act (the "Aviation Act"), has had wide-ranging effects on United's operations.  The Aviation Act makes the federal government responsible for virtually all aspects of security that United has traditionally provided.  The Aviation Act created a new government agency, the TSA, responsible for aviation security. Notably, the Aviation Act required that the security screener workforce be composed entirely of federal employees by November 2002.  Regulations under the Aviation Act also require carriers to charge passengers in the U.S. a security fee of $2.50 per enplanement, capped at $10.00 per round trip and to remit that fee to the DOT.  The DOT, as provided in the Aviation Act, also has assessed an additional fee, equal to the amount paid by carriers for security screening in the year 2000, directly on air carriers to compensate for the costs of screening activities and property.  The Aviation Act mandates numerous additional security measures, including that, as of December 31, 2002, all checked baggage be screened by explosive detection systems.

        Privacy Laws. An initiative of significant impact within the EU and elsewhere is the introduction of privacy standards that apply to companies transmitting private information from the EU to non-EU countries.  To comply with the privacy directives, the U.S. Commerce Department and the EU have agreed to safe harbor principles.  Although the safe harbor principles are voluntary at this time, United plans to comply with them.  The U.S. Commerce Department and the EU continue to review the status of voluntary compliance.

        Canada, Argentina and Australia have enacted new privacy laws covering the collection and disclosure of personally identifiable information.  These laws may have an impact on the way United collects and transmits personally identifiable information in these jurisdictions.

        Environmental Regulations.  The Company, like others in the airline industry, is subject to federal, state, local, and foreign environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils, and waste materials.  The Company and the industry are also subject to other environmental laws and regulations, including those that require the Company to remediate soil or groundwater to meet certain objectives.  It is the Company's policy to comply with all environmental laws and regulations, which can require expenditures.  The Company also conducts voluntary remediation actions.  These costs are not expected to have a material adverse effect on the business.

        Under the federal Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "Superfund") and similar environmental clean-up laws, waste generators can be subject to liability for investigation and remediation costs at disposal sites that have been identified as requiring response actions.  The Company has been identified as a potentially responsible party (by a governmental unit or private party) at certain sites that could result in future expenditures, including the Mattiace Petrochemical Superfund Site, the Approved Oil Superfund Site, the Chemsol Inc. Superfund Site, and the Gibson Environmental Inc. Superfund Site.

        There is a dispute primarily among United, American, and Ogden Services (as well as Northwest Airlines and Delta) concerning the responsibility for payment of certain clean up costs for groundwater and soil contamination near terminals 8 and 9 at New York's JFK Airport.  The parties' views on proper allocation of the costs differ. This litigation, which was initiated in 2000 in the Supreme Court of the State of New York, is currently stayed because of the bankruptcy.

        The Miami International Airport has been conducting a long-term project to investigate and remediate soil and groundwater contamination at the airport.  Recently, the Miami International Airport has identified a multitude of current and former tenants it believes should help pay for these remedial measures, and United is one of these tenants.  While the airport initiated a lawsuit in 2001 against a handful of potentially responsible parties, United is not one of the parties named in the lawsuit.

        In accordance with a June 1999 order issued by the California Regional Water Quality Control Board ("CRWQCB"), United, along with most of the other tenants of the San Francisco International Airport, has been investigating potential environmental contamination at the airport and conducting remediation when needed.  Among these projects is an investigation and remediation project for solvent impacts to soil and groundwater at the San Francisco Maintenance Center.  This project is being conducted in accordance with CRWQCB approvals.

        In August 2002, the Company entered into a settlement with the U.S. EPA to address voluntarily disclosed Clean Air Act violations associated with the requirement that low-sulfur diesel fuel be used in certain ground support equipment.  This settlement involves a penalty payment and performance of a Supplemental Environmental Project (involving the replacement of some older ground support equipment with new electric-powered equipment).

        The U.S. EPA and the State of California are seeking penalties, and potentially injunctive relief, from the Company for alleged non-compliance with hazardous waste generator requirements at United's San Francisco Maintenance Center identified in 1999 and 2001.  The Company has been working with both governmental entities to resolve this matter.

        In addition to the matters discussed above, from time to time the Company becomes aware of potential non-compliance with environmental regulations, which have either been identified by the Company (through its internal environmental compliance auditing program) or through a governmental entity.  In some instances, these matters could potentially become the subject of an administrative or judicial proceeding and could potentially involve monetary sanctions of $100,000 or more.

        The Company does not expect these matters, individually or collectively, to have a material adverse effect on the Company.

Employees - Labor Matters

        As of March 1, 2003, the Company and its subsidiaries had approximately 72,000 employees, of which approximately 80% are represented by various labor organizations.  This number represents a significant reduction from the end of 2001, when the Company and its subsidiaries had approximately 84,000 employees.  This reduction was a direct response to the continuing adverse impact on air travel resulting from the September 11, 2001 terrorist attacks, reduced demand for air travel in general, as well as United's concerted efforts to reduce costs.

        The employee groups, number of employees, labor organization and current contract status for each of United's collective bargaining groups, as of February 28, 2003, were as follows:
 


Employee Group
Number of
Employees

Union
Contract Open
for Amendment
Pilots
8,231
ALPA
September 1, 2004
Flight Attendants
18,099
AFA
March 1, 20061
Mechanics & Related
10,326
IAM
July 12, 2005
Public Contact Employees/Ramp &      
Stores/Food Service Employees
21,180
IAM
November 1, 2004
Dispatchers
173
PAFCA
January 1, 2005
Meteorologists
18
TWU
June 1, 2005

        Collective bargaining agreements ("CBAs") are negotiated under the Railway Labor Act, which governs labor relations in the transportation industry, and typically do not contain an expiration date.  Instead, they specify an amendable date, upon which the contract is considered "open for amendment."  Prior to the amendable date, neither party is required to agree to modifications to the bargaining agreement.  Nevertheless, nothing prevents the parties from agreeing to start negotiations or to modify the agreement in advance of the amendable date. Contracts remain in effect while new agreements are negotiated.  During the negotiating period, both the Company and the negotiating union are required to maintain the status quo.

         In order to meet the earnings covenant under the DIP Financing, United needed to obtain substantial labor savings from its employees by mid-February 2003. Therefore, the Company imposed immediate wage reductions on its management and salaried employees, including officers in December 2002. Additionally, United immediately began negotiations with all of its unions in early December regarding the changes to the Company's CBAs necessary to satisfy United's short-term and long-term financial and business imperatives.

        In the event the parties cannot reach consensual modifications, Section 1113(c) of the Bankruptcy Code permits the Company to move to reject its CBAs. Under Section 1113(c), the Company must satisfy several statutorily prescribed substantive and procedural prerequisites before the Bankruptcy Court will authorize the Company to reject its CBAs. In order to meet the deadline imposed by the DIP Financing covenants for reducing its labor costs, United had been prepared to file a motion to reject its CBAs pursuant to Section 1113(c) of the Bankruptcy Code by December 26, 2002, if consensual CBA modifications could not be reached before that date.

        As the December 26 deadline neared, however, United and several of its unions agreed to consensual interim wage relief from its unions that would allow United and its unions more time to continue negotiations to reach agreements on the CBA modifications necessary for United to reorganize successfully while still meeting the short-term financial imperatives established by the DIP covenants. United reached agreements with four of its five unions to reduce wages on an interim basis, effective January 1, 2003 to April 30, 2003. The leadership of the IAM rejected the Company's proposal and therefore, on December 27, 2002, United filed a motion with the Bankruptcy Court to impose a wage reduction for the IAM-represented employees. On January 10, 2003, the Bankruptcy Court granted the Company's motion.

_______________________
1  The collective bargaining agreement between the Company and the AFA provides for negotiated mid-term wage adjustments.
 

        Under the terms of the interim agreements with its unions, and the relief granted by the Bankruptcy Court against the IAM, United agreed not to file a motion to reject its CBAs pursuant to Section 1113(c) before March 15, 2003. In the meantime, United and its unions continued negotiations. The Company's DIP covenants, however, still require United to obtain all of the relief sought in its proposed CBA modifications by May 1, 2003. As a result, on March 17, 2003, United filed a motion to reject its CBAs pursuant to Section 1113(c) and the Bankruptcy Court has scheduled hearings on this motion for April 14. March 17 was the deadline by which such a motion needed to be filed to ensure that the Company could obtain a ruling on its motion by early May 2003 and stay in compliance with its DIP Financing covenants.

         On March 26, 2003, the Company reached a tentative agreement with the Air Line Pilots Association, International ("ALPA") on a restructured CBA. The agreement, which will become effective May 1, 2003, if ratified by the pilot membership, has a 6-year duration and would reduce pay and benefits, and improve productivity (through work rule changes), by an average of approximately $1.1 billion per year versus the current contract.  As part of these changes, retirement and medical benefits for pilots would be reduced through a decrease in the Company's contribution to the pilot defined contribution plan, a reduction in the formula for their defined benefit plan, and changes to the medical plan including increases to co-payments.

         The tentative agreement includes a success-sharing program that provides the opportunity for annual pay-outs tied to the Company's level of profitability and performance.  The tentative agreement provides for significantly enhanced flexibility with respect to regional jets, code share arrangements and a low-cost offering.  Finally, the Company has agreed to include in its plan of reorganization provisions that pilots would receive a distribution of the equity, securities or other consideration provided to the general unsecured creditors.  Additionally, the Company had agreed that any plan of reorganization it proposes or supports will provide the pilot group with a distribution of the above-described equity, securities or other consideration (as compared to the total distribution provided to all employee groups) which matches the proportion of pilots' contribution to total employee cost reductions.

         The pilot contribution in the tentative agreement represents a significant portion of the overall labor cost reductions sought by the Company.  Should the Company be unable to obtain labor cost reductions from any of its union groups (through consensual agreements or otherwise) which fall below the relief the Company has articulates as necessary from that group, the Company has agreed to proportionately reduce ALPA's approximate $1.1 billion contribution.

        For additional information on labor negotiations, see Other Information, "Labor Agreements" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Corporate Governance and the ESOPs; Sunset

        In July 1994, the stockholders of UAL approved a plan of recapitalization that provided an approximately 55% equity and voting interest in UAL to certain employees of United, in exchange for wage concessions and work-rule changes.  The employees' equity interest was allocated to individual employee accounts through the year 2000 under the Employee Stock Ownership Plans ("ESOPs") created as part of the recapitalization.  The entire ESOP voting interest is voted by the ESOP trustee at the direction of, and on behalf of, the employees participating in the ESOPs through Voting Preferred Stock. For further background information and a description of the ESOPs see Note 16, "ESOP Preferred Stock" and Note 19, "Employee Stock Ownership Plans" in the Notes to Consolidated Financial Statements.

        As part of the recapitalization, the Company's stockholders approved an elaborate governance structure, which was contained principally in the Company's Restated Certificate of Incorporation ("UAL Charter") and the ESOPs.  Among other matters, the UAL Charter provided that the Company's Board of Directors was to consist of five public directors, four independent directors and three employee directors appointed by different classes of stockholders.  A number of special stockholder, Board and Board Committee voting requirements were also established which included special Board voting requirements on Extraordinary Matters (e.g. specified business transaction outside the ordinary course of business; significant asset dispositions; and most issuances of equity securities), amendments to the UAL Charter and specified bylaws, repurchases of common stock, stock sales to employee benefit plans, and business transactions with labor.

        Under the terms of the UAL Charter, these special governance provisions, except as set forth below, expired or "Sunset" in all relevant respects on March 7, 2003, when the (a) common shares issuable upon conversion of outstanding Class 1 and Class 2 ESOP convertible preferred stock, plus (b) Common Equity (generally common stock issued or issuable as of July 1995) and common stock held in the ESOP and any other employee benefit plans sponsored by UAL or any of its subsidiaries for the benefit of employees, represented, in the aggregate, less than 20% of Common Equity.  For purposes of measuring the Sunset, employee ownership was 33.37% at December 31, 2002 and 19.21% on March 7, 2003.  After Sunset, Class P Voting Preferred Stock, Class M Voting Preferred Stock and Class S Voting Preferred Stock represent the right to cast in the aggregate the number of votes that is equal to 46.23%, 37.13% and 16.64%, respectively, of the number of shares of Common Stock issuable upon conversion of ESOP Preferred Stock outstanding or issuable under the Supplemental ESOP. The following provisions relating to the Board of Directors are in effect following Sunset: the three employee directors (representing ALPA, IAM and salaried and management employees) continue to serve on the Board; the Board size remains at 12 directors; the Outstanding Public Director Nominating Committee has the responsibility to nominate up to nine directors; and the two union directors serve on the Executive Committee and on any other committees with responsibilities substantially the same as to those of any committee on which the union directors were serving immediately prior to Sunset.

       This section is intended as a general summary and is qualified in its entirety by reference to the UAL Charter.
 
 

ITEM 2.  PROPERTIES.

Flight Equipment

        As of December 31, 2002, United's operating aircraft fleet totaled 567 jet aircraft, of which 267 were owned and 300 were leased.  These aircraft are listed below:
 


Aircraft Type
Average
No. of Seats

Owned

Leased

Total
Average
Age (Years)
           
A319-100 120   33   22   55   3
A320-200 138   43   55   98   5
B737-300 120   10   91 101 14
B737-500 104   39   18   57 11
B747-400  347   23   21   44   8
B757-200 182   43   54   97 11
B767-200 168   18     0   18 20
B767-300 219   17   20   37   8
B777-200 288   41   19   60   4
           
Total Operating Fleet 267 300 567   9

        As of December 31, 2002, all 267 of the aircraft owned by United were encumbered under debt agreements.  For additional information on accounting for these aircraft see Note 12, "Long-Term Debt" and Note 13, "Lease Obligations" in the Notes to Consolidated Financial Statements.

        United has on firm order with the manufacturers 42 Airbus A319-100 and A320-200 and one Boeing 777-200 aircraft.  The Company is evaluating these contracts in light of its financial condition and operational requirements.

        In connection with the Company's bankruptcy reorganization under Chapter 11, United is reassessing its fleet requirements and is seeking to reduce significantly its aircraft financing costs. Central to this undertaking is the Company's effort to readjust lease and mortgage payments for aircraft whose fair market values have fallen since the execution of the original agreements.  United is negotiating with a significant number of its aircraft lenders and lessors to restructure the underlying financings to reflect current market rates.  Although the Company has reached agreements in principle with respect to a number of aircraft, there can be no assurance that those tentative arrangements will be successfully converted to final contracts, or that other comparable arrangements will be available to the Company.  To the extent United is unable to reach final agreements at economically attractive terms for the requisite number of aircraft, its financial and operational performance may be adversely affected.

        Under Section 1110 of the Bankruptcy Code, the automatic stay lasts for only 60 days with respect to Section 1110-eligible aircraft, engines and related equipment except under two conditions. The debtor may extend the 60-day period by agreement of the relevant financier, with court approval. Alternatively, the debtor may agree to perform all of the obligations under the applicable financing and cure any defaults thereunder as required by the Bankruptcy Code.  In the absence of either such arrangement, the financier may take possession of the property and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such equipment.

        The 60-day period under Section 1110 in UAL's Chapter 11 Case expired on February 7, 2003.  The Company has reached agreements with a significant number of aircraft financiers to extend the automatic stay, in exchange in certain instances for United's agreement to make specified payments.  United also has made elections with respect to certain other aircraft to cure all existing defaults and to pay the contract rates as required by the Bankruptcy Code. With respect to certain aircraft, however, United neither negotiated an extension of the automatic stay nor agreed to cure and resume payments.  Accordingly, the financiers of such aircraft may seek to repossess the property.  Although no such financiers have sought to repossess any United equipment, and although the Company believes that market conditions for commercial aircraft make repossession unlikely, there can be no assurance that UAL's lenders and lessors will not repossess any of the applicable aircraft.  Any such repossessions could result in substantial disruptions to United's operations and could have a material adverse effect on the Company's business.

        For more information on Section 1110, see Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code" in the Notes to Consolidated Financial Statements.

Ground Facilities

        United has entered into various leases relating to its use of airport landing areas, gates, hangar sites, terminal buildings and other airport facilities in most of the municipalities it serves.  Major leases expire at San Francisco in 2003 and 2011, Oakland in 2007, Washington-Dulles in 2014, Chicago O'Hare in 2018, Los Angeles in 2021, Denver in 2025 and Indianapolis in 2031.  United intends to exercise its rights under the 2003 San Francisco lease by extending the term until 2013 pursuant to a 10-year renewal option. United owns a 106-acre complex in suburban Chicago consisting of more than 1,000,000 square feet of office space for its world headquarters, a computer facility and a training center.  United also owns a flight training center, located in the City and County of Denver, that can accommodate 36 flight simulators and more than 90 computer-based training stations.  Both the Chicago and Denver facilities are fully mortgaged. United owns a limited number of other properties, including a reservations facility and an office building in Denver and a crew hotel in Honolulu, Hawaii; all of these facilities are fully mortgaged.

        United's Maintenance Operation Center at San Francisco International Airport occupies 129 acres of land, 3,000,000 square feet of floor space and 12 aircraft hangar docks under a lease expiring in 2003, with an option to extend for 10 years.  United intends to exercise its rights under the lease agreement by extending the term until 2013 pursuant to the renewal option. United's Indianapolis Maintenance Center, a major aircraft maintenance and overhaul facility, is operated under a lease with the Indianapolis Airport Authority that expires in 2031.  The Indianapolis Maintenance Center occupies 300 acres of land, 1,690,000 square feet of floor space and 12 aircraft hangar docks. United also leases a major facility at the Oakland, California airport, dedicated to widebody airframe maintenance.  The Oakland facility occupies 44 acres of land, 380,000 square feet of floor space and has four aircraft hangar docks.

        United's off-airport leased properties have included a number of ticketing, sales and general office space in the downtown and outlying areas of most of the larger cities comprised in the United system. As part of its restructuring and cost containment efforts, United has closed, terminated or rejected all of its city ticket office leases. United continues to lease and operate a number of general office, reservations, sales and other support facilities.

        At December 31, 2002, approximately $1.7 billion in special facilities revenue bonds ("municipal bonds") originally issued on behalf of United to build or improve airport-related facilities were outstanding. The Company leases facilities at airports pursuant to lease agreements where municipal bonds funded at least some of its airport-related projects. Pursuant to the financing agreements entered into by United in connection with such issuance of municipal bonds, the Company is required to make payments in amounts sufficient to pay the interest semi-annually with principal payable upon maturity.

        United is not permitted under the Bankruptcy Code to make payments on unsecured pre-petition debt without providing notice to its creditors and receiving the approval of the Bankruptcy Court. As United has been advised its municipal bonds are unsecured (or in certain instances, partially secured) pre-petition debt, United cannot make payments thereon without first meeting the requirements outlined above.Accordingly, the Company has classified all of its municipal bonds as liabilities subject to compromise.

        Section 365 of the Bankruptcy Code requires that the Company timely perform all of its post-petition obligations under unexpired leases of non-residential real property. The Company believes that it is in compliance with all payment obligations under its lease agreements relating to those airports where it has municipal bonds outstanding. Under certain of the airport lease agreements, however, the Company may be considered in default due to the non-payment of the debt and therefore subject to the default provisions of the lease agreements with the airports. Possible consequences could include loss of the Company's status as a signatory airline (resulting in increased rents and landing fees) and loss of the Company's exclusive space agreement.

        The Company did not pay certain rental and landing fees when first due on December 1, 2002 under its airport use agreement with the City of Chicago with respect to the Chicago O'Hare International Airport. By letter to the Company dated December 4, 2002, Corporation Counsel for the City of Chicago asserted that the Company may have forfeited its exclusive rights to its premises at O'Hare on account of the Company's non-payment of such rental and landing fees. By letter to Corporation Counsel for the City of Chicago on December 5, 2002, the Company confirmed that it had paid, by wire transfer, on December 5, 2002, the full payment of outstanding rental and landing fee obligations at O'Hare and that such payment constituted a cure of any delinquency or default and that the Company's rights under such lease remain unaffected. Likewise, by letter to Corporation Counsel for the City of Chicago on December 6, 2002, the Company reiterated its position that the December 5th payment represented a cure of any rental delinquencies or defaults and that the City's attempt to modify the Company's exclusive rights was ineffective. A difference of opinion remains as to whether the City of Chicago's attempt to change the exclusive nature of the premises at O'Hare has any legal effect.

        The Company did not make the debt service payments due March 1, 2003 of approximately $3.2 million on its Chicago O'Hare Series 1999A Bonds and of approximately $1.0 million on its Miami-Dade Series 2000 Bonds. Additionally, the Company does not intend to make debt service payments or any other payment due on or after April 1, 2003 on any of the municipal bond issuances, which include those referenced above, issued on behalf of the Company and relating to domestic airport financings.

        The Company filed a Complaint Of Debtor For Declaratory Judgment with the Bankruptcy Court on February 28, 2003 and entered into a Standstill Agreement with the City of Chicago to seek clarification of its obligations under the municipal bonds and to protect its rights under its airport lease agreement at Chicago's O'Hare International Airport until the Bankruptcy Court decides the merits of the complaint.

        On March 21, 2003, the Company filed other Complaints of Debtor for Declaratory Judgment and, in connection therewith, corresponding Motions for Temporary Restraining Order with respect to the municipal bonds issuances relating to the facilities at the Denver International Airport, the New York City - John F. Kennedy International Airport, the San Francisco International Airport, and the Los Angeles International Airport, each seeking a clarification of the Company's obligations under the applicable municipal bonds, and the protection of its rights under its underlying airport lease agreements at the applicable airport until the Bankruptcy Court decides the merits of each of the above complaints. On March 27, the Bankruptcy Court conducted a hearing on this issue.  At that time, the Court continued the hearing until March 31, 2003 and the parties are attempting to negotiate an order that would protect the Company's rights under its leases by requiring the lessors to give additional notice of certain alleged defaults.  The Company is unable to predict what, if any, action might be taken in the future by either the bondholders or the airport authorities as a result of its failure to pay these obligations as contractually required.
 
 
 
 

ITEM 3.  LEGAL PROCEEDINGS.

In re: UAL Corporation, et. al.

         As discussed above, on the Petition Date, the Company, United and 26 other direct and indirect wholly owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.  The Chapter 11 Cases are being jointly administered under the caption "In re UAL Corporation, et al., Case Nos. 02-B-48191 through 02-B-48218."  As debtors-in-possession, the Debtors are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.  As of the Petition Date, virtually all pending litigation (including some of the actions described below) is stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, again subject to certain exceptions, to recover on pre-petition claims against the Debtors.  In addition, Debtors may reject pre-petition executory contracts and unexpired lease obligations, and parties affected by these rejections may file claims with the Bankruptcy Court.  At this time, it is not possible to predict the outcome of the Chapter 11 Cases or their effect on the Company's business.

Summers v. UAL Corporation ESOP, et. al.

        The UAL Corporation ESOP and the ESOP Committee were sued on February 28, 2003, by certain ESOP participants in a purported class action that alleges that the ESOP Committee breached its fiduciary duty by not selling UAL stock held by the ESOP from July 19, 2001 to the present. The complaint cites numerous events and disclosures that allegedly should have alerted the Committee to the need to sell the shares. The ESOP committee ultimately appointed State Street to act as fiduciary, and State Street started selling the shares in September 2002 when the stock was trading between $1 and $5 per share. The Company has $10 million in fiduciary insurance in place to cover some portion of any liability and is obligated to indemnify the Committee members beyond that coverage.

Frank, et al. v. United; EEOC v. United

        A class action lawsuit against United was filed on February 7, 1992 in federal district court in California, alleging that United's former flight attendant weight program, in effect from 1989 to 1994, unlawfully discriminated against flight attendants on the grounds of sex, age and other factors, and seeking monetary relief.  On April 29, 1994, the class was certified as to the sex and age claims. Following extensive motion practice, on March 10, 1998, the district court dismissed all the claims against United.  Following an appeal to the U.S. Court of Appeals for the Ninth Circuit, a three-judge panel of the Ninth Circuit, on June 21, 2000, overturned the ruling.  The court ruled that the plaintiffs were entitled to judgment as a matter of law on their claims for discrimination based on sex and that a trial was required for determination on their claims for age discrimination. In addition, the appellate court reversed the dismissal of all individual class representative claims of discrimination and the case was remanded to the district court for further proceedings.  United's petition before the U.S. Supreme Court was rejected.  Prior to United's Chapter 11 filing, the parties settled the case to enable plaintiffs to establish the size of their unsecured claim.  The automatic stay resulting from United's Chapter 11 filing will be lifted to allow the court to conduct proceedings to allow the finalization of the settlement as to the class.

Hall d.b.a. Travel Specialists v. United

        A North Carolina travel agent filed an antitrust class action suit against United (and other carriers) initially in state court and then in federal court in North Carolina following the reduction by United (and other carriers) in November 1999 of commission rates payable to travel agents. Plaintiffs allege that United and the other carrier-defendants conspired to fix travel agent commissions in violation of the Sherman Act and seek treble damages and injunctive relief. Subsequent to this initial filing, the case has been expanded by the addition of five new travel agencies, ARTA, and eight new carrier defendants, including two Star Alliance carriers. In addition, the court has allowed the addition of claims related to carriers' commission reduction actions in 1997, 1998, 2001, and 2002. Earlier this year the Court granted plaintiffs' motion to certify the case as a class action consisting of all U.S. (and its possessions) travel agencies. Plaintiffs have claimed lost commissions, assuming liability, in the amount of approximately $13 billion, although United's alleged share of this amount has not been determined by plaintiffs. Upon UAL's Chapter 11 filing, this case was stayed as against United. Since that date, all remaining defendants have moved for summary judgment. Those motions are pending before the court.  Trial has been set for September 2, 2003.

        In addition to the Hall case, United has been named in several other cases filed in the U.S. and Canada, involving commission rates payable to travel agencies. These cases are in their early stages. United does not expect the outcome of Hall and the related cases to have any material effect upon UAL's consolidated financial position or results of operations.

Litigation Associated with September 11 Terrorism

        Approximately 40 lawsuits have been served on United in the U.S. District Court for the Southern District of New York related to the September 11 terrorist attacks.  The suits seek a variety of recoveries, including wrongful death, injury or property damage, and claim that United and others breached their duty of care to the passengers and to the ground victims.  A number of lawsuits have also been filed against American and other defendants.  Under federal law, United's liability on such claims will be limited to the amount of United's insurance coverage.  United anticipates the filing of other lawsuits related to the September 11 attacks in the future.  Also, a forum was created under federal law to provide, as an alternative to litigation, an administrative avenue for the payment of compensation to victims of the terror attacks. United has stipulated that the automatic stay applicable to these lawsuits under the U.S. Bankruptcy Code will be lifted for 60 days to permit United's participation in a motion to dismiss the claims of the ground victims.

        See also Item 1, "Business - Environmental Regulation" and Note 21, "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        No matter was submitted to a vote of security holders of the Company during the fourth quarter of 2002.
 
 

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                     STOCKHOLDER MATTERS.

        The Company's Common Stock, $.01 par value (the "Common Stock"), is traded principally on the New York Stock Exchange (the "NYSE") under the symbol UAL, and is also listed on the Chicago Stock Exchange and the Pacific Stock Exchange.  The following sets forth for the periods indicated the high and low sales prices of the Company's Common Stock on the NYSE Composite Tape and dividends paid per share.
 
 
 

   
High
Low
Dividends Paid
2002:        
  1st quarter
$ 17.90
$ 10.90
none
  2nd quarter
   16.11
     9.50
none
  3rd quarter
   11.60
     1.90
none
  4th quarter 
     4.91
    0.64
none
         
2001:        
  1st quarter
$ 45.50
$ 30.50
$ .3125
  2nd quarter
    38.50
  30.50
.3125
  3rd quarter
   36.54
   16.22
.0500
  4th quarter
   20.10
    9.40
none
         

        The Company has suspended the payment of cash dividends on the Common Stock. No assurance can be given as to when or whether the payment of dividends will resume.

        The rights and claims of the Company's various creditors and security holders will be determined by any plan of reorganization filed by UAL.  No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies, and it is possible that UAL's equity or other securities will be restructured in a manner that will reduce substantially or eliminate any remaining value. Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in any of such securities and claims.

        On February 28, 2003, based on reports by the Company's transfer agent for the Common Stock, there were 19,665 common stockholders of record.

        Continued listing on the NYSE requires, among other things, compliance with certain quantitative criteria established by the NYSE. One such requirement is that the stock price remain, on average, at or above $1. On March 25, 2003, the Company received notice from the NYSE that the Common Stock was "below criteria" in this regard in that its average closing price for the preceding 30 consecutive trading days was less than $1. The Company has determined that it cannot affirm to the NYSE an intent to cure this deficiency within the prescribed period of time and, as a result, the NYSE has initiated delisting procedures of the Common Stock and other NYSE-listed securities of UAL. The Company expects the last day of trading on the NYSE to be April 2, 2003.
 
 

ITEM 6. SELECTED FINANCIAL DATA AND OPERATING STATISTICS.
 

(In Millions, Except Per Share and Rates)
Year Ended December 31
 
2002
2001
2000
1999
1998
Income Statement Data:          
Operating revenues
$ 14,286 
$ 16,138 
$ 19,352 
$ 18,027 
$ 17,561 
Earnings (loss) before extraordinary item          
and cumulative effect
(3,212)
(2,137)
265 
1,238 
821 
Net earnings (loss)
(3,212)
 (2,145)
50 
1,235 
821 
Per share amounts, diluted:          
Earnings (loss) before extraordinary           
item and cumulative effect
(53.55)
(39.90)
1.89 
9.97 
6.83 
Net earnings (loss)
(53.55)
 (40.04)
0.04 
9.94 
6.83 
Cash dividends declared per common share
0.36 
1.25 
           
Other Information:          
Total assets at year-end
$ 23,656 
$ 25,197 
$ 24,355 
$ 20,963 
$ 18,559 
Long-term debt and capital lease          
obligations, including current portion,          
and redeemable preferred stock
700 
10,117 
7,487 
5,369 
5,345 
Liabilities subject to compromise
13,833 
           
Revenue passengers 
69 
 75 
85 
87 
87 
Revenue passenger miles 
109,460 
 116,635 
126,933 
125,465 
124,609 
Available seat miles
148,827 
 164,849 
175,485 
176,686 
174,008 
Passenger load factor
73.5%
70.8%
72.3%
71.0%
71.6%
Breakeven passenger load factor
92.3%
90.1%
69.4%
64.9%
64.9%
Passenger revenue per passenger mile
10.8¢
11.7¢
13.3¢
12.5¢
12.4¢
Operating revenue per available seat mile
9.4¢
9.8¢
11.0¢
10.2¢
10.1¢
Operating expense per available seat mile
11.4¢
12.0¢
10.6¢
9.4¢
9.2¢
Fuel gallons consumed
2,458 
2,861 
3,101 
3,065 
3,029 
Average price per gallon of jet          
fuel, including tax
78.2¢
86.5¢
81.0¢
57.9¢
59.0¢
         

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 

This section contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to the Company on the date of the filing of this Form 10K, and are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from those referenced in the forward-looking statements are listed in the last paragraph of the section, "Outlook for 2003." The Company disclaims any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.

Chapter 11 Reorganization

        On December 9, 2002, the Debtors filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, in Chicago. For further details regarding the bankruptcy filing, see "Bankruptcy Considerations" under Item 1.

        On the Petition Date, the Bankruptcy Court gave interim approval for an aggregate of up to $1.5 billion in DIP Financing. The DIP Financing is structured as a $300 million facility from Bank One, NA (the "Bank One Facility") and a $1.2 billion facility provided by a group led by JPMorgan Chase Bank, Citicorp USA, Inc., Bank One, NA and The CIT Group/Business Credit, Inc. (the "Club Facility").  The Company has received commitments of $1.0 billion under the Club Facility following the completion of the syndication process for that facility; the balance is conditioned upon the participation of one or more additional lenders, subject to approval by the existing participants.  The Company currently has access to the entire Bank One Facility and to $500 million of the Club Facility. Access to the balance of the Club Facility is subject to specified terms of that facility.  These terms require that the Company achieve performance milestones under its business plan, which include substantial cost savings in the near term.  Final approval of the DIP Financing was granted by the Bankruptcy Court on December 30, 2002. For more information on the DIP Financing, see Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code" in the Notes to Consolidated Financial Statements.

        In order to successfully exit Chapter 11, the Company will need to propose, and obtain confirmation by the Bankruptcy Court of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would resolve, among other things, the Debtors' pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for its corporate governance subsequent to exit from bankruptcy. The timing of filing a plan of reorganization by the Company will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 Cases. Although the Company expects to file a plan of reorganization that provides for its emergence from bankruptcy as a going concern, there can be no assurance at this time that a plan of reorganization will be confirmed by the Bankruptcy Court, or that any such plan will be implemented successfully.

        Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect pre-petition indebtedness or to exercise control over the property of the debtor's estate.  Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities are subject to settlement under the plan of reorganization.  Notwithstanding the foregoing, the Debtors' rights to possess and operate certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract are governed by Section 1110 of the Bankruptcy Code ("Section 1110") that specifies different treatment. For further information on Section 1110 and its impact on the Company, see "Properties - Flight Equipment" under Item 2 and Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code" in the Notes to Consolidated Financial Statements.

         Under Section 365 of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain other conditions.  In general, rejection of an unexpired lease or executory contract is treated as a pre-petition breach of the lease or contract in question. Subject to certain exceptions, this rejection relieves the Debtors of performing their future obligations under that lease or contract but entitles the lessor or contract counterparty to a pre-petition general unsecured claim for damages caused by the deemed breach. Section 1113(c) of the Bankruptcy Code specified particular treatment of collective bargaining agreements ("CBAs") which a debtor may move to reject if the debtor first satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court's approval of the rejection. See "Employees - Labor Matters" under Item 1 and "Labor Agreements" below for further information.

        At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on the Company's business or when it may emerge from Chapter 11.  The Company's future results depend on the timely and successful confirmation and implementation of a plan of reorganization. The rights and claims of various creditors and security holders will be determined by the plan as well.  No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies, and it is possible that UAL's equity or other securities will be restructured in a manner that will reduce substantially or eliminate any remaining value. Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in any of such securities and claims.

        On February 24, 2003, the Bankruptcy Court entered a preliminary injunction in order to restrict the trading of the Company's common stock and debt interests in the Company. The purpose of the preliminary injunction was to ensure that the Company did not lose the benefit of its net operating loss ("NOL"). Under federal and state income tax law, an NOL can be used to offset future taxable income, and thus is an extremely valuable asset. However, a company can lose the benefit of its NOLs if the company is deemed to undergo an "ownership change" under certain very specific tax rules in the Internal Revenue Code. Excessive trading in a company's stock (or debt when the company is in bankruptcy) can trigger such an "ownership change," and thus the Company sought to restrict the trading of the Company's common stock and debt interests.

        Under the terms of the preliminary injunction, no person can buy or sell UAL stock if that person holds more than 4.8 million shares of UAL common stock or would hold more than 4.8 million shares after the purchase. Any person who holds more than $200 million in debt claims against UAL must register as a "substantial claimholder" with UAL, and no person may acquire debt claims against UAL if the acquisition of the claims would cause them to hold more than $200 million in such claims. See Note 7, "Income Taxes" in the Notes to Consolidated Financial Statements.

         The accompanying consolidated financial statements have been prepared in accordance with SOP 90-7 and on a going-concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.  However, as a result of the Debtors' Chapter 11 filing, such realization of assets and satisfaction of liabilities, without substantial adjustments or changes in ownership, are subject to uncertainty.  While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business, the Debtors may sell or otherwise dispose of assets, or liquidate and settle liabilities, for some amounts other than those reflected in the consolidated financial statements.  Further, a plan of reorganization could materially change the amounts and classifications in the historical financial statements.

Results of Operations

Summary of Results -
         The air travel business is subject to seasonal fluctuations. United's operations are often adversely impacted by winter weather and United's first- and fourth-quarter results normally reflect reduced travel demand. Historically, operating results are better in the second and third quarters. The events of September 11 and the downturn in the U.S. economy distorted the normal seasonal relationships in 2001 and 2002. As a result of the U.S. war with Iraq, the typical seasonal fluctuations may continue to be disrupted in 2003.

        During 2000, the Company experienced significant operational disruptions, as a result of labor-related delays and cancellations, as well as weather and air traffic control limitations, which adversely affected both revenue and expense performance. The Company attempted to mitigate the impact of these operational difficulties by reducing capacity, particularly in the domestic markets, where most of the problems were concentrated. The Company estimated the revenue shortfall arising from these disruptions and associated schedule reductions and cancellations to be somewhere between $700 and $750 million for the year.

         Additionally, beginning in early 2001, the weakening U.S. economy had a significant impact on the airline industry as corporations reduced their business travel budgets and changed their travel behavior. During the first six months of 2001, the industry began experiencing significant revenue declines as a result of the decrease in business traffic, which impacted both unit revenues and yields, particularly in the domestic markets. United's domestic passenger revenue was down $728 million (12%) in the first six months of 2001 compared to the same period in 2000, partially driven from a 4% domestic capacity reduction and a 15% decline in business revenues. Domestic unit revenue was down 8% from 2000. Domestic business revenue was down $631 million (15%) in the first six months of 2001, driven by a 13% decline in volume and a 2% decline in yield.

         Historically, there has been a strong correlation between airline revenues and GDP and corporate profitability. As corporate profitability dropped during this period, companies reduced spending on travel. During this period, approximately 65% to 75% of United's domestic revenues were derived from business travelers, which resulted in United being disproportionately affected by this decline as compared to some of United's competitors who rely less heavily on business travelers.

        The terrorist attacks of September 11, 2001 had a significant negative impact on passenger and cargo demand for air travel. In a direct response to the adverse impact on air travel as a result of the terrorist attacks, United reduced its capacity by 23% based on system-wide available seat miles compared to levels prior to September 11. This schedule reduction allowed for the early retirement of the entire B727-200 and B737-200 fleets in 2001. Additionally, United began the process of furloughing approximately 20,000 employees. During the fourth quarter 2001, United restructured its aircraft delivery program with both The Boeing Company and Airbus Industrie to defer deliveries of new aircraft for 2002 and 2003 from the 67 originally planned to 24 aircraft. United took delivery of 24 of an original 49 aircraft scheduled for the year 2002 and will not take delivery of any of the 18 aircraft originally scheduled for 2003. The remaining 43 aircraft have been deferred into 2004 and beyond. United's future schedule will vary as the Company reacts to continuing changes in demand and yields, as well as normal factors such as seasonality and fleet composition.

         As part of the Air Transportation Safety and System Stabilization Act of 2001 (the "Act") enacted in response to the events of September 11, 2001, the federal government made $5.0 billion in federal grants available to the airline industry. The Company received a total of $782 million in grants under the Act. This amount represents the Company's total allocation of grant money under the Act and is recorded as non-operating income in the Statements of Consolidated Operations. For further discussion of the impact of the attacks, the Company's response and the Act on the Company's financial statements, see Note 3, "Special Charges" in the Notes to Consolidated Financial Statements.

         Throughout 2002, the Company continued to suffer from the weakened revenue environment resulting from the events of September 11 and the weak U.S. economy. In early 2002, year-over-year unit revenues had been improving each month from a 14% decline in January to a 4% decline in May; however, unit revenue growth stalled in the third and fourth quarters as demand continued to be weak and yields declined. Industry revenues continue to remain below 1995 levels and United, in particular, has experienced declines in domestic unit revenue that are below industry levels. United's unit revenue for 2002 decreased 4% from the prior year and yields have declined 8% year-over-year.

        UAL's loss from operations was $(2.8) billion in 2002, compared to $(3.8) billion in 2001. UAL's net loss for 2002 was $(3.2) billion ($(53.55) per share), compared to $(2.1) billion ($(39.90) per share) before the cumulative effect of an accounting change in 2001.

        The 2002 results include a special charge of $149 million recorded in connection with the closing of Avolar ($82 million) and severance related to furloughs ($67 million) Additionally, the Company recorded a gain of $46 million on the sale of its investment in Cendant Corporation and recognized $130 million in non-operating income as compensation under the Act. During 2002, the Company also had a 0% effective tax rate, as compared to recognizing a $1.2 billion tax credit in 2001.

        During 2001, United recorded a special charge of $1.3 billion in operating expense and $49 million in non-operating expense for amounts relating to the September 11 terrorist attacks and the resulting impact on the Company's schedule and operations. In addition, through December 31, United has recognized $652 million in non-operating income as compensation under the Act.

        Also during 2001, UAL recognized a special charge of $116 million for costs associated with a terminated merger with US Airways Group, Inc., including a $50 million termination fee. In addition, the Company recorded a gain of $261 million on the sale of certain investments.

         Each of the above special charges and gains on sales are described more fully in Note 3, "Special Charges," Note 7, "Income Taxes" and Note 8 "Investments" in the Notes to Consolidated Financial Statements.

2002 Compared with 2001 -
        Operating Revenues. Operating revenues decreased $1.9 billion (12%) and United's revenue per available seat mile (unit revenue) decreased 4% from 9.76 cents to 9.35 cents. Passenger revenues decreased $1.9 billion (14%) due to a 6% decrease in revenue passenger miles and an 8% decrease in yield. United's available seat miles across the system decreased 10% from 2001; however, passenger load factor increased 2.7 points to 73.5%. The following analysis by market is based on information reported to the DOT:
 

 
Increase (Decrease)
 
Available Seat
Revenue Passenger Miles
Revenue Per Revenue
 
Miles (Capacity)
(Traffic)
Passenger Mile (Yield)
Domestic
(7%)
(5%)
(11%)
Pacific
(15%)
(4%)
(3%)
Atlantic
(15%)
(10%)
-
Latin America
(16%)
(19%)
(13%)
System
(10%)
(6%)
(8%)

        Cargo revenues decreased $31 million (4%) due primarily to a 5% decrease in cargo ton miles, as cargo yields remained flat year over year. Other operating revenues increased $95 million (6%) primarily due to increases in Mileage Plus third-party revenues.

        Operating Expenses. Operating expenses decreased $1.5 billion (8%) and United's cost per available seat mile (unit cost) increased 0.8% from 11.24 cents to 11.33 cents, excluding special charges. Salaries and related costs decreased $51 million (1%) as the impact of furloughing employees was partially offset by contractually driven salary and benefit enhancements as well as increases to pension and postretirement expense. Aircraft fuel decreased $555 million (22%) on a 14% decrease in consumption and a 10% decrease in fuel price. Purchased services decreased $239 million (15%) primarily as a result of volume-driven decreases in GDS (global distribution systems) and credit card discount fees. Depreciation and amortization decreased $66 million (6%) primarily due to retirements of older aircraft. Aircraft maintenance decreased $141 million (20%) due to retirements of older aircraft and a decrease in engine and aircraft repair volumes as a result of reduced flying. Commissions decreased $294 million (41%) as a result of United discontinuing paying base commissions on all tickets purchased in the U.S. and Canada, effective March 20, 2002, as well as a decrease in commissionable revenues. Other operating expenses decreased $157 million (9%) due to decreases in crew layover expenses and volume-driven food and beverage costs, offset by increased costs for hull and liability insurance of approximately $100 million.

        Other income (expense). Other non-operating expense amounted to $534 million in 2002 compared to $450 million in 2001, excluding special charges, reorganization items, gains on sales and the airline stabilization grant. Interest expense increased $65 million (12%) due to new debt issuances and increased borrowing rates. Interest capitalized decreased $54 million (68%) primarily as a result of lower advance payments outstanding towards future aircraft purchases. Interest income decreased $45 million (43%) due to lower investment balances combined with lower interest rates. Miscellaneous, net decreased $64 million (74%) primarily as a result of lower reserve requirements for legal and environmental costs.

2001 Compared with 2000 -
        Operating Revenues.  Operating revenues decreased $3.2 billion (17%) and United's revenue per available seat mile (unit revenue) decreased 11% from 11.02 cents to 9.76 cents. Passenger revenues decreased $3.1 billion (19%) due to an 8% decrease in revenue passenger miles and an 11% decrease in yield. United's available seat miles across the system decreased 6% from 2000 which, combined with the decrease in revenue passenger miles, resulted in a decrease to passenger load factor of 1.5 points to 70.8%. The following analysis by market is based on information reported to the DOT:
 

 
Increase (Decrease)
 
Available Seat
Revenue Passenger Miles
Revenue Per Revenue
 
Miles (Capacity)
(Traffic)
Passenger Mile (Yield)
Domestic
(8%)
(10%)
(11%)
Pacific
(4%)
(6%)
(13%)
Atlantic
2%
(2%)
(11%)
Latin America
(10%)
(12%)
(6%)
System
(6%)
(8%)
(11%)

        Cargo revenues decreased $227 million (24%) due to a 24% decrease in cargo ton miles largely as a result of the September 11 terrorist attacks, as well as the discontinuation of freighter operations in the fourth quarter 2000. Other operating revenues grew $157 million (11%) primarily due to a $161 million increase in fuel sales to third parties.

        Operating Expenses. Operating expenses decreased $78 million (0.4%) and United's cost per available seat mile (unit cost) increased 6%, from 10.58 cents to 11.24 cents, excluding special charges. Salaries and related costs increased $203 million (3%) due to routine annual salary increases for non-contract employees, contractually-driven increases for employees represented by ALPA and the estimated costs of contracts with the IAM, which were partially offset by the reduction in force implemented after September 11. Commissions decreased $315 million (31%) as a result of a decrease in commissionable revenues and a change to the commission structure implemented in August 2001, which reduced the cap paid on commissions issued in the U.S. for domestic travel from $50 for a round-trip ticket ($25 for a one-way ticket) to $20 and $10, respectively. Aircraft rent decreased $61 million (7%) as the retirement of older aircraft reduced the number of aircraft under operating leases. Landing fees and other rent increased $50 million (5%) primarily due to increased rates at various airports. Depreciation and amortization increased $38 million (4%) due to an increase in the number of owned aircraft. Cost of sales increased $219 million (21%) primarily due to costs associated with fuel sales to third parties.

        Other income (expense). Other non-operating expense amounted to $450 million in 2001 compared to $271 million in 2000, excluding special charges, gains on sales and the airline stabilization grant. Interest expense increased $123 million (31%) as a result of new debt issuances. Equity in losses of affiliates increased $11 million (92%) primarily due to losses recorded for the Company's investment in Orbitz.

Liquidity and Capital Resources

         The matters described in "Liquidity and Capital Resources," to the extent that they relate to future events or expectations, may be significantly affected by the Chapter 11 Cases. Those proceedings will involve, or may result in, various restrictions on the Company's activities, limitations on financing, the need to obtain Bankruptcy Court and Creditor's Committee approval for various matters and uncertainty as to relationships with vendors, suppliers, customers and others with whom the Company may conduct or seek to conduct business.

        Generally, under the Bankruptcy Code, most of a debtor's liabilities must be satisfied in full before the debtor's stockholders can receive any distribution on account of such shares. The rights and claims of the Company's various creditors and security holders will be determined by any plan of reorganization filed by UAL.  Further, it is also likely that pre-petition unsecured claims against the Company will be substantially impaired in connection with the Company's reorganization. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies, and it is possible that UAL's equity or other securities will be restructured in a manner that will reduce substantially or eliminate any remaining value.

Liquidity -
         UAL's total of cash, cash equivalents and short-term investments, including restricted cash (both short- and long-term), was $1.9 billion at December 31, 2002, compared to $2.6 billion at December 31, 2001. Cash flows used in operations amounted to $1.1 billion, including the receipt of $130 million in government grant money.

         Property additions, including aircraft and aircraft spare parts, amounted to $887 million, including $730 million of vendor-financed purchases. During 2002, United took delivery of eight A319, twelve A320 and four B777 aircraft. All of these aircraft were purchased. United also acquired one B757 and nine B737 aircraft off lease during the same period. Additionally, ten owned aircraft were sold and then leased back under operating leases during the year.

         Financing activities during 2002 included principal payments under debt and capital lease obligations of $1.3 billion and $220 million, respectively. During 2002, United closed on a $775 million private debt financing which refinanced certain aircraft and raised approximately $250 million in additional cash. United also arranged long-term financing for approximately $314 million in debt that had been placed in interim financing facilities and refinanced $238 million in long-term debt through a sale-leaseback transaction that raised approximately $72 million in additional cash. Additionally, United repaid $133 million in receivables-backed short-term borrowings when certain banks supporting the borrowing program declined to renew it. In December 2002, United borrowed $700 million under the DIP Financing.

         In June 2002, United repaid $34 million to the State of Indiana, on behalf of the various parties to the agreements, for failure to reach its capital targets in connection with the construction of the Indianapolis Maintenance Center. In addition, in December 2002, the Company paid $59 million in retroactive pay plus accrued interest to IAM-represented employees.

         During 2002, the Company received approximately $580 million, net, in income tax refunds, part of which was a result of changes in the tax laws. In addition, United paid $290 million in federal transportation taxes that had been deferred under the Act after the September 11 terrorist attacks.

         Also in 2002, the Company received $137 million in proceeds from the sale of its Cendant Corporation stock and $130 million in compensation under the Act. In the third quarter of 2002, the Company received approximately $113 million in cash which had been held in trust under a services agreement with Galileo International (now Cendant Corporation).

         As of December 31, 2002, the Company had $578 million in restricted cash (including $116 million in long-term restricted cash) on deposit with various state and local governments. The cash largely represents security for worker compensation obligations in states where United self-insures, security deposits for airport leases and reserves with institutions which process the Company's sales. Prior to 2002, United met many of these obligations through surety bonds or a secured letter of credit facility; however, many of the bonds have been cancelled and the letter of credit facility expired in August of 2002. As a result, United has been and may, in the future, be required to post additional collateral in the form of cash deposits to support these types of obligations.

        United's liability insurance for losses resulting from war perils (terrorism, sabotage, hijacking and other similar perils) was cancelled effective September 26, 2001. United obtained replacement coverage, although it was charged significantly higher premiums for this replacement coverage which was in a substantially reduced amount for claims not involving aircraft passengers. Additionally, the FAA began providing supplemental third-party war risk insurance coverage to commercial carriers for renewable 60-day periods for levels of coverage not available in the market, which United also obtained.

         In November 2002, Congress passed the Homeland Security Act of 2002, which required the FAA to provide third party, passenger and hull war risk insurance through August 31, 2003. This insurance may be extended to December 31, 2003, subject to the federal government's determination that such coverage is necessary to the national interest. There can be no assurance, however, that the FAA insurance will continue to be available. Should the FAA discontinue this coverage, obtaining replacement insurance from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all.

         United did not make any cash contributions to its defined benefit pension plan trusts for U.S. based employees in 2001 or 2002. In lieu of making cash contributions, the Company utilized a portion of its credit balance (the cumulative difference between prior year minimum required contributions and actual contributions) to meet the minimum required contribution. The Company has a remaining credit balance that is available to be used in 2003; however, once the credit balance is fully utilized, substantial contributions may be required. The Company currently estimates, based on current market conditions and benefit plans, that it could be required to contribute approximately $5.5 billion to its defined benefit pension plan trusts over the next few years. However, future funding requirements are dependent upon factors such as interest rate levels, funded status, regulatory requirements for funding purposes and the level and timing of asset returns as compared with the level and timing of expected benefit disbursements. In addition, the Company is seeking to revise its pension plans, as discussed in "Labor Agreements" below, which would also impact future funding requirements. As such, it is not possible to be more specific with respect to required contributions and actual future contributions may differ materially. As of December 31, 2002, United's defined benefit pension plans were in compliance with all U.S. government funding requirements.

         In conjunction with the ratification of the contracts for the IAM, the Company has provided collateral consisting of certain real estate, flight simulators, ground equipment and spare part assets to support the payment of approximately $520 million in retroactive wages due under the contracts in eight quarterly installments commencing December 2002. In December 2002, the Company made the first payment required under the contract and is currently seeking release of the additional collateral.

         On September 30, 2002, UAL announced that it was suspending the payment of dividends on its 12.25% Series B preferred stock and extending the payment of the December 31 distribution on its 13.25% Trust Originated Preferred Securities ("TOPrS") to March 31, 2003. As a result of its bankruptcy filing, UAL is no longer making dividend payments on the Series B or paying distributions on the TOPrS.

         In connection with UAL's announcement that it was suspending dividend and distribution payments, Standard & Poor's ("S&P") downgraded UAL's Series B preferred stock and TOPrS to D from CC. As a result of the bankruptcy filing, S&P downgraded United's senior unsecured debt to D. In August 2002, Moody's Investors Service Inc. downgraded its credit ratings on United's senior unsecured debt from Caa1 to Ca and its ratings on UAL's Series B preferred stock and redeemable preferred securities from Ca to C. Downgrades of the Company's credit ratings during 2002 have resulted in an increase of $2 million in interest expense for the year.

         At December 31, 2002, commitments for the purchase of property and equipment, principally aircraft, approximated $1.6 billion, after deducting advance payments. Of this amount, an estimated $0.1 billion is expected to be spent in 2003. For further details, see Note 21, "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements.

Capital Commitments -
        The Company's business is very capital intensive, requiring significant amounts of capital to fund the acquisition of assets, particularly aircraft. United has, in the past, funded the acquisition of aircraft through outright purchase, by issuing debt, or by entering into capital or operating leases. Similarly, the Company often enters into long-term lease commitments with airports to ensure access to terminal, cargo, maintenance and other similar facilities. As can be seen in the table below, these operating lease commitments (which are sometimes referred to as "off-balance sheet debt") are significant.

        Following is a summary of the Company's material contractual cash obligations as of December 31, 2002:
 

(In billions) Less than
Years
Years
After
 
  one year
2 and 3
4 and 5
5 years
Total
Long term debt
$ - 
$ .7
$ - 
$ - 
$ .7 
Capital lease obligations
.3
.6
.8
1.2
2.9
Operating leases
1.6
3.2
3.2
15.3
23.3
Pension obligations
-
3.2
2.3
nm
5.5
Capital spending commitments
.1 
.7 
.8 
1.6 
Total contractual cash obligations 
$ 2.0 
$ 8.4
$ 7.1
$ 16.5
$ 34.0

         As a result of the bankruptcy filing, the Company is not permitted to make any payments on its pre-petition debt and therefore, the amounts have been excluded from the above table. In addition, as discussed in Note 1, "Proceedings under Chapter 11 of the Bankruptcy Code" and Note 13, "Lease Obligations" in the Notes to Consolidated Financial Statements, the Company may assume, assume and assign or reject certain executory contracts and unexpired leases pursuant to the Bankruptcy Code. As a result, the Company anticipates that its lease obligations as currently detailed in the above table will change significantly in the future.

        The pension obligations as of December 31, 2002 are based on the Company's current pension assumptions and current labor contracts. Thus, they assume no permanent wage concessions are achieved, nor any changes to the Company's pension benefit plans are implemented and that no waivers have been obtained from the government to spread the minimum cash contributions for pensions over a longer period. If these changes are effected in the future, the Company's pension funding obligations could be reduced by approximately $1.9 billion over this same period.

        See Note 12, "Long-Term Debt," Note 13, "Lease Obligations," Note 20, "Pension and Postretirement Plans" and Note 21, "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements for additional discussion of these items.

Capital Resources -
         DIP Financing. The DIP Financing consists of two facilities, the Bank One Facility for $300 million and the Club Facility for $1.2 billion. The Company has received commitments of $1.0 billion under the Club Facility following the completion of the syndication process for that facility; the balance is conditioned upon the participation of one or more additional lenders, subject to approval by the existing participants.

         The Bank One Facility consists of a $300 million term loan with an interest rate option of the prime rate plus 5.5% or LIBOR plus 6.5% (with a LIBOR floor of 3%). As of December 31, 2002, the Company had borrowed $300 million at the LIBOR option which is due in five equal monthly installments beginning in March 2004.

         The Club Facility consists of a revolving credit and letter of credit facility of $800 million and a term loan of $400 million, which matures on July 1, 2004. The Company has the option of borrowing under the Club Facility at an interest rate of the prime rate plus 5.5% or LIBOR plus 6.5% (with a LIBOR floor of 3%). As of December 31, 2002, the Company had borrowed $400 million under the term loan at the LIBOR option. In addition, the Company had available a $100 million letter of credit facility that was drawn down in March 2003. The remaining $700 million under the revolving credit facility is subject to stringent availability hurdles as discussed below.

         The terms of the DIP Financing include covenants that require the Company to satisfy monthly ongoing financial requirements as determined by EBITDAR (earnings before interest, income taxes, depreciation, amortization and aircraft rents) and covenants that limit, among other things, the Debtors' ability to borrow additional money, make capital expenditures and make additional corporate investments. In addition, the Company is required to maintain a minimum unrestricted cash balance, excluding escrowed amounts, of $300 million.

         Under the Club Facility, borrowing availability is determined by a formula based on a percentage of eligible assets. The eligible assets consist of certain previously unencumbered aircraft, spare engines, spare parts inventory, certain flight simulators and quick engine change kits. The underlying value of such assets may fluctuate periodically due to prevailing market conditions and fluctuations in value may have an impact on the borrowing availability under the Club Facility. Availability may be further limited by additional reserves imposed by the banks in their commercially reasonable discretion.

         The remaining $700 million of availability under the Club Facility, subject to the limitation on borrowing availability discussed above, will be available to the Company after certain conditions are met, including achieving positive cumulative EBITDAR; submitting a certified updated business plan; providing updated appraisals on the collateral and ascertaining there has been no material adverse change with respect to transferability of routes, gate leaseholds or slots.

Other Information

Plan for Transformation -
         During the first quarter of 2003, the Company presented to its Board of Directors and employees information regarding the plan for transformation (the "Plan"), which outlines the fundamental changes to United's strategic direction. The Plan, which the Company is working to refine through further collaboration with its employee and creditor constituencies, seeks to develop a durable and sustainable business model that will lay the foundation for a company that is successful and competitive for the long run.

         Core objectives of the Plan are the reduction of United's labor and non-labor costs and the development of a more comprehensive and compelling portfolio of products. The Plan is intended to leverage United's strengths, including its industry-leading global route network, substantial, well-situated hubs and large and loyal customer base, including its Mileage Plus frequent flyer program. Key operational elements of the plan include: (1) the preservation and enhancement of United's extensive mainline service targeted primarily at the business traveler; (2) the creation of a low-cost offering to compete directly with low-cost carriers for leisure and price-sensitive travelers; (3) the growth of the Company's United Express regional operations and (4) the expansion of United's domestic and international alliances.

         Through the Plan, the Company must:

        The Company has already began making cost reductions through a comprehensive restructuring program that includes:          Additionally, in 2003, the Company has implemented an additional across-the-board reduction to cut costs by targeting such areas as overhead staffing, food and beverage costs and technology spending. The Company has also begun a "best practices" program designed to examine every area of the Company and implement more efficient practices. This program is expected to result in an additional $400 million in cost reductions by 2005.

Labor Agreements -
         In order to meet the EBITDAR covenant under the DIP Financing, United needed to obtain substantial labor savings from its employees by mid-February 2003. Therefore, the Company imposed immediate wage reductions of between 3% and 11% on its management and salaried employees, including officers in December 2002. Additionally, United immediately began negotiations with all of its unions in early December regarding the changes to the Company's CBAs necessary to satisfy United's short-term and long-term financial and business imperatives. The Company's proposed changes to its CBAs involve targeted cost savings of $2.56 billion annually on a cash basis compared to the current contractual path. These cost savings are expected to be realized through wage rate reductions, work rule modifications and reduced benefit levels.

        In the event the parties cannot reach consensual modifications, Section 1113(c) of the Bankruptcy Code permits the Company to move to reject its CBAs. Under Section 1113(c), the Company must satisfy several statutorily prescribed substantive and procedural prerequisites before the Bankruptcy Court will authorize the Company to reject its CBAs. In order to meet the deadline for reducing its labor costs and avoid being in default under the terms of the DIP Financing, United had been prepared to file a motion to reject its CBAs pursuant to Section 1113(c) of the Bankruptcy Code by December 26, 2002, if consensual CBA modifications could not be reached before that date.

         As the December 26 deadline neared, however, United and several of its unions agreed to consensual interim wage relief from its unions that would allow United and its unions more time to continue negotiations to reach agreements on the CBA modifications necessary for United to successfully reorganize while still meeting the short-term financial imperatives established by the DIP covenants in the meantime. United reached agreements with four of its five unions to reduce wages on an interim basis, effective January 1, 2003 to April 30, 2003, resulting in a reduction to wages for ALPA-represented employees of 29%, AFA-represented employees of 9% and PAFCA and TWU-represented employees of 13%. The leadership of the IAM rejected the Company's proposal and therefore, on December 27, 2002, United filed a motion with the Bankruptcy Court to impose a 13% wage reduction for the IAM-represented employees. On January 10, 2003, the Bankruptcy Court granted the Company's motion and the Company effectively reduced IAM-represented employee wages by 13% (14% from wages earned after January 10, 2003). These wage reductions, combined with the wage reductions for the Company's salaried and management employees, are expected to result in cost savings of approximately $70 million per month through April 2003.

         Under the terms of the interim agreements with its unions, and the relief granted by the Bankruptcy Court against the IAM, United agreed not to file a motion to reject its CBAs pursuant to Section 1113(c) before March 15, 2003. In the meantime, United and its unions continued negotiations. The Company's DIP covenants, however, still require United to obtain all of the relief sought in its proposed CBA modifications by May 1, 2003. As a result, on March 17, 2003, United filed a motion to reject its CBAs pursuant to Section 1113(c) and the Bankruptcy Court has scheduled hearings on this motions for April 14. March 17 was the deadline by which such a motion needed to be filed to ensure that the Company could obtain a ruling on its motion by early May 2003 and stay in compliance with its DIP Financing covenants. Without the full relief sought by United's proposed CBA modifications becoming effective by early May, the Company would be unable to meet its covenants, entitling its DIP lenders to foreclose on substantial assets United needs to operate its business.

         On March 26, 2003, the Company reached a tentative agreement with the Air Line Pilots Association on a restructured CBA. The agreement, which will become effective May 1, 2003, if ratified by the pilot membership, has a 6-year duration, includes provisions for a 30% pay cut (with1.5% increases on May 1, 2006, 2007, 2008 and April 30, 2009) and common pay rates for three groupings of aircraft: B747-400 and B777 (paid at the B777 rate), B767 and B757 (paid at a blended rate), and A319/320 and B737 300/500 (paid at the B737 rate). The pilot defined benefit plan multiplier is reduced to 1.35 and the participation credit is capped at 30 years. The Company's contribution to the pilot defined contribution plan is reduced from 11% to 9%. Pilot health benefits will be adjusted to incorporate mainstream benefit provisions and form the basis for a common plan among all employees with a 20% co-pay.

         The agreement provides for flexibility with respect to regional jets, domestic and international code share, cargo, and targeted low-cost operations. The contract no longer contains a prohibition on furlough or a requirement to maintain a minimum fleet or level of pilot staffing. Instead, the agreement provides for the establishment of a single block hours commitment at the time of emergence from bankruptcy.

         As a part of the restructured CBA, United pilots will participate in a two-part success-sharing program including an annual incentive plan that aligns the interests of management and other employees and a pre-tax profit-sharing plan that recognizes the pilots' level of participation in the overall restructuring. In addition, the pilot group will have a representative on the UAL board of directors with ordinary voting power. The pilots additionally will receive equity securities or other consideration under the plan of reorganization that fairly reflects the value of the pilot contribution to the reorganization of the Company.

US Airways Code Share -
         On July 24, 2002, the Company announced a code share agreement with US Airways. The agreement, which is expected to generate more than $200 million in annual revenue for United, would allow both carriers to market service on each other's network, providing significant consumer benefits and bringing new revenue and customers to their route networks.

         United and US Airways customers have access to each carriers' airport clubs and they are able to earn and redeem miles on each carriers' frequent flyer program. Additionally, beginning January 28, 2003, the two carriers began to code share on selected flights and expect to complete implementation of the code sharing arrangement by the end of 2003.

Foreign Operations -
        United generates revenues and incurs expenses in numerous foreign currencies. These expenses include aircraft leases, commissions, catering, personnel expense, advertising and distribution costs, customer service expenses and aircraft maintenance. Changes in foreign currency exchange rates impact operating income through changes in foreign currency-denominated operating revenues and expenses. Despite the adverse (favorable) effects a strengthening (weakening) foreign currency may have on U.S. originating traffic, a strengthening (weakening) of foreign currencies tends to increase (decrease) reported revenue and operating income because United's foreign currency-denominated operating revenue generally exceeds its foreign currency-denominated operating expense for each currency.

        With a worldwide network and significant sales and marketing efforts in the U.S. as well as every major economic region in the world, United is able to mitigate its exposure to fluctuations in any single foreign currency. The Company's biggest net exposures are typically for British pound, Hong Kong dollar, euro and Japanese yen. The table below sets forth the Company's exposure to various currencies in 2002:
 

   
Operating revenue net of operating expense
  Currency (in millions)
Foreign Currency
Value
USD
Value
  British pound
72
$107
  Hong Kong dollar
795
102
  euro
71
68
  Japanese yen
6,615
54

        To reduce the impact of exchange rate fluctuations on United's financial results, the Company may hedge some of the risk of exchange rate volatility on its anticipated future foreign currency revenues by purchasing put options (consisting of Japanese yen, euro, Canadian dollars, Australian dollars and British pounds) and selling Hong Kong dollar forwards. To reduce hedging costs, the Company sells a correlation option in the first five currencies referred to above. United also attempts to reduce its exposure to transaction gains and losses by converting excess local currencies generated to U.S. dollars on a timely basis and by entering into currency forward or exchange contracts. As a result of the bankruptcy filing, all swaps and forwards were terminated by the respective counterparties and the Company's ability to enter into new swaps or forwards may be limited in the future as a result of the bankruptcy filing.

        United's foreign operations involve insignificant amounts of physical assets; however, the Company does have sizable intangible assets related to acquisitions of Atlantic and Latin America route authorities. Operating authorities in international markets are governed by bilateral aviation agreements between the U.S. and foreign countries. Changes in U.S. or foreign government aviation policies can lead to the alteration or termination of existing air service agreements that could adversely impact the value of United's international route authority. Significant changes in such policies could also have a material impact on UAL's operating revenues and results of operations.

Municipal Bonds -
         At December 31, 2002, approximately $1.7 billion in special facilities revenue bonds ("municipal bonds") originally issued on behalf of United to build or improve airport-related facilities were outstanding. The Company leases facilities at airports pursuant to lease agreements where municipal bonds funded at least some of its airport-related projects. Pursuant to the financing agreements entered into by United in connection with such issuance of municipal bonds, the Company is required to make payments in amounts sufficient to pay the interest semi-annually with principal payable upon maturity.

         United is not permitted under the Bankruptcy Code to make payments on unsecured pre-petition debt without providing notice to its creditors and receiving the approval of the Bankruptcy Court. As United has been advised its municipal bonds are unsecured (or in certain instances, partially secured) pre-petition debt, United cannot make payments thereon without first meeting the requirements outlined above. Accordingly, the Company has classified all of its municipal bonds as liabilities subject to compromise.

         Section 365 of the Bankruptcy Code requires that the Company timely perform all of its post-petition obligations under unexpired leases of non-residential real property. The Company believes that it is in compliance with all payment obligations under its lease agreements relating to those airports where it has municipal bonds outstanding. Under certain of the airport lease agreements, however, the Company may be considered in default due to the non-payment of the debt and therefore subject to the default provisions of the lease agreements with the airports. Possible consequences could include loss of the Company's status as a signatory airline (resulting in increased rents and landing fees) and loss of the Company's exclusive space agreement.

          The Company did not make the debt service payments due March 1, 2003 of approximately $3.2 million on its Chicago O'Hare Series 1999A Bonds and of approximately $1.0 million on its Miami-Dade Series 2000 Bonds. Additionally, the Company does not intend to make debt service payments or any other payment due on or after April 1, 2003 on any of the municipal bond issuances, which include those referenced above, issued on behalf of the Company and relating to domestic airport financings.

         The Company filed a Complaint Of Debtor For Declaratory Judgment with the Bankruptcy Court on February 28, 2003 and entered into a Standstill Agreement with the City of Chicago to seek clarification of its obligations under the municipal bonds and to protect its rights under its airport lease agreement at Chicago's O'Hare International Airport until the Bankruptcy Court decides the merits of the complaint.

        On March 21, 2003, the Company filed other Complaints of Debtor for Declaratory Judgment and, in connection therewith, corresponding Motions for Temporary Restraining Order with respect to the municipal bonds issuances relating to the facilities at the Denver International Airport, the New York City - John F. Kennedy International Airport, the San Francisco International Airport, and the Los Angeles International Airport, each seeking a clarification of the Company's obligations under the applicable municipal bonds, and the protection of its rights under its underlying airport lease agreements at the applicable airport until the Bankruptcy Court decides the merits of each of the above complaints.  On March 27, the Bankruptcy Court conducted a hearing on this issue.  At that time, the Court continued the hearing until March 31, 2003 and the parties are attempting to negotiate an order that would protect the Company's rights under its leases by requiring the lessors to give additional notice of certain alleged defaults.  The Company is unable to predict what, if any, action might be taken in the future by either the bondholders or the airport authorities as a result of its failure to pay these obligations as contractually required.

Airport Rents and Landing Fees -
        United is charged facility rents and/or landing fees at every airport at which it operates. In recent years, many airports have increased or sought to increase rates charged to airlines as a means of compensating for increased demands upon airport revenues. Airlines have challenged certain of these increases through litigation and, in some cases, have not been successful. However, to the extent the limitations on such charges are relaxed or the ability of airlines to challenge such charges is restricted, the rates charged by airports may increase substantially. Management cannot predict either the likelihood or the magnitude of any such increase.

Environmental and Legal Contingencies -
        United has been named as a Potentially Responsible Party at certain Environmental Protection Agency or State Environmental Protection Agency ("EPA or State EPA") cleanup sites which have been designated as Superfund Sites. United's alleged proportionate contributions at the sites are minimal; however, at sites where the EPA or State EPA have commenced litigation or administrative proceedings, potential liability is joint and several. Additionally, United has participated and is participating in remediation actions at certain other sites, primarily airports. The estimated cost of these actions is accrued when it is determined that it is probable that United is liable. Environmental regulations and remediation processes are subject to future change, and determining the actual cost of remediation will require further investigation and additional progress of the remediation. Therefore, the ultimate disposition cannot be determined at this time. However, while such cost may vary from United's current estimate, United believes the difference between its accrued reserve and the ultimate liability will not be material.

        UAL has certain other contingencies resulting from the above environmental actions and other litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel, the nature of such contingencies and prior experience, that the ultimate disposition of these contingencies is not likely to materially affect UAL's financial condition, operating results or liquidity.

         As a result of the Chapter 11 Filing, as of the Petition Date, virtually all pending litigation is stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, again subject to certain exceptions, to recover on pre-petition claims against the Debtors.

Sunset -
         In connection with the July 1994 recapitalization, certain employees of United were granted an approximate 55% equity and voting interest in UAL in exchange for wage concessions and work-rule changes. In addition, the Company's stockholders approved an elaborate governance structure as described in Item 1. Business, "Corporate Governance and the ESOPs." Under the recapitalization, the governance structure remained in place and employees maintained 55% of the aggregate voting power until "Sunset." Sunset occurred on March 7, 2003, resulting in the elimination of the 55% voting power of the employees, among other things. (See Note 16, "ESOP Preferred Stock" and Note 19, "Employee Stock Ownership Plans" in the Notes to Consolidated Financial Statements, as well as Item 1. Business, "Corporate Governance and the ESOPs; Sunset.")

Outstanding Income Tax Claims -
         The Company has income tax refund claims ("Refund") against the Internal Revenue Service ("IRS") of $126 million resulting from tax overpayments attributable to the six years 1988 to 1993 as well as $262 million resulting from a 2002 net operating loss that has been carried back to and generates a refund for taxes paid in 1998 and 1999. However, the U.S. Department of Justice ("DOJ") had imposed an "administrative freeze" that prohibited the IRS from remitting any of the $388 million to the Company. The DOJ action was in response to the Company's bankruptcy filing and was based on alleged claims of the U.S. government that might be subject to setoff against the Refund. After discussions with the DOJ, the Company reached an agreement with the government to lift the freeze and permit the IRS to process and remit approximately $365 million of the Refund. On March 27, 2003, the Bankruptcy Court approved the settlement and the Company anticipates receiving the funds shortly.

Critical Accounting Policies -
        Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. UAL has prepared the accompanying financial statements in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has identified the following critical accounting policies utilized in the preparation of these financial statements.

        Accounting for Long-Lived Assets. The Company has approximately $16 billion in operating property and equipment at December 31, 2002. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections made by the Company, including the estimation of useful lives, residual values and in 2001, impairment charges.

         The Company records aircraft at acquisition cost, upon delivery. Depreciable life is determined by using economic analysis, reviewing existing fleet plans, and comparing estimated lives to other airlines operating similar fleets. Older generation aircraft are assigned lives of 25 years which is consistent with the experience of United and other airlines. As aircraft technology has improved, useful life has increased. Thus, the Company has estimated the lives of "new generation" aircraft to be 30 years. Residual values are estimated based on the Company's historical experience with regards to the sale of both aircraft and spare parts and are established in conjunction with the estimated useful lives of the aircraft. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are revised periodically to recognize changes in the Company's fleet plans and changes in conditions.

         The Company recognizes an impairment charge when an asset's carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset's carrying value and fair market value. Typically, management estimates the undiscounted future cash flows for its aircraft fleet with models used by the Company in making fleet and scheduling decisions. These models utilize the Company's projections of passenger yield, fuel costs, labor costs and other relevant factors for the markets where the specific aircraft will operate.

         In 2001, the Company recorded an impairment charge of $517 million for the B737-500 and B747-400 aircraft fleets resulting from the anticipated decrease in future cash flows in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." (See Note 3, "Special Charges" in the Notes to Consolidated Financial Statements.) In the fourth quarter of 2002, the Company evaluated its fleet in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Utilizing the Company's current cash flow projections, based on the proposed CBA modifications and other cost savings as discussed above in "Plan for Transformation" and "Labor Agreements," and current appraisals of aircraft value, management determined that no further impairment was necessary.

         See Note 2(f), "Summary of Significant Accounting Policies - Operating Property and Equipment" in the Notes to Consolidated Financial Statements for additional information regarding United's policies on accounting for long-lived assets.

        Frequent Flyer Accounting. United's Mileage Plus frequent flyer program awards miles to passengers who fly on United, United Express, the Star Alliance carriers and certain other airlines that participate in the program. Additionally, United sells mileage credits to participating airline partners in the Mileage Plus program and ULS sells mileage credits to non-airline business partners. In either case, the outstanding miles may be redeemed for travel on any airline that participates in the program. The Company has an obligation to provide this future travel; therefore, for awards to passengers redeeming on United, United Express or one of the Mileage Plus partners, the Company recognizes a liability and corresponding expense for this future obligation. For miles sold to third parties, a portion of revenue from the sale of mileage is deferred and recognized when the transportation is provided.

         At December 31, 2002, United's estimated outstanding number of awards was approximately 10.5 million, as compared with 11.1 million at the end of the prior year. United estimates approximately 8.6 million of these awards will ultimately be redeemed and, accordingly, the Company has recorded a liability of $717 million, which includes the deferred revenue from the sale of miles to program participants. The Company utilizes a number of estimates in accounting for its Mileage Plus program that require management judgment.

         Members may not reach the threshold necessary for a free ticket and outstanding miles may not always be redeemed for free travel. Therefore, the Company estimates how many miles will never be used and excludes those miles from its estimate of the liability. Based on historical data, the difference between the awards expected to be redeemed and the total awards outstanding arises because: (1) some awards will never be redeemed, (2) some will be redeemed for non-travel benefits, and (3) some will be redeemed on partner carriers. The Company also estimates the number of miles that will be used per award. If actual miles used are more or less than estimated, the Company must adjust its liability and corresponding expense.

         When a travel award level is attained, the Company records a liability for the estimated incremental costs of providing travel, based on expected redemptions. United's incremental costs include the additional costs of providing service to the award recipient, such as fuel, meals, insurance and ticketing costs, for what would otherwise be a vacant seat.  The incremental costs do not include any contribution to overhead or profit.  A change to these cost estimates could have a significant impact on the Company's liability in the year of change as well as in future years.

        In each of 2002, 2001 and 2000, 2.0 million Mileage Plus travel awards were used on United.  This number represents the number of awards for which travel was actually provided in 2002 and not the number of seats that were allocated to award travel.  These awards represented 7.8% of United's total revenue passenger miles in 2002, 8.1% in 2001, and 7.2% in 2000.  Passenger preference for Saver awards, which have inventory controls, keeps displacement of revenue passengers at a minimum.  Total miles redeemed for travel on United in 2002, including awards and upgrades, represented 59% of the total miles redeemed, of which 70% were used for travel within the U.S. and Canada.  In addition to the awards issued for travel on United, approximately 24% of the total miles redeemed in 2002 were used for travel on partner airlines.

         As the Company also sells mileage credits to participating airline and non-airline partners, a change to either the time period over which the credits are used or the estimate of the number or fair value of tickets could have a significant impact on the Company's revenues in the year of change as well as future years. Additional information regarding the Mileage Plus frequent flyer program is included in Note 2(g), "Summary of Significant Accounting Policies - Mileage Plus Awards" in the Notes to Consolidated Financial Statements.

        Pension Benefits. The Company accounts for pension benefits using SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87.") Under SFAS No. 87, pension expense is recognized on an accrual basis over employees' approximate service periods and is generally calculated independent of funding decisions or requirements. Detailed information regarding the Company's pension plans are included in Note 20, "Retirement and Postretirement Plans" in the Notes to Consolidated Financial Statements. The Company's future funding requirements are discussed in "Liquidity and Capital Resources" above.

         The calculation of pension expense and pension obligations requires the use of a number of assumptions, including the assumed discount rate and the expected return on plan assets. The fair value of plan assets decreased from $7.6 billion at December 31, 2001 to $6.3 billion at December 31, 2002. Lower investment returns, higher benefit payments due to recent labor contract amendments and declining discount rates have increased the difference between the plans' fair value and accumulated benefit obligations from $1.3 billion at December 31, 2001 to $4.7 billion at December 31, 2002.

         The Company utilized a discount rate of 6.75% at December 31, 2002, compared to 7.5% at December 31, 2001 and 7.75% at December 31, 2000. The discount rate is based on the Moody's Aa bond index as of December 31, 2002, adjusted for the duration of United's pension obligations. Duration is a commonly used measure of interest rate risk that either assumes that yield changes do not change the expected cash flows ("modified duration") or assumes that expected cash flows may change given the fact that the yield changes ("effective duration"). Since United's pension obligations are generally not satisfied in a single lump sum distribution, management, with assistance from its actuary, used the modified duration methodology to determine an acceptable discount rate by matching the expected cash outflows of United's pension obligations against available bonds with appropriate maturities.

        The Company assumed an expected rate of return on plan assets of 9.0% at December 31, 2002 compared to 9.75% used at December 31, 2001 and 2000. The expected return on plan assets is based on an evaluation of the historical behavior of the broad financial markets and the Company's investment portfolio and taking into consideration input from the plans' investment consultant and actuary regarding expected long-term market conditions and investment management performance. The expected long-term rate of return on plan assets is based on a target allocation of assets to the following fund types: 60% equities, 35% fixed income and 5% other with expected long-term rates of return of 11%, 6.5% and 13%, respectively.

         The Company believes that the long-term asset allocation on average will approximate the targeted allocation and regularly reviews the actual asset allocation to periodically rebalance the investments to the targeted allocation when appropriate. Pension expense is reduced by the expected return on plan assets, which is measured by assuming the market-related value of plan assets increases at the expected rate of return. The market-related value is a calculated value that phases in differences between the expected rate of return and the actual return over a period of five years.

         Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions. Under SFAS No. 87, those gains and losses are not required to be recognized currently as pension expense, but instead may be deferred. If the unrecognized net gain or loss exceeds 10% of the greater of the projected benefit obligations and the market-related value of plan assets, the amount outside the 10% corridor is subject to amortization over the average remaining service life of the covered active employees. At December 31, 2002, the Company had unrecognized actuarial losses of $4.5 billion. The recognition of these losses is expected to increase pension expense by approximately $75 million, $108 million and $157 million in 2003, 2004 and 2005, respectively. Additionally, the Company had unrecognized prior service costs from past benefit improvements of $1.2 billion, which will be amortized as a component of pension expense over the average remaining service life of the covered active employees. The recognition of these costs is expected to increase pension expense by approximately $91 million in each of 2003, 2004 and 2005.

        Valuation Allowance for Deferred Tax Assets. The Company initially recorded a tax valuation allowance against its deferred tax assets in the third quarter of 2002. In recording the valuation allowance, management considered whether it was more likely than not that some or all of the deferred tax assets would be realized. This analysis included consideration of scheduled reversals of deferred tax liabilities, projected future taxable income, carryback potential and tax planning strategies, in accordance with SFAS No. 109, "Accounting for Income Taxes." At December 31, 2002, the Company had recorded a tax valuation allowance of $1.2 billion against its deferred tax assets. See also Note 7, "Income Taxes" in the Notes to Consolidated Financial Statements for additional information.

New Accounting Pronouncements -
         In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Disposal or Exit Activities" ("SFAS No. 146"). SFAS No. 146 requires that liabilities for costs associated with exit or disposal activities be recognized when the liabilities are incurred, rather than when an entity commits to an exit plan. The Company adopted SFAS No. 146 on January 1, 2003. The new rules will change the timing of liability and expense recognition related to exit or disposal activities, but not the ultimate amount of such expenses.

         In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately and are provided in Note 21, "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements. The Company does not expect FIN 45 to have a material effect on its results of operations.

         In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires the consolidation of variable interest entities ("VIEs"), as defined. FIN 46 applies to VIEs created after January 31, 2003. The related disclosure requirements are effective immediately and are provided in Note 21, "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements. The Company is still evaluating the impact of FIN 46 on its financial statements.

Outlook for 2003 -
         The threat of war with Iraq and subsequent initiation of hostilities has resulted in a significant decline in revenues for the first quarter and the immediate future. Passenger unit revenue for January and February 2003 has declined 6% and 11%, respectively, as compared to the same months of 2002 and future international bookings in particular, have dropped significantly from the same period last year. UAL currently expects to report an operating loss of approximately $900 million for the first quarter of 2003.

         United's near-term revenue forecast has deteriorated significantly from recent projections, as the threat of war became a reality. In recent weeks, the Company has experienced declines in fuel prices, but due to continued volatility in the market place, is unable to predict what impact, if any, the war with Iraq will have on fuel prices in the future. As fuel is a significant expense to United, changes in fuel price could have a significant impact on the Company's results of operations.

         With the initiation of military action between the U.S. and Iraq on March 19, the Company immediately began the implementation of its contingency plan, which involved reducing the schedule by an additional 8% effective April 6, 2003 and the implementation of associated reductions in employment levels through placing a portion of its employees on temporary unpaid leave.

         The Company, in participation with the ATA and other airlines, is in discussions with the U.S. government regarding the need for financial relief for the industry. Although the Company will continue to pursue relief from the government and other sources, given the uncertain situation, further temporary reductions in employee compensation may be necessary in the future.

        The Company's existing fuel hedges were terminated December 9, 2002 by the counterparties, as the Company's bankruptcy filing constituted an event of default under the contracts. The terms of the DIP Financing limit United's ability to post collateral in connection with fuel hedging. Notwithstanding the above, as market conditions and its economic outlook change, the Company continually evaluates the potential economic benefit of entering into fuel hedging arrangements.

        Certain statements included in the above "Outlook" paragraphs, as well as elsewhere throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking and thus reflect the Company's current expectations and beliefs with respect to certain current and future events and financial performance. Such forward-looking statements are and will be, as the case may be, subject to many risks and uncertainties relating to the operations and business environments of the Company that may cause actual results to differ materially from any future results expressed or implied in such forward-looking statements. Factors that could significantly affect net earnings, revenues, expenses, unit costs, fuel, load factor and capacity include, without limitation, the following: the Company's ability to continue as a going concern; the Company's ability to operate pursuant to the terms of the DIP Financing; the Company's ability to obtain court approval with respect to motions in the Chapter 11 proceeding prosecuted by it from time to time; the Company's ability to develop, prosecute, confirm and consummate one or more plans of reorganization with respect to the Chapter 11 cases; risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for the Company to propose and confirm one or more plans of reorganization, for the appointment of a Chapter 11 trustee or to convert the cases to Chapter 7 cases; the Company's ability to achieve necessary reductions in labor costs; the Company's ability to obtain and maintain normal terms with vendors and service providers; the Company's ability to maintain contracts that are critical to its operations; the potential adverse impact of the Chapter 11 cases on the Company's liquidity or results of operations; the costs and availability of financing; the Company's ability to execute its business plan; the Company's ability to attract, motivate and/or retain key employees; the Company's ability to attract and retain customers; demand for transportation in the markets in which the Company operates; general economic conditions; the effects of the war in Iraq and any other hostilities or act of war (in the Middle East or elsewhere) or any terrorist attack; the ability of other air carriers with whom the Company has alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; the costs and availability of aircraft insurance; the costs of aviation fuel; the costs associated with existing or future security measures and practices; competitive pressures on pricing (particularly from lower-cost competitors); government legislation and regulation; consumer perceptions of the Company's products; weather conditions; and other risks and uncertainties set forth from time to time in UAL's reports to the United States Securities and Exchange Commission. Consequently, the forward-looking statements should not be regarded as representations or warranties by the Company that such matters will be realized. The Company disclaims any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.
 
 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Interest Rate Risk - United's exposure to market risk associated with changes in interest rates relates primarily to its debt obligations and short-term investments. United does not use derivative financial instruments in its investments portfolio. United's policy is to manage interest rate risk through a combination of fixed and floating rate debt and entering into swap agreements, depending upon market conditions. A portion of the borrowings are denominated in foreign currencies which exposes the Company to risks associated with changes in foreign exchange rates. To hedge against some of this risk, the Company has placed foreign currency deposits (primarily for Japanese yen and euros) to meet foreign currency lease obligations designated in the respective currencies. Since unrealized mark-to-market gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency obligations, the Company reduces its overall exposure to foreign currency exchange rate volatility. The fair value of these deposits is determined based on the present value of future cash flows using an appropriate swap rate. The fair value of long-term debt is based on the quoted market prices for the same or similar issues or the present value of future cash flows using a U.S. Treasury rate that matches the remaining life of the instrument, adjusted by a credit spread.
 

(In millions)
Expected Maturity Dates
2002
2001
               
Fair
 
Fair
 
2003
2004
2005
2006
2007
Thereafter
Total
Value
Total
Value
ASSETS                    
Cash equivalents                    
Fixed rate
$ 856
$ -
$ -
$ -
$ -
$ -
$ 856
$ 856
$1,647
$1,647
Avg. interest rate
1.36%
-
-
-
-
-
1.36%
 
2.21%
 
Variable rate
$ 30 
$ -
$ -
$ -
$ -
$ -
$ 30 
$ 30 
$ 41
$ 41
Avg. interest rate
2.07%
-
-
-
-
-
2.07%
 
2.28%
 
Short term investments                    
Fixed rate
$ 110
$ -
$ -
$ -
$ -
$ -
$ 110 
$ 110
$ 742
$ 742
Avg. interest rate
6.50%
-
-
-
-
-
6.50%
 
5.09%
 
Variable rate
$ 278 
$ -
$ -
$ -
$ -
$ -
$ 278
$ 278 
$ 198
$ 198
Avg. interest rate
1.81%
-
-
-
-
-
1.81%
 
2.53%
 
                     
Lease deposits                
Fixed rate - yen deposits
$ -
$ -
$ -
$ -
$ 64
$ 293 
$ 357 
$ 419 
$ 314
$ 361
Avg. interest rate
-
-
-
-
3.25%
3.01%
3.06%
 
3.06%
 
Fixed rate - FF deposits
$ -
$ -
$ -
$ -
$ -
$ - 
$ - 
$ - 
$ 10
$ 10
Avg. interest rate
-
-
-
-
-
-
-
 
5.61%
 
Fixed rate - DM deposits
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ 304
$ 329
Avg. interest rate
-
-
-
-
-
-
-
 
6.73%
 
Fixed rate - EUR deposits
$ 2
$ 2
$ 2
$ 2
$ 60
$ 337 
$ 405 
$ 480 
$ 26
$ 25
Avg. interest rate
4.56%
4.59%
4.63%
4.66%
6.58%
5.56%
5.61%
 
4.14%
 
Fixed rate- USD deposits
$ -
$ -
$ -
$ -
$ -
$ 14 
$ 14 
$ 16 
$ 13
$ 15
Avg. interest rate
-
-
-
-
-
6.49%
6.49%
 
6.49%
 
                     
LONG-TERM DEBT                    
U. S. Dollar denominated                    
Fixed rate debt
$ - 
$ -
$ -
$ - 
$ - 
$ -
$ -
$ -
$5,101
$4,273
Avg. interest rate
-
-
-
-
-
-
-
-
7.58%
 
Variable rate debt
$ -
$700 
$ - 
$ - 
$ - 
$ - 
$700
$700
$2,746
$2,591
Avg. interest rate
-
7.75%
-
-
-
-
7.75%
 
3.37%
 
                     

 
   
December 31, 2002
 
(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
     
(Pay)/Receive
Interest rate swap
$ 130
7.56%
$ (27)

 
   
December 31, 2001
 
(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
     
(Pay)/Receive2
Interest rate swap
$ 135
7.86%
$ (17)

        Foreign Currency Risk - United has established a foreign currency hedging program using currency forwards and options (purchasing put options and selling correlation options) to hedge exposure to the Japanese yen, Hong Kong dollar, Canadian dollar, British pound, Australian dollar and the euro. The goal of the hedging program is to effectively manage risk associated with fluctuations in the value of the foreign currency, thereby making financial results more stable and predictable. United does not use currency forwards or currency options for trading purposes. As of December 31, 2002, United had no outstanding currency hedges.

 
December 31, 2001
(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
Forward exchange contracts    
(Pay)/Receive2
Japanese Yen - Purchased forwards
$ 115
126.60
$ (4)
- Sold forwards
$ 58
130.90
$ -
French Franc - Purchased forwards
$ 50
5.05
$ (6)
Euro - Purchased forwards
$ 152
1.27
$ (16)
       

        Price Risk (Aircraft Fuel) - When market conditions indicate risk reduction is achievable, United enters into fuel option contracts to reduce its price risk exposure to jet fuel. The option contracts are designed to provide protection against sharp increases in the price of aircraft fuel. As market conditions change, so may United's hedging program. As a result of the bankruptcy filing, all fuel hedges were terminated by the respective counterparties.
 

   
December 31, 2001
 
(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
     
(Pay)/Receive2
Purchased forward contracts - Crude oil
$ 201
$ 23.96/bbl
$ (28)
Purchased forward contracts - Heating oil
$ 120
$ 27.16/bbl
$ (17)

___________________
2 Estimated fair values represent the amount United would pay/receive on December 31, 2002 or December 31, 2001 to terminate the contracts.
 
 
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORTS

To the Board of Directors and Stockholders of
UAL Corporation
Elk Grove Township, Illinois

We have audited the accompanying consolidated statement of financial position of UAL Corporation (Debtor-in-Possession) and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a)2 for the year ended December 31, 2002. These consolidated financial statements ("financial statements") and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The financial statements of the Company and financial statement schedule listed in the Index at Item 15(a)2 for the years ended December 31, 2001 and 2000, before the change in composition of its reportable segments and inclusion of disclosures as discussed in Note 23 and Note 2(k), respectively, were audited by other auditors who have ceased operations. Those auditors, expressed an unqualified opinion on those financial statements and financial statement schedule in their report dated February 20, 2002, and included an explanatory paragraph that described a change in accounting principle for the measurement of redeemable preferred ESOP stock and change in accounting principles for revenue recognition.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such 2002 financial statements present fairly, in all material respects, the financial position of UAL Corporation (Debtor-in-Possession) and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the 2002 financial statement schedule, when considered in relation to the basic 2002 financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1, the Company has filed for reorganization under Chapter 11 of the United States Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, as a result of the bankruptcy filing, realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty and raise substantial doubt about the Company's ability to continue as a going concern. Management's plan concerning these matters is also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty.

As discussed above, the financial statements as of and for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. As described in Note 23, the Company changed the composition of its reportable segments in 2002, and the amounts in the 2001 and 2000 financial statements relating to reportable segments have been restated to conform to the 2002 composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2001 and 2000 financial statements. Our procedures included (i) comparing the adjusted amounts to the Company's underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliations of segment amounts to the financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

As described in Note 2(k), these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2(k) with respect to 2001 and 2000 included (a) agreeing the previously reported net earnings (loss) to the previously issued financial statements and the adjustments to reported net earnings (loss) representing amortization expense (including any related tax effects) recognized in those periods related to intangible assets that are no longer being amortized to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net earnings (loss) to reported net earnings (loss), and the related earnings (loss) per share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 2(k) are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

DELOITTE & TOUCHE LLP

Chicago, Illinois
March 20, 2003
 
 

To the Stockholders and
Board of Directors, UAL Corporation:

We have audited the accompanying statements of consolidated financial position of UAL Corporation (a Delaware corporation) and subsidiary companies as of December 31, 2001 and 2000, and the related statements of consolidated operations, consolidated cash flows and consolidated stockholders' equity for each of the three years in the period ended December 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UAL Corporation and subsidiary companies as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

As explained in Note 1(b) of the Notes to Consolidated Financial Statements, effective January 1, 2001, the Company changed its accounting principles for the measurement of redeemable preferred ESOP stock as a result of the adoption of Topic D-98 "Classification and Measurement of Redeemable Securities" and effective January 1, 2000, the Company changed certain of its accounting principles for revenue recognition as a result of the adoption of Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule referenced in Item 14(a) 2 herein is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
 
 

Arthur Andersen LLP (1)

Chicago, Illinois
February 20, 2002

(1)   This report is a copy of the previously issued report covering 2001, 2000 and 1999. The predecessor auditors have not reissued their report.

 
UAL Corporation and Subsidiary Companies
(Debtor and Debtor-In-Possession)
Statements of Consolidated Operations
(In millions, except per share)
 
Year Ended December 31
Operating revenues:
2002
2001
2000
Passenger
$ 11,872 
$ 13,788 
$ 16,932 
Cargo
673 
704 
931 
Other operating revenues
1,741
1,646
1,489
 
14,286
16,138
19,352
Operating expenses:      
Salaries and related costs
7,029 
7,080 
6,877 
Aircraft fuel
1,921 
2,476 
2,511 
Commissions
416 
710 
1,025 
Purchased services
1,411 
1,650 
1,711 
Aircraft rent
851 
827 
888 
Landing fees and other rent
1,021 
1,009 
959 
Depreciation and amortization
960 
1,026 
988 
Aircraft maintenance
560 
701 
698 
Cost of sales
1,240 
1,280 
1,061 
Other operating expenses
1,565 
1,722 
1,841 
Special charges
149
1,428
139
 
17,123
19,909
18,698
Earnings (loss) from operations
(2,837)
(3,771)
654
Other income (expense):      
Interest expense
(590)
(525)
(402)
Interest capitalized
25 
79 
77 
Interest income
60 
105 
101 
Equity in earnings (losses) of affiliates
(7)
(23)
(12)
Gain on sale of investments
46 
261 
109 
Non-operating special charges
(49)
(61)
Airline stabilization grant
130 
652 
Reorganization items, net
(10)
Miscellaneous, net
(22)
(86)
(35)
 
(368)
414
(223)
Earnings (loss) before income taxes, distributions on preferred       
securities, extraordinary item and cumulative effect
(3,205)
(3,357)
431 
Provision (credit) for income taxes
-
(1,226)
160
Earnings (loss) before distributions on preferred securities,      
extraordinary item and cumulative effect
(3,205)
(2,131)
271 
Distributions on preferred securities, net of tax
(7)
(6)
(6)
Earnings (loss) before extraordinary item and cumulative effect
(3,212)
(2,137)
265 
Extraordinary loss on early extinguishment of debt, net of tax
(6)
Cumulative effect of accounting change, net of tax
-
(8)
(209)
Net earnings (loss) 
$ (3,212)
$(2,145)
$ 50
       
Per share, basic:      
Earnings (loss) before extraordinary item and cumulative effect
$ (53.55)
$ (39.90)
$ 2.02 
Extraordinary loss on early extinguishment of debt, net of tax
(0.05)
Cumulative effect of accounting change, net of tax
(0.14)
(1.93)
Net earnings (loss)
$ (53.55)
$ (40.04)
$ 0.04
       
Per share, diluted:      
Earnings (loss) before extraordinary item and cumulative effect
$ (53.55)
$ (39.90)
$ 1.89 
Extraordinary loss on early extinguishment of debt, net of tax
(0.06)
Cumulative effect of accounting change, net of tax
(0.14)
(1.79)
Net earnings (loss)
$ (53.55)
$ (40.04)
$ 0.04

See accompanying Notes to Consolidated Financial Statements.
 
 

UAL Corporation and Subsidiary Companies
(Debtor and Debtor-In-Possession)
Statements of Consolidated Financial Position
(In millions)

 
December 31
Assets
2002
2001
     
Current assets:    
Cash and cash equivalents
$ 886
$ 1,688
Restricted cash
462
-
Short-term investments
388
940
Receivables, less allowance for doubtful     
accounts (2002 - $29; 2001 - $30)
788
1,047
Aircraft fuel, spare parts and supplies, less    
obsolescence allowance (2002 - $57; 2001 - $70)
310
329
Income tax receivables
326
174
Deferred income taxes
-
272
Prepaid expenses and other
219
636
 
3,379
5,086
Operating property and equipment:    
Owned -     
Flight equipment
15,533
14,745
Advances on flight equipment
173
566
Other property and equipment
3,882
3,919
 
19,588
19,230
Less - Accumulated depreciation and amortization
5,306
4,716
 
14,282
14,514
Capital leases -     
Flight equipment
2,489
2,667
Other property and equipment
84
99
 
2,573
2,766
Less - Accumulated amortization
494
472
 
2,079
2,294
 
16,361
16,808
Other assets:    
Long-term restricted cash
116
Investments
124
278
Intangibles, less accumulated amortization     
(2002 - $347; 2001 - $333)
412
422
Pension assets
1,162
562
Aircraft lease deposits
776
667
Prepaid rent
408
374
Deferred income taxes
-
97
Other
918
903
 
3,916
3,303
     
 
$ 23,656
$ 25,197
     

See accompanying Notes to Consolidated Financial Statements.
 
 

UAL Corporation and Subsidiary Companies
(Debtor and Debtor-In-Possession)
Statements of Consolidated Financial Position
(In millions, except share data)

 
December 31
Liabilities and Stockholders' Equity
2002
2001
Current liabilities:    
Notes payable
$ - 
$ 133 
Long-term debt maturing within one year
1,217 
Current obligations under capital leases
237 
Advance ticket sales
1,021 
1,183 
Accounts payable
284 
1,268 
Accrued salaries, wages and benefits
1,496 
1,227 
Accrued aircraft rent
903 
Other accrued liabilities
1,190
1,898
 
3,991
8,066
     
Long-term debt
700
6,622
Long-term obligations under capital leases
-
1,943
     
Other liabilities and deferred credits:    
Deferred pension liability
4,661 
1,241 
Postretirement benefit liability
1,809 
1,690 
Deferred gains
827 
Accrued aircraft rent
551 
Deferred income taxes
249 
Other
894
1,049
 
7,613
5,358
Liabilities subject to compromise (Note 10)
13,833
-
Commitments and contingent liabilities (Note 21)    
Company-obligated mandatorily redeemable     
preferred securities of a subsidiary trust
-
98
Preferred stock committed to Supplemental ESOP
2
77
     
Stockholders' equity:    
Serial preferred stock (Note 15)
ESOP preferred stock (Note 16)
Common stock at par, $0.01 par value; authorized 200,000,000    
shares; issued 98,470,381 shares at December 31, 2002 and    
71,266,547 shares at December 31, 2001
Additional capital invested
5,070 
4,995 
Retained deficit
(3,417)
(199)
Stock held in treasury, at cost -     
Preferred, 10,213,519 depositary shares at December 31,    
2002 and 2001 (Note 15)
(305)
(305)
Common, 16,102,418 shares at December 31, 2002 and     
16,282,369 shares at December 31, 2001
(1,167)
(1,180)
Accumulated other comprehensive loss
(2,663)
(275)
Other
(2)
(4)
 
(2,483)
3,033
     
     
 
$ 23,656
$ 25,197

See accompanying Notes to Consolidated Financial Statements.
 
 

UAL Corporation and Subsidiary Companies
(Debtor and Debtor-In-Possession)
Statements of Consolidated Cash Flows
(In millions)

 
Year Ended December 31
 
2002
2001
2000
Cash and cash equivalents at beginning of year
$ 1,688
$ 1,679
$ 310
Cash flows from (utilized by) operating activities:      
Net earnings (loss)
(3,212)
(2,145)
50 
Adjustments to reconcile to net cash provided by       
operating activities -      
Reorganization items
10 
ESOP compensation expense
147 
Cumulative effect of accounting change, net of tax
209 
Extraordinary loss on debt extinguishment, net of tax
Gain on sale of investments
(46)
(261)
(109)
Investment impairment
61 
Pension funding less than (greater than) expense
451 
391 
(21)
Deferred postretirement benefit expense
339 
214 
153 
Depreciation and amortization
970 
1,932 
1,058 
Provision (credit) for deferred income taxes
665 
(1,144)
317 
Undistributed (earnings) losses of affiliates
30 
13 
Decrease (increase) in receivables
262 
165 
68 
Decrease (increase) in other current assets
130 
170 
(208)
Increase (decrease) in advance ticket sales
(162)
(271)
42 
Increase (decrease) in accrued income taxes
(85)
(60)
(77)
Increase (decrease) in accounts payable      
and accrued liabilities
(704)
589 
761 
Amortization of deferred gains
(64)
(66)
(66)
Other, net
299
288
68
 
(1,139)
(160)
2,472
Cash flows from (utilized by) investing activities:      
Additions to property and equipment
(157)
(1,951)
(2,538)
Proceeds on disposition of property and equipment
364 
178 
324 
Proceeds on sale of investments
137 
259 
147 
Acquisition of MyPoints.com, net of cash acquired (Note 24)
(32)
Decrease (increase) in short-term investments
552 
(275)
(286)
Increase in restricted cash
(578)
Other, net
(247)
(148)
(168)
 
71
(1,969)
(2,521)
Cash flows from financing activities:      
Repurchase of common stock
(81)
Proceeds from issuance of long-term debt
950
2,485 
2,515 
Proceeds from DIP lenders
700 
Repayment of long-term debt
(1,338)
(176)
(441)
Principal payments under capital leases
(220)
(289)
(283)
Purchase of equipment certificates under Company leases
(208)
Decrease in equipment certificates under Company leases
296 
33 
228 
Increase (decrease) in short-term borrowings
(133)
133 
(61)
Cash dividends
(7)
(88)
(118)
Other, net
18
40
(133)
 
266
2,138
1,418
Increase (decrease) in cash and cash equivalents during the year
(802)
9
1,369
       
Cash and cash equivalents at end of year
$ 886
$ 1,688
$ 1,679
       

See accompanying Notes to Consolidated Financial Statements.
 
 

UAL Corporation and Subsidiary Companies
(Debtor and Debtor-In-Possession)
Statements of Consolidated Stockholders' Equity
(In millions, except per share)

         
Unearned
Accumulated
 
     
Additional
Retained
ESOP
 
Other
   
 
Preferred
Common
Capital
Earnings
Preferred
Treasury
Comp.
   
 
Stock
Stock
Invested
(Deficit)
Stock
Stock
Income
Other
Total
Balance at December 31, 1999
$ -
$ 1
$ 4,038
$ 2,138
$ (28)
$(1,402)
$ 352
$ (9)
$ 5,090
Year ended December 31, 2000:                  
Net earnings
-
-
50 
50 
Other comprehensive income, net:                  
Unrealized losses on securities, net
-
-
(196)
(196)
Minimum pension liability adj.
-
-
-
(4)
(4)
Total comprehensive income
-
-
50
(200)
(150)
Cash dividends on preferred                  
stock ($1.44 per Series B share)
-
-
(10)
(10)
Cash dividends on common                  
stock ($1.25 per share)
-
-
(144)
(144)
Common stock repurchases
-
-
(81)
(81)
Issuance and amortization of                  
ESOP preferred stock
-
-
147 
147 
ESOP dividend ($8.89 per share)
-
-
(36)
28 
Preferred stock committed to                  
Supplemental ESOP
-
-
650 
650 
Other
-
-
(46)
-
-
(1)
-
2
(45)
Balance at December 31, 2000
-
1
4,797
1,998
-
(1,484)
152
(7)
5,457
Year ended December 31, 2001:                  
Net loss
-
-
(2,145)
(2,145)
Other comprehensive income, net:                  
Unrealized losses on investments, net
-
-
(116)
(116)
Unrealized losses on derivatives, net
-
-
(46)
(46)
Minimum pension liability adj.
-
-
-
(265)
(265)
Total comprehensive income
-
-
(2,145)
(427)
(2,572)
Cash dividends on preferred                   
stock ($1.44 per Series B share)
-
-
(10)
(10)
Cash dividends on common                  
stock ($0.30 per share)
-
-
(42)
-
(42)
Preferred stock committed to                  
Supplemental ESOP
-
-
229 
229 
Other
-
-
(31)
-
-
(1)
-
3
(29)
Balance at December 31, 2001
-
1
4,995
(199)
-
(1,485)
(275)
(4)
3,033
Year ended December 31, 2002:                  
Net loss
-
-
(3,212)
-
-
(3,212)
Other comprehensive income, net:                  
Unrealized losses on investments, net
-
-
-
-
(40)
(40)
Unrealized gains on derivatives, net
-
-
-
-
16 
16 
Minimum pension liability adj.
-
-
-
-
(2,364)
(2,364)
Total comprehensive income
-
-
(3,212)
-
(2,388)
(5,600)
Cash dividends on preferred                   
stock ($1.08 per Series B share)
-
-
(6)
-
(6)
Preferred stock committed to                  
Supplemental ESOP
-
-
75 
-
75 
Other
-
-
-
-
-
13
-
2
15 
Balance at December 31, 2002
$ -
$ 1
$5,070
$(3,417)
$ -
$(1,472)
$(2,663)
$ (2)
$(2,483)

See accompanying Notes to Consolidated Financial Statements.
 
 

Notes to Consolidated Financial Statements

(1)    Proceedings Under Chapter 11 of the Bankruptcy Code

        Chapter 11 Reorganization. On December 9, 2002 ("Petition Date"), UAL Corporation, United Air Lines, Inc. and 26 direct and indirect wholly owned subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division ("Bankruptcy Court"). The reorganization cases are being jointly administered under the caption "In re: UAL Corporation, et al., Case No. 02-48191" ("Chapter 11 Cases"). Included in the Consolidated Financial Statements are subsidiaries which have not commenced Chapter 11 cases and are not Debtors. The assets and liabilities of such non-filing subsidiaries are not considered material to the Consolidated Financial Statements.

         The Debtors continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. In general, as debtors-in-possession, the Debtors are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. At hearings held on December 9, 2002, the Bankruptcy Court granted the Debtors first day motions for various relief designed to stabilize operations and business relationships with customers, vendors, employees and others and entered orders granting authority to the Debtors to, among other things: (a) pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations; (b) honor customer service programs, including United's Mileage Plus frequent flyer program and ticketing program; and (c) honor obligations arising prior to the Petition Date related to the Company's interline, clearinghouse, code sharing and other similar agreements. The Bankruptcy Court also gave interim approval for the Debtors to access a total of up to $1.5 billion of debtor-in-possession secured financing ("DIP Financing") provided by JPMorgan Chase Bank, Citicorp USA, Inc., Bank One, NA and The CIT Group/Business Credit, Inc. Final approval of the DIP Financing was granted by the Bankruptcy Court on December 30, 2002. (See "DIP Financing" below.)

         Under Section 362 of the Bankruptcy Code, the filing of the bankruptcy petition automatically stays most actions against a debtor, including most actions to collect pre-petition indebtedness or to exercise control over the property of the debtor's estate. Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities are subject to settlement under a plan of reorganization to be approved by the Bankruptcy Court.

        Shortly after the Chapter 11 filing, the Debtors began notifying all known current or potential creditors of the Chapter 11 filing for the purpose of identifying and quantifying all pre-petition claims against the Debtors. The Chapter 11 filing triggered defaults on substantially all debt and lease obligations of the Debtors.

        Notwithstanding the preceding general discussion of the automatic stay, the Debtors' rights to possess and operate certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract are governed by a particular provision of the Bankruptcy Code that specifies different treatment. Section 1110 of the Bankruptcy Code ("Section 1110") provides that unless the Debtors take certain action, within 60 days after the Petition Date or such later date as is agreed by the applicable lessor, secured party, or conditional vendor, the contractual rights of such financier to take possession of such equipment and to enforce any of its other rights or remedies under the applicable agreement are not limited or otherwise affected by the automatic stay or any other provision of the Bankruptcy Code.

        Under Section 1110 of the Bankruptcy Code, the automatic stay lasts for only 60 days with respect to Section 1110-eligible aircraft, engines and related equipment except under two conditions. The debtor may extend the 60-day period by agreement of the relevant financier, with court approval. Alternatively, the debtor may agree to perform all of the obligations under the applicable financing and cure any defaults thereunder as required by the Bankruptcy Code. In the absence of either such arrangement, the financier may take possession of the property and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such equipment.

        The 60-day period under Section 1110 in the Company's Chapter 11 Case expired on February 7, 2003. The Company has reached agreements with a significant number of aircraft financiers to extend the automatic stay, in exchange in certain instances for United's agreement to make specified payments. United also has made elections with respect to certain other aircraft to cure all existing defaults and to pay the contract rates as required by the Bankruptcy Code. With respect to certain aircraft, however, United neither negotiated an extension of the automatic stay nor agreed to cure and resume payments. Accordingly, the financiers of such aircraft may seek to repossess the property. Although no such financiers have sought to repossess any United equipment, and although the Company believes that market conditions for commercial aircraft make repossession unlikely, there can be no assurance that United's lendors and lessors will not repossess any of the applicable aircraft. Any such repossessions could result in substantial disruptions to United's operations and could have a material adverse effect on the Company's business.

         Under Section 365 of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain other conditions. In general, rejection of an unexpired lease or executory contract is treated as a pre-petition breach of the lease or contract in question and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such lease or contract but entitles the lessor or contract counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may file claims against the Debtors' estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure most existing defaults under such executory contract or unexpired lease. In this regard, the Company expects that liabilities subject to compromise and resolution in the Chapter 11 Cases will arise in the future as a result of damage claims created by the Debtors' rejection of various executory contracts and unexpired leases. Conversely, the Company would expect that the assumption of certain executory contracts and unexpired leases may convert liabilities shown as subject to compromise to liabilities not subject to compromise.

         Section 1113(c) of the Bankruptcy Code permits a debtor to move to reject its collective bargaining agreements ("CBAs") if the debtor first satisfies several statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court's approval of the rejection. After bargaining in good faith and sharing relevant information with its unions, the debtor must make proposals to modify its existing CBAs based on the most complete and reliable information available at the time. The proposed modifications must be necessary to permit the reorganization of the debtor and must ensure that all the affected parties are treated fairly and equitably relative to the creditors and the debtor. Ultimately, rejection is appropriate if the unions refuse to agree to the debtors necessary proposals "without good cause" and the balance of the equities favors rejection.

         As required by the Bankruptcy Code, the United States Trustee for the Northern District of Illinois ("U.S. Trustee") has appointed an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors. There can be no assurance that the Creditors' Committee will support the Debtors' positions or the Debtors' ultimate plan of reorganization, once proposed, and disagreements between the Debtors and the Creditors' Committee could protract the Chapter 11 Cases, could negatively impact the Debtors' ability to operate during the Chapter 11 Cases and could delay the Debtors' emergence from Chapter 11.

        In order to successfully exit Chapter 11, the Company will need to propose, and obtain confirmation by the Bankruptcy Court of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would resolve, among other things, the Debtors' pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for its corporate governance subsequent to exit from bankruptcy. On March 21, 2003, the Bankruptcy Court approved the extension of the Company's "exclusivity period" (during which it is the only party permitted to file a plan of reorganization) to October 2003, but under certain circumstances, the exclusivity period could be shortened by two months. The timing of filing a plan of reorganization by the Company will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 Cases. Although the Company expects to file a plan of reorganization that provides for its emergence from bankruptcy as a going concern, there can be no assurance at this time that a plan of reorganization will be confirmed by the Bankruptcy Court, or that any such plan will be implemented successfully.

         Financial Statement Presentation. The accompanying consolidated financial statements have been prepared in accordance with American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a going-concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.

        SOP 90-7 requires that the financial statements for periods subsequent to the Chapter 11 filing petition distinguish transactions and events that are directly associated with the reorganization from the operations of the business. Accordingly, revenues, expenses (including professional fees), realized gains and losses, and provisions for losses directly associated with the reorganization and restructuring of the business are reported separately in the financial statements. The Statements of Consolidated Financial Position distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities subject to compromise are reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.

        In addition, as a result of the Chapter 11 filing, the realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty. Given this uncertainty, there is substantial doubt about the Company's ability to continue as a going concern. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for some amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements.

         Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition Date. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the Chapter 11 Cases. The deadline for filing proofs of claim with the Bankruptcy Court is May 12, 2003, with a limited exception for governmental entities, which have until June 9, 2003 to file proofs of claim. Accordingly, the ultimate number and allowed amounts of such claims are not presently known.

         DIP Financing. The DIP Financing consists of two facilities, a $300 million facility provided by Bank One N.A. ("Bank One Facility") and a $1.2 billion facility provided by J.P. Morgan Chase Bank, Citicorp USA, Inc., Bank One, N.A. and The CIT Group/Business Credit, Inc. ("Club Facility"). The Company has received commitments of $1.0 billion under the Club Facility following the completion of the syndication process for that facility; the balance is conditioned upon the participation of one or more additional lenders approved by the existing participants.

         The Bank One Facility consists of a $300 million term loan with an interest rate option of the prime rate plus 5.5% or LIBOR plus 6.5% (with a LIBOR floor of 3%). As of December 31, 2002, the Company had borrowed $300 million at the LIBOR option which is due in five equal monthly installments beginning in March 2004.

         The Club Facility consists of a revolving credit and letter of credit facility of $800 million and a term loan of $400 million, which matures on July 1, 2004. The Company has the option of borrowing under the Club Facility at an interest rate of the prime rate plus 5.5% or LIBOR plus 6.5% (with a LIBOR floor of 3%). As of December 31, 2002, the Company had borrowed $400 million under the term loan at the LIBOR option. In addition, the Company had available a $100 million letter of credit facility which was not drawn down on in December, but was fully utilized by March 2003. The remaining $700 million under the revolving credit facility is subject to stringent availability hurdles as discussed below.

         The DIP Financing is guaranteed by each of the Debtors and is secured by first priority liens on all unencumbered present and future assets of the Debtors and by junior liens on all other assets of the Debtors, other than certain specified assets, including assets which are subject to financing agreements that are entitled to the benefits of Section 1110 to the extent such financing agreements prohibit such junior liens. In addition, the Bank One Facility is secured by cash collateral collected under the Co-Branded Credit Card Agreement between Bank One and the Company.

         The terms of the DIP Financing include covenants that require the Company to satisfy ongoing monthly financial requirements as determined by EBITDAR (earnings before interest, income taxes, depreciation, amortization and aircraft rents) and covenants that limit, among other things, the Debtors' ability to borrow additional money, make capital expenditures and make additional corporate investments. In addition, the Company is required to maintain a minimum unrestricted cash balance, excluding escrowed amounts, of $300 million.

         Under the Club Facility, borrowing availability is determined by a formula based on a percentage of eligible assets. The eligible assets consist of certain previously unencumbered aircraft, spare engines, spare parts inventory, certain flight simulators and quick engine change kits. The underlying value of such assets may fluctuate periodically due to prevailing market conditions and fluctuations in value may have an impact on the borrowing availability under the Club Facility. Availability may be further limited by additional reserves imposed by the banks in their commercially reasonable discretion.

         The remaining $700 million of availability under the Club Facility, subject to the limitation on borrowing availability discussed above, will be available to the Company after certain conditions are met, including achieving positive cumulative EBITDAR; submitting a certified updated business plan; providing updated appraisals on the collateral and ascertaining there has been no material adverse change with respect to transferability of routes, gate leaseholds or slots.

(2) Summary of Significant Accounting Policies

        (a) Basis of Presentation - UAL is a holding company whose principal subsidiary is United. The consolidated financial statements include the accounts of UAL and all of its majority-owned affiliates (collectively "the Company"). All significant intercompany transactions are eliminated. Certain prior-year financial statement items have been reclassified to conform to the current year's presentation.

        (b) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        (c) Airline Revenues - Passenger fares and cargo revenues are recorded as operating revenues when the transportation is furnished. The value of unused passenger tickets is included in current liabilities as advance ticket sales. In addition, United has formed bilateral alliances with other airlines which include: joint frequent flyer participation; code sharing of flight operations; coordination of reservations, baggage handling and flight schedules and other resource-sharing activities. Code sharing is an agreement under which a carrier's flights can be marketed under the two-letter airline designator code of another carrier. Revenues earned under these arrangements are allocated between the code share partners based on existing contractual agreements and airline industry standard pro-ration formulas and are recognized as passenger revenue when the transportation is provided.

        (d) Cash and Cash Equivalents and Short-Term Investments - Cash in excess of operating requirements is invested in short-term, highly liquid, income-producing investments. Investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents. Other investments are classified as short-term investments.

        From time to time, United lends certain of its securities classified as cash and cash equivalents and short-term investments to third parties. United requires collateral in an amount exceeding the value of the securities and is obligated to reacquire the securities at the end of the contract. United accounts for these transactions as secured borrowings rather than sales and does not remove the securities from the balance sheet. At December 31, 2002, United had no secured borrowings outstanding.

        At December 31, 2002 and 2001, $402 million and $526 million, respectively, of investments in debt securities included in cash and cash equivalents and short-term investments were classified as available-for-sale, and $714 million and $2.0 billion, respectively, were classified as held-to-maturity. Investments in debt securities classified as available-for-sale are stated at fair value based on the quoted market prices for the securities, which does not differ significantly from their cost basis. Investments classified as held-to-maturity are stated at cost which approximates market due to their short-term maturities. The gains or losses from sales of available-for-sale securities are included in interest income for each respective year.

        At December 31, 2002, the Company had $578 million in restricted cash, including $116 million in long-term restricted cash. The cash largely represents security for worker compensation obligations in states where United self-insures, security deposits for airport leases and reserves with institutions which process the Company's sales.

        (e) Aircraft Fuel, Spare Parts and Supplies - Aircraft fuel and maintenance and operating supplies are stated at average cost. Flight equipment spare parts are stated at average cost less an obsolescence allowance.

        (f) Operating Property and Equipment - Owned operating property and equipment is stated at cost. Property under capital leases, and the related obligation for future lease payments, are initially recorded at an amount equal to the then present value of those lease payments.

        Depreciation and amortization of owned depreciable assets is based on the straight-line method over their estimated service lives. Leasehold improvements are amortized over the remaining period of the lease or the estimated service life of the related asset, whichever is less. Aircraft are depreciated to estimated salvage values, generally over lives of 25 to 30 years; buildings are depreciated over lives of 25 to 45 years; and other property and equipment are depreciated over lives of 3 to 15 years.

        Properties under capital leases are amortized on the straight-line method over the life of the lease or, in the case of certain aircraft, over their estimated service lives. Lease terms are 10 to 22 years for aircraft and flight simulators and 29 years for buildings. Amortization of capital leases is included in depreciation and amortization expense.

        Maintenance and repairs, including the cost of minor replacements, are charged to maintenance expense accounts as incurred. Costs of additions to and renewals of units of property are charged to property and equipment accounts.

        (g) Mileage Plus Awards - UAL accrues the estimated incremental cost of providing free travel awards earned under its Mileage Plus frequent flyer program when such award levels are reached. United sells mileage credits to participating airline partners in the Mileage Plus program and UAL Loyalty Services ("ULS"), a wholly owned subsidiary of UAL, sells mileage credits to non-airline business partners.

        A portion of revenue from the sale of mileage credits is deferred and recognized as passenger revenue when the transportation is provided. Accordingly, UAL recorded a charge of $209 million, net of tax, in 2000, for the cumulative effect of a change in accounting principle to reflect the application of the accounting method to prior years. This change resulted in a reduction to revenues of approximately $38 million for 2000.

        (h) Deferred Gains - Gains on aircraft sale and leaseback transactions are deferred and amortized over the lives of the leases as a reduction of rental expense.

        (i) United Express - United has marketing agreements under which independent regional carriers, flying under the United Express name, feed passengers to United owned and operated flights. United pays these carriers on a fee-per-departure basis and includes the revenues derived from the carriers in passenger revenue, net of these expenses. United Express revenues (net of expenses) included in passenger revenues were $(255) million, $(232) million and $(49) million for 2002, 2001 and 2000, respectively.

         While the effect on United's results, taking into account only the United Express flights, is negative, the Company realizes a significant benefit (not included in the results shown above) from the traffic provided to United's operations as a result of these agreements.

         United has call options on 83 regional jets owned or leased by these carriers. The call option is a standard part of the United Express agreement and is intended to allow United to secure control over regional jets used for United Express flying in the event a United Express agreement is terminated. The call option reduces this risk if the Company determines that a change of United Express carrier is necessary, particularly due to the significant time lag between order and delivery of aircraft (such as regional jets made to United's specifications).

         The call options are only exercisable if United maintains a specified credit rating and the United Express carrier fails to meet required operating and/or financial performance levels for a specified period of time. Due to United's current credit rating, none of the call options are exercisable at this time.

        (j) Advertising - Advertising costs, which are included in other operating expenses, are expensed as incurred. Advertising expense was $169 million, $217 million and $269 million for the years ended December 31, 2002, 2001 and 2000, respectively.

        (k) Intangibles - Intangibles consist primarily of route acquisition costs and intangible pension assets (see Note 20, "Retirement and Postretirement Plans").

        Effective January 1, 2002, UAL adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). In connection with the adoption of SFAS No. 142, UAL discontinued $12 million in annual amortization expense on route acquisition costs, which are indefinite-lived intangible assets. SFAS No. 142 also requires companies to test intangibles for impairment on an annual basis or on an interim basis when a triggering event occurs. During the first quarter of 2002, the Company performed an initial evaluation of its intangibles and determined that the fair value of its intangibles was in excess of the book value.

         The following information relates to UAL's intangibles at December 31, 2002:
 

(In millions)
Gross Carrying
Accumulated
 
Amount
Amortization
Amortized intangible assets    
Airport Slots and Gates
$ 184
$ 166
Other
47
14
 
$ 231
$ 180
     
Unamortized intangible assets    
Routes
$ 344
 
Goodwill
17
 
 
$ 361
 

         Slots and gates are amortized on a straight-line basis over the life of the related leases. Other intangibles are amortized over periods of 3 to 10 years. Total amortization expense recognized in 2002 was $12 million. The Company expects to record amortization expense of $8 million in 2003, $7 million in 2004 and 2005, $6 million in 2006 and $4 million in 2007.

         Route authorities are rights granted by governments to operate flights to and from a particular country. These authorities are very specific and limited, fixed in nature and are rarely available in the marketplace. Accordingly, route authorities are highly valued and sought after assets by all airlines. During 2002, UAL obtained a third-party appraisal of its route authorities which concluded that the market value of these assets continues to be considerably in excess of the book value.

         Slots and gates, like routes, are highly valued assets that do not frequently come into the marketplace. The Company has no intention to sell these assets and believes that the market value is in excess of the recorded book value.

         Goodwill primarily relates to UAL Loyalty Services' ("ULS") acquisition of MyPoints.com, which occurred in July 2001 and is based on the final purchase price allocation. Management believes that the cash flows of ULS's operation, as reflected in Note 23, "Segment Information" are sufficient to support the value of these intangibles and goodwill.

         Pro forma results for the years ended 2001 and 2000 assuming the discontinuation of amortization are shown below:
 

(In millions, except per share)
2001
 
2000
       
Earnings (loss) before cumulative effect       
and extraordinary loss, as reported
$(2,137)
 
$ 265
Amortization of routes, net of tax
7
 
7
Earnings (loss) before cumulative effect       
and extraordinary loss, pro forma
$(2,130)
 
$ 272
       
Net earnings (loss), as reported
$(2,145)
 
$ 50
Amortization of routes, net of tax
7
 
7
Net earnings (loss), pro forma
$(2,138)
 
$ 57
Per share
Basic
Diluted
Basic
Diluted
Earnings (loss) before cumulative effect         
and extraordinary loss, as reported
$(39.90)
$(39.90)
$ 2.02 
$ 1.89
Amortization of routes, net of tax
0.14
0.14
0.08
0.06
Earnings (loss) before cumulative effect
$(39.76)
$(39.76)
$ 2.10
$ 1.95
and extraordinary loss, pro forma        
         
Net earnings (loss), as reported
$(40.04)
$(40.04)
$ 0.04 
$ 0.04
Amortization of routes, net of tax
0.14
0.14
0.08
0.06
Net earnings (loss), pro forma
$(39.90)
$(39.90)
$ 0.12
$ 0.10
         

        (l) Measurement of Impairments - Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses the accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 did not have an effect on the Company's results of operations.

         United's policy is to recognize an impairment charge when an asset's carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset's carrying value and fair market value.

        (m) Stock Option Accounting - At December 31, 2002, the Company had certain stock-based employee compensation plans, as described in Note 18, "Stock Options and Awards." The Company has elected to continue accounting for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost pertaining to stock options is reflected in the Company's net earnings (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. If compensation cost for stock-based employee compensation plans had been determined using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings (loss) and earnings (loss) per share would have instead been reported as the pro forma amounts indicated below:
 

(In millions, except per share)
Year Ended December 31
 
2002
2001
2000
Net earnings (loss), as reported
$(3,212)
$ (2,145)
$ 50
Less: Total compensation expense determined under      
fair value method, net of tax in 2001 and 2000
(28)
(16)
(17)
 
$(3,240)
$ (2,161)
$ 33
       
Net earnings (loss) per share:      
Basic and Diluted - As reported
$ (53.55)
$ (40.04)
$ 0.04 
Basis and Diluted - Pro forma $ (54.01)
$ (40.34)
$(0.10)

(3) Special Charges

2002 -
         Avolar.On March 22, 2002, UAL announced the orderly shutdown of its wholly owned subsidiary Avolar, which was formed in early 2001 to operate and sell fractional ownership interests in premium business aircraft. In connection with the closing of Avolar, UAL recorded a special charge of $82 million in the first quarter 2002 which included aircraft deposits and termination fees ($55 million), operating related expenses ($18 million), severance related costs ($7 million) and other costs ($2 million).

         In accordance with Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," the Company identified those charges which should be recognized at the time management had committed to an exit plan. The special charge included current period and future estimated liabilities incurred which would produce no future economic benefit to UAL.

         Specifically, the current period expenses included in the charge were related to obligations incurred prior to the commitment date which would not produce any future benefit to the Company and included costs for promotional flights, consultant fees for the development of computer systems, advertising in anticipation of operations and other miscellaneous expenses.

        Severance. During the fourth quarter of 2002, UAL announced the closing of three reservation centers, a maintenance line and four international stations and the conversion of five stations in the U.S. to United Express service, which resulted in the furloughing of a number of employees. Additionally, in connection with the Company's plan to decrease the airline's flying schedule, as well as overall cost-saving measures, the Company announced a reduction in employment levels effective January and February 2003. As a result of the announced furloughs, the Company recorded a special charge of $67 million in the fourth quarter of 2002 for severance-related charges.

2001 -
         Related to September 11. During the third quarter of 2001, United recorded a special charge of $1.3 billion in operating expense and $49 million in non-operating expense for amounts relating to the September 11 terrorist attacks and the resulting impact on the Company's schedule and operations.

         The special charge in operating expense was made up of the following (in millions):
 

   
Amount
  Special charges:  
  Aircraft groundings and impairment
$ 788
  Reduction in force
217
  Early termination fees
181
  Discontinued capital projects
107
  Miscellaneous
19
  Total operating special charges
$ 1,312
     

         After the September 11 terrorist attacks, the Company grounded the B727-200 and B737-200 fleets and recorded a charge of $271 million, reflecting the write down of the fleets to fair value.

         Due to the changes implemented to United's operations, the Company reviewed its fleet for impairment in accordance with SFAS No. 121, as amended by SFAS No. 144. Management determined that the estimated net undiscounted future cash flows generated by its B737-500 and B747-400 fleets would be less than their carrying value. Management estimated the undiscounted future cash flows with models used by the Company in making fleet and scheduling decisions. These models utilized the Company's projections of passenger yield, fuel costs, labor costs and other relevant factors for the markets where these aircraft will operate. The aircraft in each of these fleets were written down to their fair market values, as estimated by management using published sources, third-party appraisals and bids received from third parties. Accordingly, the special charge includes an impairment charge of $517 million for these aircraft fleets resulting from the anticipated decrease in future cash flows.

          Also as a result of the terrorist attacks, the Company furloughed approximately 20,000 employees across all work groups (pilots, flight attendants, mechanics, ramp service, customer service and management and salaried employees). In connection with the furloughs, United accrued severance costs of approximately $217 million, including a one-time curtailment charge relating to the accelerated recognition of unrecognized prior service costs for certain of the Company's pension plans.

         Also included in the special charge is $107 million relating to the write-off of capital projects no longer being pursued. As a direct result of September 11, management made the decision to terminate all funding and labor resources for numerous capitalized projects that were in-process prior to September 11 and which did not provide any immediate economic or long-term safety benefits to customers or the airline. The projects and related amounts capitalized that were discontinued following September 11 included computer system development costs ($48 million), aircraft improvements ($33 million), airport facility improvements ($21 million) and other miscellaneous projects ($5 million).

         After management announced the furlough and the freeze on all capital expenditures, United determined that the Company was unlikely to meet certain commitments or provisions of certain executory contracts with third parties. The executory contracts are related to agreements with state and local governments ($157 million), aircraft improvements ($11 million) and facilities and other ($13 million)

          Additionally, the Company recorded a non-operating special charge of $49 million related to certain non-operating aircraft that were leased to others. The fair value of these aircraft was significantly impacted by the events of September 11.

         As part of the Air Transportation Safety and System Stabilization Act of 2001 (the "Act") enacted in response to the events of September 11, 2001, the federal government made $5.0 billion in federal grants available to the airline industry. The Company received a total of $782 million in grants under the Act, of which $652 million was received in 2001 and $130 million in 2002. These amounts represent the Company's total allocation of grant money under the Act.

        Following is a reconciliation of activity related to the accruals for the reduction in force and early termination fees:
 

   
Reduction in force
Early termination fees
  Balance at December 31, 2001
$ 87
$ 171
  Accruals
67
39
  Payments
(43)
(48) 
  Reversal of overaccruals
(44)
-
  Balance at December 31, 2002
$ 67
$ 162

         During 2002, the Company reversed $44 million of overaccruals pertaining to the reduction in force as a result of the Company furloughing fewer employees than was initially anticipated in early 2002.

         Through December 31, 2002, the Company had received approximately $58 million related to insurance recoveries on aircraft destroyed by the September 11 attacks and approximately $12 million related to other covered expenses.  The Company anticipates that its liability from claims arising from the events of September 11, 2001 will be significant, after considering the liability protections provided for by the Act; however, the Company expects that any amounts paid on such claims will be borne by its insurance carriers as claims are resolved and, in any event, the Company believes that, under the Act, its liability will be limited to its insurance coverage.

         The Company has not incurred any material environmental obligations relating to September 11.

        US Airways Merger.During the second quarter of 2001, UAL recognized a special charge of $116 million for incremental direct costs incurred related to the potential acquisition of US Airways Group, Inc. that was ultimately terminated. In addition to a $50 million termination fee, the Company incurred costs of $29 million related to integration project management, $16 million in legal fees and $21 million in other professional fees that were written off.

2000 -
         Operating Special Charges. The Company recorded the following special charges in operating expense in 2000:
 

  (in millions)
Amount
  Fleet impairments
$ 33
  Sublease losses
16
  Write-down of leased equipment
36
  Impairment of equipment
54
   
$ 139

         During 2000, the Company permanently grounded certain BAe Turbo-Prop aircraft which had been used in the United Express operation and announced the planned early retirement of the B727-222 aircraft fleet resulting in an impairment charge of $33 million, in accordance with SFAS No. 121, as amended by SFAS No. 144. In connection with the grounding of the BAe aircraft, the Company also incurred a charge of $16 million for losses related to subleases, in accordance with FASB Technical Bulletin 79-15, "Accounting for Loss on a Sublease Not Involving the Disposal of a Segment."

         The Company also announced its decision to end its freighter operation effective December 24, 2000, resulting in the early retirement of four DC10-30 freighter aircraft which were under lease. Accordingly, the Company recorded a charge of $12 million in the fourth quarter of 2000. Additionally, the Company permanently grounded seven leased B747-238 aircraft in the second quarter of 2000 and recorded a $24 million charge, as the aircraft continued to be leased but were no longer used for operating purposes beyond 2000.  These charges were recognized in accordance with EITF 88-10, "Costs Associated with Lease Modification or Termination," as it was determined that the grounded, leased aircraft and improvements had no substantive future use or benefit. Accordingly, the remaining rental payments and capitalized leasehold improvements were written-off.

         Finally, the Company recorded a charge of $37 million in the second quarter of 2000 when the Company retired the inflight video system on certain B777-222 aircraft, which was replaced by an enhanced and more reliable inflight video system. The Company also recorded an impairment charge of $17 million to reduce the carrying value of certain equipment no longer used in the Company's operations as of the fourth quarter 2000, to net realizable value in accordance with SFAS No. 121.

         Priceline. In 1999, United received 5.5 million warrants convertible into 5.5 million shares of Priceline common stock at an exercise price of $52.625, which were recorded at their fair value of $61 million. In the third quarter of 2000, United recorded an impairment loss of $38 million, net of tax, in non-operating expense, for the write-down of these warrants to zero. Subsequent to the third quarter of 2000, the Company sold all of its warrants in Priceline for less than $1 million in proceeds.

(4) Per Share Amounts

        Basic earnings per share were computed by dividing net earnings (loss) before extraordinary item and cumulative effect by the weighted-average number of shares of common stock outstanding during the year and potential participating ESOP preferred shares in periods where such shares are dilutive using the if-converted method. In addition, diluted earnings per share amounts include potential common shares, including common shares issuable upon conversion of ESOP shares committed to be released.
 

Earnings (Loss) Attributable to Common Stockholders (in millions)
2002
2001
2000
Net earnings (loss) before cumulative effect and extraordinary item
$(3,212)
$(2,137)
$ 265 
Preferred stock dividends
(10)
(10)
(46)
Earnings (loss) attributable to common stockholders (Basic and Diluted)
$(3,222)
$(2,147)
$ 219
       
Shares (in millions)      
Weighted average shares outstanding 
 60.2 
53.8 
51.3 
Participating convertible ESOP preferred stock
 -
-
57.0
Weighted average number of shares (Basic)
 60.2 
53.8 
108.3 
Non-participating convertible ESOP preferred stock
 - 
7.5 
Other
 -
-
0.7
Weighted average number of shares (Diluted)
60.2
53.8
116.5
       
Earnings (Loss) Per Share (before cumulative effect and extraordinary item)      
Basic
$(53.55)
$(39.90)
$ 2.02 
Diluted
$(53.55)
$(39.90)
$ 1.89 

        At December 31, 2002, stock options to purchase 12,850,750 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the exercise price of these options was greater than the average market price of the common shares. In addition, 33,857,761 shares of convertible ESOP preferred stock were not included in the computation of diluted earnings per share, as the result would be antidilutive.

(5) Comprehensive Income

        The following table presents the tax effect of those items included in other comprehensive income:
 

 
Year Ended December 31
(In millions)
2002
2001
2000
   
Tax
Net of
 
Tax
Net of
 
Tax
Net of
 
Pre-Tax
Effect
Tax
Pre-Tax
Effect
Tax
Pre-Tax
Effect
Tax
Unrealized holding gains (losses) on                  
investments arising during period
$ 6 
$ - 
$ 6 
$ 79 
$ (29)
$ 50 
$ (297)
$ 101 
$ (196) 
Less: reclassification adjustment                  
for gains included in net income
46
-
46
261
(95)
166
-
-
-
Net unrealized holding gains (losses)
(40)
 - 
(40)
(182)
66 
(116)
(297)
101 
(196)
Net unrealized gains (losses)                  
on derivatives
16 
16 
(72)
26 
(46)
Minimum pension liability
(2,364)
-
(2,364)
(418)
153
(265)
(6)
2
(4)
Total other comprehensive income
$(2,388)
$ -
$(2,388)
$ (672)
$ 245
$ (427)
$ (303)
$ 103
$(200)

        Unrealized gains (losses) on securities primarily represent gains (losses) on the Company's investments in Galileo and Cendant as discussed in Note 8, "Investments."

         The components of accumulated other comprehensive income (loss) (which are all net of applicable taxes in 2000 and 2001) are as follows:
 
 

 
Unrealized
Unrealized
Minimum
 
(in millions)
Gain/(Loss)
Losses on
Pension
 
 
on Investments
Derivatives
Liability
Total
Balance at December 31, 1999
$ 355
$ -
$ (3)
$ 352
Current year net change
(196)
-
(4)
(200)
Balance at December 31, 2000
$ 159
$ -
$ (7)
$ 152
Current year net change
(116)
(46)
(265)
(427)
Balance at December 31, 2001
$ 43
$ (46)
$ (272)
$ (275)
Current year net change
(40)
16
(2,364)
(2,388)
Balance at December 31, 2002
$ 3
$ (30)
$(2,636)
$(2,663)

(6)  Other Income (Expense) - Miscellaneous

        Included in Other income (expense) - "Miscellaneous, net" was $(13) million, $(21) million and $(22) million of foreign exchange gains (losses) in 2002, 2001 and 2000, respectively.

(7) Income Taxes

        In 2002, UAL incurred both a regular and an alternative minimum tax ("AMT") loss. The carryback of the AMT loss to 1998 and 1999 will produce a federal tax refund, thereby reducing AMT credits. The primary differences between UAL's regular tax loss and AMT loss are the depreciation adjustments and preferences.

         In assessing the realizability of its deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax asset will be realized. During 2002, the Company recorded a valuation allowance against its deferred tax assets.

        The provision (credit) for income taxes is summarized as follows:
 

  (In millions)
2002
2001
2000
  Current -       
  Federal
$ (669) 
$ (82)
$ (133)
  State
4
(24)
   
(665)
(82)
(157)
  Deferred -       
  Federal
 755 
(1,048)
278
  State
(90)
(96)
39
   
665
(1,144)
317
   
$ -
$(1,226)
$ 160

         The significant components of the deferred income tax provision (credit) are as follows:
 

(In millions)
2002
2001
2000
Deferred tax provision (exclusive of the    
other components listed below)
$ (495)
$(1,150)
$ 317
Increase in the valuation allowance       
for deferred tax assets
1,160
6
-
 
$ 665 
$(1,144)
$ 317

        The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows:
 

(In millions)
2002
2001
2000
Income tax provision at statutory rate
$(1,124)
$(1,175)
$ 151 
State income taxes, net of federal income      
tax benefit
 (56)
(62)
10 
ESOP dividends
(17)
(32)
Nondeductible employee meals
13 
18 
24 
Valuation allowance
1,160 
Other, net
7
4
7
 
$ -
$(1,226)
$ 160

        Temporary differences and carryforwards that give rise to a significant portion of deferred tax assets and liabilities for 2002 and 2001 are as follows:
 

(In millions)
2002
2001
 
Deferred Tax
Deferred Tax
Deferred Tax
Deferred Tax
 
Assets
Liabilities
Assets
Liabilities
Employee benefits, including        
postretirement medical and ESOP
$  1,753 
$ 29 
$ 1,329
$ 80
Depreciation, capitalized interest        
and transfers of tax benefits
3,733
-
3,180
Federal and state net operating loss        
carryforwards
1,627 
-
1,162
-
Mileage Plus deferred revenue
196 
-
171
-
Gains on sale and leasebacks
 247 
-
275
-
Rent expense
 468 
-
462
-
AMT credit carryforwards
 294 
-
255
-
Other
1,126 
1,032 
939
958
Less: Valuation allowance
(1,166)
-
(6)
-
 
$ 4,545
$ 4,794
$ 4,587
$ 4,218

        At December 31, 2002, UAL and its subsidiaries had $294 million of federal AMT credits and $1.6 billion of federal and state net operating loss ("NOL") credits which may be carried forward to reduce the tax liabilities of future years. Federal NOL credits of $218 million expire in 2022 and $1.2 billion expire in 2023.

         Current Internal Revenue Service ("IRS") rules would place the Company's NOLs at risk if an ownership change occurs during the three years prior to emergence from bankruptcy. An ownership change is triggered if shareholders owning 5% or more of the stock change their holdings in the aggregate by at least 50 percentage points. Consequently, the Bankruptcy Court has entered an injunction preventing trading in the Company's securities by substantial equity holders and claimholders, including the ESOP trustee, State Street Bank & Trust.

         On March 4, 2003, the Company announced that it had received a private letter ruling from the IRS which would permit the Company to allow the additional sale of UAL common stock held by the ESOP without jeopardizing these tax benefits. (See Note 16, "ESOP Preferred Stock" and Note 19, "Employee Stock Ownership Plans" for further details.)

         The Company has determined, based on its history of operating earnings (losses) and current declaration of bankruptcy, that it is more likely than not that the gross deferred tax assets, net of valuation allowances at December 31, 2002 are expected to be realized through the reversals of existing deferred tax credits.

(8) Investments

        At December 31, 2000, United owned 15,940,000 shares (18%) in Galileo, a leading provider of electronic global distribution services for the travel industry. On October 1, 2001, Cendant Corporation ("Cendant") acquired all of the outstanding common stock of Galileo for a combination of stock and cash. Accordingly, United tendered all of its shares in Galileo for net proceeds of $65 million and 21,168,320 shares in Cendant, resulting in a gain of $244 million. In the fourth quarter of 2001, United sold 14 million shares of Cendant common stock for net proceeds of $194 million, resulting in a gain of $17 million. In January 2002, United sold its remaining investment in Cendant for net proceeds of $137 million, resulting in a gain of $46 million.

        During 2000, 2001 and 2002, ULS invested approximately $53 million in Orbitz, an Internet travel web site. ULS owns approximately 22% of Orbitz and accounts for this investment using the equity method of accounting.

        During 1998 and 1999, United invested approximately $51 million in GetThere.com resulting in a 28% minority interest consisting of common stock, warrants and options. United accounted for its investment in GetThere.com using the equity method of accounting. On October 6, 2000, Sabre Holdings Corporation acquired all of the outstanding common stock of GetThere.com for $17.75 per share. Accordingly, after converting its options and warrants, United tendered all of its shares for net proceeds of $147 million, resulting in a gain of approximately $69 million, net of tax.

(9) Acquisitions

        On July 18, 2001, ULS successfully completed its cash tender offer to acquire all of the outstanding common stock of MyPoints.com for $2.60 per share. MyPoints.com is an Internet-based direct marketing and membership services company, known for its database-driven loyalty infrastructure. Including the costs related to vested management stock options, outstanding warrants and transaction-related expenditures, the aggregate cost of the acquisition was approximately $118 million ($32 million, net of cash acquired). The Company recorded approximately $32 million to goodwill and intangible assets based on the final purchase price allocation. This transaction is being accounted for under the purchase method, in accordance with SFAS No. 141, "Business Combinations."

(10) Liabilities Subject to Compromise

         Liabilities subject to compromise refers to liabilities incurred prior to the commencement of the Chapter 11 Cases. These amounts represent the Company's estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from negotiations, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim or other events. It is anticipated that such adjustments may be material. Payment terms for these amounts will be established in connection with the Chapter 11 Cases.

         At December 31, 2002, the Company had liabilities subject to compromise of approximately $13.8 billion which consisted of the following:
 

  (In millions)  
  Long-term debt, including accrued interest
$ 8,331 
  Aircraft-related accruals and deferred gains
2,306 
  Capital lease obligations, including accrued interest
2,195 
  Accounts payable
332 
  Company-obligated mandatorily redeemable  
  preferred securities of a subsidiary trust
97 
  Other 
572
   
$ 13,833
     

(11) Short-Term Borrowings

        At December 31, 2001, United had outstanding $133 million in short-term borrowings, bearing an average interest rate of 2.80%. Receivables amounting to $145 million were pledged by United to secure repayment of such outstanding borrowings. This arrangement was terminated in May 2002 and the borrowings repaid.

(12) Long-Term Debt

        As of December 31, 2002, all of the Company's pre-petition debt is in default due to the Chapter 11 filing. Pre-petition debt, which is classified as liabilities subject to compromise as of December 31, consisted of the following:
 

  (In millions)  
  Secured notes, 2.03% to 9.52%, averaging  
  5.83%, due through 2014
$ 7,050 
  Debentures, 9.00% to 11.21%, averaging  
  9.89%, due through 2021
646 
  Special facility bonds, 5.63% to 6.38%,   
  averaging 5.90%, due through 2035
493
   
$ 8,189

        A summary of long-term debt, including current maturities, as of December 31 is as follows:
 

(In millions)
2002
2001
DIP Facility, 7.75%, due 2004
$ 700
$ - 
Secured notes, 2.30% to 9.83%, averaging    
5.78%, due through 2014
6,708 
Debentures, 9.00% to 11.21%, averaging    
9.89%, due through 2021
646 
Special facility bonds, 5.63% to 6.38%,     
averaging 5.90%, due through 2035
-
493
 
700
7,847
Less: Unamortized discount on debt
(8)
Current maturities
-
(1,217)
 
$ 700
$ 6,622
     

        At December 31, 2002, United had outstanding a total of $3.9 billion of debt at variable rates from 2.03% to 9.52% based on specified spreads over LIBOR.

         In December 2002, the Company borrowed $700 million under the DIP Facility as described more fully in Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code."

         During 2002, the Company refinanced approximately $525 million in interim financing through a $775 million private debt financing which refinanced certain aircraft. The Company also arranged long-term financing for approximately $314 million in debt that had been placed in interim financing facilities and refinanced $238 million in long-term debt through a sale-leaseback transaction.

        In July 2000, the Company issued $921 million in enhanced equipment trust certificates ("EETCs") to refinance certain owned aircraft and aircraft under operating leases. Net proceeds after refinancing the operating leases was $622 million. In December 2000, the Company issued an additional $1.5 billion in EETCs to finance certain owned aircraft and in August 2001, the Company issued $1.5 billion in EETCs to finance certain owned aircraft. Also during 2001, the Company issued $1.0 billion in long-term debt to finance the acquisition of aircraft.

        In addition to scheduled principal payments, in 2000 the Company repaid $116 million in principal amount of debentures prior to maturity. The debentures were scheduled to mature at various times through 2021. An extraordinary loss of $6 million, net of tax benefits of $4 million was recorded, reflecting amounts paid in excess of the debt carrying value.

        At December 31, 2002, United had recorded $493 million in special facilities revenue bonds to finance the acquisition and construction of certain facilities at Los Angeles, San Francisco, Miami and Chicago. United guarantees the payment of these bonds under various payment and loan agreements. The bond proceeds are restricted to expenditures on the facilities and unspent amounts are classified as other assets in the Statements of Consolidated Financial Position.

        Various assets, principally aircraft, having an aggregate book value of $11.0 billion at December 31, 2002, were pledged as security under various loan agreements.

         The carrying amount of the Company's borrowings under the DIP Facility approximates the fair value. The fair value of the Company's debt included in liabilities subject to compromise cannot be reasonably estimated at December 31, 2002. The fair value of debt at December 31, 2001 was $6.9 billion.

(13) Lease Obligations

        The Company leases aircraft, airport passenger terminal space, aircraft hangars and related maintenance facilities, cargo terminals, other airport facilities, real estate, office and computer equipment and vehicles. As allowed under Section 365 of the Bankruptcy Code, the Company may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain other conditions. Consequently, the Company anticipates that its liabilities pertaining to leases, and the amounts related thereto as discussed below, will change significantly in the future.

        At December 31, 2002, scheduled future minimum lease payments under capital leases (substantially all of which are for aircraft) and operating leases having initial or remaining noncancelable lease terms of more than one year were as follows:
 

(In millions)
Operating Leases
Capital
 
Aircraft
Non-aircraft
Leases
Payable during -      
2003
$ 985
$ 614
$ 318 
2004
1,021
595
329 
2005
1,034
582
298 
2006
1,045
559
325 
2007
1,025
620
451 
After 2007
7,694
7,488
1,144
Total minimum lease payments
$ 12,804
$ 10,458
2,865 
Imputed interest (at rates of 5.3% to 12.2%)    
(805)
Present value of minimum lease payments    
$ 2,060

        As of December 31, 2002, United leased 300 aircraft, 59 of which were under capital leases. These leases have terms of 5 to 26 years, and expiration dates ranging from 2003 through 2018. Under the terms of all leases, United has the right to purchase the aircraft at the end of the lease term, in some cases at fair market value and in others at fair market value or a percentage of cost. The theoretical present value of United's future minimum lease payments under operating leases for aircraft and non-aircraft was $5.2 billion and $3.5 billion, respectively, at December 31, 2002.

        Certain of the Company's aircraft lease transactions contain provisions such as put options giving the lessor the right to require the Company to purchase the aircraft at lease termination for a certain amount resulting in residual value guarantees. Leases containing this or similar provisions are recorded as capital leases on the statement of financial position and, accordingly, any and all residual value guarantee amounts contained in an aircraft lease are fully reflected as capital lease obligations on the Statements of Consolidated Financial Position.

        In connection with the financing of certain aircraft accounted for as capital leases, United had on deposit at December 31, 2002 an aggregate 42 billion yen ($357 million), 387 million euro ($405 million) and $14 million in certain banks and had pledged an irrevocable security interest in such deposits to certain of the aircraft lessors. These deposits will be used to pay off an equivalent amount of recorded capital lease obligations.

        Amounts charged to rent expense, net of minor amounts of sublease rentals, were $1.5 billion in 2002, $1.4 billion in 2001 and $1.5 billion in 2000. Included in 2002 rental expense was $11 million in contingent rentals, resulting from changes in interest rates for operating leases under which the rent payments are based on variable interest rates.

(14) Company-Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust

        In December 1996, UAL Corporation Capital Trust I (the "Trust") issued $75 million of its 13 1/4% Trust Originated Preferred Securities (the "Preferred Securities") in exchange for 2,999,304 depositary shares, each representing 1/1000 of one share of Series B 12 1/4% preferred stock (see Note 15, "Serial Preferred Stock"). Concurrent with the issuance of the Preferred Securities and the related purchase by UAL of the Trust's common securities, the Company issued to the Trust $77 million aggregate principal amount of its 13 1/4% Junior Subordinated Debentures (the "Debentures") due 2026. The Debentures are and will be the sole assets of the Trust. The interest and other payment dates on the Debentures correspond to the distribution and other payment dates on the Preferred Securities. Upon maturity or redemption of the Debentures, the Preferred Securities will be mandatorily redeemed. The Debentures are redeemable at UAL's option, in whole or in part, on or after July 12, 2004, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. Upon the repayment of the Debentures, the proceeds thereof will be applied to redeem the Preferred Securities.

        There is a full and unconditional guarantee by UAL of the Trust's obligations under the securities issued by the Trust. However, the Company's obligations are subordinate and junior in right of payment to certain other of its indebtedness. UAL has the right to defer payments of interest on the Debentures by extending the interest payment period, at any time, for up to 20 consecutive quarters. If interest payments on the Debentures are so deferred, distributions on the Preferred Securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, UAL may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock.

        As a result of the Chapter 11 filing, the Company is in default to the Trust and is no longer making interest payments on the Debentures. As a result, the Trust will no longer have the funds available to pay distributions on the Preferred Securities and stopped accruing and paying such dividends in October 2002. The Trust is in default on the Preferred Securities. As the Company is a guarantor on the outstanding Debentures, as a result of the default, the Company has become a debtor to the holders of the Preferred Securities directly. This liability is a pre-petition liability and has been classified as liabilities subject to compromise. Additionally, the Company is no longer accruing for distributions on the Preferred Securities.

        The fair value of the Preferred Securities at December 31, 2002 and 2001 was $3 million and $57 million, respectively.

(15) Serial Preferred Stock

        At December 31, 2002, UAL had outstanding 3,203,177 depositary shares, each representing 1/1000 of one share of Series B 12 1/4% preferred stock, with a liquidation preference of $25 per depositary share ($25,000 per Series B preferred share) and a stated capital of $0.01 per Series B preferred share. Under its terms, any portion of the Series B preferred stock or the depositary shares is redeemable for cash after July 11, 2004, at UAL's option, at the equivalent of $25 per depositary share, plus accrued dividends. The Series B preferred stock is not convertible into any other securities, has no stated maturity and is not subject to mandatory redemption.

        The Series B preferred stock ranks senior to all other preferred and common stock outstanding, except the Preferred Securities, as to receipt of dividends and amounts distributed upon liquidation. The Series B preferred stock has voting rights only to the extent required by law and with respect to charter amendments that adversely affect the preferred stock or the creation or issuance of any security ranking senior to the preferred stock. Additionally, if dividends are not paid for six cumulative quarters, the Series B preferred stockholders are entitled to elect two additional members to the UAL Board of Directors until all dividends are paid in full. Pursuant to UAL's restated certificate of incorporation, UAL is authorized to issue a total of 50,000 shares of Series B preferred stock.

        On September 30, 2002, UAL announced that it was suspending the payment of dividends on the Series B preferred stock. As a result of the Chapter 11 filing, the Company is no longer accruing for dividends on the Series B preferred stock.

        UAL is authorized to issue up to 15,986,584 additional shares of serial preferred stock.

(16) ESOP Preferred Stock

        The following activity relates to UAL's outstanding ESOP preferred stocks (see Note 19, "Employee Stock Ownership Plans" for a description of the ESOPs):
 

 
Class 1 ESOP
Class 2 ESOP
ESOP Voting
Balance December 31, 1999
12,100,463
948,036
12,625,323
Shares issued
539,177 
855,998 
3,073,968 
Converted to common
(420,958)
(283,428)
(710,056)
Balance December 31, 2000
12,218,682
1,520,606
14,989,235
Shares issued
692,811 
857,496 
Converted to common
(359,780)
(239,705)
(603,107)
Balance December 31, 2001
11,858,902 
1,973,712 
15,243,624 
Shares issued
980,724 
Converted to common
(5,346,850)
(1,362,881)
(6,790,616)
Balance December 31, 2002
6,512,052
1,591,555
8,453,008

        An aggregate of 17,675,345 shares of Class 1 and Class 2 ESOP Preferred Stock were issued to employees under the ESOPs. Each share of ESOP Preferred Stock is convertible into four shares of UAL common stock. Shares typically are converted to common as employees retire or otherwise leave the Company. The stock has a par value of $0.01 per share and is nonvoting. The Class 1 and Class 2 ESOP Preferred Stocks have a liquidation value of $126.96 per share. The Class 1 ESOP Preferred Stock provided a fixed annual dividend of $8.8872 per share, which ceased on March 31, 2000; the Class 2 does not pay a fixed dividend.

        Class P, M and S Voting Preferred Stocks were established to provide the voting power to the employee groups participating in the ESOPs. Additional Voting Preferred Stock were issued as shares of the Class 1 and Class 2 ESOP Preferred Stock were allocated to employees. In the aggregate, 17,675,345 shares of Voting Preferred Stock were issued through the year 2000. The Voting Preferred Stock outstanding at any time commands voting power for approximately 55% of the vote of all classes of capital stock in all matters requiring a stockholder vote, other than for the election of members of the Board of Directors. The Voting Preferred Stock has a par value and liquidation preference of $0.01 per share. The stock is not entitled to receive any dividends and is convertible into .0004 shares of UAL common stock.

        Class Pilot MEC, IAM, SAM and I junior preferred stock (collectively "Director Preferred Stocks") were established to effectuate the election of one or more members to UAL's Board of Directors. One share each of Class Pilot MEC and Class IAM junior preferred stock is authorized and issued. The Company is authorized to issue ten shares each of Class SAM and Class I junior preferred stock. There were three shares of Class SAM and four shares of Class I issued at December 31, 2002. Each of the Director Preferred Stocks has a par value and liquidation preference of $0.01 per share. The stock is not entitled to receive any dividends and Class I was redeemed automatically upon "Sunset," which occurred March 7, 2003, as discussed below.

         In September 2002, State Street Bank and Trust ("State Street") was appointed as an independent fiduciary for the ESOP. On September 27, 2002, State Street filed a Form 144 "Notice of Proposed Sale of Securities" ("Form 144") with the SEC to indicate it may sell up to 10,964,700 shares of UAL common stock over the next three months. On October 25, 2002, November 22, 2002 and December 9, 2002, State Street amended its Form 144 to sell an additional 4,040,758, 10,283,398 and 28,291,896, respectively. The shares of common stock are issuable upon the conversion of shares of Class 1 and Class 2 ESOP Preferred Stock held by the plan and are issued on a private placement basis to State Street. As of December 31, 2002, State Street had converted 6.0 million shares of ESOP Preferred Stock to an equivalent 24.0 million common shares and sold them on the open market, pursuant to the Form 144 as amended.

         On December 9, 2002, the Company filed a motion with the Bankruptcy Court to prevent the sale of UAL common stock by substantial holders of equity or claims in order to protect its NOLs. (See Note 7, "Income Taxes.") The Bankruptcy Court issued a temporary injunction but permitted the Company to allow State Street to sell a certain number of shares. In January 2003, State Street was allowed to convert an additional 3.2 million shares of ESOP Preferred Stock to an equivalent 12.8 million common shares and sell them on the open market. On March 4, 2003, the Company announced it had received a private letter ruling from the IRS which would allow the Company to permit State Street to sell an additional 3.9 million shares of UAL common stock without jeopardizing its NOLs. State Street then converted 0.9 million shares of ESOP Preferred Stock to an equivalent 3.9 million common shares and sold them on the open market.

         Also in September 2002, the United Air Lines, Inc. Pension and Welfare Plans Administrative Committee appointed AON Fiduciary Counselors, Inc. ("AON") as an independent fiduciary for the UAL Stock Funds offered in the Company's 401(k) plans. On September 27, 2002, AON filed a Form 144 with the SEC to indicate it may sell up to 10,577,325 shares of UAL common stock in the 401(k) plans. Simultaneous with the filing of the Form 144, AON directed Fidelity Investments ("Fidelity") and Frank Russell Trust Company ("Frank Russell") to cease the purchase of UAL common stock and to raise the amount of cash held in the UAL Stock Fund to 20% by selling UAL common stock. As of December 31, 2002, Fidelity and Frank Russell had sold all of the UAL common stock previously held by the plans.

         Employee voting under the ESOP is determined by Voting Preferred Stock and not by Class 1 and Class 2 ESOP Preferred Stock. The Voting Preferred Stock will generally continue to represent approximately 55% of the aggregate voting power until "Sunset," even though the common stock issuable upon conversion of the ESOP stock may represent more or less than 55% of the fully diluted common stock of UAL. Sunset will occur when the common shares issuable upon conversion of Class 1 and Class 2 ESOP Preferred Stock, plus any common shares held by any other Company sponsored employee benefit plan, plus any available unissued ESOP shares held in the ESOPs, equal, in the aggregate, less than 20% of the common equity (generally common stock issued or issuable at the time of the recapitalization), and available unissued ESOP shares of UAL. For purposes of measuring the Sunset, employee ownership was approximately 33% at December 31, 2002. As a result of the additional sales of UAL common stock discussed above, employee ownership was reduced to less than 20% on March 7, 2003, thus triggering the Sunset.

(17) Common Stockholders' Equity

        Changes in the number of shares of UAL common stock outstanding during the years ended December 31 were as follows:
 

 
2002
2001
2000
Shares outstanding at beginning of year
54,984,178 
52,538,692 
50,776,583 
Stock options exercised
34,000 
187,400 
Shares issued from treasury under      
compensation arrangements
181,401 
53,242 
32,458 
Shares acquired for treasury
(1,398)
(40,097)
(1,326,877)
Forfeiture of restricted stock
(5,800)
Conversion of ESOP preferred stock
27,197,566 
2,398,184 
2,817,829 
Other
6,216
157
57,099
Shares outstanding at end of year
82,367,963
54,984,178
52,538,692

        During 2000, the Company repurchased 1,258,263 shares of common stock on the open market at a total purchase price of $81 million.

(18) Stock Options and Awards

        The Company has granted options to purchase common stock to various officers and employees. The option price for all stock options is at least 100% of the fair market value of UAL common stock at the date of grant. Options generally vest and become exercisable in four equal, annual installments beginning one year after the date of grant, and generally expire in ten years.

        The Company has also awarded shares of restricted stock to officers and key employees. These shares generally vest over a five-year period and are subject to certain transfer restrictions and forfeiture under certain circumstances prior to vesting. Unearned compensation, representing the fair market value of the stock at the measurement date for the award, is amortized to salaries and related costs over the vesting period. During 2002 and 2000, respectively, 175,000 and 23,000 shares of restricted stock were issued from treasury. No shares were issued in 2001. The amortization of restricted stock resulted in $1 million in compensation expense being recorded in 2002 and $2 million in each of the years 2001 and 2000. As of December 31, 2002, 263,800 shares were restricted and unvested.

        SFAS No. 123 establishes a fair value based method of accounting for stock options. As discussed in Note 2(m), "Summary of Significant Accounting Policies - Stock Option Accounting," the Company has elected to continue using the intrinsic value method of accounting prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."

        The weighted-average grant date fair value of restricted shares issued was $3.03 for shares issued in 2002 and $51.83 for shares issued in 2000. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 

 
2002
2001
2000
Risk-free interest rate
4.8%
6.4%
6.4%
Dividend yield
0.0%
2.4%
2.4%
Volatility
46.0%
36.0%
35.0%
Expected life (years)
4.0
4.0
4.0

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

        Stock option activity for the past three years was as follows:
 

 
2002
2001
2000
   
Wtd Avg
 
Wtd. Avg.
 
Wtd. Avg.
 
Shares
Exer Price
Shares
Exer. Price
Shares
Exer. Price
Outstanding at beginning of year
10,744,224 
$ 47.44
7,660,472 
$ 52.78 
6,666,409 
$ 52.42
Granted
5,785,975 
$ 10.22
3,178,500 
$ 34.50 
1,447,600 
$ 53.24
Exercised
-
(34,000)
$ 20.72 
(187,400)
$ 23.96
Terminated
(2,078,049)
$ 39.42
(60,748)
$ 54.05 
(266,137)
$ 67.50
Outstanding at end of year
14,452,150 
$ 33.69
10,744,224 
$ 47.44 
7,660,472 
$ 52.78
             
Options exercisable at year-end
6,567,992
$ 47.89
 5,507,581 
$ 48.72 
4,200,748 
$ 44.54
             
Reserved for future grants at year-end
14,051,244
5,166,804
8,284,556
             
Wtd avg fair value of options            
granted during the year
$ 4.15
$ 11.90
$ 17.80

        The following information relates to stock options outstanding as of December 31, 2002:
 

 
Options Outstanding
Options Exercisable
   
Weighted-Average
     
Range of
Outstanding at
Remaining
Weighted-Average
Exercisable at
Weighted-Average
Exercise Prices
December 31, 2002
Contractual Life
Exercise Price
December 31, 2002
Exercise Price
           
$ 2 to 13
5,185,660
9.3 years
$ 9.90
-
-
$ 14 to 29
2,127,290
2.9 years
$ 21.18
2,127,290
$ 21.18
$ 30 to 45
2,370,750
8.0 years
$ 37.47
651,200
$ 37.77
$ 46 to 59
2,045,100
5.5 years
$ 53.34
1,475,752
$ 53.34
$ 60 to 69
1,545,450
6.2 years
$ 62.76
1,185,100
$ 62.78
$ 70 to 92
1,177,900
5.3 years
$ 81.18
1,128,650
$ 81.30
 
14,452,150 
   
6,567,992
 

(19)  Employee Stock Ownership Plans

        On July 12, 1994, the stockholders of UAL approved a plan of recapitalization to provide an approximately 55% equity interest in UAL to certain employees of United in exchange for wage concessions and work-rule changes. The employees' equity interest was allocated to individual employees through the year 2000 under ESOPs which were created as a part of the recapitalization.

        The ESOPs cover employees represented by ALPA, the IAM and U.S. management and salaried employees and include a "Leveraged ESOP," a "Non-Leveraged ESOP" and a "Supplemental ESOP." Both the Leveraged ESOP and the Non-Leveraged ESOP are tax-qualified plans while the Supplemental ESOP is not a tax-qualified plan.

        The equity interests were delivered to employees through two classes of preferred stock (Class 1 and Class 2 ESOP Preferred Stock, collectively "ESOP Preferred Stock"), and the voting interests were delivered through three separate classes of preferred stocks (Class P, M and S Voting Preferred Stock, collectively, "Voting Preferred Stock"). The Class 1 ESOP Preferred Stock was delivered to an ESOP trust in seven separate sales under the Leveraged ESOP, the last of which occurred on January 5, 2000. Based on Internal Revenue Code Limitations, shares of the Class 2 ESOP Preferred Stock were either contributed to the Non-Leveraged ESOP or allocated as "book entry" shares to the Supplemental ESOP annually through the year 2000. The classes of preferred stock are described more fully in Note 16, "ESOP Preferred Stock."

        Shares of ESOP Preferred Stock were legally released or allocated to employee accounts as of year-end. The final allocation of shares occurred in March 2001 effective December 31, 2000. During 2002, 88,981 shares of Class 2 ESOP Preferred Stock previously allocated in book entry form were issued and either contributed to the qualified plan or converted and sold on behalf of terminating employees. In addition, during 2002, State Street began converting shares as discussed in Note 16, "ESOP Preferred Stock."

        For the Class 2 ESOP Preferred Stock committed to be contributed to employees under the Supplemental ESOP, employees can elect to receive their "book entry" shares in cash upon termination of employment. At December 31, 2002, there were 360,831 book entry shares outstanding under the Supplemental ESOP. The estimated fair value of such shares at December 31, 2002 and 2001 is reflected in the Statements of Consolidated Financial Position.

(20) Retirement and Postretirement Plans

        The Company has various retirement plans, both defined benefit and defined contribution, which cover substantially all employees. The Company also provides certain health care benefits, primarily in the U.S., to retirees and eligible dependents, as well as certain life insurance benefits to retirees. The Company has reserved the right, subject to collective bargaining agreements, to modify or terminate the health care and life insurance benefits for both current and future retirees. The amounts disclosed below do not reflect the impact of any changes to the benefit plans that might be contemplated as a result of the bankruptcy filing or negotiations with unions under the collective bargaining agreements.

        The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in the Statements of Consolidated Financial Position for the defined benefit and other postretirement plans as of December 31:
 

(In millions)    
Change in Benefit Obligation
Pension Benefits
Other Benefits
 
2002
2001
2002
2001
Benefit obligation at beginning of year
$10,095 
$ 9,252 
$ 2,359 
$ 1,706 
Service cost
  399 
352 
100 
68 
Interest cost
 809 
722 
211 
149 
Plan participants' contributions
 2 
11 
11 
Amendments
 544 
4
 217 
Actuarial (gain) loss
 1,442 
284 
1,218 
473 
Curtailments
13 
69 
Foreign currency exchange rate changes
17 
(15)
Benefits paid
(635)
(518)
(151)
(117)
Benefit obligation at end of year
$12,673
$10,095
$  3,965
$ 2,359
         
         
         
         
         
         
Change in Plan Assets        
 
2002
2001
2002
2001
Fair value of plan assets at beginning of year
$  7,575 
$ 8,511 
$ 118 
$ 116 
Actual return on plan assets
 (704)
(457)
Employer contributions
 53 
43 
 135 
101 
Plan participants' contributions
 11 
11 
Foreign currency exchange rate changes
(5)
Benefits paid
(635)
(518)
(151)
(117)
Fair value of plan assets at end of year
$ 6,298
$ 7,575
$ 119
$ 118
         
Funded status
$(6,377)
$ (2,520)
$(3,846)
$(2,241)
Unrecognized actuarial (gains) losses
 4,456 
1,508 
1,677 
484 
Unrecognized prior service costs
 1,150 
692 
209 
Unrecognized net transition obligation
13
15
-
-
Net amount recognized
$ (758)
$ (305)
$(1,960)
$(1,755)
         
Amounts recognized in the statement of        
financial position consist of:
2002
2001
2002
2001
         
Prepaid (accrued) benefit cost
$  (758)
$ (305)
$(1,960)
$(1,755)
Accrued benefit liability
(3,956)
(991)
Intangible asset
 1,162 
562 
Accumulated other comprehensive income
2,794
429
-
-
Net amount recognized
$ (758)
$ (305)
$(1,960)
$(1,755)
         
Weighted-average assumptions
2002
2001
2002
2001
         
Discount rate
6.75%
7.50%
6.75%
7.50%
Expected return on plan assets
9.00%
9.75%
8.00%
8.00%
Rate of compensation increase
4.30%
4.20%
-
-

        The assumed health care cost trend rate for gross claims paid was 10.0% for 2003 decreasing to an ultimate rate of 4.5% in 2009 and 8% for 2002 decreasing to an ultimate rate of 4.5% in 2006.

        The net periodic benefit cost included the following components:
 

(In millions)
Pension Benefits
Other Benefits
 
2002
2001
2000
2002
2001
2000
Service cost
$   399 
$ 352 
$ 269 
$ 100 
$ 68 
$ 47 
Interest cost
 809 
722 
629 
211 
149 
120 
Expected return on plan assets
(822)
(805)
(740)
(9)
(9)
(9)
Amortization of prior service cost            
including transition obligation/(asset)
 89 
73 
58 
10 
Curtailment charge
74 
Recognized actuarial (gain)/loss
26
16
(7)
 27
2
(9)
Net periodic benefit costs
$ 501
$ 432
$ 209
$ 339
$ 214
$ 149

        Total pension expense for all retirement plans (including defined contribution plans) was $683 million in 2002, $629 million in 2001 and $302 million in 2000.

        The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the plans with accumulated benefit obligations in excess of plan assets were $12.7 billion, $11.0 billion and $6.3 billion, respectively, as of December 31, 2002 and $10.1 billion, $8.9 billion and $7.6 billion, respectively, as of December 31, 2001.

        Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care trend rate would have the following effects:
 

(In millions)
1% Increase
1% Decrease
Effect on total service and interest cost
$ 50 
$ (40) 
Effect on postretirement benefit obligation
$ 672
$ (539) 

        Changes in interest rates or rates of inflation may impact the assumptions used in the valuation of pension obligations and postretirement obligations including discount rates, rates of return on plan assets and rates of increase in compensation, resulting in increases or decreases in United's pension and postretirement liabilities and pension and postretirement costs.

         The pension obligation and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 0.5% (from 6.75% to 6.25%) would increase the Company's pension obligation at December 31, 2002 by approximately $820 million and increase the estimated 2003 pension expense by approximately $85 million.

         Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return on plan assets by 0.5% (from 9.0% to 8.5%) would increase the estimated 2003 pension expense by approximately $40 million.

(21) Commitments, Contingent Liabilities and Uncertainties

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

         Financings and Guarantees. In addition to common commercial lease transactions, United also enters into numerous long-term agreements to lease certain airport and maintenance facilities which are financed through tax-exempt special facilities revenue bonds and issued by various local municipalities to build or improve airport and maintenance facilities. Under these lease agreements, United is required to make rental payments in amounts sufficient to pay the maturing principal and interest payments on the bonds. At December 31, 2002, $1.2 billion principal amount of such bonds was outstanding. As of December 31, 2002, UAL and United had jointly guaranteed $35 million of such bonds and United had guaranteed $1.2 billion of such bonds, including accrued interest. The payments required to satisfy these obligations are included in the future minimum lease payments disclosed in Note 13, "Lease Obligations."

         Third Party Guarantees. In conjunction with efforts to enhance the Star Alliance, in 1999 United agreed to guarantee a portion of third-party debt. The guarantee is set to expire in 2009 when the loan is due in full. United's maximum exposure to the guaranteed loan is approximately $106 million and will only trigger if the loan is in default. No liability was recorded by United at the time of the guarantee. United earns commitment fees on the maximum guaranteed amount of the loan. In addition, United may also earn drawdown fees on the outstanding loan balance based on a calculated formula, requiring the borrower to pay the incremental difference between United's credit rating and the borrower's. Upon drawdown on the guaranteed loan, United can seek reimbursement of the paid amount from the borrower plus interest at the Federal funds rate plus 2%. United has subordinate security interests on the aircraft purchased with the loan proceeds.

         Fuel Consortiums. United also participates in numerous fuel consortiums with other carriers at major airports to reduce the costs of fuel distribution and storage. Interline agreements govern the rights and responsibilities of the consortium members and provide for the allocation of the overall costs to operate the consortium based on usage. The consortiums (and in limited cases, the participating carriers) have entered into long-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax-exempt bonds (either special facilities lease revenue bonds or general airport revenue bonds), issued by various local municipalities. In general, the consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds. As of December 31, 2002, approximately $450 million principal amount of such bonds are direct indebtedness of fuel consortiums at major hubs in which United participates. United's maximum exposure is approximately $210 million principal amount of such bonds based on United's past consortium participation and will only trigger if the other participating carriers or consortiums members default on their lease payments. The guarantees are set to expire when the tax-exempt bonds are paid in full, which ranges from 2010 to 2028. No liability was recorded by United at the time the indirect guarantees were made.

         In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") which requires the consolidation of variable interest entities ("VIEs"), as defined. The Company is still evaluating whether special facilities revenue bonds and fuel consortiums should be considered VIEs under FIN 46.

          EETC Debt. In 1997 and 2000, United issued EETCs to refinance certain owned aircraft and aircraft under operating leases. A portion of these proceeds are direct obligations of United and were recognized in the Statements of Consolidated Financial Position while certain proceeds were place in trusts not owned or affiliated with United. The proceeds placed in off-balance sheet trusts were used to refinance the remaining bank debt of the lessors in existing leveraged leases with United. As of December 31, 2002, approximately $300 million of these proceeds were placed in off-balance sheet trusts. For one of the trusts, United is the swap provider and pays fixed interest and receives variable interest which converts the trust's variable rate assets to fixed rate assets and converts United's variable rate lease payments to fixed rate lease payments.

         The Company is still evaluating whether or not the EETC trusts are considered VIEs under FIN 46.

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

         UAL records liabilities for legal and environmental claims against it in accordance with generally accepted accounting principles. These amounts are recorded based on the Company's assessments of the likelihood of their eventual settlements. The amounts of these liabilities could increase or decrease in the near term, based on revisions to estimates relating to the various claims. In addition, as a result of the bankruptcy filing, as of the Petition Date, virtually all pending litigation is stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, again subject to certain exceptions, to recover on pre-petition claims against the Debtors. Accordingly, the Company has classified certain of these liabilities as liabilities subject to compromise.

         Commitments. At December 31, 2002, commitments for the purchase of property and equipment, principally aircraft, approximated $1.6 billion, after deducting advance payments. An estimated $0.1 billion will be spent in 2003, $0.3 billion in 2004, $0.4 billion in 2005, $0.4 billion in 2006 and $0.4 billion in 2007 and thereafter. The major commitments are for the purchase of A319, A320 and B777 aircraft, which are currently scheduled to be delivered through 2007.

        In connection with the construction of the Indianapolis Maintenance Center, United agreed to spend an aggregate $800 million on capital investments by the year 2001 and employ at least 7,500 individuals by the year 2004. In the event such targets are not reached, United may be required to make certain payments to the city of Indianapolis and state of Indiana. As a result of the events of September 11 and the subsequent reduction in the Company's operations, headcount and capital spending, United repaid $34 million to the state and local governments in June of 2002 and has accrued for the additional estimated liability for 2004.

        Approximately 80% of United's employees are represented by various labor organizations. The contracts with ALPA and the IAM become amendable in 2004 and with the AFA in 2006. The Company is in the process of negotiating with its labor unions to amend the existing contracts in light of the bankruptcy filing and United's need to cut costs. As described in Note 1, "Proceedings Under Chapter 11 of the Bankruptcy Code," Section 1113(c) of the Bankruptcy Code permits the Company to move to reject its labor contracts. On March 17, 2003, United filed a motion with the Bankruptcy Court to reject its labor contracts pursuant to Section 1113(c) and the Company expects to obtain a ruling on the motion by early May.

(22) Financial Instruments and Risk Management

        Derivative Financial Instruments - Effective January 1, 2001, UAL adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended. The adoption of SFAS No. 133 resulted in a cumulative charge of $8 million, net of tax, to 2001 earnings. This primarily related to the changes in fair values of certain equity warrants that were not designated as qualifying hedging instruments.

       Hedges of Future Cash Flows

        Foreign Currency - United enters into forwards and currency swaps to reduce exposure to currency fluctuations on Japanese yen- and euro-denominated capital lease obligations. The cash flows of the forwards and swaps mirror those of the capital leases. These forwards and swaps have been designated as cash flow hedges of the foreign currency denominated lease payments. For these forwards and swaps, United excludes changes in fair value resulting from changes in the forward points in its assessment of effectiveness. Any gains or losses realized upon early termination of these forwards and swaps are recorded (net of tax) as a component of other comprehensive income and recognized in income as the hedged transaction impacts earnings. As a result of the bankruptcy filing, all swaps and forwards were terminated by the respective counterparties while out of the money. The outstanding liabilities for these swaps and forwards are recorded as liabilities subject to compromise.

        The Company hedges some of the risks of exchange rate volatility on its anticipated future Japanese yen, euro, Canadian dollar, Australian dollar and British pound revenues by purchasing put options and on Hong Kong dollar revenues by entering into forward contracts. These options and forwards have a duration of less than one year and the amounts are synchronized with the expected cash receipts. Accordingly, the put options and forwards have been designated as cash flow hedges of the anticipated cash receipts. Changes in the fair value of purchased put option contracts, to the extent they are effective, are recorded as a component of other comprehensive income (net of tax) and then recognized as a component of passenger revenue when the underlying hedged revenue is recorded. United excludes, in its assessment of effectiveness, changes in the fair value of these instruments that are a result of changes in their time value. As of December 31, 2002, the Company has no outstanding currency hedges.

        Aircraft Fuel - From time to time, United uses crude oil and heating oil forwards and options to hedge a portion of its price risk related to aircraft fuel purchases. These contracts have maturity dates of less than two years and have been designated as cash flow hedges of anticipated jet fuel purchases. These contracts are recorded at fair value with the changes in fair value, to the extent they are effective, recorded in other comprehensive income (net of tax), until the underlying hedged fuel is consumed. The Company determines the ineffective portion of the fuel forwards and options as the change in the fair value of the hedge contracts compared to the change in expected cash outflows for the hedged jet fuel. United excludes, in its assessment of effectiveness, changes in the fair value of these instruments that are a result of changes in their time value. As a result of the bankruptcy filing, all fuel hedges were terminated by the respective counterparties. The gain that resulted from the early termination of the hedges is recorded as a component of other comprehensive income and will be reclassified into earnings in the period of the original maturity of the hedges.

        Interest Rate - United is a party to a series of interest rate swaps that convert floating-rate operating leases to fixed-rate leases. United has designated these swaps as cash flow hedges of the floating-rate leases and has recorded these contracts at fair value with the effective portion recorded as a component of other comprehensive income (net of tax). As of December 31, 2002, United had $130 million notional amount of interest rate swaps outstanding with a fair value to United of $(27) million.

        The ineffectiveness resulting from the changes in fair value of aircraft fuel and interest rate hedge positions was immaterial. There was no ineffectiveness resulting from the changes in fair value of foreign currency hedge positions reported in earnings. Amounts excluded from the assessment of effectiveness amounted to approximately $1 million before income taxes and were recorded in "Miscellaneous, net."

        The following is a reconciliation of current period changes of the portion of stockholders' equity relating to derivatives that qualify as cash flow hedges:
 

(In millions)
(decrease)/increase
Balance as of December 31, 2001
$ (46)
Current period increase in fair value
   4
Reclassifications into earnings
  12
Balance as of December 31, 2002
$ (30)

        Of this amount, $5 million in losses is expected to be recorded into earnings within the next twelve months. At December 31, 2002, the term of derivative instruments hedging variability in cash flows, except those related to payment of variable interest on existing financial instruments, was sixteen years.

Other Derivative Instruments Not Designated as Hedges

        Foreign Currency - From time to time, United enters into Japanese yen forward exchange contracts to minimize gains and losses on the revaluation of short-term yen-denominated liabilities. The yen forwards, typically having short-term maturities, are not designated hedges under SFAS No. 133 and are marked to fair value through the income statement at the end of each accounting period. The unrealized mark-to-market gains and losses generally offset the losses and gains recorded on the yen liabilities.

        To reduce hedging costs, the Company sells a correlation option denominated in Japanese yen, euros, Canadian dollars, Australian dollars and British pounds. These correlation options are not designated as a hedge and the changes in the fair market value of the correlation options are included in "Miscellaneous, net."

(23) Segment Information

         In the first quarter of 2002, the Company made changes to its corporate structure which resulted in substantially all of UAL's customer loyalty and on-line travel marketing programs (which were previously the responsibility of United) becoming owned and operated by ULS. ULS had been United's agent to market and sell Mileage Plus miles to non-airline business partners beginning in October of 2000. In the first quarter of 2002, ULS assumed direct responsibility for these relationships rather than as an agent of United. The above changes were designed to increase the overall value of UAL's loyalty businesses by focusing management attention on these activities and enhancing the range of products and services offered to Mileage Plus members and business partners. United remains responsible for all Mileage Plus airline partnerships and the setting of airline mileage accruals and award levels and airline-related loyalty recognition levels. As both United and ULS remain wholly owned subsidiaries of UAL, there is no impact to UAL's consolidated results of operations or statements of financial position for these transactions.

         As a result of the transactions described in the previous paragraph, the Company has adjusted its segment reporting structure. UAL now has five reportable segments which reflect the current management of the business: North America, the Pacific, the Atlantic and Latin America which are part of United, and ULS. Prior year information has been restated to reflect the change to UAL's reportable segments; however, the 2001 and 2000 information does not reflect the change in arrangements between United and ULS which occurred in the first quarter of 2002.

         In accordance with DOT guidelines, the Company allocates passenger and cargo revenues for the North America segment based on the actual flown revenue for flights with an origin and destination in the U.S. Passenger and cargo revenue for international segments is based on the actual flown revenue for flights with an origin or destination in that segment. Other revenues that are not directly associated with a flight (such as Red Carpet Club membership fees) are allocated based on available seat miles flown in that segment.

         The accounting policies for each of these segments are the same as those described in Note 2, "Summary of Significant Accounting Policies," except that segment financial information has been prepared using a management approach which is consistent with how the Company's management internally disperses financial information for the purpose of making internal operating decisions. UAL evaluates performance based on earnings before income taxes, special charges and gains on sales. A reconciliation of the total amounts reported by reportable segments to the applicable amounts in the consolidated financial statements follows:
 
 

(In millions)
Year Ended December 31, 2002
 
United Air Lines, Inc.
   
Inter-
UAL
 
North
   
Latin
   
segment
Consolidated
  America
Pacific
Atlantic
America
ULS
Other
Elimination
Total
Revenue
$8,840 
$2,415 
$1,830 
$ 477 
$ 703
$  21 
$ 14,286 
Intersegment revenue
221 
68 
53 
12 
51
 4 
(409)
Interest income
74 
20 
15 
 6
 (59)
60 
Interest expense
 338 
126 
106 
31 
60
(71)
 590 
Equity in earnings (losses)                
of affiliates
(8)
-
(7)
Depreciation and amortization
599 
175 
138 
36 
 12 
 960 
Earnings before income taxes,                
special charges, gains on                
sales and stabilization grant
(2,298)
 (565)
(369)
(194)
 226
(22)
(3,222)
(In millions)
Year Ended December 31, 2001
 
United Air Lines, Inc.
   
Inter-
UAL
 
North
   
Latin
   
segment
Consolidated
  America
Pacific
Atlantic
America
ULS
Other
Elimination
Total
Revenue
$10,664 
$2,663 
$2,081 
$ 679 
$ 27 
$ 24 
$ 16,138 
Intersegment revenue
175 
30 
(205)
Interest income
63 
16 
12 
 105 
Interest expense
329 
81 
101 
29 
(15)
525 
Equity in earnings (losses)                
of affiliates
(29)
 
(23)
Depreciation and amortization
 689 
161 
153 
18 
1,026 
Earnings before income taxes,                
special charges, gains on                
sales and stabilization grant
(1,771)
 (580)
(386)
(141)
96 
(11)
(2,793)
(In millions)
Year Ended December 31, 2000
 
United Air Lines, Inc.
   
Inter-
UAL
 
North
   
Latin
   
segment
Consolidated
  America
Pacific
Atlantic
America
ULS
Other
Elimination
Total
Revenue
$13,094 
$3,161 
$2,260 
$ 816 
$ - 
$ 21 
$ 19,352 
Intersegment revenue
22 
(22)
Interest income
55 
23 
16 
 101 
Interest expense
234 
95 
66 
21 
(14)
402 
Equity in earnings (losses)                
of affiliates
(5)
(2)
(1)
(4)
 
(12)
Depreciation and amortization
 628 
176 
141 
43 
988 
Earnings before income taxes,                
special charges, gains on                
sales and stabilization grant
285 
 73 
108 
12 
39 
522 
(In millions)
2002
2001
2000
Total earnings for reportable segments
$ (3,200)
$ (2,782)
$ 483 
Special charges, including reorganization items
(159)
(1,477)
(200)
Airline stabilization grant
130 
652 
Gains on sales
 46 
261 
109 
Other UAL subsidiary earnings
(22)
(11)
39
Total earnings (loss) before income taxes,      
distributions on preferred securities,       
extraordinary item and cumulative effect
$ (3,205)
$ (3,357)
$   431

        UAL's operations involve an insignificant level of dedicated revenue producing assets by reportable segment. The overwhelming majority of United's revenue producing assets can be deployed in any of the four reportable segments, as any given aircraft may be used in multiple segments on any given day. Therefore, United allocates depreciation and amortization expense associated with those assets on the basis of available seat miles flown in each segment. In addition, UAL has significant intangible assets related to the acquisition of its Atlantic and Latin America route authorities. ULS has $379 million in total assets as of December 31, 2002.

(24) Statement of Consolidated Cash Flows - Supplemental Disclosures

        Supplemental disclosures of cash flow information and non-cash investing and financing activities were as follows:
 

(In millions)
2002
2001
2000
Cash paid during the year for:      
Interest (net of amounts capitalized)
$  493 
$ 393 
$ 298 
Income taxes
 58 
42 
23 
       
Acquisition of MyPoints.com:      
Fair value of:      
Assets acquired
151 
Liabilities assumed
(33)
Cash paid
118 
Less cash acquired
(86)
Net cash paid for acquisitions
32 
     
Non-cash transactions:      
Capital lease obligations incurred
339 
Long-term debt incurred in connection      
with additions to equipment
730 
669 
32 
Increase in pension intangible assets
600 
307 
107 
Net unrealized gain (loss) on investments 
(24)
(173)
(196)

(25) Selected Quarterly Financial Data (Unaudited)
 

(In millions, except per share)
1st
2nd
3rd
4th
 
 
Quarter
Quarter
Quarter
Quarter
Year
2002:          
Operating revenues
$ 3,288 
$ 3,793 
$ 3,737 
$ 3,468 
$ 14,286 
Loss from operations
(711)
(485)
(646)
(995)
(2,837)
Net loss
$ (510)
$ (341)
$ (889)
$ (1,472)
$ (3,212)
           
Per shares amounts, basic and diluted:          
Net loss
$ (9.22)
$ (6.08)
$ (15.57)
$ (20.70)
$ (53.55)
           
2001:          
Operating revenues
$ 4,424 
$ 4,658 
$ 4,107 
$ 2,949 
$ 16,138 
Loss from operations
(391)
(469)
(2,025)
(886)
(3,771)
Loss before cumulative effect
(305)
(365)
(1,159)
(308)
(2,137)
Cumulative effect of accounting change, net
(8)
 - 
-
(8)
Net loss
$ (313)
$ (365)
$ (1,159)
$ (308)
$ (2,145)
           
Per share amounts, basic and diluted:          
Loss before cumulative effect
$ (5.82)
$ (6.87)
$ (21.43)
$ (5.68)
$ (39.90)
Cumulative effect of accounting change, net
(0.15)
 - 
(0.14)
Net loss
$ (5.97)
$ (6.87)
$ (21.43)
$ (5.68)
$ (40.04)
           

        The sum of quarterly earnings (loss) per share amounts is not the same as annual earnings (loss) per share amounts because of changing numbers of shares outstanding.

        During the first quarter of 2002, UAL recorded a special charge of $82 million in connection with the closing of its wholly owned subsidiary Avolar. Also during the first quarter of 2002, UAL sold its remaining investment in Cendant Corporation and recognized a gain of $46 million in non-operating income.

        During the second and third quarters of 2002, United recognized $80 million and $50 million, respectively, in compensation under the Act as non-operating income.

        In the third quarter of 2002, UAL recorded $418 million in non-cash tax expense to establish a valuation allowance against its deferred tax asset. Additionally, in the fourth quarter of 2002, UAL recorded $326 million in additional non-cash tax expense to achieve a 0% effective tax rate for the full year.

        In the fourth quarter of 2002, UAL recorded a special charge of $67 million for severance related to furloughs announced for various employee groups. In addition, UAL recorded $10 million in reorganization items related to its bankruptcy filing in non-operating expense.

        During the second quarter of 2001, UAL recorded a special charge of $116 million for costs associated with a terminated merger with US Airways Group, Inc.

        During the third quarter of 2001, UAL recorded a special charge of $1.3 billion in operating expense and $49 million in non-operating expense for amounts relating to the September 11 terrorist attacks. Additionally, in the third and fourth quarters of 2001, UAL recognized $391 million and $261 million, respectively, in compensation under the Act as non-operating income.

        During the fourth quarter of 2001, United recognized a gain of $261 million on the sale of its investments in Galileo and Cendant.

        Each of the above items is described more fully in Note 3, "Special Charges."
 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

        For information regarding the Company's change in independent auditors from Arthur Andersen LLP to Deloitte and Touche LLP, please refer to UAL's Form 8-K filed with the SEC on May 2, 2002.
 
 

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors.

        Glenn F. Tilton. Age 54.  Director since September 2002.  Mr. Tilton has been Chairman, President and Chief Executive Officer of the Company and United since September 2002.  From October 2001 until August 2002, he served as Vice Chairman of ChevronTexaco Corporation (global energy).  From February 2001 until October 2001 he served as Chairman and Chief Executive Officer of Texaco, Inc.  From January 1997 until February 2001 he served as President of Texaco's Global Business Unit.  He serves as a Director of Lincoln National Corporation.

        W. James Farrell.  Age 60.  Director since 2001.  Mr. Farrell has been Chairman and Chief Executive Officer of Illinois Tool Works Inc. (manufacturing and marketing of engineered components) for the past five years.  Mr. Farrell also currently serves as a Director of Allstate Insurance Company, Illinois Tool Works Inc., Kraft Foods, Inc. and Sears, Roebuck and Company.

        James J. O'Connor.  Age 66.  Director since 1984.  Mr. O'Connor has been retired Chairman and Chief Executive Officer since 1998 and served as Chairman and Chief Executive Officer of Unicom Corporation (holding company) from 1994 to 1998 and its wholly owned subsidiary, Commonwealth Edison Company (supplier of electricity) from 1980 to 1998.  He serves as a Director of Corning Incorporated, Smurfit-Stone Container Corporation and Tribune Company.

        Paul E. Tierney, Jr.  Age 60.  Director since 1990.  Mr. Tierney has been a General Partner at Darwin Capital Partners (investment management) since 1999 and as a Managing Member of Development Capital, LLC (investment management) since 1997.  He serves as a Director of Liz Claiborne, Inc.

        Richard D. McCormick.  Age 62.  Director since 1994. Mr. McCormick has been Chairman Emeritus since 1999 and served as Chairman from 1992 to 1999 of US WEST, Inc. (telecommunications).  From 1996 to 1998 he served as President and from 1991 to 1998 as Chief Executive Officer of US WEST.  He serves as a Director of Wells Fargo & Company and United Technologies Corporation. Mr. McCormick was nominated by the Independent Director Nomination Committee and elected in 2002, pursuant to the terms of a stockholders agreement, by the holders of UAL's Class I Stock (the Company, ALPA and IAM). At the time Sunset occurred (March 7, 2003), the Class I Stock was automatically redeemed. In the future, Mr. McCormick and the other directors elected by the holders of the Class I Stock or their replacements will be elected by the UAL common stockholders.

        Hazel R. O'Leary.  Age 65.  Director since 1999. Ms. O'Leary has been President of O'Leary & Associates (energy services and investment strategy) since 2002.  From 2000 to 2002 she served as President and Chief Operating Officer of Blaylock & Partners (investment banking).  From 1997 to 2000 she served as President of O'Leary & Associates.  From 1993 to 1997, she served as Secretary at the U.S. Department of Energy (government).  She serves as a Director of The AES Corporation and Scottish Annuity & Life Holdings, Ltd. Ms. O'Leary was nominated by the Independent Director Nomination Committee and elected in 2002, pursuant to the terms of a stockholders agreement, by the holders of UAL's Class I Stock (the Company, ALPA and the IAM).

        John K. Van de Kamp.  Age 67.  Director since 1994. Mr. Van de Kamp serves as President of the Thoroughbred Owners (trade association) of California and is Of Counsel for Dewey Ballantine (law firm), both since 1996. Mr. Van de Kamp was nominated by the Independent Director Nomination Committee and elected in 2002, pursuant to the terms of a stockholders agreement, by the holders of UAL's Class I Stock (the Company, ALPA and the IAM).

        John H. Walker.  Age 45.  Director since 2002. Mr. Walker has been the Chief Executive Officer since 2001 and from 2001 to 2000 has been President and Chief Operating Officer of Weirton Steel Corporation (steel manufacturer).  From 1997 to 2000 he was President of Flat Rolled Products, a division of Kaiser Aluminum Corporation, and from 1996 to 1997 he served as Vice President, Operations of Kaiser Aluminum Corporation, a aluminum company that filed for protection under federal bankruptcy laws on February 12, 2002.  He serves as a Director of Weirton Steel Corporation. Mr. Walker was nominated by the Independent Director Nomination Committee and elected in 2002, pursuant to the terms of a stockholders agreement, by the holders of UAL's Class I Stock (the Company, ALPA and IAM).

         Paul R. Whiteford, Jr.  Age 52.  Director since 2002. Captain Whiteford has served as Chairman since 2002 and was Vice-Chairman from 2000 to 2001 of ALPA-MEC (labor union).  He has been a United B767 Captain since 1990. Captain Whiteford was nominated by the ALPA-MEC and elected in 2002 by the United Airlines Pilots Master Executive Council, ALPA, the holder of UAL's Class Pilot MEC stock.

         Stephen R. Canale.  Age 58.  Director since 2002. Mr. Canale has served as President and Directing General Chairman since 1999 and was Assistant General Chairman in 1997 of the IAM District Lodge 141 (labor union). Mr. Canale was nominated by the IAM and elected in 2002 by the International Association of Machinists and Aerospace Workers, the holder of UAL's Class IAM stock.

        W. Douglas Ford.  Age 59.  Director since 2002.  Mr. Ford served as the Chief Executive of Refining & Marketing in 1999 and as the Executive Director from 2000 to 2002 of BP p.l.c. (petroleum and petrochemicals holding company).  From 1993 to 1999 he served as Executive Vice President of Amoco Corporation (oil company).  He serves as a Director of USG Corporation. Mr. Ford was nominated by the System Roundtable, a body of salaried and management employees of United, and elected in 2002 by the holders of UAL's Class SAM stock, who are W. Douglas Ford, the Salaried/Management Employee Director and Sara A. Fields, United's Senior Vice President-People.

Executive Officers of the Registrant

        Information regarding the executive officers of the Company is as follows:

        Frederic F. Brace.  Age 45.  Mr. Brace has been Executive Vice President and Chief Financial Officer of the Company and United since August 2002.  From September 2001 until August 2002, Mr. Brace served as the Company and United's Senior Vice President and Chief Financial Officer.  From July 1999 until September 2001, Mr. Brace had served as United's Senior Vice President - Finance and Treasurer.  From February 1998 through July 1999, he served as Vice President - Finance of United.

        Douglas A. Hacker.  Age 47.  Mr. Hacker has been Executive Vice President - Strategy of the Company and United since December 2002.  From September 2001 until December 2002, Mr. Hacker served as United's Executive Vice President and President of UAL Loyalty Services, Inc.  From July 1999 to September 2001, Mr. Hacker had served as the Company's Executive Vice President and Chief Financial Officer and as United's Executive Vice President Finance & Planning and Chief Financial Officer. From February 1996 to September 2001, he served as Senior Vice President and Chief Financial Officer.

        Francesca M. Maher.  Age 45.  Ms. Maher has been Senior Vice President, General Counsel and Secretary of the Company and United since October 1998.  From June 1997 until October 1998, she served as Vice President, General Counsel and Secretary of the Company and United.  Previously, she served as Vice President - Law and Corporate Secretary of the Company and Vice President - Law, Deputy General Counsel and Corporate Secretary of United.

        Peter D. McDonald.  Age 51.  Mr. McDonald has been Executive Vice President - Operations of the Company and United since September 2002.  From January 2002 until September 2002, Mr. McDonald served as United's Senior Vice President - Airport Operations.  From May 2001 until January 2002, he served as United's Senior Vice President - Airport Services.  From July 1999 until May 2001, he served as Vice President - Operational Services.  From July 1995 until July 1999, he served as Managing Director - Los Angeles Metro Area.

        Glenn F. Tilton.  See information regarding Mr. Tilton above under Directors.

        There are no family relationships among the executive officers or the directors of the Company.  The executive officers of the Company serve at the discretion of the Board of Directors.
 

ITEM 11.  EXECUTIVE COMPENSATION.

Director Compensation

        UAL does not pay its directors who are also employees of UAL additional compensation for their services as directors.  In 2002, compensation for non-employee directors included the following:

        --  annual retainer of $18,000;

        --  $900 for each board and board committee meeting attended;

        --  annual retainer of $2,700 to committee chairmen (other than chair of Compensation Administration Committee); the chairs of the CAP and Transaction Committees were only paid for the quarters in which the Committees were active;

        --  expenses of attending board and committee meetings;

        --  400 shares of common stock; and

        --  189 deferred stock units representing common stock.

        Under the Company's stock ownership guidelines, it is recommended that UAL directors keep the 400 shares they receive each year while they serve are on the Board.  They may also elect to receive some or all of their cash retainers and fees in UAL common stock, as well as to defer their stock and cash compensation for tax purposes.  The deferred stock units are unfunded and are settled in shares of UAL common stock after the director leaves the Board.

        UAL considers it important for its directors to understand UAL's business and have exposure to UAL's operations and employees.  For this reason, UAL provides free transportation and free cargo shipment on United to its directors and their spouses and eligible dependent children.  UAL reimburses its directors for federal and state income taxes resulting from actual use of the travel and shipment privileges.  A director who retires from the Board with at least five years of UAL creditable service will receive free travel, subject to certain exceptions.

        The cost of this policy in 2002 for each director, including cash payments made in January and October 2002 for income tax liability, was as follows:
 
 

Name
Cost($)
Name
Cost($)
Stephen R. Canale
1,009
Hazel R. O'Leary
5,010
John W. Creighton, Jr. (1)
1,448
John F. Peterpaul (1)
10,759
Rono J. Dutta (1)
60,543
Paul E. Tierney, Jr.
147,485
W. James Farrell
73,018
Glenn F. Tilton
2,638
W. Douglas Ford
8,447
John K. Van de Kamp
54,758
              Richard D. McCormick
75,555
John H. Walker
20,635
               James J. O'Connor
79,442
Paul R. Whiteford, Jr.
24,286

(1)  Messrs. Creighton, Dutta and Peterpaul each ceased to be a director of UAL in 2002.








Compensation Committee Interlocks and Insider Participation

        Mr. Tilton and Captain Whiteford serve on the Compensation Committee, but not the Compensation Administration Committee.  Mr. Tilton, Captain Whiteford and Mr. Canale are employees of United. Captain Whiteford is also the Chairman of the ALPA-MEC and an officer of ALPA. ALPA and UAL are parties to a collective bargaining agreement for its pilots represented by ALPA.  Mr. Canale is President and Directing General Chairman of the IAM District Lodge 141.  UAL and the IAM are parties to a collective bargaining agreement for its ramp and stores, public contact employees, food service, security officers and Mileage Plus employees represented by the IAM.

Executive Compensation

 

Summary Compensation Table

 
Annual Compensation
Long Term Compensation

 

All Other
Compensation
($)

         
Awards
Payouts
Name and
Principal Position
Year
Salary
($)
Bonus
($)
Other
Annual
Compensation
($)(1)
Restricted
Stock
Awards
($)(2)
Securities
Underlying
Options/SARs
(#)
LTIP
Payouts
($) (3)
                 
Glenn F. Tilton
Chairman, President,
Chief Executive Officer
2002
312,314
3,000,000
88,683
287,000
1,150,000
0
4,500,000(4)
                 
John W. Creighton
Former Chairman and 
Chief Executive Officer
2002

2001

0

0

250,000

0

1,398

11,364

0

0

0

400,000

0

0

0

0

                 
Rono J. Dutta
Former President
2002

2001

2000

448,000

600,000

556,379

0

0

118,062

59,537

17,633

39,739

0

0

0

220,000

145,700

78,000

0

0

0

1,787,996(5)

47,741

35,670

                 
Douglas A. Hacker
Executive Vice President - Strategy
2002

2001

2000

524,100

515,000

464,583

192,880

192,880

109,316

111,260

70,037

9,001

0

0

0

0

60,700

65,000

161,693

160,116

0

37,387(6)

41,482

25,622

                 
Andrew P. Studdert
Former Executive Vice President and Chief Operating Officer
2002

2001

2000

389,000

515,000

451,042

0

0

85,586

24,565

6,562

4,634

0

0

0

220,000

121,400

65,000

0

0

0

1,577,267(7)

21,271

30,120

                 
Frederic F. Brace
Executive Vice President and Chief Financial Officer
2002

2001

445,717

350,953

0

0

33,552

38,193

82,000

0

200,000

52,300

0

0

9,884(8)

12,166

                 
Peter D. McDonald
Executive Vice President - Operations
2002
301,818
0
32,913
58,500
157,650
0
8,963(9)
                 
Francesca M. Maher Senior Vice President, General Counsel and Secretary
2002

2001

2000

353,373

347,500

296,745

0

0

60,477(2)

29,906

38,507

9,592

0

2,419(2)

100,000

26,000

0

0

0

7,472(10)

10,053

19,190

________________________________________________________________________________________

(1)    The amounts represented under "Other Annual Compensation" include payments to the named executive officers to cover their tax liabilities incurred in connection with the free transportation and cargo shipment on United that it provides to the officers.  With respect to Mr. Tilton, the other annual compensation amount for 2002 includes $43,643 for temporary living expenses and a payment to cover the tax liabilities incurred in connection with the payment for the temporary living expenses.  With respect to Mr. Creighton, the other annual compensation does not include amounts related to temporary living expenses and temporary office space, which are described below under "Employment Contracts and Arrangements--Mr. Creighton's Retirement Arrangements."

(2)    The number and value of restricted stock holdings at December 31, 2002 for each of Messrs. Brace, Dutta, Hacker, McDonald and Studdert is 25,000 shares and $35,750, respectively. These grants vest 100% five years from the date of grant. For Mr. Tilton the number and value of restricted stock holdings at December 31, 2002 is 100,000 shares and $143,000.  This grant vests in four annual installments beginning on September 2, 2003. With respect to Messrs. Dutta and Studdert, their restricted shares were forfeited in connection with their recent termination as executive officers. Dividends are paid on these restricted shares/units to the extent paid on our common stock.  Ms. Maher elected to receive a portion of her 2000 incentive award in deferred stock units under our incentive program.  As a result of this election, she was credited with a restricted stock unit award in 2001.  These units are subject to forfeiture if withdrawn prior to January 1, 2006.

(3)    Represents a payment under the UAL Loyalty Services ("ULS") long-term incentive plan equal to Mr. Hacker's vested interest in net value created of ULS' asset portfolio upon a liquidating event involving a sale of a portfolio asset as described in the Executive Compensation report.

(4)    For Mr. Tilton, amount represents $4.5 million paid by the Company into three secular trusts on Mr. Tilton's behalf.  The secular trusts are described in more detail under "Employment Contracts and Arrangements - Mr. Tilton's Employment Agreement."

(5)    For Mr. Dutta, amount in 2002 includes $46,041 in split dollar life insurance premiums, $1.6 million as severance (based on two times his annual salary less $2,000 a month for the term of his agreement) under his employment agreement $50,000, representing a payment of $2,000 per month from September 2002 through September 2004 in connection with his resignation from the Company (as described in more detail under "Employment Contracts and Arrangements - Mr. Dutta's Agreement") and $91,955 in accrued but unused vacation.

(6)    For Mr. Hacker, amount in 2002 includes $37,387 in split dollar life insurance premiums.

(7)    For Mr. Studdert, amount in 2002 includes $20,574 in split dollar life insurance premiums, $1.452 million as severance (based on two times his annual salary less $1,000 a month for the term of his agreement) under his employment agreement $25,000, representing a payment of $1,000 per month from September 2002 through September 2004 in connection with his resignation from the Company (as described in more detail under "Employment Contracts and Arrangements - Mr. Studdert's Agreement") and, $79,693 in accrued but unused vacation.

(8)    For Mr. Brace, amount in 2002 includes $9,884 in split dollar life insurance premiums.

(9)    For Mr. McDonald, amount in 2002 includes $8,963 in split dollar life insurance premiums.

(10)    For Ms. Maher, amount in 2002 includes $7,472 in split dollar life insurance premiums.
 

Option Grants in 2002

        The table below provides information about stock options that UAL granted during 2002 to the officers named in the Summary Compensation Table.  The hypothetical present values of stock options granted in 2002 are calculated under a modified Black-Scholes model, a mathematical formula used to value options.  The actual amount realized upon exercise of stock options will depend upon the amount by which the market price of common stock on the date of exercise is greater than the exercise price.  The officers will not be able to realize a gain from the stock options granted unless, during the exercise period, the market price of common stock exceeds the exercise price of the options.
 

 
Name
Number of
Securities
Underlying
Options
Granted(#)(1)
% of Total
Options
Granted to
Employees in
Fiscal Year(2)
Exercise
Or Base
Price
($/Sh)
Expiration
Date
Hypothetical
Present Value
at Date of Grant
$(3)
           
Glenn F. Tilton
1,150,000
19.9
3.03
9/1/12
1,460,500
John W.  Creighton, Jr.
0
-
-
-
  -
Rono J. Dutta
220,000
3.8
13.12
(2)
1,210,000
Frederic F. Brace
125,000

75,000

2.2

1.3

13.12

3.48

2/26/12

8/27/12

687,500

109,500

Douglas A. Hacker
0
-
-
-
-
Andrew P. Studdert
220,000
3.8
13.12
(2)
1,210,000
Francesca M. Maher
100,000
1.7
13.12
2/26/12
550,000
Peter D. McDonald
82,650

75,000

1.4

1.3

12.61

  2.43

2/26/12

10/23/12

436,392

76,500

_________________________________________________________________________________

(1)    All options become exercisable in four equal annual installments commencing February 27, 2003, one year from the date of grant, except Mr. Tilton's which becomes exercisable in four equal annual installments commencing on September 2, 2003,  Mr. Brace's option for 75,000, which becomes exercisable in four equal annual installments commencing on August 28, 2003, and Mr. McDonald's option for 75,000, which becomes exercisable in four equal annual installments commencing on October 24, 2003.  The options are transferable, at each officer's election, to certain family members.

(2)    Messrs. Dutta and Studdert's options were cancelled on September 13, 2002 in connection with their departure from UAL.

(3)    To realize hypothetical present values upon the exercise of the options, the market price would have to increase to $18.62 for the February 26, 2002 grant; $4.30 for the September 2, 2002 grant; $4.94 for the August 28, 2002 grant; and $3.45 for the October 24, 2002 grant.  The modified Black-Scholes model used to calculate the hypothetical values at date of grant considers a number of factors to estimate the option's present value, including the stock's historic volatility calculated using the monthly closing price of common stock over a 91 month period ending February 2002, the estimated average holding period of the option, interest rates and the stock's expected dividend yield.  The assumptions used in the valuation of the options were: stock price volatility of .46, holding period of 4 years, interest rate of 4.8%, and dividend yield of 0%.

        There is no assurance that the hypothetical present values of stock options presented in the table above represent the actual values of the options, and the hypothetical values shown should not be viewed as UAL's predictions of the future value of common stock.
 
 

Aggregated 2002 FY-End Option Values (1)

        The table below provides information about stock options held at the end of 2002 by the officers named in the Summary Compensation Table.  The value of those options at year-end is based on the difference between the fair market value of the underlying securities on that date and the option exercise price.  No options were exercised by these officers in 2002.
 

Name
Number of Securities
Underlying Unexercised
Options at FY-End (#)
Exercisable/Unexercisable (1)
Value of Unexercised
In-the-Money Options
at FY-End ($)
Exercisable/Unexercisable
Glenn F. Tilton
0/1,150,000
0/0
John W. Creighton
400,000/0
0/0
Rono Dutta
(2)
0/0
Frederic F. Brace
153,025/260,875
0/0
Douglas A. Hacker
299,850/94,350
0/0
Andrew P. Studdert
(2)
0/0
Francesca M. Maher
127,025/159,975
0/0
Peter D. McDonald
31,525/182,375
0/0

______________________

(1)    Options granted prior to July 12, 1994 to Mr. Hacker are exercisable for two shares of common stock and $84.81.

(2)    All options cancelled on September 13, 2002.

Pension Plan Table


Years of Participation
Final Average Pay
5
10
15
20
25
30
35
$200,000 
$16,300 
$32,600 
$48,900 
$65,200 
$81,500 
$97,800 
$114,100 
400,000 
32,600 
65,200 
97,800 
130,400 
163,000 
195,600 
228,200 
600,000 
48,900 
97,800 
146,700 
195,600 
244,500 
293,400 
342,300 
800,000 
65,200 
130,400 
195,600 
260,800 
326,000 
391,200 
456,400 
1,000,000 
81,500 
163,000 
244,500 
326,000 
407,500 
489,000 
570,500 

        This table 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).  The amount of the normal retirement benefit under the plan is the product of 1.63% times years of credited participation in the plan times final average pay (highest five of last ten years of covered compensation).  The retirement benefit amount is not offset by the participant's social security benefit.   Compensation used in calculating benefits under the plan includes base salary and amounts shown as bonus in the Summary Compensation Table.  Under the qualified plan, years of participation for persons named in the compensation table are as follows: Mr. Studdert - 7 years; Ms. Maher - 9 years; Mr. Hacker - 9 years; Mr. Brace - 14 years; Mr. Dutta - 17 years; Mr. McDonald - 31 years.  Mr. Tilton, who joined UAL in September of 2002, is not eligible to participate in the Company's qualified plan until October 1, 2003.  The amounts shown do not reflect limitations imposed by the Internal Revenue Code on retirement benefits that may be paid under plans qualified under the code.  United has agreed to provide under non-qualified plans the portion of the retirement benefits earned under the pension plan that would otherwise be subject to code limitations.

        In light of the Company's recent Chapter 11 filing, UAL is currently considering the adoption of one pension plan for all of the Company's officers and employees.

        If Mr. Hacker is employed until age 50, he will be credited with additional years of participation so that his total years of participation will equal 25.4 years.  In addition, if he is employed during the period between the date he attains age 50 and the date he attains age 55, he will be credited with an additional month of participation for each month of participation credited to him during that period.  If he remains employed past age 55, he will be credited an additional 1/2 month of participation for each month of participation credited to him after age 55.

        Mr. Dutta and Mr. Studdert continued to receive participation credit through February 15, 2003.

        In connection with the hiring of Mr. Tilton, UAL agreed to provide a pension make-whole payment, which is described below.

Employment Contracts and Arrangements

Mr. Tilton's Employment Agreement

        Mr. Tilton was elected Chairman, President and Chief Executive Officer of UAL effective September 2, 2002.  The Company entered into a five-year employment agreement with Mr. Tilton effective September 5, 2002, which agreement was amended on December 8, 2002 and again on February 17, 2003 in connection with the Company's bankruptcy filing.  The amended agreement provides for an annual base salary of $845,500 (which reflects an 11% reduction from the original amount), and is subject to increases as part of the normal salary program for the Company's senior executives.  The agreement provides Mr. Tilton a $3 million signing bonus, which Mr. Tilton will be required to repay if he voluntarily resigns other than for good reason or UAL terminates him for cause on or before the earlier of June 1, 2004 or the date a plan of reorganization is approved by the Bankruptcy Court.

        Under the terms of the agreement, Mr. Tilton also received options to purchase 1,150,000 shares of UAL common stock.  The exercise price for the options is $3.03, which was the average of the high and low sales price of the common stock on the New York Stock Exchange on August 30 and September 3, 2002.  The options expire on September 1, 2012.  The Company also agreed to reimburse Mr. Tilton for his and his family's relocation expenses, including a cash payment to cover his income tax liability for the relocation reimbursement.  Under his employment agreement, Mr. Tilton is eligible to receive an annual incentive bonus with a target percentage equal to 100% of his base salary.  He is entitled to an additional 100% over this target bonus amount for superior performance.

        If Mr. Tilton's employment is terminated by UAL without "cause," or by him for "good reason," or if there is a "change in control," UAL will pay him his base salary as reduced by the December 8th amendment, any annual bonus and any earned and vested benefits he may be entitled to through the termination date.  UAL will also pay Mr. Tilton a lump sum payment equal to his base salary reduced by the December 8th amendment and target bonus multiplied by the greater of (1) the remaining term of his agreement or (2) three years.  Mr. Tilton's other benefits will be continued for this period.  All long-term incentive awards will immediately vest on the termination date, including any unvested stock options or restricted stock awards.  Under Mr. Tilton's agreement, a "change of control" is defined as: (1) a merger, consolidation or sale of substantially all the Company's assets in which the voting securities of the Company immediately before the merger, consolidation or sale represent less than 80% of the voting power after the merger, consolidation or sale; (2) the acquisition by a person or group of 25% or more of the voting securities of the Company; (3) the UAL shareholders approve any plan or proposal for the liquidation of the Company; (4) a change in the majority of the Board over a 24-month period (unless the new directors were approved by a two-thirds majority of prior directors); or (5) any other event or transaction that the Board of Directors determines is a change of control.

        A "change of control" will generally not arise as a result of events occurring prior to or on account of a plan of reorganization of the Company under Chapter 11 of the Bankruptcy Code, unless (1) there is a merger with another commercial airline and the holders of the claims and/or interests in the Company before the merger have less than 80% of the combined voting power after the merger; or (2) creditors of the Company with an intent to control the management and policies of the Company on an on-going basis acquire at least 25% of the voting securities of the Company; or (3) a sale of the assets of the Company to another commercial airline, unless the creditors and/or interest holders in the Company receive, directly or indirectly, at least 80% of the combined voting power of the acquirer.

        In consideration of projected retirement benefits foregone by Mr. Tilton as a result of his resignation from his prior employer and acceptance of UAL's employment offer, $4.5 million was paid into three secular trusts on Mr. Tilton's behalf subject to ratable vesting over three years.  The non-vested portion is to be forfeited and returned to UAL if Mr. Tilton voluntarily terminates employment for other than good reason or is terminated for cause.

        On February 21, 2003, the Bankruptcy Court approved UAL's motion to assume Mr. Tilton's amended employment agreement.

Mr. Creighton's Retirement Arrangements

        In connection with Mr. Creighton's retirement in 2002, UAL agreed that he would remain as an on-call employee of United through year-end 2002.  Although Mr. Creighton did not receive a salary and bonus, he received benefits, including medical, dental and life insurance, through December 31, 2002.  He also received a one-time cash payment of $250,000 as consideration for his services.

        In addition, Mr. Creighton's temporary living expenses while working at UAL's headquarters in Chicago, including the cost of a temporary residence (which could not exceed $3,000 per month) and a per diem allowance, continued to be paid by UAL through November 2002.  Through October 2002, UAL also provided Mr. Creighton with office space located in the vicinity of his personal residence in Seattle to be used primarily for UAL business while he was staying at his personal residence.  The reimbursement for this office space was limited to $3,000 per month.

Mr. Studdert's Agreement

        UAL and Mr. Andrew Studdert recently entered into an agreement regarding Mr. Studdert's recent termination as an executive officer of UAL.  Under the terms of the agreement, Mr. Studdert will remain an on-call employee of UAL and will receive $1,000 per month through September 2004 unless the agreement is terminated earlier.  During the term of the agreement, Mr. Studdert will continue to provide services for UAL if UAL reasonably requests such services.  Mr. Studdert will continue to receive the transportation benefit that UAL provides to its executive officers, as well as other health and insurance benefits.  Mr. Studdert has agreed to forfeit all vested and unvested stock options granted under UAL's equity incentive plans as well as any unvested restricted stock.  The agreement and Mr. Studdert's employment will terminate prior to September 2004 if Mr. Studdert voluntarily terminates his employment or, without the Company's consent, accepts a position with a competitor of United or he otherwise breaches the agreement.

Mr. Dutta's Agreement

        UAL and Mr. Rono Dutta recently entered into an agreement regarding Mr. Dutta's recent termination as an executive officer of UAL.  Under the terms of the agreement, Mr. Dutta will remain an on-call employee of UAL and will receive $2,000 per month through September 2004 unless the agreement is terminated earlier.  During the term of the agreement, Mr. Dutta will continue to provide services for UAL if UAL reasonably requests such services.  Mr. Dutta will continue to receive the transportation benefit that United provides to its executive officers, as well as other health and insurance benefits.  Mr. Dutta has agreed to forfeit all vested and unvested stock options granted under UAL's equity incentive plans as well as any unvested restricted stock.  The agreement and Mr. Dutta's employment will terminate prior to September 2004 if Mr. Dutta voluntarily terminates his employment or, without the Company's consent, accepts a position with a competitor of United or he otherwise breaches the agreement. UAL has consented to Mr. Dutta serving on the board of directors of US Airways and to him serving as a consultant to an investment banking firm that may represent the American Airlines creditors' committee in the event that airline were to file for bankruptcy protection.
 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Equity Compensation Plan Information

        The following table sets forth information as of December 31, 2002 regarding the number of shares of UAL common stock that may be issued under UAL's equity compensation plans.
 

 
A
B
C

 
 

Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
       
Equity Compensation Plans approved by the Company's stockholders 
12,877,750
$35.58
2,108,878
       
Equity Compensation Plans not approved by the Company's stockholders (1)
1,586,168
$13.79(2)
11,983,738 (3)
       
Total
14,463,918
$33.69(4)
14,092,616 (3)
       

_________________

(1)       Includes shares and other awards under the following plans that have not been approved by UAL's stockholders:  1995 Director's Plan; United Employees Performance Incentive Plan; an option issued to a former CEO and 2002 Share Incentive Plan.  The material terms of each of these plans is described following the table.

(2)       The weighted-average exercise price was calculated based on 800,000 options granted to Mr. Greenwald at an exercise price of $22.53 and 650,000 options granted to Mr. Tilton at an exercise price of $3.03.  The remaining 136,168 shares do not have an exercise price.

(3)        Includes 11,942,366 shares available for future issuance under the 2002 Incentive Share Plan and 41,372 shares available for issuance under the 1995 Directors Plan.  The number of shares available for future issuance does not include any shares issuable under outstanding awards or the 2002 Share Incentive Plan that are subsequently forfeited, expired or canceled without the delivery of shares of common stock or withheld by UAL to satisfy any applicable tax withholding obligations, which are available again for issuance under the 2002 Share Incentive Plan.

(4)       The total weighted-average exercise price does not include the 136,168 shares referred to in footnote 2, for which there is no exercise price.
 
 

1995 Directors Plan

        Under the 1995 Directors Plan, each outside director is granted 400 shares of common stock and 189 deferred stock units (each unit representing the right to receive a share of common stock at a future date) during each year that he or she is an outside director of UAL.  If any outside director is not a director for the entire calendar year, such director's award of deferred stock units will be prorated.  Each outside director may elect to forego the receipt of all or any portion of cash fees payable to him or her for service as a director (i.e., meeting fees and committee fees) and instead receive shares of common stock equivalent in value to the cash fees based on the fair market value of a share of common stock on the date the cash fee is payable to the director.  The outside directors may also elect to defer the receipt of cash fees payable to the director as well as the stock award and the deferred stock units to be granted to the director in any year, which deferral may be paid after the director leaves the Board, either as a lump sum or in ten or less annual payments.  The 1995 Directors Plan authorizes the issuance of up to 400,000 shares of common stock (either through use of treasury shares or open market purchases) and, as of December 31, 2002, 41,372 shares remained available for future awards.

2002 Share Incentive Plan

        The 2002 Share Incentive Plan permits the award of nonqualified stock options and restricted shares to participants as well as stock appreciation rights.  The exercise price of a nonqualified stock option cannot be less than the fair market value of a share of UAL common stock on the date of grant and the exercise period cannot exceed ten years.  Restricted shares issued under the 2002 Share Incentive Plan vest over a time period established by the applicable committee (not to exceed ten years) and are subject to certain transfer restrictions and forfeiture under certain circumstances prior to vesting.  In addition, the Compensation Committee or the Compensation Administration Committee may grant to participants other awards, including dividends and dividend equivalents and other awards that are valued in whole or part by reference to, or are otherwise based on, the fair market value of shares of UAL common stock.  The 2002 Share Incentive Plan authorizes the issuance of 12,500,000 shares of common stock as well as 267,366 shares that were available for issuance as awards under the 1998 Restricted Stock Plan as of July 31, 2002 and, as of December 31, 2002, approximately 11,942,366 shares remained available for future awards under the 2002 Share Incentive Plan.  Only treasury shares may be issued under the 2002 Share Incentive Plan.  The terms of the 2002 Share Incentive Plan also provides that any shares awarded under the 1998 Restricted Stock Plan or the 2002 Share Incentive Plan that are subsequently forfeited, expired or canceled without the delivery of shares of common stock or withheld by UAL to satisfy any applicable tax withholding obligations will be available again for issuance under the plan.

Gerald Greenwald Option Shares

        On July 12, 1994, UAL entered into an employment agreement with Gerald Greenwald, UAL's then Chairman and Chief Executive Officer.  Pursuant to the agreement, Mr. Greenwald received options to acquire 800,000 shares of UAL common stock (post-stock split).  The exercise price for the options is $22.53, which was the fair market value for the UAL common stock on July 12, 1994.  The options were to vest over a five-year period, but vested earlier in connection with the termination of Mr. Greenwald's employment with UAL.  To date, all 800,000 of the options received by Mr. Greenwald are outstanding.  The options are due to expire on July 11, 2004.

United Employees Performance Incentive Plan

        Under the terms of the United Employees Performance Incentive Plan (referred to as PIP), participants may receive additional cash compensation if the Company meets specified performance criteria and the employee's individual performance warrants additional compensation.  Prior to the beginning of each year, the Company's Compensation Committee establishes a threshold level of pre-tax profit margin that the Company must obtain before any award may be made under the PIP for that year.  The Compensation Committee also determines the appropriate individual performance objectives for each year that are related to specified areas, including financial performance, operational performance or customer satisfaction.

        Under the PIP, an incentive award is typically paid in cash following the end of a calendar year; however, certain key employees are allowed to elect to defer receipt of their incentive award and can elect to receive their deferred incentive award in UAL common stock (treasury shares or shares purchased in the open market).  The amount of the stock to be paid to each employee is equal to the amount of the incentive award divided by the fair market value of the stock (using a five-day average share price) determined as of the date the incentive award would have been paid in cash but for the deferral election.  Under the PIP, any employee who defers his or her receipt of the incentive award for five or more years will also be credited with an additional amount equal to the 20% of the incentive award.  The Compensation Administration Committee administers the plan with respect to any "officer" as defined in the Exchange Act rules and the Compensation Committee administers the plan with respect to all other participants.  There is no fixed number of shares available for issuance under this plan.  In 2000, UAL's shareholders approved the portion of the PIP relating to any "covered award" that could result in the application of Section 162(m) of the Code.
 

BENEFICIAL OWNERSHIP OF SECURITIES

Certain Beneficial Owners

        The following table shows the number of shares of UAL voting securities owned by any person or group known to UAL as of March 17, 2003, to be the beneficial owner of more than 5% of any class of its voting securities.
 


 

Name and Address of Beneficial
Owner


 

Title of Class

Amount and Nature
of Beneficial
Ownership(1)

 

Percent of
Class

State Street Bank and Trust
Company, Trustee
225 Franklin Street
Boston, MA 02110
Common Stock
Class P ESOP Voting
    Junior Preferred Stock
Class M ESOP Voting
    Junior Preferred Stock
Class S ESOP Voting
    Junior Preferred Stock
17,583,559 (2)

1,862,255 (2)

1,637,880 (2)

658,255 (2)

14.45%

100%

100%

100%

Susquehanna Investment Group
401 City Avenue, Suite 220
Bala Cynwyd, PA 19004
Common Stock
4,397,029 (3)
6.6%
United Airlines Pilots Master
Executive Council
Air Line Pilots Association,
International
6400 Shafer Court, Suite 700
Rosemont, IL 60018
Class Pilot MEC Junior
    Preferred Stock
1
100%

 

 
 

Name and Address of Beneficial
Owner


 
 

Title of Class


 

Amount and Nature
of Beneficial
Ownership(1)


 
 

Percent of
Class

International Association of
Machinists and Aerospace Workers
District #141
9000 Machinists Place
Upper Marlboro, MD 20722
Class IAM Junior
    Preferred Stock
1
100%
W. Douglas Ford
UAL Corporation
P.O. Box 66919
Chicago, IL 60666
Class SAM Junior
    Preferred Stock
2
66.67%
Sara A. Fields
Senior Vice President-People 
United Airlines
P.O. Box 66100
Chicago, IL 60666
Class SAM Junior
    Preferred Stock
1
33.33%
(1)    Shares of Class Pilot MEC, Class IAM and Class SAM stock elect one ALPA, IAM and Salaried/Management Employee Director, respectively, and have one vote on all matters submitted to the holders of common stock other than the election of directors.

(2)    Based on information provided to the Company from State Street Bank and Trust Company, as of March 17, 2003, State Street, (1) as trustee under the ESOP, it had shared voting power over 1,862,255 shares of Class P ESOP Voting Junior Preferred Stock representing 6.68% of our voting power, 1,637,880 shares of Class M ESOP Voting Junior Preferred Stock representing 5.36% of our voting power, and 658,255 shares of Class S ESOP Voting Junior Preferred Stock (Class P, M and S voting stocks referred to as the voting preferred stocks) representing 2.4% of our voting power, and shares dispositive power over 3,127,800 shares of Class 1 ESOP Convertible Preferred Stock and 962,245 shares of Class 2 ESOP Convertible Preferred Stock, each convertible into quadruple that number of shares of common stock, as well as 1,663 shares of common stock issuable upon conversion of the voting preferred stocks and (2) as trustee acting in various fiduciary capacities, it had sole dispositive power over 853,203 shares of common stock, and sole voting power for 793,441 shares. The reporting person disclaims beneficial ownership of all shares reported. Voting power of voting preferred stocks is limited to matters other than the vote for directors.

(3)    Based on a Schedule 13G filed with the SEC on February 10, 2003 in which Susquehanna Investment Group reported sole voting power and sole dispositive power for 4,397,029 shares of common stock.
 

Directors and Executive Officers

        The following table sets forth the number of shares of common stock and of voting preferred stock held in the ESOP owned as of March 17, 2003, by each director, and each executive officer included in the Summary Compensation Table, and by UAL directors and executive officers as a group.  Unless UAL says otherwise in a footnote, the owner exercises sole voting and investment power over the securities (other than unissued securities which ownership we have imputed to the owner).  Some UAL directors and executive officers also own shares of other classes of its preferred stock as shown in the table above.
 
 

Name of Director or
Executive Officer and Group
Common Stock
Beneficially Owned(1)
Percent
Of Class
Voting Preferred Stock
Beneficially Owned(2)
Stephen R. Canale
1,337
*
0
W. James Farrell
14,441
*
0
W. Douglas Ford
12,331
*
0
Richard D. McCormick
31,587
*
0
James J. O'Connor
24,684
*
0
Hazel R. O'Leary
6,482
*
0
Paul E. Tierney, Jr.
40,649
*
0
Glenn F. Tilton
100,000
*
0
John K. Van de Kamp
24,254
*
0
John H. Walker
13,126
*
0
Paul R. Whiteford, Jr.
1,529
*
382
Douglas A. Hacker
399,641
*
1,344
Frederic F. Brace
256,483
*
673
Francesca M. Maher
189,806
*
659
Peter D. McDonald
87,651
*
172
Directors and Executive Officers as a Group (15 persons)
1,204,001
1.2
3,230

__________________

*        Less than 1%
  (1)    These numbers include (a) deferred stock units for Farrell 13,641, Ford 12,331, McCormick 29,389, O'Connor 17,563, O'Leary 6,082, Tierney 4,833, Van de Kamp 24,254 and Walker 13,126 (which reflects beneficial ownership of common stock represented by deferred stock units under the UAL Corporation 1995 Directors Plan); (b) options exercisable within 60 days of March 17, 2003 for Brace 212,000, Hacker 337,800, Maher 181,200, and McDonald 61,963; (c) common stock issuable upon conversion of ESOP preferred for Brace 2,691, Hacker 5,377, Maher 2,637, McDonald 688, Whiteford 1,529, and for the group -- (see footnote 2); (d) for Mr. Canale, 1,337 held indirectly by a pension plan; (e) for Mr. Brace, 5,090 held indirectly by his trust and 5,090 held indirectly by his spouse's trust; and (f) for Ms. Maher, 4,320 held indirectly by estate of deceased spouse.

(2)    Reflects beneficial ownership through the ESOP of (a) Class P Voting Stock for Mr. Whiteford, and (b) Class S Voting Stock for Messrs. Brace, Hacker and McDonald and Ms. Maher, and for directors and executive officers as a group.  Represents less than 1%.
 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        See "Compensation Committee Interlocks and Insider Participation" under "Executive Compensation."
 

ITEM 14.  CONTROLS AND PROCEDURES.

        Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures.  Based on that evaluation, the Company's CEO and CFO have concluded that UAL's disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Subsequent to the date of their evaluation, there were no significant changes in UAL's internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)     1.      Financial Statements.  The financial statements required by this item are listed in Item 8, "Financial Statements and Supplementary Data" herein.

        2.    Financial Statement Schedules.  The financial statement schedule required by this item is listed below and included in this report after the signature page hereto.

Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000.

All other schedules are omitted because they are not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto.

        3.     Exhibits.  The exhibits required by this item are listed in the Exhibit Index which immediately precedes the exhibits filed with this Form 10-K, and is incorporated herein by this reference.  Each of Exhibits 10.31 through 10.39 and 10.41 through 10.60 listed in the Exhibit Index is a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

(b)     Reports on Form 8-K.

        Form 8-K dated November 5, 2002 to report an agreement in principle with KfW to restructure debt.

        Form 8-K dated November 26, 2002 to report the extent of employee participation in the UAL recovery plan.

        Form 8-K dated December 2, 2002 to report United's reliance on grace periods included in certain debt obligations.

        Form 8-K dated December 9, 2002 to report United's (and certain of its subsidiaries) filing under Chapter 11.

        Form 8-K dated December 12, 2002 to report the filing of an NOL order to assist the Debtors in preserving their net operating losses.
 
 


SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March, 2003.
 
 
  

UAL CORPORATION
 
 
/s/ Glenn F. Tilton 
Glenn F. Tilton
Chairman of the Board, President 
and Chief Executive Officer

 

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below on the 28th day of March, 2003 by the following persons on behalf of the registrant and in the capacities indicated.
 

/s/ Glenn F. Tilton    
Glenn F. Tilton    
Chairman of the Board, President 
and Chief Executive Officer 
(principal executive officer)
   
     
/s/ Frederic F. Brace   /s/ Hazel R. O'Leary
Frederic F. Brace
Executive Vice President and 
Chief Financial Officer 
(principal financial and accounting officer)
  Hazel R. O'Leary
Director
     
/s/ Stephen R. Canale   /s/ Paul E. Tierney, Jr.
Stephen R. Canale
Director
  Paul E. Tierney, Jr.
Director
     
/s/ W. James Farrell   /s/ John K. Van de Kamp
W. James Farrell   John K. Van de Kamp
Director   Director
     
/s/ W. Douglas Ford   /s/ John H. Walker
W. Douglas Ford   John H. Walker
Director   Director
     
/s/ Richard D. McCormick   /s/ Paul R. Whiteford, Jr.
Richard D. McCormick   Paul R. Whiteford, Jr.
Director   Director
     
/s/ James J. O'Connor    
James J. O'Connor    
Director    

 

Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)







I, Glenn F. Tilton, the Chairman, President and Chief Executive Officer of UAL Corporation (the "Company"), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

(4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
 

(a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 

(5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function):
  (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and
 

(6) The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Glenn F. Tilton
Glenn F. Tilton
UAL Corporation
Chairman, President and Chief Executive Officer
March 28th, 2003
 
 


Certification of the Principal Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)







I, Frederic F. Brace, the Executive Vice President and Chief Financial Officer of UAL Corporation (the "Company"), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

(4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
 

(a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 

(5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function):
  (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and
 

(6) The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Frederic F. Brace
Frederic F. Brace
UAL Corporation
Executive Vice President and Chief Financial Officer
March 28th, 2003
 
 

Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)








I, Glenn F. Tilton, the Chairman and Chief Executive Officer of UAL Corporation (the "Company") certify that to the best of my knowledge, based upon a review of the Annual Report on Form 10-K for the period ended December 31, 2002 of the Company (the "Report"):

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 

/s/ Glenn F. Tilton
Glenn F. Tilton
UAL Corporation
Chairman and Chief Executive Officer
March 28th, 2003
 
 


Certification of the Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)







I, Frederic F. Brace, the Executive Vice President and Chief Financial Officer of UAL Corporation (the "Company") certify that to the best of my knowledge, based upon a review of the Annual Report on Form 10-K for the period ended December 31, 2002 of the Company (the "Report"):

      (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
      (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
 

/s/ Frederic F. Brace
Frederic F. Brace
UAL Corporation
Executive Vice President and Chief Financial Officer
March 28th, 2003
 
 
 
 

Schedule II

 

UAL Corporation and Subsidiary Companies
Valuation and Qualifying Accounts
For the Years Ended December 31, 2002, 2001 and 2000
(In millions)


   
Additions 
   
 
Balance at
Charged to
 
Balance at
 
Beginning
Costs and
 
End of
Description
of Period
Expenses
Deductions3
Year
         
Year Ended December 31, 2000        
Reserves deducted from assets to which they apply:      
Allowance for doubtful accounts
$ 13
$ 15
$ 14
$ 14
         
Obsolescence allowance -        
Flight equipment spare parts 
$ 45
$ 12
$ 2
$ 55
         
         
Year Ended December 31, 2001        
Reserves deducted from assets to which they apply:      
Allowance for doubtful accounts
$ 14
$ 41
$ 25
$ 30
         
Obsolescence allowance -        
Flight equipment spare parts 
$ 55
$ 27
$ 12
$ 70
         
Valuation allowance for        
deferred tax assets
$
$ 6
$ -
$ 6
         
         
Year Ended December 31, 2002        
Reserves deducted from assets to which they apply:       
Allowance for doubtful accounts
$ 30
$ 40
$ 41
$ 29
         
Obsolescence allowance -        
Flight equipment spare parts
$ 70
$ 14
$ 27
$ 57
         
Valuation allowance for        
deferred tax assets 
$ 6
$1,160
$ -
$1,166
         

F-1

___________________________
Deduction from reserve for purpose for which reserve was created.
 
 
 
 
 
 
 
 
 
 
 
 

EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of UAL Corporation ("UAL"), as amended (filed as Exhibit 3.1 to UAL's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference)
   
3.2 By-laws (filed as Exhibit 3.2 to UAL's Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference)
   
4.1 Deposit Agreement dated as of July 12, 1994 between UAL Corporation and holders from time to time of Depository Receipts described herein (filed as Exhibit 4.1 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
4.2 Indenture dated as of December 20, 1996 between UAL Corporation and The First National Bank of Chicago, as Trustee (filed as Exhibit 4.2 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
4.3 Officer's Certificate relating to UAL's 13-1/4% Junior Subordinated Debentures due 2026 (filed as Exhibit 4.3 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
4.4 Form of UAL's 13-1/4% Junior Subordinated Debenture due 2026 (filed as Exhibit 4.4 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
4.5 Guarantee Agreement dated as of December 30, 1996 with respect to the 13-1/4% Trust Originated Preferred Securities of UAL Corporation Capital Trust I (filed as Exhibit 4.5 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
4.6 Amended and Restated Declaration of Trust of UAL Corporation Capital Trust I dated as of December 30, 1996 (filed as Exhibit 4.6 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
4.7 Debtor in Possession Credit Agreement dated December 24, 2002 by and among United Air Lines, Inc., the United subsidiaries named therein, the Lenders named therein and Bank One, NA, as agent
   
4.8 First Amendment and Limited Waiver dated February 19, 2003 to Debtor in Possession Credit Agreement dated December 24, 2002 by and among United Air Lines, Inc., the United subsidiaries named therein, the Lenders named therein and Bank One, NA, as agent
   
4.9 Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain Subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, Et al.
   
4.10 First Amendment dated February 10, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain Subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, Et al.
   
4.11 Second Amendment dated February 10, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain Subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, Et al.
   
4.12 Third Amendment dated February 18, 2003 to Revolving Credit, Term Loan and Guaranty Agreement dated December 24, 2002 by and among United Air Lines, Inc., UAL Corporation, certain Subsidiaries of United Air Lines, Inc. and UAL Corporation as named therein, the Lenders named therein, JP Morgan Chase Bank, Et al.
   
  UAL's indebtedness under any single instrument does not exceed 10% of UAL's total assets on a consolidated basis.  Copies of such instruments will be furnished to the Securities and Exchange Commission upon request.
   
10.1 Amended and Restated Agreement and Plan of Recapitalization, dated as of March 25, 1994 (the "Recapitalization Agreement"), as amended, among UAL Corporation, the Air Line Pilots Association ("ALPA"), International and the International Association of Machinists and Aerospace Workers ("IAM") (filed as Exhibit 10.1 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.2 Second Amendment to the Agreement and Plan of Recapitalization, dated as of June 2, 1994, among UAL, ALPA and the IAM (filed as Exhibit 10.2 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.3 Agreement, dated as of July 16, 1996, pursuant to Section 1.6q of the Recapitalization Agreement among UAL, ALPA and IAM (filed as Exhibit 10.3 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.4 UAL Corporation Employee Stock Ownership Plan, effective as of July 12, 1994 (filed as Exhibit 10.4 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.5 First Amendment to UAL Corporation Employee Stock Ownership Plan, dated December 28, 1994 (filed as Exhibit 10.5 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.6 Second Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of August 17, 1995 (filed as Exhibit 10.6 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.7 Third Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of December 28, 1995 (filed as Exhibit 10.7 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.8 Fourth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of July 16, 1996 (filed as Exhibit 10.8 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.9 Fifth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of December 31, 1996 (filed as Exhibit 10.9 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.10 Sixth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of August 11, 1997 (filed as Exhibit 10.3 to UAL's Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference)
   
10.11 Seventh Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of May 19, 1999 (filed as Exhibit 10.10 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.12 Eighth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of November 10, 1999 (filed as Exhibit 10.11 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.13 Ninth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of October 29, 1999 (filed as Exhibit 10.12 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.14 Tenth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of April 28, 2000 (filed as Exhibit 10.3 to UAL's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference)
   
10.15 Eleventh Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of December 29, 2000 (filed as Exhibit 10.15 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.16 Twelfth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of January 28, 2002 (filed as Exhibit 10.1 to UAL's Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference)
   
10.17 Fourteenth Amendment to UAL Corporation Employee Stock Ownership Plan ,dated as of December 19, 2002
   
10.18 UAL Corporation Employee Stock Ownership Plan Trust Agreement between UAL Corporation and State Street Bank and Trust Company, effective July 12, 1994 (filed as Exhibit 10.16 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.19 UAL Corporation Supplemental ESOP, effective as of July 12, 1994 (filed as Exhibit 10.17 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.20 First Amendment to UAL Corporation Supplemental ESOP, dated February 22, 1995 (filed as Exhibit 10.18 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.21 Second Amendment to UAL Corporation Supplemental ESOP, dated as of August 17, 1995 (filed as Exhibit 10.19 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.22 Third Amendment to UAL Corporation Supplemental ESOP, dated as of December 28, 1995 (filed as Exhibit 10.20 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.23 Fourth Amendment to UAL Corporation Supplemental ESOP, dated as of July 16, 1996 (filed as Exhibit 10.21 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.24 Fifth Amendment to UAL Corporation Supplemental ESOP, dated as of December 31, 1996 (filed as Exhibit 10.22 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.25 Sixth Amendment to UAL Corporation Supplemental ESOP, dated as of August 11, 1997 (filed as Exhibit 10.4 to UAL's Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference)
   
10.26 Seventh Amendment to UAL Corporation Supplemental ESOP, dated as of May 19, 1999 (filed as Exhibit 10.21 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.27 Eighth Amendment to UAL Corporation Supplemental ESOP, dated as of November 10, 1999 (filed as Exhibit 10.22 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.28 Ninth Amendment to UAL Corporation Supplemental ESOP, dated as of October 29, 1999 (filed as Exhibit 10.23 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.29 UAL Corporation Supplemental ESOP Trust Agreement between UAL Corporation and State Street, effective July 12, 1994 (filed as Exhibit 10.28 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.30 Class SAM Preferred Stockholders' Agreement, dated as of July 12, 1994 (filed as Exhibit 10.30 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.31 UAL Corporation 2000 Incentive Stock Plan (filed as Exhibit 10.1 to UAL's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference)
   
10.32 UAL Corporation Employees Performance Incentive Plan (filed as Exhibit 10.2 to UAL's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference)
   
10.33 UAL Corporation 1998 Restricted Stock Plan (filed as Exhibit 10.1 to UAL's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference)
   
10.34 UAL Corporation 2002 Share Incentive Plan (filed as Exhibit 10.1 to UAL's Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference)
   
10.35 United NewVentures Long Term Incentive Plan (filed as Exhibit 10.44 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.36 Description of Compensation and Benefits for Directors (filed as Exhibit 10.34 to UAL's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
   
10.37 UAL Corporation 1995 Directors Plan, as amended and restated effective October 24, 2002
   
10.38 United Supplemental Retirement Plan (filed as Exhibit 10.35 of UAL's Form 10-K for the year ended December 31, 1998 and incorporated herein by reference)
   
10.39 Description of Officer Benefits (filed as Exhibit 10.37 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.40 2000 Agreement between United Air Lines, Inc. and the Air Line Pilots in the service of United Air Lines, Inc. represented by ALPA (filed as Exhibit 10.41 to UAL's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference)
   
10.41 Description of Benefit Arrangement for John W. Creighton, Jr. (filed as Exhibit 10.42 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.42 Non-Qualified Stock Option Agreement for John W. Creighton, Jr. (filed as Exhibit 10.43 to UAL's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference)
   
10.43 Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton (filed as Exhibit 10.3 to UAL's Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference)
   
10.44 Amendment No. 1 dated December 8, 2002 to the Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton
   
10.45 Amendment No. 2 dated February 17, 2003 to the Employment Agreement dated September 5, 2002 by and among United Air Lines, Inc., UAL Corporation and Glenn F. Tilton
   
10.46 Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and the Northern Trust Company (filed as Exhibit C to Exhibit 10.3 to UAL's Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference)
   
10.47 Amendment No. 1 dated February 17, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company
   
10.48 Amendment No. 2 dated February 28, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 1 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company
   
10.49 Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and the Northern Trust Company (filed as Exhibit D to Exhibit 10.3 to UAL's Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference)
   
10.50 Amendment No. 1 dated February 17, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company
   
10.51 Amendment No. 2 dated February 28, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 2 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company
   
10.52 Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and the Northern Trust Company (filed as Exhibit E to Exhibit 10.3 to UAL's Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference)
   
10.53 Amendment No. 1 dated February 17, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company
   
10.54 Amendment No. 2 dated February 28, 2003 to the Glenn F. Tilton Secular Trust Agreement No. 3 dated September 5, 2002 by and among UAL Corporation, Glenn F. Tilton and The Northern Trust Company
   
10.55 Agreement dated February 16, 2003 by and among United Air Lines, Inc., UAL Corporation and Rono J. Dutta
   
10.56 Agreement dated February 16, 2003 by and among United Air Lines, Inc., UAL Corporation and Andrew P. Studdert
   
10.57 Employment Agreement dated July 12, 1994 between UAL Corporation and Gerald Greenwald (filed as Exhibit 10.5 to UAL's Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference)
   
10.58 Amendment No. 1 dated July 12, 1994 to Employment Agreement dated July 12, 1994 between UAL Corporation and Gerald Greenwald (filed as Exhibit 10.6 to UAL's Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference)
   
10.59 Amendment No. 2 dated April 5, 1999 to Employment Agreement dated July 12, 1994 between UAL Corporation and Gerald Greenwald (filed as Exhibit 10.2 to UAL's Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference)
   
10.60 Non-Qualified Stock Option Agreement between UAL Corporation and Gerald Greenwald (filed as Exhibit 10.9 to UAL's Form 10-Q for the quarter ended June 30, 1994 and incorporated by reference)
10.61 Restricted Stock Agreement dated September 2, 2002 between Glenn F. Tilton and UAL Corporation (filed as Exhibit B to Exhibit 10.3 to UAL's form 10-Q for the quarter ended September 30, 2002 and incorporated here by reference)
12.1 Computation of Ratio of Earnings to Fixed Charges
   
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements
   
21 List of UAL's subsidiaries
   
23 Consent of Independent Public Accountants
   

        With respect to the documents incorporated by reference to this Form 10-K, UAL's Commission File Number is 1-6033.
 
  Bank One/United: DIP Credit Agreement

Exhibit 4.7
DEBTOR IN POSSESSION
CREDIT AGREEMENT

                This Debtor In Possession Credit Agreement, dated as of  December 24, 2002 ("Closing Date"), is among United Air Lines, Inc., a Delaware corporation, as debtor and debtor in possession ("Borrower"), the parties identified herein as the "Credit Parties", as debtors and debtors in possession, the Lenders (as defined below) and Bank One, NA, a national banking association having its principal office in Chicago, Illinois, as Agent.  The parties hereto agree as follows:

                WHEREAS, on December 9, 2002 (the "Petition Date"), the Credit Parties filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"), which cases are jointly administered under Case No. 02-B-48191 (each a "Chapter 11 Case" and collectively, the "Chapter 11 Cases");

                WHEREAS, the Credit Parties continue to operate their respective businesses and manage their respective properties as debtors and debtors in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code; and

                WHEREAS, Borrower has requested that Lenders provide a senior secured superpriority term loan facility of up to $300,000,000 for the purposes of financing the Credit Parties' ordinary course working capital and general corporate needs.

ARTICLE I.
DEFINITIONS

                As used in this Agreement:

                "Accounts" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "Additional DIP" means that certain debtor in possession financing provided to Borrower pursuant to the Additional DIP Credit Agreement.

                "Additional DIP Collateral" means all Property, now existing or hereafter acquired, of the Credit Parties which secures the Credit Parties' obligations under the Additional DIP, including, without limitation, all unencumbered aircraft, spare engines, spare parts inventory, Routes, Supporting Route Facilities, Slots, Foreign Slots, QEC Kits (as defined in the Additional DIP Credit Agreement), Flight Simulators , and Gate Leaseholds (to the extent that the grant of a Lien on such Gate Leaseholds, Supporting Route Facilities and/or Foreign Slots is permitted by applicable law, it being understood that in any event a Lien on Gate Leaseholds, Supporting Route Facilities and/or Foreign Slots shall extend to the proceeds of any such Gate Leaseholds, Supporting Route Facilities and/or Foreign Slots).  Notwithstanding the foregoing, "Additional DIP Collateral" shall not include the Co-Branded Card Collateral.

                "Additional DIP Credit Agreement" means that certain Revolving Credit, Term Loan and Guaranty Agreement dated the date hereof, among Borrower, Parent, the Guarantors named therein, the Lenders party thereto, JPMorgan Chase Bank, as Co-Administrative Agent, Co-Collateral Agent and Paying Agent, Citicorp USA Inc., as Co-Administrative Agent and Co-Collateral Agent, J.P. Morgan Securities Inc., as Joint Lead Arranger and Joint Bookrunner, Salomon Smith Barney Inc., as Joint Lead Arranger and Joint Bookrunner, Bank One, NA, as Co-Arranger, Banc One Capital Markets, Inc., as Co-Arranger, and The CIT Group/Business Credit, Inc., as Co-Arranger.

                "Additional DIP Intercreditor Agreement" shall have the meaning set forth in Section 4.1 hereof.

                "Additional DIP Lenders" means those entities that are lenders under the Additional DIP, in their capacities as such.

                "Additional DIP Voluntary Prepayment" shall have the meaning set forth in Section 2.2.

                "Affected Lender" shall have the meaning set forth in Section 2.19 hereof.

                "Affiliate" means, as to any Person, any other Person that directly or indirectly, controls, is controlled by or is under common control with such Person.  For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting stock, by contract or otherwise; provided, however, that an Affiliate shall not include the Parent's Employee Stock Option Plan (for purposes of this definition, "ESOP"), the trustee of the ESOP or any Person who is a beneficial owner of voting stock of the Parent that is subject to the ESOP and who is eligible to report and reports such beneficial ownership on Schedule 13G promulgated under the Securities Exchange Act of 1934, as amended.

                "Agent" means Bank One in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X.

                "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof and in no event in excess of $300,000,000.

                "Agreement" means this debtor in possession credit agreement, as it may be amended, restated, supplemented or otherwise modified and in effect from time to time.

                "Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4 hereof.

                "Aircraft Mortgage" shall have the meaning set forth in Section 4.1(xxvii).

                "Air Transportation Stabilization Act and Regulations" shall mean the Air Transportation Safety and System Stabilization Act, P.L. 107-42, as the same may be amended from time to time, and the regulations promulgated thereunder (14 C.F.R. Part 1310) and related OMB Regulations, 14 C.F.R. Part 1300.

                "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum.

                "Application" shall mean the Application of the Borrower to be updated or supplemented with the ATSB for the issuance of a federal credit instrument under the Air Transportation Stabilization Act and Regulations, as amended, modified or supplemented from time to time.

                "Applicable Margin" means, with respect to a Loan of any Type at any time, the following rate per annum:  (a) 3.50% per annum, with respect to a Floating Rate Loan, and (b) 4.50% per annum, with respect to a Eurodollar Loan.

                "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender, or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

                "Arranger" means Banc One Capital Markets, Inc., a Delaware corporation, and its successors, in its capacity as Lead Arranger and Sole Book Runner.

                "Article" means an article of this Agreement unless another document is specifically referenced.

                "ATSB" shall mean the Air Transportation Stabilization Board, created pursuant to Section 102(b) of the Air Transportation Safety and System Stabilization Act.

                "Authorized Officer" means any of the Treasurer, Chief Financial Officer, Principal Accounting Officer, Controller or financial Vice President of the Borrower or the applicable Credit Party, acting singly.

                "Avoidance Actions" shall mean the Borrower's and the Credit Parties' claims and causes of action arising under Section 502(d), 544, 547, 548 or 550 of the Bankruptcy Code or any other avoidance action under the Bankruptcy Code.

                "Bank One" means Bank One, NA, a national banking association having its principal office in Chicago, Illinois, in its individual capacity, and its successors.

                "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. § 101, et seq.), as amended and in effect from time to time and the regulations issued from time to time thereunder.

                "Bankruptcy Court" shall have the meaning set forth in the Recitals hereof.

                "Borrower" shall have the meaning set forth in the preamble hereof, and its successors and assigns.

                "Borrowing Date" means December 24, 2002 or such other Business Day (as shall be mutually agreed upon by the Parties hereto) on which the Loan is made hereunder.

                "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Loans, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York City for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system.

                "Capital Expenditures" shall mean, for any period, the aggregate of all expenditures (whether (i) paid in cash and not theretofore accrued or (ii) accrued as liabilities during such period, and including that portion of any post-petition Capitalized Lease which is capitalized on the consolidated balance sheet of the Parent and the Subsidiaries) net of cash amounts received by the Borrower and the Credit Parties from other Persons during such period in reimbursement of Capital Expenditures made by the Borrower and the Credit Parties, excluding interest capitalized during construction, made by the Borrower and the Credit Parties during such period that, in conformity with Agreement Accounting Principles, are required to be included in or reflected by the property, plant, Equipment or similar fixed asset accounts reflected in the consolidated balance sheet of the Parent and the Subsidiaries (including Equipment which in the ordinary course of business is purchased simultaneously with the trade-in or exchange of existing Equipment owned by the Borrower or any of the Credit Parties to the extent of the gross amount of such purchase price less the book value of the Equipment being traded in or exchanged at such time), but excluding expenditures made in connection with the replacement or restoration of assets to the extent reimbursed or financed from (x) insurance proceeds paid on account of the loss of or the damage to the assets being replaced or restored, (y) awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced or (z) proceeds of asset sales permitted by this Agreement which proceeds are not required to be used to prepay the Loans pursuant to Section 2.13 of the Additional DIP Credit Agreement.

                "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles (excluding any leases that become Capitalized Leases as a result of a recharacterization of operating leases as Capitalized Leases in connection with the renegotiation thereof, provided that the Borrower's payment obligations thereunder are unchanged).

                "Carve Out Reserve" shall have the meaning set forth in Section 2.21(c) hereof.

                "Change in Control" means (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Parent or the Borrower; or (ii) the occupation of a majority of the seats (other than vacant seats) on the Board of Directors of the Parent or the Borrower by Persons who were neither (A) nominated by the Board of Directors of the Parent or the Borrower nor (B) appointed by directors so nominated.

                "Chapter 11 Cases" shall have the meaning set forth in the Recitals hereof.

                "Chattel Paper" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "Closing Date" shall have the meaning set forth in the preamble hereof.

                "Co-Branded Card Agreements" means, collectively, (i) that certain Co-Branded Card Marketing Services Agreement dated as of July 1, 2001, among Parent, ULS and Bank One, Delaware, N.A. f/k/a First USA Bank, NA, as amended, restated, supplemented and otherwise modified from time to time, including, without limitation, as amended pursuant to the Co-Branded Card Amendment and the Co-Branded Debit Card Amendment, (ii) that certain Side Letter to Bank One, Delaware, N.A. dated December 7, 2002 by Parent and agreed and acknowledged to by Borrower, ULS, Mileage Plus Holdings, Inc., Mileage Plus Marketing, Inc. and Mileage Plus, Inc., (iii) the License Agreement dated as of November 22, 2002, by and between Borrower and ULS, (iv) the Mileage Plus Operating Agreement dated as of November 22, 2002, by and between Borrower and ULS, (v) the Umbrella Agreement dated as of November 22, 2002, by and between Borrower and ULS and (vi) the Domestic Customer Service Outsourcing Agreement dated as of November 22, 2002, by and among ULS, Mileage Plus, Inc. and Borrower, in each case as amended and in effect on the Closing Date and as the same may be hereafter amended, supplemented or otherwise modified in accordance herewith.

                "Co-Branded Debit Card Amendment" means that certain Third Amendment to Co-Branded Card Marketing Services Agreement dated as of December 7, 2002, by and among Bank One, Delaware, N.A., Parent and ULS.

                "Co-Branded Card Amendment" means that certain Amendment Number 4 to the Co-Branded Card Marketing Services Agreement dated as of December 7, 2002, by and among Bank One, Delaware, N.A., Parent, ULS and Borrower.

                "Co-Branded Card Collateral" means all of the Credit Parties' right, title and interest in the Co-Branded Card Agreements, including, without limitation, all rights to payment thereunder, and all Property used or useful in connection with the delivery by the Credit Parties (including, without limitation, the Borrower) or any of their Affiliates of the benefits (including, without limitation, miles and other services) Bank One, Delaware, N.A. receives under the Co-Branded Card Agreements, including, without limitation, all assets owned by ULS (except for those assets which are not used or useful in connection with the delivery of the above described benefits), Mileage Plus Holdings, Inc., Mileage Plus Marketing, Inc. and Mileage Plus, Inc. and all call centers, customer lists, systems, programs, software, and all trademarks, tradenames (including without limitation the "Mileage Plus" tradename and derivations thereof), other intellectual property and general intangibles in connection with the foregoing and all proceeds, rents and products thereof and distributions thereon.

                "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time.

                "Collateral" means all Property of the Borrower and each Credit Party, including, without limitation, all of the Property covered (or intended to be covered) by this Agreement, the Orders and the other Loan Documents, including, without limitation, the Co-Branded Card Collateral and the Additional DIP Collateral. Collateral shall not include (i) Section 1110 Assets that are subject to valid, perfected and non-avoidable liens, (ii) Avoidance Actions (it being understood that, notwithstanding such exclusion, the proceeds of Avoidance Actions shall be available to repay the Obligations), (iii) funds held in Escrow Accounts (it being understood that, notwithstanding such exclusion, the Borrower's and any applicable Credit Party's rights to receive any excess funds remaining in the Escrow Accounts following the payment in full of the taxes, fees and charges payable from such Escrow Accounts shall be subject to the grant of security interest and Lien described in Section 2.21 (subject only to the Additional DIP Lenders' Lien on the Additional DIP Collateral)) and (iv) interests of the Borrower and the Credit Parties in the joint ventures set forth on Schedule 1.1(d) (but only to the extent that applicable law or the organizational documents with respect to any such joint venture do not permit an assignment of such interests, it being understood that in any event the Agent's Lien granted hereunder shall extend to the proceeds (of any kind) of any disposition of any such joint venture interests and all distributions thereon).

                "Commercial Tort Claims" means those certain currently existing commercial tort claims of the Credit Parties.

                "Commitment" means, for each Lender, the obligation of such Lender to make the Loan not exceeding the amount set forth opposite its signature below, as it may be modified as a result of any assignment that has become effective pursuant to Section 12.3.3 or as otherwise modified from time to time pursuant to the terms hereof.

                "Control" shall have the meaning set forth in Article 8 or, if applicable, in Section 9-104, 9-105, 9-106 or 9-107 of Article 9 of the Illinois UCC.

                "Conversion/Continuation Notice" shall have the meaning set forth in Section 2.9 hereof.

                "Controlled Group" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Parent, the Borrower or any of the Parent's Subsidiaries, are treated as a single employer under Section 414 of the Code.

                "Credit Parties" means Borrower and the other parties identified as "Credit Parties" on the signature pages hereto.

                "DCA" shall mean Ronald Reagan Washington National Airport.

                "Default" means an event described in Article VII.

                "Deposit Accounts" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "Documents" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "DOT" shall mean the United States Department of Transportation.

                "EBITDAR" shall mean, for any period, all as determined in accordance with Agreement Accounting Principles, the consolidated net income (or net loss) of the Parent and its Subsidiaries for such period, plus (a) the sum of (i) depreciation expense, (ii) amortization expense, (iii) other non-cash charges (excluding any book gains or losses recognized on the return of aircraft associated with a rejection or settlement of the Borrower's credit agreement dated as of November 17, 1999, as amended, with Kreditanstalt fur Wiederaufbau and the Borrower's 1997-1 enhanced equipment trust certificates), (iv) consolidated federal, state and local income tax expense, (v) gross interest expense for such period less gross interest income for such period, (vi) aircraft rent expense, (vii) extraordinary losses, (viii) any non-recurring charge or restructuring charge; (ix) the cumulative effect (whether positive or negative) of any change in accounting principles; (x) any Fees (as defined in the Additional DIP Credit Agreement) and fees set forth in the Fee Letter paid, in each case, by the Borrower and not otherwise added back to consolidated net income (or net loss) pursuant to any of the foregoing clauses of this definition; and (xi) the difference (whether positive or negative) between the cash paid by Bank One, Delaware, N.A. during such period pursuant to its "Annual Guaranteed Miles Purchased" (as defined in the agreement referred to in clause (i) of the definition of Co-Branded Card Agreements) and the amount of the revenue recorded during such period on account of the miles so purchased by Bank One, Delaware, N.A. pursuant to the Co-Branded Card Agreements during such period and prior periods less (b) extraordinary gains plus or minus (c) the amount of cash received or expended in such period in respect of any amount which, under clause (viii) above, was taken into account in determining EBITDAR for such or any prior period.

                "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof.

                "Environmental Lien" shall mean a Lien in favor of any Governmental Authority for (i) any liability under federal or state environmental laws or regulations, or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment.

                "Equipment" shall have the meaning set forth in Article 9 of the Illinois UCC and shall include, without limitation, all vehicles, vessels, aircraft, aircraft engines, propellers, parts, spare parts, spare engines, flight simulators, and quick engine change kits.

                "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

                "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a single employer within the meaning of Section 414(b), (c), (m), or (o) of the Code.

                "Escrow Accounts" shall mean certain funds set aside by the Borrower or any Credit Party to manage the collection and payment of amounts collected by the Borrower or such Credit Party for the benefit of third party beneficiaries relating to: (a) federal income tax withholding and backup withholding tax, employment taxes, transportation excise taxes and security related charges, including (i) federal payroll withholding taxes, as described in Sections 3101, 3111 and 3402 of the Code, (ii) federal Unemployment Tax Act taxes, as described in Chapter 23 of Subtitle C of the Code, (iii) federal air transportation excise taxes, as described in Sections 4261 and 4271 of the Code, (iv) federal security charges, as described in Title 49 of the Code of Federal Regulations of 2002 (referred to in this definition as the "CFR"), Chapter XII, Part 1510, (v) federal Animal and Plant Health Inspection Service of the United States Department of Agriculture (APHIS) user fees, as described in Title 21 United States Code (2002) (referred to in this definition as "U.S.C.") Section 136a and 7 CFR Section 354.3, (vi) federal Immigration and Naturalization Service (INS) fees, as described in 8 CFR Part 286, (vii) federal customs taxes as described in 19 U.S.C. Section 58c, and (viii) federal jet fuel taxes as described in Sections 4091 and 4092 of the Code collected on behalf of and owed to the federal government; (b) any and all state and local income tax withholding, employment taxes and related charges and fees and similar taxes, charges and fees, including, but not limited to, state and local payroll withholding taxes, unemployment and supplemental unemployment taxes, disability taxes, workman's or workers' compensation charges and related charges and fees that are analogous to those described in Subtitle C of the Code and that are described in or are analogous to Chapter 23 of Title 19 Delaware Code Annotated (2002) collected on behalf of and owed to state and local authorities, agencies and entities; and (c) passenger facility fees and charges as described in Title 49 Section 40117 (2002) and Title 14 of the Code of Federal Regulations of 2002, Subchapter 1, Part 158 collected on behalf of and owed to various administrators, institutions, authorities, agencies and entities; in each case held in escrow accounts or trust funds in an aggregate amount for all of such Escrow Accounts not in excess of $200,000,000 (provided that such amount may be increased upon an increase in any of the foregoing taxes, fees and charges for which the Borrower's officers and directors may have personal liability if not paid).

                "Eurodollar Base Rate" means, with respect to a Eurodollar Loan for the relevant Interest Period, the applicable British Bankers' Association LIBOR rate for deposits in U.S. dollars as reported by any generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, provided that, if no such British Bankers' Association LIBOR rate is available to the Agent, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the rate determined by the Agent to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of Bank One's relevant Eurodollar Loan and having a maturity equal to such Interest Period.

                "Eurodollar Loan" means a Loan which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurodollar Rate.

                "Eurodollar Rate" means, with respect to a Eurodollar Loan for the relevant Interest Period, the sum of (i) the greater of (I) two percent (2%) and (II) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin.

                "Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Agent, taxes imposed on its net income, and franchise taxes imposed on it, by (i) the United States of America jurisdiction under the laws of which such Lender or the Agent is incorporated or organized or (ii) the jurisdiction in which the Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located.

                "Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced.

                "FAA" shall mean the Federal Aviation Administration.

                "Facility Termination Date" means the earliest of (a) July 1, 2004, (b) the substantial consummation (as defined in Section 1101 of the Bankruptcy Code) of a plan of reorganization (the "Plan of Reorganization") that is confirmed pursuant to a final, non-appealable order entered by the Bankruptcy Court or any other court having jurisdiction in the Chapter 11 Cases, but in no event shall such date be later than the effective date of such Plan of Reorganization and (c) the date of termination of the Additional DIP Credit Agreement or of the Additional DIP Lenders' commitments thereunder; or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof.

                "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion.

                "Fee Letter" has the meaning set forth in Section 4.1(ix).

                "Fifth Freedom Rights" shall mean the operational right to enplane passenger traffic and cargo in a foreign country and deplane it in another foreign country.

                "Final Order" means an order of the Bankruptcy Court entered in the Chapter 11 Cases after a final hearing under Bankruptcy Rule 4001(c)(2) which order, among other things, modifies the automatic stay under Section 362 of the Bankruptcy Code to permit the creation and perfection of Agent's Liens on the Collateral and to provide for the automatic vacation of the automatic stay to permit the enforcement of Agent's and Lenders' remedies under the Loan Documents and which order is in substantially the form attached as Exhibit E hereto, as the same may be amended, supplemented or otherwise modified from time to time with the express written consent or joinder of Agent and Requisite Lenders and approved by the Bankruptcy Court.

                "Final Order Date" means the date of entry of the Final Order by the Bankruptcy Court.

                "Financial Forecast" shall have the meaning set forth in Section 4.1(xvi) hereof.

                "Fixtures" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "Flight Simulators" shall mean the flight simulators and flight training devices of the Borrower or any applicable Guarantor other than the flight simulators listed on Schedule 1.1(c).

                "Floating Rate" means, for any day, a rate per annum equal to (i) the Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case changing when and as the Alternate Base Rate changes.

                "Floating Rate Loan" means a Loan which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate.

                "Foreign Aviation Authorities" shall mean any foreign or governmental, regulatory or other agency or agencies which exercise jurisdiction over the issuance or authorization to serve any foreign point on each of the Routes and/or operations related to the Routes and Supporting Route Facilities.

                "Foreign Slot" shall mean all of the rights and operational authority, now held or hereafter acquired, of the Borrower and, if applicable, a Credit Party, to conduct one landing or takeoff operation during a specific hour or other period at each non-U.S. airport necessary to operate a Route.

                "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

                "Gate Leaseholds" shall mean all of the right, title, privilege, interest, and authority now or hereafter acquired or held by the Borrower or, if applicable, a Credit Party in connection with the right to use, operate or occupy space in any airport or terminal at which the Borrower conducts scheduled operations.

                "General Intangibles" shall have the meaning set forth in Article 9 of the Illinois UCC, including, without limitation, all right, title and interest in (i) Slots, Primary Foreign Slots, Routes, Primary Routes, leasehold interests (including, without limitation, leasehold interests in hangars and parts depots), Fifth Freedom Rights and "behind and beyond" rights and (ii) Gate Leaseholds, Supporting Route Facilities (including, without limitation, with respect to hangers and parts depots) and Foreign Slots to the extent that the grant of a security interest is permitted by applicable law, it being understood that, in any event, the grant of the security interest described in Section 2.26.1 on such Gate Leaseholds, Supporting Route Facilities and Foreign Slots shall extend to the proceeds (of any kind) received or to be received by the Borrower or applicable Credit Party upon the transfer or other disposition of such Foreign Slots, Gate Leaseholds and/or Supporting Route Facilities.

                "Governmental Authority" shall mean any Federal, state, municipal or other governmental department, commission, board, bureau, agency, administration or instrumentality or any court, in each case whether of the United States or foreign.

                "Guaranteed Obligations" shall have the meaning set forth in Section 16.1 hereof.

                "Guarantor" means Parent and each other Credit Party (other than Borrower), together with each such entity's successors and assigns.

                "Illinois UCC" means the Illinois Uniform Commercial Code as in effect from time to time in the State of Illinois.

                "Indebtedness" shall mean, at any time and with respect to any Person, (i) all indebtedness of such Person for borrowed money; (ii) all indebtedness of such Person for the deferred purchase price of property or services (other than property, including inventory, and services purchased, and expense accruals and deferred compensation items arising, in the ordinary course of business); (iii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments (other than performance, surety and appeal bonds arising in the ordinary course of business); (iv) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (v) all obligations of such Person under Capitalized Leases; (vi) all reimbursement, payment or similar obligations of such Person, contingent or otherwise, under acceptance, letter of credit or similar facilities and all obligations of such Person in respect of (x) currency swap agreements, currency future or option contracts and other similar agreements designed to hedge against fluctuations in foreign interest rates and currency values, (y) interest rate swap, cap or collar agreements and interest rate future or option contracts, and (z) fuel hedges and other derivatives contracts; (vii) all Indebtedness referred to in clauses (i) through (vi) above guaranteed directly or indirectly by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (A) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss in respect of such Indebtedness, (C) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered or to maintain the net worth or other financial condition or ratio of the debtor) or (D) otherwise to assure a creditor against loss in respect of such Indebtedness; and (viii) all Indebtedness referred to in clauses (i) through (vii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in Property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness (it being understood that claims arising upon the rejection of unexpired leases and other executory contracts shall not be treated as Indebtedness hereunder).

                "Instruments" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "Insufficiency" shall mean, with respect to any Plan, its "amount of unfunded benefit liabilities" within the meaning of Section 4001(a)(18) of ERISA, if any.

                "Interest Period" means, with respect to a Eurodollar Loan, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement.  Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month.  If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.

                "Interim Order" means the order of the Bankruptcy Court entered on December 9, 2002 in the Chapter 11 Cases and attached hereto as Exhibit D, as the same may be amended, supplemented or otherwise modified from time to time with the express written consent or joinder of Agent and Required Lenders and approved by the Bankruptcy Court.

                "Interim Order Date" means December 9, 2002.

                "Inventory" shall have the meaning set forth in Article 9 of the Illinois UCC.

                "Investments" of a Person shall have the meaning set forth in Section 6.25 hereof.

                "Investment Property" shall have the meaning set forth in Article 9 of the Illinois UCC, and shall include, without limitation, .securities or other ownership interests in a corporation, partnership, joint venture, limited liability company or other entity.

                "JFK" shall mean New York's John F. Kennedy (JFK) International Airport.

                "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns.

                "Lending Installation" means, with respect to a Lender or the Agent, the office, branch, subsidiary or affiliate of such Lender or the Agent listed on the signature pages hereof or on a Schedule or otherwise selected by such Lender or the Agent pursuant to Section 2.17 hereof.

                "LGA" shall mean New York's LaGuardia Airport.

                "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement).

                "Loan" means, with respect to a Lender, such Lender's term loan made pursuant to Article II (or any conversion or continuation thereof).

                "Loan Documents" means the Orders, this Agreement, any Notes issued pursuant to Section 2.13, the SGR Security Agreement, the Aircraft Mortgage and any other ancillary and collateral documents contemplated hereby or executed in connection herewith.

                "Mandatory Reductions" shall have the meaning set forth in Section 2.2(a) hereof.

                "Material Adverse Effect" means a material adverse effect on (i) the operations, business, Property, assets, prospects or condition (financial or otherwise) of the Borrower and the Credit Parties taken as a whole, (ii) the ability of the Borrower and the Credit Parties to perform their obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder.

                "Material Indebtedness" means Indebtedness in an aggregate principal amount in excess of $20,000,000 that would give rise to an administrative claim under the Bankruptcy Code, including, but not limited to, those administrative claims arising under sections 105, 326, 328, 330, 331, 503(b), 506(c), 507(a), 507(b), 546(c) or 726 of the Bankruptcy Code.

                "Material Indebtedness Agreement" means any agreement (a) under which any Material Indebtedness was created or is governed or which provides for the incurrence of Indebtedness in an amount which would constitute Material Indebtedness (whether or not an amount of Indebtedness constituting Material Indebtedness is outstanding thereunder) and (b) which was entered into either (i) Prepetition and which is affirmed after the Petition Date or (ii) Postpetition.

                "Moody's" means Moody's Investors Service, Inc.

                "Mortgage Supplement" shall have the meaning set forth in the Aircraft Mortgage.

                "Mortgaged Collateral" shall mean all of the "Collateral" as defined in the Aircraft Mortgage (including any Mortgage Supplement), defined to include, without limitation, all aircraft, spare engines and spare parts inventory included within the Collateral.

                "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Borrower, or a Subsidiary of the Borrower or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan.

                "Multiple Employer Plan" shall mean a Single Employer Plan, which (i) is maintained for employees of the Borrower or an ERISA Affiliate and at least one person  (as defined in Section 3(9) of ERISA) other than the Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which the Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.

                "Non-Primary Routes" shall mean all of the Routes other than the Primary Routes.

                "Non-U.S. Lender" shall have the meaning set forth in Section 3.5(iv) hereof.

                "Note" shall have the meaning set forth in Section 2.13 hereof.

                "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loan, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower or any other Credit Party to the Lenders or to any Lender, the Agent or any indemnified party arising under the Loan Documents.

                 "Orders" means the Interim Order and the Final Order.

                "Other Taxes" shall have the meaning set forth in Section 3.5(ii) hereof.

                "Parent" shall mean UAL Corporation, a Delaware corporation, as debtor and debtor in possession.

                "Participants" shall have the meaning set forth in Section 12.2.1 hereof.

                "Payment Date" means the last calendar day of each month.

                "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto.

                "Pension Plan" shall mean a defined benefit plan (as defined in Section 414(j) of the Code and Section 3(35) of ERISA) which is intended to be qualified under Section 401(a) of the Code.

                "Permitted Investments" shall mean:

                        (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the  United States of America), in each case maturing within twelve months from the date of acquisition thereof;

                        (b) investments in commercial paper maturing within six months from the date of acquisition thereof and having, at such date of acquisition, a rating of at least "A-2" or the equivalent thereof from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. or of at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.;

                        (c) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) maturing within six months from the date of acquisition thereof issued or guaranteed by or placed with (i) any domestic office of the Agent or the bank with whom the Borrower and the Credit Parties maintain their cash management system, or (ii) any domestic office of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and is the principal banking Subsidiary of a bank holding company having a long-term unsecured debt rating of at least "A-2" or the equivalent thereof from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. or at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.;

                        (d) investments in commercial paper maturing within six months from the date of acquisition thereof and issued by (i) Agent or (ii) the holding company of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has (A) a combined capital and surplus in excess of $250,000,000 and (B) commercial paper rated at least "A-2" or the equivalent thereof from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. or of at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.;

                        (e) investments in repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any office of a bank or trust company meeting the qualifications specified in clause (c) above; and

                        (f) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (a) through (e) above.

                "Permitted Liens" shall mean (i) Liens imposed by law (other than Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with Agreement Accounting Principles; (ii) Liens of landlords and Liens of carriers, warehousemen, consignors, mechanics, materialmen and other Liens (other than Environmental Liens and any Lien imposed under ERISA) in existence on the Petition Date or thereafter imposed by law and created in the ordinary course of business; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded) and interest of ground lessors, which do not interfere materially with the ordinary conduct of the business of the Borrower or any Credit Party, as the case may be, and which do not materially detract from the value of the Property to which they attach or materially impair the use thereof to the Borrower or any Credit Party, as the case may be; (v) purchase money Liens (including Capitalized Leases) upon or in any Property acquired or held in the ordinary course of business to secure the purchase price of such Property or to secure Indebtedness permitted by Section 6.03(v) solely for the purpose of financing the acquisition of such property; (vi) letters of credit or deposits in the ordinary course to secure leases; and (vii) extensions, renewals or replacements of any Lien referred to in paragraphs (i) through (vi) above, provided, that the principal amount of the obligation secured thereby is not increased and that any such extension, renewal or replacement is limited to the property originally encumbered thereby.

                "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof.

                "Petition Date" shall have the meaning set forth in the Recitals hereof.

                "Plan" shall mean a Single Employer Plan or a Multiemployer Plan.

                "Plan of Reorganization" shall have the meaning set forth in the definition of Facility Termination Date.

                "Pledged Deposits" means all time deposits of money (other than Deposit Accounts and Instruments), whether or not evidenced by certificates, which any Credit Party may from time to time designate as pledged to the Agent or to any Lender as security for any Obligation, and all rights to receive interest on said deposits.

                "Postpetition" means the time period immediately following the filing of the Chapter 11 Cases.

                "Postpetition Indebtedness" means all Indebtedness of the Credit Parties incurred after the filing of the Chapter 11 Cases.

                "Prepetition" means the time period ending immediately prior to the filing of the Chapter 11 Cases.

                "Prepetition Indebtedness" means all Indebtedness of any of the Credit Parties outstanding on the Petition Date immediately prior to the filing of the Chapter 11 Cases.

                "Primary Foreign Slots" shall mean the Foreign Slots set forth on Schedule 1.1(a), as may be amended from time to time at the request of the Agent pursuant to Section 6.19(b).

                "Primary Routes" shall mean the Routes set forth on Schedule 1.1(b) as may be amended from time to time at the request of the Agent pursuant to Section 6.19(b).

                "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by Bank One or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes.

                "Property" of a Person means any and all property, of any kind or type whatsoever and wherever located, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets, whether now owned, leased or operated or hereafter acquired, leased or operated by such Person, including, without limitation, all Accounts (including, without limitation, in the case of ULS, ULS' right to payment under the Co-Branded Card Agreements), Chattel Paper, Commercial Tort Claims, Documents, Equipment, Fixtures, General Intangibles, Instruments, Inventory, Investment Property, and Pledged Deposits, wherever located, in which such Person now has or hereafter acquires any right or interest, and the proceeds (including Stock Rights), insurance proceeds and products thereof, together with all books and records, customer lists, credit files, computer files, programs, printouts and other computer materials and records related thereto.

                "Purchasers" shall have the meaning set forth in Section 12.3.1 hereof.

                "Receivables" means the Accounts, Chattel Paper, Investment Property, Instruments, Pledged Deposits, and any other rights or claims to receive money which are General Intangibles or which are otherwise included as Collateral.

                "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

                "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System.

                "Reports" shall have the meaning set forth in Section 9.6 hereof.

                "Required Lenders" means Lenders in the aggregate having at least a majority of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least a majority of the aggregate unpaid principal amount of the outstanding Loan.

                "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities.

                "Routes" shall mean the routes for which the Borrower or, if applicable, a Credit Party, holds or hereafter acquires the requisite authority to operate pursuant to the Title 49 including, without limitation, applicable frequencies, exemption and certificate authorities, Fifth-Freedom Rights and "behind/beyond rights".

                "S&P" means Standard and Poor's Ratings Services, a division of The McGraw Hill Companies, Inc.

                "Sale and Leaseback Transaction" means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee.

                "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced.

                "Section" means a numbered section of this Agreement, unless another document is specifically referenced.

                "Section 1110 Assets" shall mean (i) property (and agreements related to such property) that qualifies as an "aircraft," "aircraft engine," "propeller," "appliance" or "spare part" (as defined in Section 40102 of Title 49) as those terms are used in Section 1110(a)(3)(A)(i) and (B) of the Bankruptcy Code to the extent that the Borrower or any applicable Credit Party is expressly prohibited from granting liens thereon or assignments thereof under the terms of any security agreement, lease or conditional sale agreement related thereto under which the applicable secured party, lessor or seller is entitled to the protections afforded under Section 1110 of the Bankruptcy Code with respect to such property or agreements or (ii) property referred to in the previous clause that the Borrower or any of the Credit Parties elects to return to the party providing financing therefor in exchange for a discharge of the related indebtedness.

                "Security" shall have the meaning set forth in Article 8 of the Illinois UCC.

                "SGR Security Agreement" shall have the meaning set forth in Section 4.1(xxvi).

                "Single Employer Plan" shall mean a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of the Borrower or an ERISA Affiliate or (ii) was so maintained and in respect of which the Borrower could have liability under Title IV of ERISA in the event such Plan has been or were to be terminated.

                "Slot" shall mean all of the rights and operational authority of the Borrower and, if applicable, a Credit Party, now held or hereafter acquired, to conduct one Instrument Flight Rule (as defined under the FAA regulations) landing or takeoff operation during a specific hour or half-hour period at LGA, DCA or JFK pursuant to FAA regulations, including Title 14.

                "Slot Reporting Guidelines" shall mean that, for purposes of each slot utilization report delivered pursuant to Section 6.1(n),

                (i)    a Slot will be deemed "utilized" if (A) such Slot is used for a take-off or landing operation, (B) by regulation or other regulatory notice, the FAA considers such Slot as "used" for purposes of 14 C.F.R. Section 93.227, regardless of whether or not such Slot was, in fact, used (e.g., holidays as defined in 14 C.F.R. Section 93.227(l) and labor actions), (C) by waiver, the FAA considers such Slot as "used" for purposes of 14 C.F.R. Section 93.227, even though such Slot was not, in fact, used or (D) the FAA otherwise waives the Slot utilization requirement of 14 C.F.R. Section 93.227,

                (ii)    if the Borrower engages in a temporary Slot trade, transfer, exchange or lease with another air carrier, the Borrower shall report the utilization rate for the slot received in the trade, transfer or lease, rather than for the Slot traded, transferred or leased to such other air carrier, for so long as the slot received continues to be operated by the Borrower,

                (iii)    a "week" is defined as a seven-day period, and

                (iv)    the two month FAA reporting period shall be the period for which air carriers provide slot utilization reports to the FAA pursuant to 14 C.F.R. Section 93.227.

                "Stock Rights" means any securities, dividends or other distributions and any other right or property which any Credit Party shall receive or shall become entitled to receive for any reason whatsoever with respect to, in substitution for or in exchange for any securities or other ownership interests in a corporation, partnership, joint venture or limited liability company constituting Collateral and any securities, any right to receive securities and any right to receive earnings, in which any Credit Party now has or hereafter acquires any right, issued by an issuer of such securities.

                "Subsidiary" means, with respect to any Person (referred to as the "parent" solely for purposes of this definition), any corporation, association or other business entity (whether now existing or hereafter organized) of which at least a majority of the securities or other ownership interests having ordinary voting power for the election of directors is, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

                "Supporting Route Facilities" shall mean the takeoff and/or landing rights, gates, ticket counters, office space and baggage claim areas at each airport necessary to operate a Route including, but not limited to, those at the following airports: London; Heathrow; Tokyo; Narita; Osaka; Kansai; Beijing; Capital Airport; Shanghai; Puo Dong; and Hong Kong, Hong Kong International.

                "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes.

                "Termination Event" shall mean (i) a "reportable event", as such term is described in Section 4043(c) of ERISA (other than a "reportable event" as to which the 30-day notice is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043) or an event described in Section 4068 of ERISA and excluding events which would not be reasonably likely (as reasonably determined by the Agent) to have a material adverse effect on the financial condition, operations, business, properties or assets of the Borrower and the Credit Parties taken as a whole, or (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a "substantial employer," as such term is defined in Section 4001(a)(2) of ERISA, the incurrence of liability by the Borrower or any ERISA Affiliate under Section 4064 of ERISA upon the termination of a Multiple Employer Plan, the imposition of Withdrawal Liability, or (iii) providing notice of intent to terminate a Pension Plan pursuant to Section 4041(c) of ERISA (provided such termination would have a Material Adverse Effect) or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, if such amendment requires the provision of security, or (iv) the institution of proceedings to terminate a Pension Plan by the PBGC under Section 4042 of ERISA (provided such termination would have a Material Adverse Effect), or (v) any other event or condition (other than the commencement of the Chapter 11 Cases and the failure to have made any contribution accrued as of the Petition Date but not paid) which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the imposition of any liability under Title IV of ERISA (other than for the payment of premiums to the PBGC in the ordinary course), excluding events or conditions which would not be reasonably likely (as reasonably determined by the Agent) to have a Material Adverse Effect.

                "Title 14" means Title 14 of the U.S. Code of Federal regulations, Part 93, Subparts K and S, as amended from time to time or any successor or recodified regulation.

                "Title 49" shall mean Title 49 of the Unites States Code, which, among other things, recodified and replaced the U.S. Federal Aviation Act of 1958, and the regulations promulgated pursuant thereto or any subsequent legislation that amends, supplements or supercedes such provisions.

                "Transferee" shall have the meaning set forth in Section 12.4 hereof.

                "Type" means, with respect to the Loan, its nature as a Floating Rate Loan or a Eurodollar Loan.

                "ULS" means UAL Loyalty Services, Inc., a Delaware corporation.

                "United States Citizen"  shall have the meaning set forth in Section 5.22 hereof.

                "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default.

                "Use or Lose Rule" shall mean with respect to Slots, the terms of 14 C.F.R. Section 93.227.

                "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled.

                "Withdrawal Liability" shall have the meaning given such term under Part I of Subtitle E of Title IV of ERISA.

                The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.  Terms defined in the Illinois UCC which are not otherwise defined in this Agreement are used herein as defined in the Illinois UCC.

     

    ARTICLE II.
    THE CREDITS



     
     
     
     
     
     
     
     
     

       
      2.1    Commitment.  Each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make a Loan to the Borrower in an amount not to exceed the amount of its Commitment.  At no time shall the aggregate principal amount of the outstanding Loan exceed the Aggregate Commitment.  Amounts repaid hereunder shall not be reborrowed.  The Loan shall become due and payable on the Facility Termination Date.

      2.2    Required Payments; Termination.

        (a)    Commencing on March 1, 2004 and on the first Business Day of each calendar month thereafter, the principal amount of the Loan shall be paid (with a corresponding permanent reduction in the Aggregate Commitment) in installments (each such payment and Aggregate Commitment reduction, a "Mandatory Reduction" and collectively with all other payments and reductions, the "Mandatory Reductions") in the respective amounts shown below opposite the applicable month:
         
           
          Calendar Month of
          Payment and Aggregate
          Commitment Reduction
          Payment and Aggregate
          Commitment Reduction
          March, 2004
          $60,000,000
          April, 2004
          $60,000,000
          May, 2004
          $60,000,000
          June, 2004
          $60,000,000
          July, 2004
          $60,000,000

          Notwithstanding the foregoing, the final Mandatory Reduction on July 1, 2004 shall be the greater of $60,000,000 and the remaining amount of the outstanding Loan.  Immediately upon the repayment of the Loan (and corresponding Aggregate Commitment reductions) set forth in this Section 2.2(a), each Lender's Commitment shall automatically and permanently be reduced by an amount equal to such Lender's ratable share of such reduction.

          (ii) At any time that any portion of the outstanding Loan is due and payable or the Aggregate Commitments are reduced below the aggregate principal amount of the outstanding Loan (in either case, due to a Mandatory Reduction set forth in this Section 2.2(a) or otherwise), Agent shall be entitled, solely at its discretion, to set-off or otherwise apply amounts payable by Bank One, Delaware, N.A. to Borrower under the Co-Branded Card Agreements against any such amounts due the Lenders.

              (b)    Any outstanding Loan and all other unpaid Obligations shall be paid in full by the Borrower on the Facility Termination Date.

              (c)    At any time following the occurrence of a default, event or condition, the effect of which default, event or condition permits Bank One, Delaware, N.A. to terminate any of the Co-Branded Card Agreements,  all payments made by Bank One, Delaware,  N.A. under the Co-Branded Card Agreements shall be immediately set-off or otherwise applied against the outstanding Loan with a corresponding permanent reduction in the Aggregate Commitment equal to the amount of such payments.

              (d)    Upon any voluntary permanent reduction of the revolving loan commitment and/or voluntary prepayment of the term loans under the Additional DIP Credit Agreement (the amount of such reduction or prepayment, the "Additional DIP Voluntary Prepayment"), the Borrower shall contemporaneously repay the Loan (with a corresponding reduction in the Aggregate Commitment) in an amount equal to the product of (i) the Additional DIP Voluntary Prepayment multiplied by (ii) a ratio (expressed as a percentage) of the Aggregate Commitment at the time of such prepayment to the sum of the outstanding commitments under the Additional DIP Credit Agreement at such time and the Aggregate Commitment at such time.  Such prepayment shall be applied pro rata among all remaining Mandatory Reductions.
           

        2.3    Ratable Loan.  The Loan shall be made from the several Lenders ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment.

        2.4    Types of Loan.  The Loan may be a Floating Rate Loan or a Eurodollar Loan, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9.

        2.5    [Intentionally Deleted]

        2.6    [Intentionally Deleted]

        2.7    Optional Principal Payments.  The Borrower may from time to time pay, without penalty or premium, all of the outstanding Floating Rate Loan, or, in a minimum aggregate amount of $10,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Floating Rate Loan, upon two Business Days' prior notice to the Agent.  The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.4 but without penalty or premium, all of the outstanding Eurodollar Loan, or, in a minimum aggregate amount of $10,000,000 or any integral multiple of $10,000,000 in excess thereof, any portion of the outstanding Eurodollar Loan, upon three Business Days' prior notice to the Agent.  Amounts repaid may not be reborrowed.

        2.8    Method of Selecting Types and Interest Periods of Loan.  The Borrower shall select the Type of Loan and, in the case of each Eurodollar Loan, the Interest Period applicable thereto from time to time.  No more than five (5) Eurodollar Loans may be outstanding at any time.  The Type of Loan funded on the Closing Date shall be a Floating Rate Loan.

        2.9    Conversion and Continuation of Outstanding Loan.  Each Floating Rate Loan shall continue as a Floating Rate Loan unless and until such Floating Rate Loan is converted into Eurodollar Loan pursuant to this Section 2.9 or is repaid in accordance with Section 2.7.  Each Eurodollar Loan shall continue as a Eurodollar Loan until the end of the then applicable Interest Period therefor, at which time such Eurodollar Loan shall be automatically converted into a Floating Rate Loan unless (x) such Eurodollar Loan is or was repaid in accordance with Section 2.7 or (y) the Borrower shall have given the Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Loan continue as a Eurodollar Loan for the same or another Interest Period.  Subject to the terms of Section 2.9, the Borrower may elect from time to time to convert all or any part of a Floating Rate Loan into a Eurodollar Loan.  The Borrower shall give the Agent irrevocable (unless a Eurodollar Loan is not available due to increased costs (as set forth in Section 3.2) or illegality (as set forth in Section 3.3)) notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Loan into a Eurodollar Loan or continuation of a Eurodollar Loan not later than 10:00 a.m. (Chicago time) at least three Business Days prior to the date of the requested conversion or continuation, specifying:
         

            (i)    the requested date, which shall be a Business Day, of such conversion or continuation,

            (ii)    the aggregate amount and Type of the Loan which is to be converted or continued, and

            (iii)    the amount of such Loan which is to be converted into or continued as a Eurodollar Loan and the duration of the Interest Period applicable thereto.
             

        2.10    Changes in Interest Rate, etc.  Each Floating Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Loan is made or is automatically converted from a Eurodollar Loan into a Floating Rate Loan pursuant to Section 2.9, to but excluding the date it is paid or is converted into a Eurodollar Loan pursuant to Section 2.9, at a rate per annum equal to the Floating Rate for such day.  Changes in the rate of interest on that portion of any Loan maintained as a Floating Rate Loan will take effect simultaneously with each change in the Alternate Base Rate.  Each Eurodollar Loan shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Agent as applicable to such Eurodollar Loan based upon the Borrower's selections under Sections 2.8 and 2.9 and otherwise in accordance with the terms hereof.  No Interest Period may end after the Facility Termination Date.

        2.11    Rates Applicable After Default.  Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of a Default the Agent or Required Lenders may, at their option, by written notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Loan may be made as, converted into or continued as a Eurodollar Loan.  During the continuance of a Default, Agent or the Required Lenders may, at their option, by written notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Loan shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Loan shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum.

        2.12    Method of Payment.  Subject to the right of Bank One, NA to setoff payments pursuant to Section 2.2 hereof (which such right shall be exclusively exercised by Bank One, NA), all payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by noon (local time) on the date when due and shall be applied ratably by the Agent among the Lenders.  Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender.  The Agent is hereby authorized to charge any account of the Credit Parties maintained with Bank One or any Affiliate of Bank One for each payment of principal, interest and fees as it becomes due hereunder.

        2.13    Noteless Agreement; Evidence of Indebtedness.

                        (i)    Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

                        (ii)    The Agent shall also maintain accounts in which it will record (a) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (c) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof.

                        (iii)    The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms.

                        (iv)    Any Lender may request that its Loan be evidenced by a promissory note in substantially the form of Exhibit C (a "Note").  In such event, the Borrower shall prepare, execute and deliver to such Lender such Note payable to the order of such Lender.  Thereafter, the Loan evidenced by such Note and interest thereon shall at all times (prior to any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein, except to the extent that any such Lender subsequently returns any such Note for cancellation and requests that such Loan once again be evidenced as described in paragraphs (i) and (ii) above.

        2.14    Telephonic Notices.  The Borrower hereby authorizes the Lenders and the Agent to convert or continue the Loan, effect selections of Types of the Loan and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Conversion/Continuation Notices to be given telephonically.  The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer.  If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error.

        2.15    Interest Payment Dates; Interest and Fee Basis.  Interest accrued on each Floating Rate Loan shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, and at maturity.  Interest accrued on that portion of the outstanding principal amount of any Floating Rate Loan converted into a Eurodollar Loan on a day other than a Payment Date shall be payable on the date of conversion.  Interest accrued on each Eurodollar Loan shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Loan is prepaid, whether by acceleration or otherwise, and at maturity.  Interest accrued on each Eurodollar Loan having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period.  Interest and commitment fees shall be calculated for actual days elapsed on the basis of a 360-day year.  Interest shall be payable for the day a Loan is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time) at the place of payment.  If any payment of principal of or interest on a Loan shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment.

        2.16    [Intentionally Deleted]

        2.17    Lending Installations.  Each Lender may book its Loan at any Lending Installation selected by such Lender and may change its Lending Installation from time to time.  All terms of this Agreement shall apply to any such Lending Installation and the Loan and any Notes issued hereunder shall be deemed held by each Lender for the benefit of any such Lending Installation.

        2.18    Non-Receipt of Funds by the Agent.  Unless the Borrower notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made.  The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption.  If the Borrower has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the interest rate applicable to the relevant Loan.

        2.19    Replacement of Lender.  If the Borrower is required pursuant to Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any Lender's obligation to make or continue, or to convert Floating Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 3.3 (any Lender so affected an "Affected Lender"), the Borrower may elect with the consent of Agent (such consent not to be unreasonably withheld; provided that it shall not be deemed unreasonable for Agent to withhold its consent if the Loan and this facility have not been fully syndicated (as determined by Agent in its sole discretion)), if such amounts continue to be charged or such suspension is still effective, to replace such Affected Lender as a Lender party to this Agreement, provided that no Default shall have occurred and be continuing at the time of such replacement, and provided further that, concurrently with such replacement, (i) another bank or other entity which is reasonably satisfactory to the Borrower and the Agent shall agree, as of such date, to purchase for cash the Loan and other Obligations due to the Affected Lender pursuant to an assignment substantially in the form of Exhibit A and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in same day funds on the day of such replacement (A) all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 3.4 had the Loan of such Affected Lender been prepaid on such date rather than sold to the replacement Lender.

        2.20    Approval of Interest.  Approval of this Agreement by the Bankruptcy Court shall constitute approval of the rates of interest and other amounts payable hereunder and a ruling that they are exempt from any otherwise applicable limitation.

        2.21    Superpriority Nature of Obligations; Priming Lien.

                        (a)    Except as set forth in this paragraph, the Obligations shall be secured by Liens in all of the Collateral under Sections 364(c)(2) and (c)(3) of the Bankruptcy Code, senior to all other Liens, regardless of when the Liens were obtained and regardless of their previous priority.  The Liens granted under section 364(c)(2) and (3) of the Bankruptcy Code shall be subject only to (i) in the case of Liens granted under section 364(c)(3) of the Bankruptcy Code, Liens granted to the Additional DIP Lenders on the Additional DIP Collateral, (ii) non-avoidable, valid and perfected liens in existence on the Petition Date, (iii) non-avoidable valid liens in existence on the Petition Date that are perfected subsequent to the Petition Date by section 546(b) of the Bankruptcy Code and (iv) the Carve-Out Reserve (set forth below).

                        (b)    The Obligations shall also have the status in the Chapter 11 Cases of superpriority administrative expenses under Section 364(c)(1) of the Bankruptcy Code.  Subject to the Carve Out Reserve, such superpriority administrative claim shall have priority over all other claims, costs and expenses of the kinds specified in, or ordered pursuant to, Sections 105, 326, 328, 330, 331, 503(b), 506(c), 507(a), 507(b), 726, 1114  or any other provision of the Bankruptcy Code and shall at all times be senior to the rights of any Credit Party, any Credit Party's estate, and any successor trustee or estate representative in the Chapter 11 Cases or any subsequent proceeding or case under the Bankruptcy Code (provided such claims shall be pari passu with Additional DIP Lenders' superpriority administrative expense claims).

                        (c)    Agent's Liens on the Collateral under Sections 364(c)(2) and (c)(3) of the Bankruptcy Code, for the benefit of Agent and Lenders, and the superpriority administrative claim under Section 364(c)(1) of the Bankruptcy Code afforded the Obligations shall be subject only to the following: (i) fees payable to the United States Trustee pursuant to 28 U.S.C. Section 1930(a)(6) and to the Clerk of the Bankruptcy Court and (ii) upon the occurrence and during the continuance of a Default (which is not subsequently waived or cured), the payment of accrued and unpaid professional fees and expenses allowed by the Bankruptcy Court (whether incurred prior to or subsequent to such Default) of attorneys, accountants, financial advisors or other professionals retained by any of the Credit Parties and any official committee appointed in the Chapter 11 Cases pursuant to Section 1103 of the Bankruptcy Code, in an aggregate amount not to exceed $35,000,000 (the "Carve-Out Reserve") in toto to be allocated pro rata among the Obligations hereunder and the obligations under the Additional DIP Credit Agreement, plus amounts payable pursuant to 28 U.S.C. Section 1930(a)(6) and to the Clerk of the Bankruptcy Court; provided, that any payments actually made to such professionals under Sections 330, 331 and 503 of the Bankruptcy Code in respect of fees and expenses incurred or accrued (x) prior to the occurrence of a Default, shall not reduce the Carve Out Reserve and (y) from and after the occurrence of a Default, shall reduce dollar-for-dollar the Carve Out Reserve; provided, further, that in no event shall any of the Carve Out Reserve include any fees or expenses arising after the conversion of the Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code.  In the event of a liquidation of the Borrower's and the Credit Parties' estates, the amount of the Carve-Out Reserve shall be funded into a segregated account prior to the making of any distributions.

                    (d)    Notwithstanding the foregoing, the Credit Parties shall be permitted to pay, as the same may become due and payable, subject to the provisions of the Orders and this Section 2.21 and provided that no Default has occurred and is continuing, compensation and reimbursement of expenses to professionals allowed by the Bankruptcy Court and payable under Sections 330 and 331 of the Bankruptcy Code, provided that  the Credit Parties shall not be permitted to use cash collateral of Lenders or Additional DIP Lenders or the proceeds of Loan made hereunder or under the Additional DIP to pay any amount in professional fees and expenses incurred in connection with the investigation (including discovery proceedings) of potential claims, causes of action, actions or proceedings against (i) Agent or any Lender in respect of the Obligations or otherwise or (ii) the Additional DIP Lenders in respect of obligations owing under the Additional DIP Credit Agreement.  Except for the Carve-Out Reserve and payments under 28 U.S.C. § 1930(a)(6) and to the Clerk of the Bankruptcy Court, no costs or expenses of administration shall be imposed against Agent and Lenders or the Collateral under Sections 105, 506(c) or 552 of the Bankruptcy Code, or otherwise.

        2.22    Release.  The Borrower and the other Credit Parties each hereby acknowledge, effective upon the Interim Order Date, that Borrower, the other Credit Parties, or any of their Subsidiaries, have no defense, counterclaim, offset, recoupment, cross-complaint, claim or demand of any kind or nature whatsoever that can be asserted to reduce or eliminate all or any part of Borrower's, the other Credit Parties', or their Subsidiaries' liability to repay Agent or any Lender as provided in this Agreement or to seek affirmative relief or damages of any kind or nature from Agent or any Lender.  Borrower and the other Credit Parties, each in its own right and on behalf of its bankruptcy estate, all its successors, assigns, Subsidiaries and any Affiliates and any Person acting for and on behalf of, or claiming through it (collectively, the "Releasing Parties"), hereby fully, finally and forever release and discharge Agent and Lenders and all of Agent's and Lenders' past and present officers, directors, servants, agents, attorneys, assigns, heirs, parents, subsidiaries, and each Person acting for or on behalf of any of them (collectively, the "Released Parties") of and from any and all past and present actions, causes of action, demands, suits, claims, liabilities, Liens, lawsuits, adverse consequences, amounts paid in settlement, costs, damages, debts, deficiencies, diminution in value, disbursements, expenses, losses and other obligations of any kind or nature whatsoever, whether in law, equity or otherwise (including, without limitation, those arising under Sections 541 through 550 of the Bankruptcy Code and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses, and incidental, consequential and punitive damages payable to third parties), whether known or unknown, fixed or contingent, direct, indirect, or derivative, asserted or unasserted, foreseen or unforeseen, suspected or unsuspected, now or heretofore existing against any of the Released Parties, whether held in a personal or representative capacity, and which are based on any act, fact, event or omission or other matter, cause or thing occurring at or from any time prior to and including the date hereof in any way, directly or indirectly arising out of, connected with or relating to this Agreement, the Interim Order, the Final Order and the debtor in possession financings, and allother agreements, certificates, instruments and other documents and statements (whether written or oral) related to  the debtor in possession financings.

        2.23    Waiver of any Priming Rights.  Upon the Closing Date, and on behalf of themselves and their estates, and for so long as any Obligation shall be outstanding, Borrower and the other Credit Parties hereby irrevocably waive any right, pursuant to Sections 364(c) or 364(d) of the Bankruptcy Code or otherwise, (a) to grant any Lien of equal or greater priority than the Lien securing the Obligations other than Liens permitted to be granted by this Agreement to the Additional DIP Lenders on the Additional DIP Collateral, or (b) to approve or incur a claim of equal or greater priority than the Obligations.

        2.24    Payment of Obligations.  Upon the Facility Termination Date (whether by acceleration or otherwise) of any of the Obligations under this Agreement or any of the other Loan Documents, Lenders shall be entitled to immediate payment of such Obligations without further application to or order of the Bankruptcy Court.

        2.25    No Discharge; Survival of Claims.  Borrower and each of the other Credit Parties agrees that (a) the Obligations hereunder shall not be discharged by the entry of an order confirming a Plan of Reorganization (and Borrower and each of the other Credit Parties, pursuant to Section 1141(d)(4) of the Bankruptcy Code, hereby waives any such discharge) and (b) the superpriority administrative claim granted to Agent and Lenders pursuant to the Interim Order and Final Order and described in Section 2.21 and the Liens granted to Agent pursuant to the Interim Order and Final Order and described in Section 2.21 shall not be affected in any manner by the entry of an order confirming a Plan of Reorganization in any Chapter 11 Case.

        2.26    Security.

                    2.26.1 Grant of Security Interest.

         
                    (a)  The Borrower and each other Credit Party hereby pledges, assigns and grants to the Agent, on behalf of and for the ratable benefit of the Lenders and (to the extent specifically provided in this Section 2.26) their Affiliates, a security interest in all of the Borrower's and each other Credit Party's right, title and interest in and to the Collateral to secure the prompt and complete payment and performance of the Obligations.  Notwithstanding the foregoing, the total amount of shares of capital stock or other ownership interests of any Person pledged hereunder that is not incorporated or organized in the United States shall in no event exceed sixty-five percent (65%) of the total outstanding shares of capital stock or such other ownership interests thereof.

                    (b)  With respect to all real property the title to which is held by the Borrower or any of the Credit Parties, or the possession of which is held by the Borrower or any of the Credit Parties pursuant to leasehold interest, the Borrower and each Credit Party hereby assigns and conveys as security, grants a security interest in, hypothecates, mortgages, pledges and sets over unto the Agent on behalf of the Lenders all of the right, title and interest of the Borrower and such Credit Parties in all of such owned real property and in all such leasehold interests, together in each case with all of the right, title and interest of the Borrower and such Credit Parties in and to all buildings, improvements, and fixtures related thereto, any lease or sublease thereof, all General Intangibles relating thereto and all proceeds thereof.  The Borrower and each Credit Party acknowledges that, pursuant to the Orders, the Liens in favor of the Agent on behalf of the Lenders in all of such real property and leasehold instruments (limited, in the case of leasehold interests, to the proceeds received upon any sale, disposition or termination thereof) shall be perfected without the recordation of any instruments of mortgage or assignment.  The Borrower and each Credit Party further agrees that, upon the request of Agent, the Borrower and such Credit Party shall enter into separate fee or leasehold mortgages in recordable form with respect to such properties on terms reasonably satisfactory to the Agent.

                    2.26.2 Lockboxes.  Upon request of the Agent after the occurrence of a Default, the Borrower and each other Credit Party shall execute and deliver to the Agent irrevocable lockbox agreements in the form provided by or otherwise acceptable to the Agent, which agreements shall be accompanied by an acknowledgment by the bank where the lockbox is located of the Lien of the Agent granted hereunder and of irrevocable instructions to wire all amounts collected therein to a special collateral account at the Agent.

                    2.26.3 Special Collateral Account.  The Agent shall require all cash proceeds of the Co-Branded Card Collateral to be deposited in a special non-interest bearing cash collateral account (account number 644433310) with the Agent as security for the Obligations.  The Borrower and the Credit Parties shall have no control whatsoever over said cash collateral account.  If no Default has occurred or is continuing and if no setoff is permitted pursuant to Section 2.2 hereof at such time, the Agent shall promptly transfer the collected balances in said cash collateral account into the Borrower's or applicable Credit Party's general operating account with the Agent.  If any Default has occurred and is continuing or if set-off is otherwise permitted pursuant to Section 2.2 hereof at such time, the Agent may (and shall, at the direction of the Required Lenders), from time to time, apply the collected balances in said cash collateral account to the payment of the Obligations whether or not the Obligations shall then be due.  At all times, the Borrower and the Credit Parties (i) shall direct Bank One, Delaware, N.A. to deposit all amounts owed ULS under the Co-Branded Card Agreements in such cash collateral account and (ii) agree to promptly deposit all amounts received under the Co-Branded Card Agreements in such cash collateral account.

                    2.26.4 Agent's Performance of Obligations.  Without having any obligation to do so, the Agent may perform or pay any obligation which the Borrower or any other Credit Party has agreed to perform or pay relating to the Collateral and the Borrower shall reimburse the Agent for any amounts paid by the Agent pursuant to this Section 2.26.4.  The Borrower's obligation to reimburse the Agent pursuant to the preceding sentence shall be an Obligation payable upon written demand with reasonable documentation supporting such reimbursement request.

                    2.26.5 Authorization for Agent to Take Certain Action.  The Borrower and each Credit Party irrevocably authorizes the Agent at any time and from time to time in the reasonable discretion of the Agent and appoints the Agent as its attorney in fact (i) to execute on behalf of the Borrower and each Credit Party as debtor and to file financing statements necessary in the Agent's reasonable discretion to perfect and to maintain the perfection and priority of the Agent's security interest in the Collateral, (ii) to endorse and collect any cash proceeds of the Collateral, (iii) to file a carbon, photographic or other reproduction of this Agreement (or any portion thereof) or any financing statement with respect to the Collateral as a financing statement and to file any other financing statement or amendment of a financing statement (which does not add new collateral or add a debtor) in such offices as the Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the Agent's security interest in the Collateral, (iv) to contact and enter into one or more agreements with the issuers of uncertificated securities which are Collateral and which are Securities or with financial intermediaries holding other Investment Property as may be necessary or advisable to give the Agent Control over such Securities or other Investment Property, (v) to enforce payment of the Receivables in the name of the Agent or the Borrower or any other Credit Party, (vi) to apply the proceeds of any Collateral received by the Agent to the Obligations as provided herein and (vii) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder), and the Borrower and each other Credit Party agrees to reimburse the Agent upon written demand (together with reasonable documentation supporting such reimbursement request) for any payment made or any expense incurred by the Agent in connection therewith, provided that this authorization shall not relieve the Borrower and each other Credit Party of any of its obligations under this Agreement.

                2.26.6   Further Assurances.

                (a)  The Borrower and each Credit Party agree that from time to time, at the expense of the Borrower and each Credit Party, they will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Agent to exercise and enforce any of its rights and remedies hereunder with respect to any Collateral.  Without limiting the generality of the foregoing, and without further order of the Bankruptcy Court, the Borrower and each Credit Party (i) will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary, or as Agent may reasonably request, (ii) will enter into control agreements (or take such other steps as may be reasonably requested by Agent to establish control over the Collateral) and (iii) will deliver to Agent possession of Collateral (including certificates evidencing shares of capital stock or other ownership interests) (accompanied by instruments of transfer or assignment duly executed in blank as may be reasonably requested by Agent).

                (b)  The Borrower and each Credit Party hereby authorize Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Borrower or the Credit Parties where permitted by law.
                (c)  The Borrower and each Credit Party will furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Agent may reasonably request, all in reasonable detail.
                (d)  The Borrower and each Credit Party shall provide the Agent with at least fifteen (15) days prior written notice of (i) any change in the name, organizational structure or jurisdiction of organization of the Borrower or any Credit Party, (ii) a change in the organizational identification number of the Borrower or any Credit Party and (iii) any change in the location of the chief executive office of the Borrower or any Credit Party or place of business of the Borrower or any Credit Party if it only has one place of business.  The Borrower and each Credit Party shall also promptly, but in any event within thirty (30) days of receipt of an organizational identification number, if the Borrower or applicable Credit Party did not previously have one, notify the Agent of the receipt thereof.
                (e)  In order to facilitate a subsequent transfer, if any, of Slots held by the Borrower or any Credit Party, the Borrower and the applicable Credit Parties (A) have, prior to the Closing Date, executed a blank, undated transfer document for each Slot held by the Borrower and applicable Credit Parties, as applicable, as of the Closing Date, and (B) shall, on the date of acquisition thereof, execute a blank, undated transfer document for each Slot acquired by Borrower and any Credit Party after the Closing Date, in each case, to be held in escrow by Agent until (i) exercise by the Agent of its rights upon the occurrence and during the continuance of a Default or (ii) termination of, or release from, the Liens of the SGR Security Agreement and this Agreement in accordance with the terms thereof and hereof.

        2.27    Increase in Interest.

                (a) In the event that the Additional DIP (whether initially or by way of a future amendment) provides for an interest rate that exceeds the Eurodollar Rate or Floating Rate, the definition of Eurodollar Rate or Floating Rate, as applicable, will, at the Requisite Lenders' option, be increased such that the applicable interest rates hereunder shall be no less than the applicable interest rates under the Additional DIP; any such increase shall take effect on the same date as the increased rates under the Additional DIP became effective.

                (b) It is the intent of this Section 2.27 to cause all interest rates hereunder to be no less than those interest rates charged under the Additional DIP.


    ARTICLE III
    YIELD PROTECTION; TAXES


              3.1    Yield Protection.  If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:
       
          (i)    subjects any Lender or any applicable Lending Installation to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender in respect of its Eurodollar Loans, or

          (ii)    imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Loan), or

          (iii)    imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining its Eurodollar Loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with its Eurodollar Loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Eurodollar Loans held or interest received by it, in each case by an amount deemed material by such Lender, and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation of making or maintaining its Eurodollar Loans or Commitment or to reduce the return received by such Lender or applicable Lending Installation in connection with such Eurodollar Loans or Commitment, then, within 15 days of written demand (together with reasonable documentation supporting such reimbursement request) by such Lender, the Borrower shall pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction in amount received.
           

        3.2    Changes in Capital Adequacy Regulations.  If a Lender reasonably determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of written demand (together with reasonable documentation supporting such reimbursement request) by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender reasonably determines is attributable to this Agreement, its Loan or its Commitment to make a Loan hereunder (after taking into account such Lender's policies as to capital adequacy).  "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender.  "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.

        3.3    Availability of Types of Loan.  If any Lender reasonably determines that maintenance of a Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders reasonably determine that (i) deposits of a type and maturity appropriate to match fund the Eurodollar Loan is not available or (ii) the interest rate applicable to the Eurodollar Loan does not accurately reflect the cost of making or maintaining the Eurodollar Loan, then the Agent shall suspend the availability of the Eurodollar Loan and require any affected Eurodollar Loan to be repaid or converted to Floating Rate Loan, subject to the payment of any funding indemnification amounts required by Section 3.4.

        3.4    Funding Indemnification.  If any payment of a Eurodollar Loan occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Loan is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Loan.

        3.5    Taxes.

                        (i)        All payments by the Borrower or any other Credit Party to or for the account of any Lender or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes.  If the Borrower or any other Credit Party shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower or the other applicable Credit Party shall make such deductions, (c) the Borrower or the other applicable Credit Party shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower or the other applicable Credit Party shall furnish to the Agent the original copy of a receipt (to the extent reasonably available) evidencing payment thereof within 30 days after such payment is made.

                        (ii)        In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note ("Other Taxes").

                        (iii)        The Borrower hereby agrees to indemnify the Agent and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Agent or such Lender as a result of its Commitment, any Loan made by it hereunder, or otherwise in connection with its participation in this Agreement and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto.  Payments due under this indemnification shall be made within 30 days of the date the Agent or such Lender makes written demand (together with reasonable documentation supporting such reimbursement request) therefor pursuant to Section 3.6.

                        (iv)    Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, not more than ten Business Days after the date of this Agreement, (i) deliver to the Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to the Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax.  Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Agent.  All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax.

                        (v)        For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes.

                        (vi)        Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate.

                        (vii)        If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this subsection, together with all costs and expenses related thereto (including reasonable attorneys fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent).  The obligations of the Lenders under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement.

        3.6.    Lender Statements; Survival of Indemnity.  To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of a Eurodollar Loan under Section 3.3, so long as such designation is not, in the reasonable judgment of such Lender, disadvantageous to such Lender.  Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Sections 3.1, 3.2, 3.4 or 3.5.  Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error.  Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not.  Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement.  The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement.
         
         
         
         
         

                             ARTICLE IV.
    CONDITIONS PRECEDENT



     
     
     
     
     

        4.1    Conditions Precedent to the Loan.  The Lenders shall not be required to make the Loan hereunder unless the Credit Parties have furnished to the Agent with sufficient copies for the Lenders the following documents and satisfied (or such condition has been waived) the following conditions, as applicable, in each case to Agent's reasonable satisfaction:
         
          (i)        Copies of the articles or certificate of incorporation of each Credit Party, together with all amendments, and a certificate of good standing (provided that such good standing certificate for iTarget.com, Inc. shall be delivered to the Agent within 30 days of the Closing Date) and, if reasonably requested by Agent, a certificate or certificates of qualification to do business as a foreign corporation, each certified by the appropriate governmental officer in its jurisdiction of incorporation or other applicable jurisdiction.

          (ii)        Copies certified by the Secretary or Assistant Secretary of the applicable Credit Party, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents to which such Credit Party is a party.

          (iii)        An incumbency certificate or certificates, executed by the Secretary or Assistant Secretary of each Credit Party, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of each Credit Party authorized to sign the Loan Documents to which such Credit Party is a party, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Credit Party.

          (iv)        A certificate, signed by the chief financial officer of the Borrower, stating that on the Borrowing Date no Default or Unmatured Default has occurred and is continuing.

          (v)        A written opinion of (i) Kirkland & Ellis, the Borrower's counsel, (ii) McAfee & Taft, special aviation counsel to the Agent, and (iii) Vedder, Price, Kaufman & Kammholz, special counsel to the Borrower and the Credit Parties, in each case addressed to the Lenders in form and substance reasonably acceptable to Agent.

          (vi)        Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender.

          (vii)        Written money transfer instructions, in substantially the form of Exhibit B, addressed to the Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Agent may have reasonably requested.

          (viii)        To the extent that the applicable insurance certificate permits identifying Agent, for the benefit of the Lenders, as a lienholder junior to the Additional DIP Lenders, the insurance certificates described in Section 5.20, together with endorsements naming Agent, on behalf of the Lenders, as an additional insured and loss payee under all insurance policies maintained with respect to the Properties of the Credit Parties forming a part of the Collateral, subject only to the interests of the Additional DIP Lenders.

          (ix)        The Credit Parties shall have paid all reasonable fees and expenses (including reasonable fees and expenses of counsel) (including the fees specified in any fee letter between Bank One, NA and any Credit Party (the "Fee Letter")) required to be paid to the Agent and the Lenders on or before the Closing Date to the extent invoices have been presented to the Credit Parties.

          (x)        The Bankruptcy Court shall have approved the entry by the Borrower and the other Credit Parties into the Additional DIP Credit Agreement pursuant to which the Additional DIP Lenders shall have committed to lend $1,200,000,000 to the Borrower and which Indebtedness thereunder shall be secured by a first priority Lien in the Additional DIP Collateral and a Lien junior to that of Agent on all Co-Branded Card Collateral securing the Obligations.  The Additional DIP Credit Agreement and all documents executed in connection with the Additional DIP shall be in form and substance reasonably satisfactory to Agent, including, without limitation, with respect to Agent's approval of the nature, availability requirements and repayment and default provisions of the Additional DIP.  Simultaneously with the funding of the Loan hereunder, (a) $400,000,000 shall be advanced under the Additional DIP and (b) an additional $100,000,000 shall be made available to the Borrower under the Additional DIP.

          (xi)        The Additional DIP Lenders and the Agent and Lenders shall have executed an intercreditor agreement in form and substance reasonably acceptable to Agent (the "Additional DIP Intercreditor Agreement").

          (xii)        The Agent shall have received evidence, pursuant to the Interim Order or otherwise satisfactory to it, that Borrower and the Credit Parties have created in favor of Agent, for the benefit of Lenders, a valid and perfected first priority Lien in the Collateral (other than (i) the Additional DIP Collateral, as to which Agent's Lien shall be junior to that of the Additional DIP Lenders and (ii) any other Collateral for which non-avoidable, valid and perfected Liens were in existence at the time of the Petition Date or perfected subsequent to the Petition Date as permitted by Section 546(b) of the Bankruptcy Code, as to which Agent's Lien shall be junior to such lienholders).

          (xiii)        All of the "first day orders" entered by the Bankruptcy Court at the time of the commencement of the Chapter 11 Cases, related orders and all motions and other documents to be filed with and submitted to the Bankruptcy Court in connection with this Agreement shall be reasonably satisfactory in form and substance to Agent, including, without limitation, pursuant to Section 365 of the Bankruptcy Code, the assumption (on a final and non-appealable basis) of the Co-Branded Card Agreements (including, without limitation, the Co-Branded Card Amendment) and the Co-Branded Debit Card Amendment.

          (xiv)        The Interim Order shall (a) have been entered by the Bankruptcy Court upon an application or motion of Borrower reasonably satisfactory in form and substance to Agent and on such prior notice to such parties as may be reasonably satisfactory to Agent, (b) be in full force and effect and (c) not have been reversed, stayed, modified or amended in a manner adverse to Agent in its sole discretion.

          (xv)        The Credit Parties, Bank One, Delaware, N.A. and the Agent shall have executed an agreement providing for, among other things, the ability of the Agent to apply amounts owed to UAL Loyalty Services, Inc. under the Co-Branded Card Agreements by Bank One, Delaware, N.A. to the Obligations.

          (xvi)        The Lenders shall have received (i) audited financial statements of the Credit Parties and Parent's Subsidiaries and its Affiliates on a consolidated basis for the fiscal year ended December 31, 2001, (ii) interim unaudited quarterly and monthly financial statements of the Credit Parties and Parent's Subsidiaries and Affiliates on a consolidated basis through the fiscal quarter ended September 30, 2002 and each fiscal month ending thereafter for which financial statements are available, (iii) the Credit Parties' business plan which shall include a financial forecast on a monthly basis for the fiscal period ending December 31, 2002 and on a monthly basis for the fiscal period ending December 31, 2003 and 2004 prepared by the Credit Parties and in a form reasonably acceptable to Agent (the "Financial Forecast") and (iv) a rolling 13-week cash budget for the 13-week period from the Petition Date, prepared by the Credit Parties and in a form reasonably acceptable to Agent.

          (xvii)        The Credit Parties shall have established a cash collateral account with Agent for cash deposits related to the Co-Branded Card Agreements. The Credit Parties, Bank One, Delaware, N.A. and the Agent shall have executed an agreement directing Bank One, Delaware, N.A. to make all payments under the Co-Branded Card Agreements directly to such cash collateral account.

          (xviii)        Except as set forth on Schedule 4.1 hereto, there shall exist no unstayed action, suit, investigation, litigation or proceeding (other than the Chapter 11 Cases) pending or, to the knowledge of the Credit Parties, threatened in any court or before any arbitrator or governmental instrumentality that (i) has a reasonable probability of having a Material Adverse Effect or (ii) restrains, prevents or imposes or can reasonably be expected to impose materially adverse conditions upon the transactions contemplated hereby.

          (xix)        Such other documents as any Lender or its counsel may have reasonably requested, each in form and substance reasonably satisfactory to the Borrower and its counsel and the Lenders and its counsel.

          (xx)        There exists no Default or Unmatured Default.

          (xxi)        The representations and warranties contained in Article V are true and correct in all material respects as of such Borrowing Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date.

          (xxii)        All legal matters incident to the making of the Loan shall be reasonably satisfactory to the Lenders and their counsel.

          (xxiii)        The final order providing for the assumption of the Co-Branded Card Agreements and the Interim Order and, if such proposed Borrowing Date is more than 30 days following the commencement of the Chapter 11 Cases, the Final Order shall be in full force and effect and satisfactory to Agent and the Requisite Lenders and shall not have been reversed, stayed, modified or amended and no appeal of any such order shall be pending.  The Co-Branded Card Agreements shall be in full force and effect and the Credit Parties shall not be in default thereunder.

          (xxiv)        Except (a) as disclosed in writing to the Agent and approved by the Requisite Lenders and (b) those events which (i) occur as a result of events leading up to and following the commencement of a case under Chapter 11 of the Bankruptcy Code and (ii) are reflected in the financial forecast delivered to Agent as required under Section 4.1 hereof, there shall have occurred no Material Adverse Effect since December 8, 2002 (other than those occurring as a result of events leading up to and following the commencement of a case under Chapter 11 of the Bankruptcy Code and as contemplated by the Financial Forecast).

          (xxv)        There shall exist no breach or default of any Credit Party in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in the Co-Branded Card Agreements or any document executed in connection therewith, and no other event shall have occurred or condition shall exist, the effect of which breach, default, event or condition is to cause, or to permit Bank One, Delaware, N.A. to suspend the payment of obligations otherwise owed under any of the Co-Branded Card Agreements or terminate any of the Co-Branded Card Agreements prior to the stated termination date.

          (xxvi)        The Borrower and each Credit Party shall have duly executed and delivered to the Agent a slot, gate and route security and pledge agreement (the "SGR Security Agreement"), in form and substance reasonably acceptable to Agent, duly executed by the Borrower and the Credit Parties as of the Closing Date and have taken such actions as may be contemplated by such agreement to perfect the Liens granted to the Agent thereunder.

          (xxvii)        The Borrower shall have duly executed and delivered to the Agent an aircraft mortgage (together with the Mortgage Supplement hereinafter described, the "Aircraft Mortgage"), and a Mortgage Supplement with respect to the Mortgaged Collateral in substantially the form annexed to the Aircraft Mortgage, and the Agent shall have received evidence that the Aircraft Mortgage and the Mortgage Supplement have been recorded with the FAA.  The parties hereto acknowledge and agree that any Lien described in this Agreement on the Mortgaged Collateral is a Lien in favor of the Agent for the ratable benefit of the Lenders.
           
           
           

    ARTICLE V.
    REPRESENTATIONS AND WARRANTIES

    Each of the Credit Parties jointly and severally represents and warrants to the Lenders that:

            5.1    Existence and Standing.  Each of the Borrower and the other Credit Parties (i) is duly organized and validly existing under the laws of the State of its organization and is duly qualified as a foreign organization and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect; (ii) subject to the entry by the Bankruptcy Court of the Interim Order (or the Final Order, when applicable) has the requisite corporate power and authority to effect the transactions contemplated hereby, and by the other Loan Documents to which it is a party, and (iii) subject to the entry by the Bankruptcy Court of the Interim Order (or the Final Order, when applicable) has all requisite organizational power and authority and, upon the entry of the Interim Order (or the Final Order, when applicable) the legal right to own, pledge, mortgage and operate its Properties, and to conduct its business as now or currently proposed to be conducted.

            5.2    Authorization and Validity.  Subject to the entry of the Interim Order of the Bankruptcy Court, each Credit Party has the power and authority and legal right to execute and deliver the Loan Documents and to perform its obligations thereunder.  Subject to the entry of the Interim Order of the Bankruptcy Court, the execution and delivery by the Credit Parties of the Loan Documents and the performance of its obligations thereunder have been duly authorized by proper corporate or other organizational proceedings, and the Loan Documents to which the applicable Credit Party is a party constitute legal, valid and binding obligations of such Credit Party enforceable against such Credit Party in accordance with their terms.  This Agreement and the Loan Documents have been duly executed and delivered by each of the Borrower and the Credit Parties, as applicable.

            5.3    No Conflict; Government Consent.  Upon the entry by the Bankruptcy Court of the Interim Order, neither the execution and delivery by the Credit Parties of the Loan Documents, nor the creation and perfection of the security interest in the Collateral granted hereunder, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law (including, without limitation, the Securities Exchange Act of 1934), rule, regulation (including, without limitation, Regulations T, U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree or award binding on the Credit Parties or any of their Subsidiaries or (ii) any Credit Party's or any of its Subsidiaries' articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, mortgage, deed of trust,  instrument or agreement entered into or affirmed postpetition to which any Credit Party or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of such Credit Party or any of its Subsidiaries pursuant to the terms of any such indenture, instrument or agreement.  Except for the entry of the Interim Order by the Bankruptcy Court, no order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the applicable Credit Party or any of its Subsidiaries, is required to be obtained by such Credit Party or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Credit Parties of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents.

            5.4    Financial Statements.  The Borrower has furnished the Lenders with copies of the audited consolidated financial statement and schedules of the Parent and its Subsidiaries for the fiscal year ended December 31, 2001 and the unaudited consolidated financial statements for the Parent and  its Subsidiaries for the fiscal quarter ended September 30, 2002.  Such financial statements present fairly in all material respects the financial condition and results of operations of the Parent and its Subsidiaries on a consolidated basis as of such dates and for such periods; such balance sheets and the notes thereto disclose all liabilities, direct or contingent, of the Parent and its Subsidiaries as of the dates thereof required to be disclosed by Agreement Accounting Principles and such financial statements were prepared in a manner consistent with Agreement Accounting Principles.  No material adverse change in the operations, business, properties, assets, prospects or condition (financial or otherwise) of the Parent and its Subsidiaries, taken as a whole, has occurred from the date set forth in the Parent's and its Subsidiaries' financial statements for the fiscal year ended December 31, 2001 and the fiscal quarter ended September 30, 2002 other than those occurring as a result of events leading up to and following the commencement of a proceeding under Chapter 11 of the Bankruptcy Code and the commencement of the Chapter 11 Cases.

            5.5    Material Adverse Change.  Other than the filing of the Chapter 11 Cases, since December 31, 2001 there has been no change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect.

            5.6    Taxes.  The Parent and its Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Parent or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles and as to which no Lien exists.  The United States income tax returns of the Parent and its Subsidiaries have been audited by the Internal Revenue Service through the fiscal year ended December 31, 2001.  No tax liens have been filed and no claims are being asserted with respect to any such taxes.  The charges, accruals and reserves on the books of the Parent and its Subsidiaries in respect of any taxes or other governmental charges are adequate.

            5.7    Litigation and Contingent Obligations.  There is no action, litigation, arbitration, governmental investigation, suit, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Parent or any of its Subsidiaries or any of their respective Properties which could reasonably be expected to have a Material Adverse Effect or which seeks to prevent, enjoin or delay the making of any Loan.  The Borrower is a wholly-owned Subsidiary of the Parent.  Other than any liability incident to any litigation, arbitration or proceeding which could not reasonably be expected to have a Material Adverse Effect, no Credit Party has material contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.4.

            5.8    Subsidiaries.  Schedule 5.8 contains an accurate list of all Subsidiaries of each Credit Party as of the date of this Agreement, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by each Credit Party or other Subsidiaries.  All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable.  Except for changes in ownership permitted by this Agreement, the Borrower is a direct wholly-owned Subsidiary of the Parent and the Parent owns no other Subsidiaries, whether directly or indirectly, other than the Borrower, the Credit Parties (other than the Parent) and other than as listed on Schedule 5.8 (which shall be updated, on a quarterly basis, to reflect changes in ownership permitted by this Agreement).  Other than as set forth on Schedule 5.8, (i) each of the Persons listed on Schedule 5.8 is a wholly-owned, direct or indirect Subsidiary of the Borrower, and (ii) the Borrower owns no other Subsidiaries, whether directly or indirectly.

            5.9    Intentionally Deleted.

            5.10  Statements Made.  The information that has been delivered in writing by the Borrower or any of the Credit Parties to the Lenders or to the Bankruptcy Court in connection with any Loan Document, and any financial statement delivered pursuant hereto or thereto (other than to the extent that any such statements constitute projections), taken as a whole and in light of the circumstances in which made, contains no untrue statement of a material fact and does not omit to state a material fact necessary to make such statements not misleading; and, to the extent that any such information constitutes projections, such projections were prepared in good faith on the basis of assumptions, methods, data, tests and information believed by the Borrower or such Credit Party to be reasonable at the time such projections were furnished (it being understood that projections by their nature are inherently uncertain, that no assurances can be given that projections will be realized and that actual results may in fact differ materially from any projections provided to the Lenders).

            5.11    Regulation U.  Margin stock (as defined in Regulation U) constitutes less than 25% of the value of those assets of the Parent and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder.  The Borrower is not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U), or extending credit for the purpose of purchasing or carrying margin stock and no proceeds of any Loans will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock.

            5.12    Material Agreements.  No Credit Party nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect.

            5.13    Compliance With Laws.  (a) Except for matters which could not reasonably be expected to have a Material Adverse Effect, (i) the operations of the Borrower and the Credit Parties comply in all material respects with all applicable aviation, transportation, environmental, health and safety statutes and regulations, including, without limitation, regulations promulgated under the Resource Conservation and Recovery Act (42 U.S.C. §§ 6901 et seq.) and foreign aviation laws and regulations; (ii) to the Borrower's and each of the Credit Parties' knowledge, none of the operations of the Borrower or the Credit Parties is the subject of any Federal or state investigation evaluating whether any remedial action involving a material expenditure by the Borrower or any Credit Party is needed to respond to a release of any Hazardous Waste or Hazardous Substance (as such terms are defined in any applicable state or Federal environmental law or regulations) into the environment; and (iii) to the Borrower's and each of the Credit Party's knowledge, the Borrower and the Credit Parties do not have any material contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment.

       
                        (b) Neither the Borrower nor any Credit Party is, to the best of its knowledge, in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority or Foreign Aviation Authorities the violation of which, or a default with respect to which, would have a Material Adverse Effect.

            5.14    Ownership of Collateral.  Except as set forth on Schedule 5.14, on the date of this Agreement, each Credit Party and its Subsidiaries will have good title, free of all Liens of any nature whatsoever other than those permitted by Section 6.26, to all of the Collateral and assets reflected in Parent's most recent consolidated financial statements provided to the Agent as owned by the Parent and its Subsidiaries.  The Interim Order and the Final Order will grant to Agent for its benefit and the benefit of the Lenders, a legal, valid and binding first priority Lien on the Co-Branded Card Collateral and a legal, valid and binding junior priority Lien on the Additional DIP Collateral (directly behind the Additional DIP Lenders' Lien and as permitted under Section 6.26 hereof).  Neither the Borrower nor the Credit Parties are parties to any contract, agreement, lease or instrument the performance of which, either unconditionally or upon the happening of an event, will result in or require the creation of a Lien on any assets of the Borrower or any Credit Party or otherwise result in a violation of this Agreement other than (x) the Liens granted to the Agent and the Lenders as provided for in this Agreement, (y) Liens granted to the Additional DIP Lenders and (z) Liens on aircraft parts to the extent that the terms of any mortgage or security agreement in effect on the Petition Date extends any Lien on an airframe or engine to include  parts which are subsequently installed on such airframe or engine (to the extent permitted by law).

            5.15    Intentionally Deleted.

            5.16    Environmental Matters.  In the ordinary course of its business, the officers of the Credit Parties consider the effect of Environmental Laws on the business of the Parent and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Parent and its Subsidiaries due to Environmental Laws.  On the basis of this consideration, the Borrower has concluded that Environmental Laws cannot reasonably be expected to have a Material Adverse Effect.  Neither the Parent nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect.

            5.17    Investment Company Act.  No Credit Party nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended.  Neither the making of any Loan, nor the application of the proceeds or repayment thereof by the Borrower, nor the consummation of the other transactions contemplated by the Loan Documents, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder.

            5.18    Public Utility Holding Company Act.  No Credit Party nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended.

            5.19    Intentionally Deleted.

            5.20    Insurance.  All policies of insurance of any kind or nature owned by or issued to the Borrower and the Credit Parties, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation, employee health and welfare, title, property and liability insurance, are in full force and effect and are of a nature and provide such coverage, including, without limitation, war risk and terrorism liability insurance, that is in an amount that is no less than the greater of (i) the maximum amount available to the Borrower and the Credit Parties from the DOT under the Federal Aviation Insurance Program, as amended by the Air Transportation Safety and Stabilization Act and further amended by the Homeland Security Act of 2002 and the maximum (to the extent requested by the Agents) amount available under programs established pursuant to the Terrorism Risk Insurance Act of 2002 and (ii) such amount as is customarily carried by major United States air carriers in the United States domestic airline industry; and the Borrower and the Credit Parties maintain other insurance that is sufficient and in such amounts as is customary in the United States domestic airline industry for major United States air carriers.

            5.21    Reorganization Matters.

            (a)        The Chapter 11 Cases were commenced on the Petition Date in accordance with applicable law and proper notice thereof and the proper notice for the hearing for the approval of the Interim Order and the Final Order has been given.

            (b)        After the entry of the Interim Order, and pursuant to and to the extent permitted in the Interim Order and the Final Order, the Obligations will constitute allowed administrative expense claims in the Chapter 11 Cases having priority over all administrative expense claims and unsecured claims against the Borrower now existing or hereafter arising, of any kind whatsoever, including, without limitation, all administrative expense claims of the kind specified in Sections 105, 326, 328, 330, 331, 503(b), 504(a), 506(c), 507(a), 507(b), 546(c), 726, 1114 or any other provision of the Bankruptcy Code, as provided under Section 364(c)(1) of the Bankruptcy Code, subject, as to priority only to the Carve Out Reserve and provided that all such claims shall be pari passu with all allowed administrative expense claims under the Additional DIP.

            (c)        After the entry of the Interim Order and pursuant to and to the extent provided in the Interim Order and the Final Order, the Obligations will be secured by a valid and perfected first priority Lien on all of the Collateral, subject, as to priority, only to Liens in favor of the Additional DIP Lenders on the Additional DIP Collateral and the Liens permitted pursuant to Section 6.26(i).

            (d)        The Interim Order (with respect to the period prior to the Final Order Date) or the Final Order (with respect to the period on and after the Final Order Date), as the case may be, is in full force and effect and has not been reversed, stayed, modified or amended.

            (e)        Notwithstanding the provisions of Section 362 of the Bankruptcy Code, upon the maturity (whether by acceleration or otherwise) of any of the Obligations, Agent and Lenders shall be entitled to immediate payment of such Obligations and to enforce the remedies provided for hereunder, without further application to or order by the Bankruptcy Court.

            5.22    Air Carrier Status.  (a) The Borrower is an "air carrier" within the meaning of Section 40102 of Title 49 and holds a certificate under Section 41102 of Title 49.  The Borrower holds an air carrier operating certificate issued pursuant to Chapter 447 of Title 49.  The Borrower and the Parent are each a "citizen of the United States" as defined in Section 40102(a)(15) of Title 49 and as that statutory provision has been interpreted by the DOT pursuant to its policies (a "United States Citizen").  The Borrower possesses all necessary certificates, franchises, licenses, permits, rights, designations, authorizations, exemptions, concessions and consents which are material to the operation of the routes flown by it and the conduct of its business and operations as currently conducted.

       
            (b) No Credit Party (other than the Borrower) is (or will become) an "air carrier" within the meaning of Section 40102(a)(2) of Title 49, and no Credit Party (other than the Borrower) holds (or will hold) a certificate under Section 41102(a)(1) of Title 49.

            5.23    Slot Utilization.  The Borrower is utilizing the Slots in a manner consistent with applicable regulations and contracts in order to preserve both its right to hold and operate the Slots, taking into account any waivers or other relief granted to the Borrower by the FAA.  The Borrower has not received any notice from the FAA, and is not aware of any other event or circumstance, that would be reasonably likely to impair its right to hold and operate the Slots in any material respect.

            5.24    Primary Foreign Slot Utilization.  The Borrower is utilizing the Primary Foreign Slots in a manner consistent with applicable regulations, foreign laws, and contracts in order to preserve both its right to hold and operate the Primary Foreign Slots.  The Borrower has not received any notice from any applicable Foreign Aviation Authorities, nor is the Borrower aware of any other event or circumstance, that would be reasonably likely to impair its right to hold and operate any Primary Foreign Slots in any material respect.

            5.25    Primary Route Utilization.  The Borrower holds the requisite authority to operate over each of the Primary Routes pursuant to Title 49, all rules and regulations promulgated thereunder, applicable foreign law, and the applicable rules and regulations of the FAA, the DOT and any applicable Foreign Aviation Authorities, and has, at all times after being awarded each such Primary Route, complied in all material respects with all of the terms, conditions and limitations of each such certificate or order issued by the DOT and the applicable Foreign Aviation Authorities regarding such Primary Route and with all applicable provisions of Title 49 or applicable foreign law.  There exists no violation of such terms, conditions or limitations that gives the FAA, DOT or any applicable Foreign Aviation Authorities the right to terminate, cancel, withdraw or modify in any material adverse respect the rights of the Borrower in any such Primary Route.

            5.26    Non-Primary Route Utilization.  The Borrower holds the requisite authority to operate over each of the Non-Primary Routes pursuant to Title 49, all rules and regulations promulgated thereunder, and the applicable rules and regulations of the DOT and FAA.  To the best of the Borrower's knowledge, there exists no violation of such terms, conditions or limitations that gives the FAA, DOT or any applicable Foreign Aviation Authorities the right to terminate, cancel, withdraw or modify in any material adverse respect the rights of the Borrower in any such Non-Primary Route over which the Borrower currently operates.

            5.27    Ownership Interest in Slots, Routes and Gates.  No Credit Party has (or will have) any right, title or interest in any of the Slots, Foreign Slots, Routes, Supporting Route Facilities  or Gate Leasesholds.
     
     

    ARTICLE VI.
    COVENANTS

                    During the term of this Agreement and until the Aggregate Commitment has been terminated and all Obligations have been repaid in full in cash (other than contingent indemnification obligations in respect of which no claims giving rise thereto have been asserted) unless the Required Lenders shall otherwise consent in writing:

            6.1    Financial Reporting.  The Parent will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders:

       
            (a) within 90 days after the end of each fiscal year, the Parent's consolidated balance sheet and related statement of income and cash flows, showing the financial condition of the Borrower, the Parent and its Subsidiaries on a consolidated basis as of the close of such fiscal year and the results of their respective operations during such year, the consolidated statement of the Parent to be audited for the Parent by Deloitte and Touche LP or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which shall not be qualified in any material respect other than with respect to the Chapter 11 Cases or a going concern qualification) and to be certified by an Authorized Officer of the Parent to the effect that such consolidated financial statements fairly present the financial condition and results of operations of the Borrower, the Parent and its Subsidiaries on a consolidated basis in accordance with Agreement Accounting Principles.  Such delivery shall be accompanied by any management letter prepared by such accountants;
       
            (b) within 45 days after the end of each of the first three fiscal quarters, the Parent's consolidated balance sheets and related statements of income and cash flows, showing the financial condition of the Borrower, the Parent and its Subsidiaries on a consolidated basis as of the close of such fiscal quarter and the results of their operations during such fiscal quarter and the then elapsed portion of the fiscal year, each certified by an Authorized Officer as fairly presenting in all material respects the financial condition and results of operations of the Borrower, the Parent and its Subsidiaries on a consolidated basis in accordance with Agreement Accounting Principles, subject to normal year-end audit adjustments and the absence of footnotes;
       
            (c) (i) concurrently with any delivery of financial statements under (a) and (b) above, a certificate of an Authorized Officer (A) certifying that no Default or Unmatured Default, or, if such a Default or Unmatured Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (B) setting forth computations in reasonable detail satisfactory to the Agent demonstrating compliance with the provisions of Sections 6.22, 6.24, 6.25 and 6.35 and (ii) concurrently with any delivery of financial statements under (a) above, a certificate (which certificate may be limited to accounting matters and disclaim responsibility for legal interpretations) of the accountants auditing the consolidated financial statements delivered under (a) above certifying that, in the course of the regular audit of the business of the Borrower, the Parent and its Subsidiaries, such accountants have obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accountants, a Default has occurred and is continuing, specifying the nature thereof and all relevant facts with respect thereto;
       
            (d) as soon as available, but no more than 30 days after the end of each fiscal month (i) the consolidated and unaudited monthly cash flow reports, consolidated balance sheets and related statements of income of the Borrower and its Subsidiaries on a consolidated basis and as of the close of such fiscal month and the results of their operations during such month and the then elapsed portion of the fiscal quarter, (ii) an updated 13-week rolling cash flow projection together with a weekly reconciliation of such cash flows to actual weekly results, and (iii) a monthly report detailing professional fees and expenses that have been billed and paid or billed but unpaid to date, the accumulated "hold-back" of professional fees and expenses to date, material adverse events or changes (if any) to the financial condition, operations, business, properties, assets or prospects of the Borrower and the Credit Parties taken as a whole and material litigation (if any), each certified by an Authorized Officer of the Parent as fairly presenting in all material respects the financial condition and results of operations of the Borrower, the Parent and its Subsidiaries on a consolidated basis in accordance with Agreement Accounting Principles, subject to normal year-end audit adjustments and the absence of footnotes;
       
            (e) as soon as possible, and in any event within 30 days of the Closing Date, a consolidated proforma balance sheet of the Parent's and its Subsidiaries' financial condition as of the Petition Date;
       
            (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said commission, or with any national securities exchange, as the case may be;
       
            (g) as soon as available and in any event (A) within 30 days after the Borrower or any of its ERISA Affiliates knows or has reason to know that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Single Employer Plan of the Borrower or such ERISA Affiliate has occurred and (B) within 10 Business Days after the Borrower or any of its ERISA Affiliates knows or has reason to know that any other Termination Event with respect to any such Plan has occurred, a statement of an Authorized Officer of the Borrower describing the full details of such Termination Event and the action, if any, which the Borrower or such ERISA Affiliate is required or proposes to take with respect thereto, together with any notices required or proposed to be given to or filed with or by the Borrower, the ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with respect thereto;
       
            (h) promptly and in any event within 10 Business Days after receipt thereof by the Borrower or any of its ERISA Affiliates from the PBGC copies of each notice received by the Borrower or any such ERISA Affiliate of the PBGC's intention to terminate any Single Employer Plan of the Borrower or such ERISA Affiliate or to have a trustee appointed to administer any such Plan;
       
            (i) if requested by Agent promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan of the Borrower or any of its ERISA Affiliates;
       
            (j) within 10 Business Days after notice is given or required to be given to the PBGC under Section 302(f)(4)(A) of ERISA of the failure of the Borrower or any of its ERISA Affiliates to make timely payments to a Plan, a copy of any such notice filed and a statement of an Authorized Officer of the Borrower setting forth (A) sufficient information necessary to determine the amount of the lien under Section 302(f)(3) of ERISA, (B) the reason for the failure to make the required payments and (C) the action, if any, which the Borrower or any of its ERISA Affiliates proposed to take with respect thereto;
       
            (k) promptly and in any event within 10 Business Days after receipt thereof by the Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability by a Multiemployer Plan, (B) the determination that a Multiemployer Plan is, or is expected to be, in reorganization within the meaning of Title IV of ERISA, (C) the termination of a Multiemployer Plan within the meaning of Title IV of ERISA, or (D) the amount of liability incurred, or which may be incurred, by the Borrower or any ERISA Affiliate in connection with any event described in clause (A), (B) or (C) above;
       
            (l) promptly, from time to time, such other information regarding the operations, business affairs and condition (financial and otherwise) and Collateral of the Borrower or any Credit Party, or compliance with the terms of any material loan or financing agreement as the Agent, at the request of any Lender, may reasonably request;
       
            (m) furnish to the Lenders and their counsel promptly after the same is available, copies of all pleadings, motions, applications, judicial information, financial information and other documents filed by or on behalf of the Borrower or any of the Credit Parties with the Bankruptcy Court in the Chapter 11 Cases, or distributed by or on behalf of the Borrower or any of the Credit Parties to any official committee appointed in the Chapter 11 Cases;
       
            (n) on the fifth Business Day following the end of each seven-day reporting period (or, with respect to the final report to be delivered in any two-month period, following the end of such two-month period), a slot utilization report conforming to the Slot Reporting Guidelines for the most recently completed reporting period, showing, for each airport and time allotment set forth in Schedule 6.1(n) as amended from time to time, the percentage utilization for the Slots for such airport during such time allotment for the cumulative period ending on the last day of such reporting period, certified by an Authorized Officer of the Borrower and stating that the Borrower is conducting its operations and monitoring Slot usage in a manner such that the Borrower should be able to meet the Use or Lose Rule for such Slots with respect to the applicable two-month FAA reporting period;
       
            (o) as soon as available, but in any event within 30 days prior to the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and funds flow statement) of the Parent and its Subsidiaries for the immediately succeeding fiscal year;
       
            (p) no later than 12:00 noon (Chicago time) on Friday of each week, a variance report identifying the variance to actual thirteen (13) week cash flow projections of each Credit Party and their Subsidiaries for the immediately succeeding thirteen (13) week period, accompanied by such supporting detail and documentation as shall be requested by Agent in its reasonable discretion;
       
            (q) as soon as possible and in any event within 10 days after receipt by any Credit Party, a copy of (a) any notice or claim to the effect that such Credit Party or any of its Subsidiaries is or may be liable to any Person as a result of the release by such Credit Party, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by any Credit Party or any of its Subsidiaries, which, in either case, could reasonably be expected to have a Material Adverse Effect;
       
            (r) promptly upon becoming aware thereof, notice of (a) any dispute, litigation, investigation or proceeding which may exist at any time between any Credit Party or any of its Subsidiaries and any other Person which could reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect, or (b) the commencement of or any material development in, any litigation or proceeding affecting any Credit Party in which, if adversely determined, could reasonably be expected to have a Material Adverse Effect or in which the relief sought is an injunction or other stay of the performance of this Agreement or any Loan Document; and
       
            (s) simultaneously with the furnishing thereof to the Additional DIP Lenders, all reports, documents, certificates and other information required to be furnished to the Additional DIP Lenders pursuant to the Additional DIP Credit Agreement.

            6.2    Use of Proceeds.  The Borrower will, and will cause each Subsidiary to, use the proceeds of the Loan for general working capital and other corporate purposes.  The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Loan to purchase or carry any "margin stock" (as defined in Regulation U).  Such proceeds may not be used in connection with the investigation (including discovery proceedings), initiation or prosecution of any claims, causes of action, adversary proceedings or other litigation against the Lenders or the Agent in their capacities as such.

            6.3    Notice of Default.  Each Credit Party will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which could reasonably be expected to have a Material Adverse Effect.

            6.4    Conduct of Business; Corporate Existence.

       
            (a) Each Credit Party will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted.

            (b) Each Credit Party will, and will cause each Subsidiary to preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except if such failure to preserve the same could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

            6.5    Obligations and Taxes.  The Parent will, and will cause each Subsidiary to pay all of its respective material obligations arising after the Petition Date promptly and in accordance with their terms and timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with Agreement Accounting Principles.

            6.6    Insurance.  (a) In addition to the requirements of Section 6.6(b), the Borrower and each Credit Party shall (i) keep its insurable properties insured at all times, against such risks, including fire and other risks insured against by extended coverage, as is customary with companies of the same or similar size in the same or similar businesses (including, without limitation, casualty insurance or reinsurance on its aircraft at the appraised value) and which is reasonably satisfactory to the Agent; and maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any Property (including aircraft) owned, occupied or controlled by the Borrower or any Credit Party, as the case may be, in such amounts (giving effect to self-insurance) and with such deductibles as are required pursuant to Section 5.20; and (ii) maintain such other insurance or self insurance as may be required by law.

            (b) The Borrower and each Credit Party shall maintain in full force and effect war risk and terrorism insurance on all its property in an amount that is no less than (x) through June 30, 2003 (unless the Federal Aviation Insurance Program, as amended through the date hereof, is extended to December 31, 2003, in which case, December 31, 2003), the maximum amount available to the Borrower and the Credit Parties from the DOT under the Federal Aviation Insurance Program, as amended by the Air Transportation Stabilization Act and Regulations and further amended by the Homeland Security Act of 2002 and (y) thereafter, such amount as is then customary for major United States air carriers in the United States domestic airline industry.

            (c) The Borrower and each Credit Party shall maintain business interruption insurance in amounts that are reasonably satisfactory to the Agent and customary in the airline industry for major United States carriers with foreign operations.

            (d) The Borrower and each Credit Party shall promptly deliver to the Agent copies of any notices received from its insurers with respect to insurance programs required by the Terrorism Risk Insurance Act of 2002 and, if so requested by the Agent, procure and maintain in force the insurance that is offered in such programs.

            6.7    Compliance with Laws.  The Credit Parties will, and will cause each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject including, without limitation, all Environmental Laws and all Federal Aviation Administration regulations.

            6.8    Maintenance of Properties.  The Credit Parties will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep their Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that their business carried on in connection therewith may be properly conducted at all times.

            6.9    Inspection.  The Credit Parties will, and will cause each Subsidiary to, permit the Agent and the Lenders, by their respective representatives, agents and advisors, to inspect any of the Property (including, without limitation, conducting appraisals and examinations of and monitoring the Collateral held by the Agent; provided that, Agent's appraisals of Additional DIP Collateral shall be at Agent's expense unless and until either (a) a Default exists or (b) the Additional DIP Credit Agreement has been paid in full and terminated), books and financial records and any appraisals of the Credit Parties and each Subsidiary, to examine and make copies and abstracts of the books of accounts and other financial records of the Credit Parties and each Subsidiary, and to discuss the affairs, finances and accounts of the Credit Parties and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Agent or any Lender may designate.  All such reasonable inspections shall be at the expense of the Borrower.  The Credit Parties will maintain complete and accurate books and records (in accordance with Agreement Accounting Principles) with respect to the financial operations of the Credit Parties and the Collateral, and furnish to the Agent, with sufficient copies for each of the Lenders, such reports relating to the Collateral as the Agent shall from time to time request.

            6.10    FAA and DOT Matters; Citizenship.  In the case of the Borrower, the Borrower shall (a) maintain at all times its status at the DOT as an "air carrier" within the meaning of Section 40102(a)(2) of Title 49, and hold a certificate under Section 41102(a)(1) of Title 49; (b) at all times hereunder be a United States Citizen; (c) maintain at all times its status at the FAA as an air carrier and hold an air carrier operating certificate and other operating authorizations issued by the FAA pursuant to 14 C.F.R. Sections 119 and 121 as currently in effect or as may be amended or recodified from time to time; and (d) possess and maintain all necessary certificates, exemptions, franchises, licenses, permits, designations, rights, concessions, authorizations and consents which are material to the operation of the Slots, the Primary Routes and Primary Foreign Slots flown by it and the conduct of its business and operations as currently conducted except in any case described in this clause (d), where the failure to do so, either individually or in the aggregate, could not be reasonably likely to have a Material Adverse Effect.

            6.11    Gate Utilization.  The Borrower and each Credit Party shall utilize all of its Gate Leaseholds in a manner sufficient to comply in all material respects with applicable lease provisions governing such airport gate leaseholds.

            6.12    Compliance With Terms of Leaseholds.  The Borrower and each Credit Party shall (i) make all Postpetition payments and otherwise perform all obligations in respect of all leases of real property (including, without limitation, arrangements with respect to Gate Leaseholds to which the Borrower or any Credit Party may be party), to the extent necessary to keep such leases in full force and effect and not allow such leases to lapse or be terminated or any rights to renew such leases to be forfeited or cancelled, and (ii) notify the Agent of any default by any party with respect to such leases and cooperate with the Agent in all respects to cure any such default, except, in any case, where the failure to do so, either individually or in the aggregate, could not be reasonably likely to have a Material Adverse Effect.

            6.13    Slot Utilization.  The Borrower shall:

                        (i)        utilize the Slots in a manner consistent in all material respects with applicable regulations and contracts in order to preserve its right to hold and operate the Slots, taking into account any waivers or other relief granted to the Borrower by the FAA.

                        (ii)        cause to be done all things reasonably necessary to preserve and keep in full force and effect its rights in and use of its Slots, including, without limitation, satisfying the Use or Lose Rule.  Without in any way limiting the foregoing, the Borrower shall promptly take all such steps as may be reasonably necessary now or in the future to maintain, renew and obtain the rights, licenses, authorizations or certifications as are necessary to the continued and future holding and use by the Borrower of its Slots.

            6.14    Primary Foreign Slot Utilization.  The Borrower shall:

                        (i)        utilize the Primary Foreign Slots in a manner consistent in all material respects with applicable regulations and contracts in order to preserve its right to hold and  operate the Primary Foreign Slots, taking into account any waivers or other relief granted to the Borrower by any applicable Foreign Aviation Authorities.

                        (ii)         cause to be done all things reasonably necessary to preserve and keep in full force and effect its rights in and use of its Primary Foreign Slots.  Without in any way limiting the foregoing, the Borrower shall promptly take all such steps as may be reasonably necessary now or in the future to maintain, renew and obtain the rights, licenses, authorizations or certifications as are necessary to the continued and future holding and operation by the Borrower of its Primary Foreign Slots.

            6.15    Primary Route Utilization; Route Reporting.  The Borrower and each Credit Party shall:

                        (i)        utilize the Primary Routes in a manner consistent in all material respects with Title 49, rules and regulations promulgated thereunder, and applicable foreign law, and the applicable rules and regulations of the FAA, DOT and any applicable Foreign Aviation Authorities, including, without limitation, any operating authorizations, certificates, bilateral authorizations and bilateral agreements with any applicable Foreign Aviation Authorities and contracts with respect to such Primary Routes, in order to preserve its rights to hold and operate the Primary Routes and utilize the Supporting Route Facilities for the Primary Routes.

                        (ii)        cause to be done all things reasonably necessary to preserve and keep in full force and effect its material rights in and to use its Primary Routes, except as to its authority for seven weekly services on a Fifth-Freedom basis between Hong Kong and Japan pursuant to Notice of Action Taken issued by DOT Docket OST-02 13760, dated November 22, 2002.  Without in any way limiting the foregoing, the Borrower shall promptly take (i) all such steps as may be reasonably necessary to obtain renewal of each such Primary Route authority from the DOT and any applicable Foreign Aviation Authorities, within a reasonable time prior to the expiration of such authority (as prescribed by law ore regulation, if any), and notify the Agent of the status of such renewal and (ii) all such other steps as may be necessary to maintain, renew and obtain any and all Supporting Route Facilities for the Primary Routes as needed for the continued and future operations of the Borrower over the Primary Routes which are now allocated or possessed, or as may hereafter be allocated or acquired.  The Borrower shall further take all actions reasonably necessary or, in the reasonable judgment of Agent or the agent for the Additional DIP Lenders, advisable in order to maintain its material rights to use its Primary Routes (including, without limitation, protecting the Primary Routes from dormancy or withdrawal by the DOT) and Supporting Route Facilities for the Primary Routes.  The Borrower and any applicable Credit Party shall pay any applicable filing fees and other expenses related to the submission of applications, renewal requests, and other filings as may be reasonably necessary to maintain or obtain such entity's rights in the Primary Routes and Supporting Route Facilities for the Primary Routes.

                        (iii)        promptly upon receipt thereof, deliver to the Agent copies of (i) each certificate or order issued by the DOT and the applicable Foreign Aviation Authorities with respect to Primary Routes and Supporting Route Facilities for the Primary Routes, (ii) all filings made by the Borrower with any Governmental Authority or any Foreign Aviation Authorities related to preserving and maintaining the Primary Routes and Supporting Route Facilities for the Primary Routes and (iii) any notices received from any Person notifying the Borrower or any applicable Credit Party of an event which could have a potential adverse effect upon the Primary Routes and Supporting Route Facilities for the Primary Routes, or the failure to preserve such Primary Routes and Supporting Route Facilities for the Primary Routes as required pursuant to this Section 6.15.

            6.16    Business Plan.  The Borrower and each Credit Party shall make its senior officers available to discuss the Borrower's business plan (a copy of which has heretofore been delivered to the Agent referred to in Section 4.1(xvi)) with the Agent upon the Agent's reasonable request.

            6.17    ATSB Application.  The Borrower and each Credit Party shall use all reasonable efforts to modify its previously filed Application with the ATSB, and comply in all material respects with any reasonable request from the ATSB for information in connection with such Application, to obtain a guarantee of any exit financing which may be required in connection with a Plan of Reorganization.

            6.18    Operational Matters.  The Borrower and each Credit Party shall:

       
            (a) provide the Agent with ten (10) days prior written notice of its intent to store any Aircraft, Engine or Spare Engine (each as defined in the Aircraft Mortgage) and obtain the written consent of the Agent to (i) the identity of, and servicing obligations of, any third party with which such Aircraft, Engine or Spare Engine may be stored from time to time and (ii) the location at which such Aircraft, Engine or Spare Engine will be stored (it being understood that all such storage locations shall be reasonably satisfactory to the Agent).
       
            (b) promptly notify the Agent of any reduction in work force or reallocation of the work force with primary responsibility for preparing and maintaining maintenance records for the Borrower and the Credit Parties.
       
            (c) provide to the Agent, no later than the last Business Day after the end of each month, the information described in Schedule 6.18(c) in a format reasonably satisfactory to the Agent.

            6.19    Additional Collateral.   The Borrower and each Credit Party shall:

       
            (a) upon any additional aircraft, engines, spare engines or spare parts becoming free and clear of liens, deliver to the Agent an Aircraft Mortgage and Mortgage Supplement with respect to such aircraft, engines, spare engines or spare parts.
       
            (b) upon ten (10) days' notice from Agent, supplement Schedule 1.1(a) and (b) to include any other Foreign Slots or Routes of the Borrower as the Agent may reasonably require to be added to such Schedule as a Primary Foreign Slot or Primary Route, as the case may be.

            6.20    Post Closing.  The Borrower and each Credit Party shall:

       
            (a) cause to be delivered to the Agent, within 45 days of the Closing Date, a favorable opinion of McAfee & Taft, special counsel to the Agent, with regard to, among other things, Liens on such aircraft, engines, spare parts and spare engines on which the Agent, for the benefit of the Lenders, is entitled to have a second priority Lien, in form and substance reasonably satisfactory to the Agent.
       
            (b) deliver to the Agent, within 60 days of the Closing Date, a complete list of the Routes, Supporting Route Facilities and Foreign Slots.

            6.21    Dividends; Capital Stock.  No Credit Party will, nor will any Credit Party permit any Subsidiary to, declare or pay, directly or indirectly, any dividends or make any other distribution or payment, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of capital stock (or any options, warrants, rights or other equity securities or agreements relating to any capital stock), or set apart any sum for the aforesaid purposes, provided, that (i) any Credit Party other than the Parent may pay dividends to the Borrower or another Credit Party and (ii) the Borrower and any Credit Party (other than the Parent) may pay dividends or make other distributions or payments to the Parent for corporate expenses, including, without limitation, taxes and salaries.

            6.22    Indebtedness.  No Credit Party will, nor will any Credit Party permit any Subsidiary to contract, create, incur,  assume or suffer to exist any Indebtedness, except for (i) Indebtedness under the Loan Documents; (ii) Indebtedness incurred prior to the Petition Date (including existing Capitalized Leases as set forth on Schedule 6.22); (iii) intercompany Indebtedness between the Borrower and the Credit Parties, provided that (a) all such Indebtedness owing by the Credit Parties or any Subsidiary shall be subordinated to the indefeasible payment in full of the Obligations on terms and in form and substance satisfactory to Agent and (b) at the request of Agent, such Indebtedness shall be evidenced by promissory notes payable to the applicable Credit Party, in form and substance satisfactory to Agent, which promissory notes shall be pledged to Agent as part of the Collateral, (iv) Indebtedness owed to the Additional DIP Lenders under the Additional DIP in an aggregate principal amount not to exceed $1,200,000,000; (v) Indebtedness incurred subsequent to the Petition Date secured by purchase money Liens or Capitalized Leases in an aggregate amount not to exceed the amounts permitted under Section 6.35(a); (vi) Indebtedness owed to any Lender (or any of its banking Affiliates) or any other Person in respect of fuel hedges and other derivatives contracts, in each case to the extent that such agreement or contract is permitted by order of the Bankruptcy Court and entered into in the ordinary course of business consistent with past practices; (vii) Indebtedness owed to any Lender, any Additional DIP Lender or any of their respective banking Affiliates in respect of (A) currency swap agreements, currency future or option contracts and other similar agreements designed to hedge against fluctuations in foreign interest rates and currency values, and (B) interest rate swap, cap or collar agreements and interest rate future or option contracts, in each case to the extent that such agreement or contract is permitted by order of the Bankruptcy Court and entered into in the ordinary course of business consistent with past practices; (viii) Indebtedness owed to any Lender, any Additional DIP Lender or any of their banking Affiliates in respect of any overdrafts and related liabilities arising from treasury, depository and cash management services or in connection with any automated clearing house transfers of funds; (ix) refinancings and replacements of Indebtedness secured directly or indirectly by "equipment" described in Section 1110(a)(3) of the Bankruptcy Code (as in effect on the Petition Date hereof and permitted by Section 6.22(ii)), provided that (A) the principal amount of such existing Indebtedness shall not be increased above the principal amount thereof outstanding immediately prior to such refinancing or replacement, (B) the maturity of such existing Indebtedness shall not be shortened as a result of such refinancing or replacement, (C) the weighted average life to maturity of such existing Indebtedness shall not be reduced as a result of such refinancing or replacement, and (D) the direct and contingent obligors therefore shall not be changed, as a result of or connection with such refinancing or replacement; (x) guarantees permitted under Section 6.29; (xi) Indebtedness of any of the Borrower and the Credit Parties consisting of take-or-pay obligations contained in supply agreements entered into in the ordinary course of business and consistent with past practices of the Borrower and the Credit Parties; (xii) Indebtedness of any of the Borrower and the Credit Parties arising in the ordinary course of business and consistent with the past practices of the relevant party and owing to Citibank, N.A. and its banking Affiliates providing netting services with respect to intercompany Indebtedness permitted to be incurred and outstanding pursuant to this Agreement so long as such Indebtedness does not remain outstanding for more than three days from the date of its incurrence; (xiii) Indebtedness of any of the Borrower and the Credit Parties to credit card processors in connection with credit card processing services incurred in ordinary course of business and consistent with past practices of the Borrower and the Credit Parties; and (xiv) other Indebtedness incurred subsequent to the Petition Date in an aggregate amount not to exceed $10,000,000.

            6.23    Merger.  The Credit Parties will not, nor will they permit any Subsidiary to, merge or consolidate with or into any other Person, except that any Guarantor may merge with any other Guarantor or the Borrower.

            6.24    Dispositions of Assets.  The Credit Parties will not, nor will they permit any Subsidiary to, sell or otherwise dispose of any assets (including, without limitation, the capital stock of any Subsidiary), or permit any of their Subsidiaries that are not Credit Parties so to do, except for: (i) sales or dispositions of assets (not including (A) aircraft, engines, spare engines or spare parts or (B) Slots, Foreign Slots, Routes, Supporting Route Facilities or Gate Leaseholds, the disposition of which assets referred to in this clause (B) shall be in accordance with clause (xi) of this Section) in the ordinary course of business; (ii) sales or dispositions of surplus, obsolete, negligible or uneconomical assets (including, without limitation, aircraft, engines, spare engines and spare parts, but excluding Slots, Foreign Slots, Routes, Supporting Route Facilities  and Gate Leaseholds) no longer used in the business of the Borrower and the Credit Parties; provided, that (1) 100% of the Net Proceeds  (as defined in the Additional DIP Credit Agreement) of any such sale or other disposition of aircraft included within the Borrowing Base (as defined in the Additional DIP Credit Agreement) at the time of such sale or other disposition shall be applied as a mandatory prepayment and permanent reduction of the Additional DIP pursuant to Section 2.13(b) of the Additional DIP Credit Agreement and (2) 100% of the cumulative Net Proceeds (as defined in the Additional DIP Credit Agreement) of such sales or other dispositions of property or assets (other than aircraft included within the Borrowing Base (as defined in the Additional DIP Credit Agreement)) in an aggregate amount in excess of (aa) $200,000,000 in respect of such sales or other dispositions made during the period from the Closing Date through December 31, 2003 and (bb) $300,000,000 in respect of such sales or other dispositions made during the term of this Agreement, shall be applied as a mandatory prepayment and permanent reduction of the Additional DIP pursuant to Section 2.13(b) of the Additional DIP Credit Agreement; (iii) sales or dispositions of assets among the Borrower and the Credit Parties; (iv) sales or dispositions of assets set forth on Schedule 6.24 hereto; (v) sales or dispositions in arm's length transactions, at fair market value and for cash in an aggregate amount not to exceed $5,000,000; provided, that 100% of the aggregate Net Proceeds (as defined in the Additional DIP Credit Agreement) of such sales or dispositions shall be applied as a mandatory prepayment and permanent reduction of the Additional DIP pursuant to Section 2.13(b) of the Additional DIP Credit Agreement, providedfurtherthat such prepayment and permanent reduction shall be made each time the cumulative Net Proceeds of such sales or other dispositions not theretofore so applied is equal to $1,000,000; (vi) abandonment and licensing (or sublicensing) of intellectual property Collateral provided, that such abandonment and licensing (or sublicensing) is (A) consistent with past practices and (B) with respect to intellectual property that is not material to the business of the Borrower and the Credit Parties; (vii) dispositions of assets located outside of the United States in an amount not to exceed $2,000,000; (viii) termination or rejection of any lease or the return, surrender or abandonment of any property subject thereto; (ix) the sale or discount of accounts receivable to a collection agency in connection with collections of delinquent receivables; (x) sales and dispositions of equipment, to the extent that (A) such property is exchanged for credit against the purchase price of similar replacement property or (B) the proceeds of such sale or disposition are promptly applied to the purchase price of such replacement property, provided, that any sale or disposition of Mortgaged Collateral shall only be in accordance with terms of the Aircraft Mortgage; (xi) dispositions permitted by any of the Loan Documents; (xii) sales, exchanges and swaps of engines and spare parts in the ordinary course of business and consistent with past practice and to the extent permitted by the Loan Documents; and (xiii) sales and dispositions of Section 1110 Assets.

            6.25    Investments.  The Credit Parties will not, nor will they permit any Subsidiary to, purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment in, any other Person (all of the foregoing, "Investments") except:  (i) ownership by the Parent of the capital stock of the Borrower or any Credit Party, as listed on Schedule 5.8, (ii) ownership by the Borrower and the Guarantors of the capital stock of each of the Subsidiaries listed on Schedule 5.8; (iii)Permitted Investments; (iv) advances and loans among the Borrower and the Credit Parties in the ordinary course of business; (v) Investments in the Escrow Accounts and other trust accounts;(vi) Investments existing on the Petition Date and described on Schedule 5.8 hereto; (vii) Investments in connection with (A) currency swap agreements, currency future or option contracts and other similar agreements designed to hedge against fluctuations in foreign interest rates and currency values, (B) interest rate swap, cap or collar agreements and interest rate future or option contracts, and (C) fuel hedges and other derivatives contracts, in each case to the extent that such agreement or contract is permitted by order of the Bankruptcy Court and by Section 6.22 and entered into in the ordinary course of business consistent with past practices; (viii) Investments received in settlement of amounts due to any of the Borrower and the Credit Parties effected in the ordinary course of business (including as a result of dispositions permitted by this Agreement); (ix) Investments in an amount not to exceed $10,000,000 in the aggregate in travel or airline related businesses made in connection with marketing and promotion agreements, alliance agreements, distribution agreement, agreements with respect to fuel consortiums, agreements relating to flight training, agreement relating to insurance arrangements, agreement relating to parts management systems and other similar agreements; (x) advances to officers, directors and employees of the Borrower and the Credit Parties in an aggregate amount not to exceed (A) $10,000 at any time outstanding to any individual officer, director or employee or (B) $500,000 in the aggregate at any time outstanding for all such advances; (xi) additional Investments in joint ventures listed in Schedule 5.8 for Investments in new joint ventures made after the Petition Date in an aggregate amount thereof at any one time not to exceed $10,000,000 for all Investments made pursuant to this clause together with any guaranty of Indebtedness pursuant to Section 6.29(iv); (xii) Investments held or invested in by any of the Borrower and the Credit Parties in the form of foreign cash equivalents in the ordinary course of business and consistent with past practices of the Borrower and the Credit Parties; (xiii) Investments by the Borrower and the Credit Parties not otherwise permitted under this Agreement in an aggregate amount not to exceed $5,000,000; and (xiv) advances to officers, directors and employees of the Borrower and the Credit Parties in connection with relocation expenses or signing bonuses for newly hired officers, directors or employees of the Borrower and the Credit Parties.  The term "Investments" shall not include deposits to secure the performance of leases.

            6.26    Liens.  The Credit Parties will not, nor will they permit any Subsidiary to, incur, create, assume or suffer to exist any Lien on any asset of the Borrower or the Credit Parties, now owned or hereafter acquired by the Borrower or any of such Credit Parties, other than (i) Liens which were existing on the Petition Date as reflected on Schedule 5.14; (ii) Permitted Liens; (iii) Liens in favor of the Agent and the Lenders; (iv) Liens securing purchase money Indebtedness or Capitalized Leases permitted by Section 6.22; (v) Liens securing the Additional DIP; provided that, with respect to the Additional DIP Lenders' Liens on Collateral other than Additional DIP Collateral, such Liens shall be subject and fully subordinate to the Liens granted to the Agent on behalf of the Lenders hereunder and under the Orders; and provided further that (A) the holders of such Liens shall not be permitted to exercise any remedies with respect thereto unless all of the Obligations have been paid in full in cash and the Lenders have no further Commitments hereunder and (B) the instruments and agreements pursuant to which such Lien is created are reasonably satisfactory in form and substance to the Agent and Lenders; (vi) other Liens securing Indebtedness permitted by Section 6.22(viii); (vii) licenses, leases and subleases of Mortgaged Collateral granted to others but only to the extent permitted by the Aircraft Mortgage and not interfering in any material respect with the business of the Borrower and the Credit Parties, taken as a whole; (viii) any renewal of any Lien on any "equipment" described in Section 1110(a)(3) of the Bankruptcy Code (as in effect on the Petition Date) permitted by clause (i) above, provided that the Indebtedness secured is not increased and the Lien is not extended to any additional assets of the Borrower and the Credit Parties; (ix) Liens arising from precautionary UCC financing statements regarding operating leases permitted by this Agreement; (x) any interest or title of a licensor, lessor or sublessor under any lease permitted by this Agreement; (xi)  Liens on real and personal property acquired in connection with acquisitions permitted by this Agreement to the extent such Liens exist on such acquired property at the time of acquisition and not incurred in contemplation of such acquisition, provided, that such Liens do not attach to other assets of the Borrower and the Credit Parties; (xii) Liens in favor of credit card processors having a right of setoff, revocation, refund or charge back with respect to money or instruments of the Borrower or any Credit Party; (xiii) Liens in favor of English travel agencies having a right of setoff, revocation, refund or charge back with respect to money or instruments of the Borrower or any Credit Party; (xiv) Liens on cash collateral or Letters of Credit (as defined in the Additional DIP Credit Agreement) in an aggregate amount not in excess of $50,000,000 securing Indebtedness permitted pursuant to Sections 6.22(vi) and (vii); (xv) other Liens incurred by the Borrower and the Credit Parties so long as the value of the property subject to such Liens, and the Indebtedness and other obligations secured thereby, do not exceed $1,000,000.

            6.27   Transactions with Affiliates.  The Credit Parties will not, and will not permit any Subsidiary to sell or transfer any property or assets to, or otherwise engage in any other material transactions with, any of its Affiliates (other than the Borrower and the Credit Parties) or such Affiliates' shareholders, other than transactions (i) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Credit Party than could be obtained on an arm's-length basis from unrelated third parties and investments in non-Credit Party Subsidiaries of the Borrower that are permitted hereunder, (ii) transactions permitted in the Loan Documents and the transactions contemplated thereby, (iii) reasonable and customary fees and compensation paid to, and indemnities provided on behalf of, officers, directors or employees of the Borrower or any Credit Party and (iv) any dividends, other distributions or payments permitted by Section 6.21(ii).

            6.28    Amendments to Agreements.  The Credit Parties will not enter into or permit any material amendment or modification and will not permit the termination of the Additional DIP Credit Agreement (including, without limitation, any modification of the maturity date of any loan under the Additional DIP Credit Agreement) without written consent from Requisite Lenders which consent may be withheld if the Requisite Lenders reasonably determine that such amendment or modification will adversely affect their interests. Without the written consent of the Requisite Lenders, the Credit Parties will not enter into or permit any material amendment or modification of the Co-Branded Card Agreements and will not permit the termination of the Co-Branded Card Agreements, provided that the Credit Parties may amend the Co-Branded Card Agreements in the ordinary course of business so long as such amendment shall not materially adversely affect the Lenders.

            6.30    Guarantees and Other Liabilities.  Borrower and the Credit Parties shall not purchase or repurchase (or agree, contingently or otherwise, so to do) the Indebtedness of, or assume, guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance of any obligation or capability of so doing, or otherwise), endorse or otherwise become liable, directly or indirectly, in connection with the obligations, stock or dividends of any Person, except (i) for any guaranty of Indebtedness or other obligations of any Borrower or Credit Party if the Borrower or Credit Party could have incurred such Indebtedness or obligations under this Agreement, (ii) by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, (iii) to the extent existing on the Petition Date, (iv) any guaranty of Indebtedness of joint ventures of the Borrower and the Credit Parties in an aggregate amount, together with the Investments permitted by Section 6.25(xi), not to exceed $5,000,000, and (v) any other guaranty by the Borrower and the Credit Parties in an aggregate amount not to exceed $5,000,000.

            6.31  No Negative PledgesThe Credit Parties shall not and shall not cause or permit their domestic Subsidiaries to directly or indirectly enter into or assume any agreement (other than this Agreement and the Additional DIP Credit Agreement) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, in favor of Agent, except for property subject to purchase money security interests, operating leases and capital leases and shall not permit to exist any consensual encumbrance (other than in connection with this Agreement and the Additional DIP Credit Agreement) on the ability of any Subsidiary to pay dividends or other distributions to the Credit Parties.

            6.32    Restriction on Changes.  Without the consent of the Requisite Lenders, the Credit Parties shall not and shall not cause or permit their Subsidiaries to directly or indirectly:  (a)  amend, modify or waive any term or provision of its organizational documents, including its articles of incorporation, certificates of designations pertaining to preferred stock, by-laws, partnership agreement or operating agreement in any way or change its state of incorporation, in each case unless such amendment, modification or waiver is not adverse to the Lenders (determined by the Requisite Lenders in their sole discretion), (b) engage in any material line of business substantially different from those lines of business carried on by the Credit Parties and their Subsidiaries on the Petition Date, and (c) make any changes in its equity capital structure (including, without limitation, in the terms of its outstanding capital stock) or ownership structure (except with respect to the ownership of Parent), in either case unless such change is not adverse to the Lenders (determined by the Requisite Lenders in their sole discretion).

            6.33    Reclamation Claims.  No Credit Party shall enter into any agreement to return any of its Property to any of its creditors for application against any Prepetition Indebtedness, Prepetition trade payables or other Prepetition claims under Section 546(g) of the Bankruptcy Code or allow any creditor to take any setoff or recoupment against any of its Prepetition Indebtedness, Prepetition trade payables or other Prepetition claims based upon any such return pursuant to Section 553(b)(1) of the Bankruptcy Code or otherwise if, after giving effect to any such agreement, setoff or recoupment, the aggregate amount of Prepetition Indebtedness, Prepetition trade payables and other Prepetition claims subject to all such agreements, setoffs and recoupments since the Petition Date would exceed $25,000,000.

            6.34    Chapter 11 Claims.  No Credit Party shall incur, create, assume, suffer to exist or permit any other superpriority administrative claim which is pari passu with or senior to the claims of Agent and the Lenders against Borrower and the other Credit Parties, except as permitted in Section 2.21(b) hereof.

            6.35    Orders.  Without the Required Lenders' prior written consent, there shall not occur any amendments, modifications or other changes to the Interim Order, the Final Order or any order issued under Section 365 of the Bankruptcy Code with respect to the Co-Branded Card Agreements.

            6.36    Financial Covenants.

                        (a)    Capital Expenditures.  Borrower and the Credit Parties collectively shall not make Capital Expenditures, in the aggregate, for each fiscal quarter ending on the dates listed below in an aggregate amount in excess of the amount listed below opposite such date, provided, that if the amount of the actual Capital Expenditures that are made during any fiscal quarter is less than such amount, 50% of the unused portion thereof may be carried forward to and made only during the immediately following fiscal quarter and any such amount carried forward shall be deemed to be the first portion spent:
     

           
          Fiscal Quarter Ending Capital Expenditures
          March 31, 2003 $110,000,000
          June 30, 2003 $110,000,000
          September 30, 2003 $116,000,000
          December 31, 2003 $142,000,000
          March 31, 2004 $100,000,000
          June 30, 2004 $100,000,000
                        (b)    EBITDAR.  (i) Borrower and the Credit Parties shall not permit cumulative consolidated EBITDAR for each fiscal period beginning on December 1, 2002 and ending in each case on the last day of each fiscal month ending on the dates listed below to be less than the amount specified opposite such date:
           
          Month EBITDAR
          February 28, 2003 $(964,000,000)
          March 31, 2003 $(881,000,000)
          April 30, 2003 $(849,000,000)
          May 31, 2003 $(738,000,000)
          June 30, 2003 $(585,000,000)
          July 31, 2003 $(448,000,000)
          August 31, 2003 $(219,000,000)
          September 30, 2003 $(98,000,000)
          October 31, 2003 $46,000,000
          November 30, 2003 $112,000,000
                                (ii) Borrower and the Credit Parties shall not permit  cumulative consolidated EBITDAR for each rolling twelve (12) fiscal month period ending on the dates listed below to be less than the amount listed opposite such month:
     
           
          Month EBITDAR
          December 31, 2003 $575,000,000
          January 31, 2004 $901,000,000
          February 28, 2004 $1,084,000,000
          March 31, 2004 $1,196,000,000
          April 30, 2004 $1,297,000,000
          May 31, 2004 $1,383,000,000
                        (c)    Minimum Cash.  Borrower and the Credit Parties shall not permit their aggregate cash and cash equivalents (net of cash maintained in the Escrow Accounts) to be less than $200,000,000 at any time.
     
     

    ARTICLE VII.
    DEFAULTS

      The occurrence of any one or more of the following events shall constitute a Default:
            7.1    Representations and Warranties.  Any representation or warranty made or deemed made by or on behalf of any Credit Party or any of its Subsidiaries to the Lenders or the Agent under or in connection with this Agreement, any Loan, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made.
       
            7.2    Nonpayment.  (i) Nonpayment of principal of any Loan when due, (ii) nonpayment of interest upon any Loan or of any fees under any of the Loan Documents within two Business Days after the same becomes due or (iii) nonpayment of any other obligations (other than amounts set forth in clauses (i) and (ii) hereof) under any of the Loan Documents within five Business Days after the same becomes due.

            7.3    Breach.

                    (a)    The breach by any Credit Party of any of the terms or provisions of Section 2.21, 2.22, 2.23, 2.24, 2.25, 2.26 or Article VI.

                    (b)    The breach by any Credit Party (other than a breach which constitutes a Default under another Section of this Article VII) of any of the terms or provisions of this Agreement which is not remedied within ten days after written notice from the Agent or any Lender.

            7.4    Material Indebtedness.  (a) Failure of any Credit Party or any of its Subsidiaries to pay when due any Material Indebtedness; (b) the default by any Credit Party or any of its Subsidiaries in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any Material Indebtedness Agreement, or any other event shall occur or condition exist, the effect of which default, event or condition is to cause, or to permit the holder(s) of such Material Indebtedness or the lender(s) under any Material Indebtedness Agreement to cause, such Material Indebtedness to become due prior to its stated maturity or any commitment to lend under any Material Indebtedness Agreement to be terminated prior to its stated expiration date; or (c) any Material Indebtedness of any Credit Party or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof.

            7.5    Additional DIP Credit Agreement.  The occurrence and continuance of any Event of Default under and as defined in the Additional DIP Credit Agreement.

            7.6    Governmental Action.  Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of the Credit Parties and their Subsidiaries which, when taken together with all other Property of the Credit Parties and their Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, is in excess of $10,000,000.

            7.7   Judgments.  The Credit Parties or any of their Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money in excess of $10,000,000 (or the equivalent thereof in currencies other than U.S. Dollars) in the aggregate, or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, which judgment(s), in any such case, is/are not stayed (to the extent not covered by insurance (where the applicable insurance carrier has accepted such liability)) nor on appeal or otherwise being appropriately contested in good faith.

            7.8    Intentionally Deleted.

            7.9    Intentionally Deleted.

            7.10   Change in Control.  Any Change in Control shall occur.

            7.11   Intentionally Deleted.

            7.12    Environmental Law.  The Parent or any of its Subsidiaries shall (i) be the subject of any proceeding or investigation pertaining to the release by the Parent, any of its Subsidiaries or any other Person of any toxic or hazardous waste or substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), could reasonably be expected to have a Material Adverse Effect.

            7.13    Loan Documents.  The occurrence of any "default", as defined in any Loan Document (other than this Agreement) or the breach of any of the terms or provisions of any Loan Document (other than this Agreement), which default or breach continues beyond any period of grace therein provided.

            7.14    Liens.  The Agreement and any Loan Document shall for any reason fail to create a valid and perfected first priority (or second priority with respect to the Additional DIP Collateral (or otherwise junior Lien in the event a Lien on such Additional DIP Collateral exists ahead of the Additional DIP Lenders' Lien and is permitted under Section 6.26 hereof; provided that, in such event, the Lenders' Lien shall be immediately junior to the Additional Lenders' Lien on such Additional DIP Collateral)) security interest in any Collateral purported to be covered hereby, or any Lien on any material amount of Collateral (determined by Agent in its sole discretion) granted by the terms hereof or by the terms of any Loan Document shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of this Agreement.

            7.15    ERISA.

                        (a)    any Termination Event described in clauses (iii) or (iv) of the definition of such term shall have occurred and shall continue unremedied for more than 10 days; or

                        (b)    (i) the Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor or trustee of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA Affiliate does not have reasonable grounds, in the opinion of the Agent, to contest such Withdrawal Liability and is not in fact contesting such Withdrawal Liability in a timely and appropriate manner, and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date of such notification), exceeds $10,000,000 allocable to post-petition obligations or requires payments exceeding $1,000,000 per annum in excess of the annual payments made with respect to such Multiemployer Plans by the Borrower or such ERISA Affiliate for the plan year immediately preceding the plan year in which such notification is received; or

                        (c)    the Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years that include the date hereof by an amount exceeding $10,000,000; or

                        (d)    the Borrower or any ERISA Affiliate shall have committed a failure described in Section 302(f)(1) of ERISA (other than the failure to make any contribution accrued and unpaid as of the Petition Date or any contribution waived in accordance with the grant of a minimum funding waiver under Section 303 of ERISA or Section 412(d) of the Code) and the amount determined under Section 302(f)(3) of ERISA is equal to or greater than $10,000,000.

            7.16    Bankruptcy Matters.

                        (a)    (i)  The entry of an order dismissing any Chapter 11 Case or converting any such case to one under Chapter 7 of the Bankruptcy Code or (ii) any Credit Party shall file a motion or other pleading seeking to convert any of the Chapter 11 Cases to a proceeding under Chapter 7 of the Bankruptcy Code or the dismissal of any of the Chapter 11 Cases under Section 1112 of the Bankruptcy Code or otherwise.

                        (b)    The entry of an order appointing a Chapter 11 trustee or receiver in any of the Chapter 11 Cases and the order appointing such trustee or receiver shall not be reversed or vacated within 30 days after the entry thereof.

                        (c)    The entry of an order  in any of the Chapter 11 Cases granting any other superpriority administrative claim or Lien equal or superior to that granted to Agent, on behalf of itself and Lenders (or the filing of an application by any Credit Party to approve any such superpriority administrative claim), other than (a) the permitted Liens granted to the Additional DIP Lenders in the Additional DIP Collateral and the priority claim granted to the Additional DIP Lenders under Section 364(c)(1) of the Bankruptcy Code, (b) unless the proceeds of a new loan will repay in full all Obligations and (c) ordinary course transactions under the Credit Parties' cash management systems.

                        (d)    The entry of an order in any of the Chapter 11 Cases modifying, staying, vacating, reversing or amending the final order issued under Section 365 of the Bankruptcy Code with respect to the Co-Branded Card Agreements in a manner adverse to Lenders (determined by Lenders in their sole discretion).

                        (e)    The entry of an order in any of the Chapter 11 Cases modifying, staying, vacating, reversing or amending in a manner adverse to Lenders (determined by Lenders in their sole discretion) the Interim Order, the Final Order or any other final order issued under Section 365 of the Bankruptcy Code with respect to this Agreement or any other Loan Document and such order is effective for a period in excess of 10 days.

                        (f)    The entry of an order in any of the Chapter 11 Cases appointing an officer or examiner having enlarged powers (beyond those set forth under Bankruptcy Code Sections 1106(a)(3) and (4)) or person having similar powers and functions and the order appointing such officer or examiner shall not be reversed or vacated within 30 days after the entry thereof.

                        (g)    The failure (for any reason) of the Final Order to be entered within 45 days following the Petition Date and in substantially the form of Exhibit E attached hereto.

                        (h)    The entry of an order in any of the Chapter 11 Cases avoiding or requiring repayment of any portion of the payments made on account of the Obligations owing under this Agreement.

                        (i)    The allowance of any claims arising under Section 506(c) of the Bankruptcy Code against Agent or any Lender or the Collateral or the commencement of any action adverse to Agent or any Lender or their respective rights and remedies under the Loan Documents.

                        (j)    Any Credit Party shall: (i) obtain working capital financing from any Person other than Agent and Lenders and the Additional DIP Lenders under Section 364(d) of the Bankruptcy Code; (ii) obtain financing from any Person other than Agent and Lenders under Section 364(c) of the Bankruptcy Code (other than the Additional DIP Credit Agreement or with respect to a financing used, in whole or in part, to repay in full the Obligations); (iii) grant any Lien upon or affecting any Collateral other than Liens expressly permitted by Section 6.26; or (iv) use cash collateral (as defined in Section 363(a) of the Bankruptcy Code) of Agent and Lenders under Section 363(c) of the Bankruptcy Code.

                        (k)    The entry of an order by the Bankruptcy Court in any of the Chapter 11 Cases granting relief from or modifying the automatic stay of Section 362 of the Bankruptcy Code (i) to allow any creditor (other than Agent and Lenders or, to the extent permitted under the Additional DIP Intercreditor Agreement, Additional DIP Lenders) to execute upon or enforce a Lien on any Collateral if, after giving effect thereto, the aggregate amount of all claims as to which such relief has been granted since the Petition Date would exceed $10,000,000 in the aggregate (it being understood that the relinquishment by the Credit Parties of Section 1110 Assets, or the foreclosure of security interests in Section 1110 Assets (or in property in the possession of the applicable secured party) as to which defaults have not been cured pursuant to Section 1110 of the Bankruptcy Code, shall not be included in this $10,000,000 cap), or (ii) with respect to any Lien of, or the granting of any Lien on any Collateral to, any state or local environmental or regulatory agency or authority that could reasonably be expected to have a Material Adverse Effect.

                        (l)    There shall commence any suit or action against Agent or any Lender by or on behalf of (i) any Credit Party, (ii) the Environmental Protection Agency, (iii) any state environmental protection or health and safety agency, or (iv) any official committee in any of the Chapter 11 Cases, in each case that asserts a claim in excess of $5,000,000 or seeks a legal or equitable remedy that would have the effect of subordinating the claim or Lien of Agent or any Lender to a claim in excess of $5,000,000 and, if such suit or action is commenced by any Person other than any Credit Party or any Subsidiary, officer, or employee of any Credit Party, such suit or action shall not have been dismissed or stayed within 30 days after service thereof on Agent or such Lender, as applicable, and, if stayed, such stay shall have been lifted.

                        (m)   The failure of any Credit Party to perform any of its material obligations under the Interim Order or the Final Order.

                        (n)    The entry of an order in any of the Chapter 11 Cases confirming a plan or plans of reorganization which does not contain a provision for termination of the Commitments and repayment in full in cash of all Obligations on or before the effective date of such plan or plans.

                        (o)    Any Credit Party shall make any payment in respect of Prepetition Indebtedness, Prepetition trade payables or other Prepetition claims, other than any such payments authorized by the Bankruptcy Court and approved by the Requisite Lenders (i) in accordance with "first day" orders reasonably satisfactory to Agent, (ii) in respect of certain critical vendors and other critical creditors, (iii) in respect of accrued payroll and related expenses as of the Petition Date, (iv) in respect of payments made pursuant to Section 1110 Assets and (v) in connection with the assumption of executory contracts and unexpired leases.

                        (p)    Any Credit Party shall state in writing that it (i) has ceased or intends to cease operating its business in the ordinary course or (ii) has commenced or intends to commence an orderly liquidation of substantially all of its assets.

                        (q)    Borrower, Parent or ULS has taken any step leading to its cessation as a going concern or Borrower, Parent or ULS ceases or suspends operations.

                        (r)    Any of the Co-Branded Card Agreements shall be terminated.

            7.17    Assumption of Co-Branded Card Agreements.  The sale or other disposition of all or substantially all of the Borrower's Property without the buyer's assumption of Borrower's obligations under the Co-Branded Card Agreements, which assumption Bank One, Delaware N.A. may contest.

            7.18    Slots and Routes.

            (a) During the first month of any two-month FAA slot reporting period, 50% of more of the Slots are not utilized 80% or more over such period or (ii) during the two-month FAA slot reporting period, the Borrower fails to satisfy the Use or Lose Rule with respect to 20% of the Slots at DCA and LGA; or

            (b) The Borrower loses its material rights in and to use any of its Primary Routes, Primary Foreign Slots, and/or Supporting Route Facilities for the Primary Routes, other than in cases where the Primary Routes, Primary Foreign Slots, and/or Supporting Route Facilities for the Primary Routes are transferred or otherwise disposed of as permitted in this Agreement or the SGR Security Agreement, or (iii) in cases where the Agent has provided prior written consent to the loss of such material rights.

    ARTICLE VIII.
    ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

            8.1    Acceleration and Remedies.

                    (a)    If any Default occurs, Agent may (and at the written request of the Requisite Lenders shall), notwithstanding the provisions of Section 362 of the Bankruptcy Code but subject to any provision of the Interim Order or Final Order, without any application, motion or notice to, or order from, the Bankruptcy Court, terminate or suspend the obligations of the Lenders to make a Loan hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives.

                    (b)    If, within 10 days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make a Loan hereunder as a result of any Default and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination.

                    (c)    Upon the occurrence of a Default and notwithstanding the provisions of Section 362 of the Bankruptcy Code but subject to any provision of the Interim Order or Final Order, without any application, motion or notice to, or order from, the Bankruptcy Court, the Agent may (and shall at the direction of the Required Lenders), exercise any or all of the following rights and remedies:
     

        (i)    Those rights and remedies available to a secured party under the Illinois UCC (whether or not the Illinois UCC applies to the affected Collateral) or under any other applicable law (including, without limitation, any law governing the exercise of a bank's right of setoff or bankers' lien) when a debtor is in default under a security agreement or otherwise.

        (ii)    Without notice, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable.
         

    The Agent, on behalf of the secured parties, may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

                    (d)    Upon the request of the Agent after the occurrence of a Default and notwithstanding the provisions of Section 362 of the Bankruptcy Code but subject to any provision of the Interim Order or Final Order, without any application, motion or notice to, or order from, the Bankruptcy Court, the Borrower and the other Credit Parties will:
     

      (i)    Assemble and make available to the Agent the Collateral and all records relating thereto at any place or places specified by the Agent.

      (ii)    Permit the Agent, by the Agent's representatives and agents, to enter any premises where all or any part of the Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral.

              (e)    The proceeds of the Collateral shall be applied by the Agent to payment of the Obligations in the following order:

      (i)    FIRST, to payment of all costs and expenses of the Agent incurred in connection with the collection and enforcement of the Obligations;

      (ii)    SECOND, to payment of that portion of the Obligations constituting accrued and unpaid interest and fees, pro rata among the Lenders and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them;

      (iii)    THIRD, to payment of the principal of the Obligations, pro rata among the Lenders and their Affiliates in accordance with the amount of such principal then due and unpaid owing to each of them; and

      (iv)    FOURTH, to payment of any Obligations (other than those listed above) pro rata among those parties to whom such Obligations are due in accordance with the amounts owing to each of them.

              (f)    The Borrower and each other Credit Party hereby waives notice of the time and place of any public sale or the time after which any private sale or other disposition of all or any part of the Collateral may be made.  To the extent such notice may not be waived under applicable law, any notice made shall be deemed reasonable if sent to the Borrower or other applicable Credit Party, addressed as set forth in Section 13.1, at least ten days prior to (i) the date of any such public sale or (ii) the time after which any such private sale or other disposition may be made.  Agent shall have no obligation to clean-up or otherwise prepare the Collateral for sale.

              (g)    Upon the occurrence of a Default, the Agent shall be entitled to occupy and use any premises owned or leased by the Borrower or any other Credit Party where any of the Collateral or any records relating to the Collateral are located until the Obligations are paid or the Collateral is removed therefrom, whichever first occurs, without any obligation to pay the Borrower or any other Credit Party for such use and occupancy.
       

            8.2    Amendments.  Subject to the provisions of this Section 8.2, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Lenders:
     
        (i)    Extend the final maturity of any Loan, postpone or reduce the mandatory Commitment reductions set forth in Section 2.2(a) hereof, forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon.

        (ii)    Reduce the percentage specified in the definition of Required Lenders.

        (iii)    Extend the Facility Termination Date or increase the amount of the Aggregate Commitment beyond $300,000,000 or of the Commitment of any Lender hereunder, or permit the Borrower to assign its rights under this Agreement.

        (iv)    Amend this Section 8.2.

        (v)    Except as otherwise expressly permitted under Section 6.24, release any guarantor of the Loan or release, or, except with respect to the Additional DIP Lenders' Liens on the Additional DIP Collateral, agree to subordinate the Lenders' Liens with respect to, all or substantially all of the Collateral.
         

    Notwithstanding the foregoing, no amendments, modifications or waivers to the covenants set forth in Section 6.35 shall be deemed given or made unless the same shall be in writing and signed by Lenders and Additional DIP Lenders holding more than 50% of the sum of (a) the Aggregate Commitment and (b) the outstanding commitments and/or exposure under the Additional DIP.  No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent.  The Agent may waive payment of the fee required under Section 12.3.3 without obtaining the consent of any other party to this Agreement.

            8.3    Preservation of Rights.    No delay or omission of the Lenders or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence.  Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth.  All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full.
     
     

    ARTICLE IX.
    GENERAL PROVISIONS

            9.1    Survival of Representations.  All representations and warranties of each Credit Party contained in this Agreement shall survive the making of a Loan herein contemplated.

            9.2    Governmental Regulation.  Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.

            9.3    Headings.  Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.

            9.4    Entire Agreement.  The Loan Documents embody the entire agreement and understanding among the Borrower, the other Credit Parties, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the other Credit Parties, the Agent and the Lenders relating to the subject matter thereof other than those contained in the fee letter described in Section 10.13.

            9.5    Several Obligations; Benefits of this Agreement.  The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such).  The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder.  This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement.

            9.6    Expenses; Indemnification.

                    (i)        The Borrower shall reimburse the Agent and the Arranger for any reasonable costs, internal charges and reasonable out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent (including special counsel for the Agent (including, without limitation, aviation counsel)), which attorneys may be employees of the Agent) paid or incurred by the Agent or the Arranger in connection with the preparation, filing, recordation, negotiation, execution, delivery, syndication, distribution (including, without limitation, via the internet), review, amendment, modification, and administration of the Loan Documents.  The Borrower also agrees to reimburse the Agent, the Arranger and the Lenders for any reasonable costs, internal charges and reasonable out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent, the Arranger and the Lenders (including special counsel for the Agent (including, without limita