Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): March 28, 2013

 

 

UNITED CONTINENTAL HOLDINGS, INC.

UNITED AIR LINES, INC.

UNITED AIRLINES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   001-06033   36-2675207
Delaware   001-11355   36-2675206
Delaware   001-10323   74-2099724

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

233 S. Wacker Drive, Chicago, IL 60606

233 S. Wacker Drive, Chicago, IL 60606

233 S. Wacker Drive, Chicago, IL 60606

(Address of Principal Executive Offices) (Zip Code)

(312) 997-8000

(312) 997-8000

(312) 997-8000

(Registrant’s telephone number, including area code)

N/A

(Former Name or Former Address, if Changed Since Last Report.)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 240.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 1.01 Entry into a Material Definitive Agreement.

On March 28, 2013, Continental Airlines, Inc., a Delaware corporation (“Continental”) and a wholly-owned subsidiary of United Continental Holdings, Inc. (“UAL”), and United Air Lines, Inc., a Delaware corporation (“United”) and a wholly-owned subsidiary of UAL, entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for the merger of United with and into Continental (the “Merger”). On March 31, 2013, United merged with and into Continental, with Continental continuing as the surviving corporation of the Merger and as a wholly-owned subsidiary of UAL. Upon the closing of the Merger on March 31, 2013, Continental’s name was changed to “United Airlines, Inc.” (the “Survivor”).

As of April 1, 2013, UAL, the Survivor and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), entered into a First Supplemental Indenture to the Amended and Restated Indenture dated as of January 11, 2013 among UAL, United and the Trustee (the “2013 Indenture”) in which the Survivor assumed the obligations of United as guarantor under the 2013 Indenture and with respect to $326 million aggregate principal amount of 6% Notes due 2026, $326 million aggregate principal amount of 6% Notes due 2028 and $400 million aggregate principal amount of 8% Notes due 2024, each of which were issued by UAL and guaranteed by United.

Also as of April 1, 2013, UAL, the Survivor and the Trustee entered into a First Supplemental Indenture to the Indenture dated as of July 25, 2006 among UAL, United and the Trustee (the “4.50% Convertible Notes Indenture”) in which the Survivor assumed the obligations of United as guarantor under the 4.50% Convertible Notes Indenture and with respect to $156 million aggregate principal amount of 4.50% Senior Limited-Subordination Convertible Notes due 2021, which were issued by UAL and guaranteed by United.

The foregoing descriptions of the Merger Agreement and supplemental indentures in this Item 1.01 do not purport to be complete and are qualified in their entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 hereto and incorporated herein by reference, and the First Supplemental Indenture to the 2013 Indenture and First Supplemental Indenture to the 4.50% Convertible Notes Indenture, which are filed as Exhibits 4.1 and 4.2, respectively, hereto and incorporated herein by reference.

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

Effective March 31, 2013, pursuant to the Merger Agreement, United merged with and into Continental, with Continental continuing as the surviving corporation of the Merger and changing its name to “United Airlines, Inc.” In accordance with the Merger Agreement, at the effective time of the Merger, each outstanding share of United common stock immediately prior to the Merger was cancelled and retired and no consideration was delivered in exchange therefor. Each outstanding share of Continental common stock immediately prior to the Merger remained outstanding and was unaffected by the Merger.

The foregoing description of the Merger in this Item 2.01 does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 hereto and incorporated herein by reference.

 

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

The information described in the second, third and fourth paragraphs under Item 1.01 above is incorporated herein by reference. In addition, by virtue of the Merger, the Survivor assumed by operation of law all of United’s obligations under all notes issued by United and all credit agreements, loan agreements and other contracts to which United is a party, including but not limited to all equipment notes previously issued by United in its enhanced equipment trust certificate (“EETC”) financings of aircraft. On March 31, 2013, the aggregate principal balance of such equipment notes issued in connection with United’s 2007-1 EETC financing was $505 million at interest rates ranging from LIBOR plus 2.25% per annum to 7.336% per annum. As of March 31, 2013, the aggregate principal balance of such equipment notes issued in connection with United’s 2009-1 EETC financing was $419 million at an interest rate of 10.4% per annum, and the aggregate principal balance of such equipment notes issued in connection with United’s 2009-2 EETC financing was $587 million at interest rates of 9.75% (in the case of $518 million of such notes) and 12% (in the case of $69 million of such notes).

For more information concerning the assumed obligations, see (i) “Note 14—Debt” to the Combined Notes to Consolidated Financial Statements in United’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012
10-K”), which Note is included in Exhibit 99.1 hereto and incorporated herein by reference and (ii) Items 1.01, 1.02, 2.03 and 9.01 in the Current Report on Form 8-K filed by UAL, United and Continental on March 28, 2013, which are incorporated herein by reference. Additional information can also be found in “Item 7, Management’s Discussion and Analysis—Liquidity and Capital Resources” of the 2012 10-K.


Item 5.03 Amendments to Articles of Incorporation or By-laws; Change in Fiscal Year.

In accordance with the provisions of the Merger Agreement, at the effective time of the Merger, the certificate of incorporation of the Survivor was amended and restated to read in its entirety as set forth in Exhibit 3.1 hereto (the “Survivor Certificate of Incorporation”). The Survivor Certificate of Incorporation was approved by UAL, the sole stockholder of Continental, on March 22, 2013 and affects the following changes to the certificate of incorporation of Continental in effect immediately prior to the effective time of the Merger: (i) changes the name of Continental to “United Airlines, Inc.” and (ii) revises the limitation of liability provision to eliminate or limit the personal liability of directors to the fullest extent permitted by the General Corporation Law of the State of Delaware (the “DGCL”) in the event of any amendment to the DGCL authorizing corporate action further eliminating or limiting the personal liability of directors.

In accordance with the provisions of the Merger Agreement, at the effective time of the Merger, the by-laws of the Survivor were amended and restated to read in their entirety as set forth in Exhibit 3.2 hereto (the “Survivor By-laws”). The Survivor By-laws include the following provisions, which are amended or in addition to the provisions contained in the by-laws of Continental in effect immediately prior to the effective time of the Merger: (i) the Board is authorized to take any action without a meeting if all members consent thereto in writing or by electronic transmission; (ii) shares of the Survivor’s stock may be certificated or uncertificated; and (iii) the Chairman, Chief Executive Officer or President has the authority to vote the securities of any other corporation which are owned or held by the Survivor.

The foregoing descriptions of the Survivor Certificate of Incorporation and Survivor By-laws in this Item 5.03 do not purport to be complete and are qualified in their entirety by reference to the Survivor Certificate of Incorporation and Survivor By-laws, which are filed as Exhibits 3.1 and 3.2 hereto and incorporated herein by reference.

 

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

Pursuant to Rule 3-05(b) of Regulation S-X, Exhibit 99.1 to this Current Report on Form 8-K presents the consolidated balance sheets of United as of December 31, 2012 and 2011 and the related statements of consolidated operations, comprehensive income (loss), cash flows and stockholder’s deficit for each of the three years in the period ended December 31, 2012, together with the report of independent registered public accounting firms thereon. The successor is viewed as the acquirer in the Merger following the legal form of the transaction and, therefore, the historical financial statements of United have been included pursuant to Rule 3-05(b) in this Form 8-K of the successor. The notes to these financial statements are combined notes relating to the financial statements of UAL and Continental in addition to the financial statements of United, because this was the presentation used in the 2012 10-K. However, for purposes of this Form 8-K, information in the notes to the United financial statements included in Exhibit 99.1 relating to the financial statements of UAL or Continental shall be deemed excluded from such notes.

(b) Pro Forma Financial Information.

The Merger represents a transaction between entities under common control and United is considered the predecessor entity for accounting purposes. Transactions between entities under common control are accounted for as if the transaction occurred at the beginning of the earliest period presented under which the entities were under common control, and prior years are retrospectively adjusted to furnish comparative information similar to the pooling method. The pro forma financial statements have been combined with United as the predecessor entity because it was the first of the two subsidiaries that was controlled by UAL, the parent entity. Exhibit 99.2 to this Current Report on Form 8-K presents the following Unaudited Pro Forma Condensed Combined Financial Information of United and Continental, which has been prepared in accordance with Article 11 of Regulation S-X:

 

   

Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2012;

 

   

Unaudited Pro Forma Condensed Combined Statements of Operations for the years ended December 31, 2012, 2011 and 2010; and

 

   

Notes to Unaudited Pro Forma Condensed Combined Financial Statements.


(d) Exhibits.

 

Exhibit
Number

  

Description

2.1    Agreement and Plan of Merger, dated as of March 28, 2013, by and between Continental Airlines, Inc. and United Air Lines, Inc.
3.1    Amended and Restated Certificate of Incorporation of United Airlines, Inc.
3.2    Amended and Restated By-laws of United Airlines, Inc.
4.1    First Supplemental Indenture dated as of April 1, 2013 by and among United Continental Holdings, Inc., United Airlines, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Amended and Restated Indenture dated as of January 11, 2013
4.2    First Supplemental Indenture dated as of April 1, 2013 by and among United Continental Holdings, Inc., United Airlines, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Indenture dated as of July 25, 2006
99.1    Consolidated Balance Sheets of United as of December 31, 2012 and 2011 and the related Statements of Consolidated Operations, Comprehensive Income (Loss), Cash Flows and Stockholder’s Deficit for each of the three years in the period ended December 31, 2012 and the notes thereto, together with the report of independent registered public accounting firms thereon
99.2    Unaudited Pro Forma Condensed Combined Financial Statements of United and Continental


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

      UNITED CONTINENTAL HOLDINGS, INC.
      UNITED AIR LINES, INC.*
      UNITED AIRLINES, INC.
    By:   /s/ John D. Rainey
Date: April 3, 2013       John D. Rainey
      Executive Vice President and Chief Financial Officer

 

* By United Airlines, Inc. (f/k/a Continental Airlines, Inc.) as successor by merger to United Air Lines, Inc.


Exhibit Index

 

Exhibit
Number

  

Description

2.1    Agreement and Plan of Merger, dated as of March 28, 2013, by and between Continental Airlines, Inc. and United Air Lines, Inc.
3.1    Amended and Restated Certificate of Incorporation of United Airlines, Inc.
3.2    Amended and Restated By-laws of United Airlines, Inc.
4.1    First Supplemental Indenture dated as of April 1, 2013 by and among United Continental Holdings, Inc., United Airlines, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Amended and Restated Indenture dated as of January 11, 2013
4.2    First Supplemental Indenture dated as of April 1, 2013 by and among United Continental Holdings, Inc., United Airlines, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Indenture dated as of July 25, 2006
99.1    Consolidated Balance Sheets of United as of December 31, 2012 and 2011 and the related Statements of Consolidated Operations, Comprehensive Income (Loss), Cash Flows and Stockholder’s Deficit for each of the three years in the period ended December 31, 2012 and the notes thereto, together with the report of independent registered public accounting firms thereon
99.2    Unaudited Pro Forma Condensed Combined Financial Statements of United and Continental
EX-2.1

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (“Agreement”) is dated as of March 28, 2013 by and between Continental Airlines, Inc., a Delaware corporation (“Continental”), and United Air Lines, Inc., a Delaware corporation (“United”).

WHEREAS, the respective Boards of Directors of Continental and United have each approved and adopted this Agreement and the transactions contemplated by this Agreement, in each case after making a determination that this Agreement and such transactions are advisable and in the best interests of each such corporation and its stockholders; and

WHEREAS, United Continental Holdings, Inc. (the “Parent”), the sole stockholder of both Continental and United has approved the adoption of this Agreement and the transactions contemplated by this Agreement; and

WHEREAS, pursuant to the transactions contemplated by this Agreement and on the terms and subject to the conditions set forth herein, United, in accordance with Section 251 of the Delaware General Corporation Law (“DGCL”), will merge with and into Continental, with Continental continuing as the surviving corporation (the “Merger”).

NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Section 251 of the DGCL, United shall be merged with and into Continental at the Effective Time (as hereinafter defined). Following the Effective Time, the separate corporate existence of United shall cease, and Continental shall continue as the surviving corporation under the name “United Airlines, Inc.” (the “Surviving Corporation”). The effects and consequences of the Merger shall be as set forth in this Agreement and the DGCL.

2. Effective Time. Subject to the provisions of this Agreement, the parties shall duly prepare, execute and file a certificate of merger (the “Certificate of Merger”) with the Secretary of State of the State of Delaware with respect to the Merger and make all other filings or recordings required by the DGCL in connection with the Merger. The Merger shall become effective upon the filing of the Certificate of Merger or at such later time as is specified in such Certificate of Merger (the “Effective Time”).

3. Effect of the Merger. The Merger shall have the effects set forth in the DGCL, including without limitation, Section 259 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, from the Effective Time, (i) all the properties, rights, privileges, immunities, powers and franchises of United shall vest in Continental, as the Surviving Corporation, and all debts, liabilities, obligations and duties of United shall become the debts, liabilities, obligations and duties of Continental, as the Surviving Corporation.


4. Organizational Documents. The Amended and Restated By-Laws of Continental in effect immediately prior to the Effective Time shall be amended and restated at the Effective Time to read in their entirety as set forth in Exhibit A attached hereto and, as so amended and restated, shall be the by-laws of the Surviving Corporation until thereafter amended as provided therein or by the DGCL. The Amended and Restated Certificate of Incorporation of Continental in effect immediately prior to the Effective Time shall be amended and restated at the Effective Time to read in its entirety as set forth in Exhibit B attached hereto and, as so amended and restated, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended as provided therein or by the DGCL.

5. Directors and Officers. The directors and officers of Continental immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation from and after the Effective Time and shall hold office until the earlier of their respective death, resignation or removal or their respective successors are duly elected or appointed and qualified in the manner provided for in the certificate of incorporation and Bylaws of the Surviving Corporation or as otherwise provided by the DGCL.

6. Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Continental, United or Parent:

(a) each share of common stock of United, par value $5.00 per share (“United Common Stock”), issued and outstanding immediately prior to the Effective Time (including each share of United Common Stock that is owned directly or indirectly by United (as treasury stock or otherwise)) shall be automatically canceled and retired and will cease to exist, and no consideration will be delivered in exchange therefor; and

(b) each share of capital stock of Continental issued and outstanding immediately prior to the Effective Time shall remain outstanding following the consummation of the Merger.

7. Labor Required Provisions. Continental hereby acknowledges that it has received copies of all of United’s collective bargaining agreements, and all amendments thereto (the “United CBAs”). Annex A sets forth certain sections of the United CBAs regarding successor transactions, including those sections listed under the heading “Commitments” (the “United Employee Commitments”) and under the heading “Irrevocable Commitments” (the “Irrevocable United Employee Commitments”). Each of United and Continental hereby agrees, and will cause its Subsidiaries to agree, to abide by the terms of the United Employee Commitments, as applicable, and each of United and Continental hereby irrevocably agrees, and will cause its Subsidiaries to agree irrevocably, to abide by the terms of the Irrevocable United Employee Commitments with respect to the operations and employees of the Surviving Corporation.

8. Entire Agreement. This Agreement together with the Certificate of Merger constitutes the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings, representations and warranties and agreements, both written and oral, with respect to such subject matter.

 

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9. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

10. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Agreement.

11. Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument.

13. Further Action. Each of the Parties hereto hereby agrees that at any time, or from time to time, as and when requested by the Surviving Corporation, or by its successors and assigns, it will execute and deliver, or cause to be executed and delivered in its name by its last acting officers or by the corresponding officers of the Surviving Corporation, all such conveyances, assignments, transfers, deeds or other instruments, and will take or cause to be taken such further or other action, as the Surviving Corporation, its successors or assigns, may deem necessary or desirable in order to evidence the transfer, vesting or devolution to the Surviving Corporation of any property, right, privilege or franchise pursuant to applicable law, or to vest or perfect in or confirm to the Surviving Corporation, its successors and assigns, title to and possession of all the property, rights, privileges, powers, franchises and interests as a result of the merger referred to herein pursuant to applicable law, and otherwise to carry out the intent and purpose hereof.

[Signatures appear on the following page.]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

CONTINENTAL AIRLINES, INC.
By:   /s/ John D. Rainey
Name:   John D. Rainey
Title:   Executive Vice President and Chief Financial Officer
UNITED AIR LINES, INC.
By:   /s/ Jeffery A. Smisek
Name:   Jeffery A. Smisek
Title:   Chairman, President and Chief Executive Officer

 

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Annex A

Commitments

 

1. Subsections 1-D-1, 1-D-3, and 1-D-4, as construed by Paragraph 3 of MOU 10 (the “Parent Agreement”), and Subsections 1-E-1, and 1-E-2 of the Agreement between United Air Lines, Inc. and the Air Line Pilots in the service of United Air Lines, Inc. as represented by the Air Line Pilots Association, International, dated November 15, 2012, effective November 15, 2012—January 2017, as amended from time to time (the “Pilot CBA”)

 

2. Paragraphs 1.A and 1.B. of Letter of Agreement and Understanding: Scope Agreement to Agreement between United Air Lines, Inc. and the Flight Attendants in the service of United Air Lines, Inc. as represented by the Association of Flight Attendants-CWA, dated February 28, 2012, effective February 28, 2012—February 8, 2016, as amended from time to time, as construed by Letter of Agreement regarding Expedited Mediation Protocol and Related Agreements between United Airlines, Inc. and the Flight Attendants in the service of United Airlines, Inc. as represented by the Association of Flight Attendants—CWA, AFL-CIO, dated September 2, 2011, as amended from time to time

 

3. Section 1.D (except Section 1.D.2) of the Agreement between United Airlines, Inc. and the Airline Technicians and Related Employees in the service of United Airlines, Inc. as represented by the International Brotherhood of Teamsters, dated January 1, 2010, effective January 1, 2010—June 30, 2013, as amended from time to time (the “Technicians and Related CBA”)

 

4. Section 1.D of the Agreement between United Airlines, Inc. and Aircraft Dispatchers in the service of United Airlines, Inc. as represented by the Professional Airline Flight Control Association, dated May 1, 2003, effective May 1, 2003—May 1, 2009, as amended from time to time (the “Dispatchers CBA”)

 

5. Article III, Paragraphs B and D of the Agreement between United Air Lines, Inc. and the International Association of Machinists and Aerospace Workers, governing Ramp and Stores Employees, dated January 24, 2006, effective July 1, 2005—December 31, 2009, as amended from time to time (the “Ramp and Stores CBA”)

 

6. Article III, Paragraphs B and D of the Agreement between United Air Lines, Inc. and the International Association of Machinists and Aerospace Workers, governing Public Contact Employees, dated January 24, 2006, effective July 1, 2005—December 31, 2009, as amended from time to time (the “Public Contact CBA”)

 

7. Article III, Paragraphs B and D of the Agreement between United Air Lines, Inc. and the International Association of Machinists and Aerospace Workers, governing Maintenance Instructors, dated January 24, 2006, effective July 1, 2005—December 31, 2009, as amended from time to time (the “Maintenance Instructors CBA”)

 

Annex A-1


8. Article III, Paragraphs B and D of the Agreement between United Air Lines, Inc. and the International Association of Machinists and Aerospace Workers, governing Fleet Technical Instructors and Related Employees, dated January 24, 2006, effective July 1, 2005—December 31, 2009, as amended from time to time (the “Fleet Technical CBA”)

 

9. Article III, Paragraphs B and D of the Agreement between United Air Lines, Inc. and the International Association of Machinists and Aerospace Workers, governing Security Officers, dated January 24, 2006, effective July 1, 2005—December 31, 2009 (the “Security Officer CBA”)

 

10. Article III, Paragraphs B and D of the Agreement between United Air Lines, Inc. and the International Association of Machinists and Aerospace Workers, governing Food Services Employees, dated January 24, 2006, effective July 1, 2005—December 31, 2009 (the “Food Services CBA”)

 

11. Article III, Paragraph A of the Agreement between Mileage Plus, Inc. and the International Association of Machinists and Aerospace Workers, governing Mileage Plus, Inc. Public Contact Employees, dated May 14, 2003, effective May 1, 2003—May 1, 2009, as amended from time to time (the “MPI PCE CBA”)

 

Annex A-2


Irrevocable Commitments

 

1. Subsection 1-D-2, as construed by Paragraph 3 of the Parent Agreement, of the Pilot CBA

 

2. Subsection 1.D.2 of the Technicians and Related CBA

 

3. Section 1.E of the Dispatchers CBA

 

4. Article III, Paragraph C of the Ramp and Stores CBA

 

5. Article III, Paragraph C of the Public Contact CBA

 

6. Article III, Paragraph C of the Maintenance Instructors CBA

 

7. Article III, Paragraph C of the Fleet Technical CBA

 

8. Article III, Paragraph C of the Security Officer CBA

 

9. Article III, Paragraph C of the Food Services CBA

 

10. Article III, Paragraph B of the MPI PCE CBA

 

Annex A-3


EXHIBIT A

AMENDED AND RESTATED BY-LAWS OF UNITED AIRLINES, INC.

ARTICLE I

STOCKHOLDERS’ MEETINGS

SECTION 1.01. Annual Meetings. The annual meeting of stockholders shall be held at an hour and date determined by the Board of Directors.

SECTION 1.02. Special Meetings. A special meeting of the stockholders may be called to be held at any time by the Chairman or by the President at the request of any member of the Board of Directors, or as otherwise authorized by the Certificate of Incorporation or by law.

SECTION 1.03. Place of Meetings. All meetings of the stockholders of the Corporation shall be held at such place, within or without the State of Delaware, as shall from time to time be designated by the Board of Directors or stated in the notice of the meeting or waivers thereof.

SECTION 1.04. Notice of Meetings. Except as otherwise required by statute, written notice of each meeting of stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting, not less than ten nor more than sixty days before the date of the meeting, either personally or by mail in a postage-prepaid envelope addressed to such stockholder at such stockholder’s address as it appears on the stock ledger of the Corporation. Every notice of a meeting of stockholders shall state the place, date and hour of the meeting. Notice of special meetings shall state the purpose(s) for which the meeting is called. Any stockholder may, prior to, at the meeting or subsequent thereto, waive notice of any meeting, in writing signed by such stockholder or such stockholder’s duly appointed attorney-in-fact.

SECTION 1.05. Quorum and Voting. Except as otherwise required by law or by the Certificate of Incorporation, the presence at meetings, in person or by duly authorized proxy, of the holders of a majority of the outstanding shares of stock entitled to vote thereat shall constitute a quorum for the transaction of business and the vote, in person or by proxy, of the holders of a majority of the shares constituting such quorum shall be binding upon all stockholders of the Corporation. In the absence of a quorum, the meeting may be adjourned for not more than 30 days, by a majority of the voting shares present; no notice of an adjourned meeting need be given.

SECTION 1.06. Voting by Corporations. Shares standing in the name of a corporation may be voted or represented on behalf of such corporation by the Chairman, Chief Executive Officer, President, any Vice President, the Secretary or any Assistant Secretary of such corporation or by any person authorized to do so by a proxy or power of attorney executed by any such officer or by authority of the Board of Directors of such corporation.

SECTION 1.07. Consents in Lieu of Voting. Any action of stockholders of the Corporation required or permitted to be taken at a meeting of such stockholders may be taken without a meeting, without prior notice, and without a vote if a written consent setting forth the action so taken shall be signed by all the stockholders having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon are present and voted.


ARTICLE II

BOARD OF DIRECTORS

SECTION 2.01. Number and Term of Office. The number of directors shall be fixed each year by the stockholders, but may not be less than one. Each director shall be elected by a plurality vote of the stockholders at their annual meeting, or, where applicable, in accordance with Section 2.02 of this Article II. Each director shall hold office until the next annual meeting and thereafter until his or her successor is duly elected or appointed and qualified, subject, however, to removal by the stockholders.

SECTION 2.02. Vacancies. In case of any vacancies in the Board of Directors not caused by removal, the additional director(s) may be elected either (a) by a majority of the directors then in office, although less than a quorum, or (b) by the stockholders, at either an annual or special meeting.

SECTION 2.03. Quorum. Except as otherwise required by law or by the Certificate of Incorporation or as otherwise provided herein, one-third (but not less than two in the event the Board consists of two or more directors) of the total number of directors or committee members actually holding office at the time of the meeting of the Board of Directors or committee thereof, as applicable, shall constitute a quorum for the transaction of business by the Board of Directors or such committee, as the case may be, at such meeting and the act of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors or such committee thereof, as applicable.

SECTION 2.04. Meetings. Regular meetings of the Board of Directors or any committee thereof may be held without notice at such time(s) and place(s) as the Board of Directors or such committee, as the case may be, may from time to time determine. Special meetings of the Board of Directors or any committee thereof may be held wherever called by any director or committee member, as the case may be. Notice of any special meeting shall be communicated to each director or committee member, not later than the day before such meeting. Notice of a meeting need not be given to a director if waived by him or her in writing or if he or she shall be present at the meeting.

SECTION 2.05. Action by Unanimous Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, by electronic transmission or transmissions, or as otherwise permitted by law, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of the Board of Directors or such committee.

SECTION 2.06. Telephone Conference or Similar Meeting. Members of the Board of Directors or of any committee elected or appointed by the Board of Directors may participate in a meeting of the Board of Directors or such committee, as the case may be, by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting.

 

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SECTION 2.07. Resignations and Removal of Directors. Any director of the Corporation may resign at any time by giving written notice thereof to the President or to the Secretary. The resignation of any director shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any director or the entire Board of Directors may be removed, either for or without cause, at any time, by the affirmative vote of the holders of record of a majority of the outstanding shares entitled to vote at an election of directors, except as may be provided by statute or the Certificate of Incorporation; and the vacancy in the Board of Directors caused thereby may be filled by the stockholders at the same time or any time thereafter.

ARTICLE III

COMMITTEES

SECTION 3.01. Appointment. The Board of Directors may, from time to time, by affirmative vote of a majority of the whole Board of Directors, appoint one or more committees, and each such committee shall consist of one or more directors of the Corporation. Except as otherwise provided by law or the Certificate of Incorporation, the Board of Directors shall delegate to any such committee such powers as the Board of Directors may deem appropriate; provided, however, that no committee shall be authorized to (a) elect any officer of the Corporation, (b) designate the Chief Executive Officer, (c) fill any vacancy in the Board of Directors or any newly created directorship, (d) amend these By-laws, (e) take any action which, under these By-laws, requires the vote of a specified proportion of the Board of Directors or (f) take any other action prohibited in the Certificate of Incorporation.

SECTION 3.02. Powers. Any action taken by a committee in accordance with its purpose and within the powers delegated to it by the Board of Directors shall have the same effect as if such action were taken by the Board of Directors.

SECTION 3.03. Records. Records shall be kept of the acts and proceedings of any committee and same shall be reported from time to time to the Board of Directors.

ARTICLE IV

OFFICERS, EMPLOYEES AND AGENTS

SECTION 4.01. Officers. The officers of the Corporation shall be elected by the Board of Directors and may be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Secretary, a Treasurer, and one or more Assistant Secretaries or Assistant Treasurers. The Board of Directors may also appoint such other officers and agents as from time to time may appear to be necessary or advisable in the conduct of the affairs of the Corporation. Any number of offices may be held by the same person.

 

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SECTION 4.02. Term of Office; Removal. So far as practicable, each elected officer shall be elected at the organization meeting of the Board in each year, and shall hold office until the organization meeting of the Board in the next subsequent year and until his or her successor is chosen or until his or her earlier death, resignation or removal in the manner hereinafter provided. Any officer may be removed at any time, with or without cause, by the Board of Directors.

SECTION 4.03. Chief Executive Officer. The Board of Directors may designate either the Chairman of the Board of Directors or the President as the Chief Executive Officer of the Corporation. As Chief Executive Officer, such officer shall have general and active control of the Corporation’s business and affairs.

SECTION 4.04. Chairman of the Board. The Board of Directors may elect a Chairman of the Board of Directors, who may, but need not, be designated Chief Executive Officer of the Corporation. The Chairman of the Board of Directors shall preside at all meetings of stockholders and of the Board of Directors at which he or she may be present, and shall have such other powers and duties as he or she may be called upon by the Board of Directors to perform.

SECTION 4.05. President. The President, if not designated as Chief Executive Officer of the Corporation, shall share with the Chairman of the Board of Directors in the general management of the business and affairs of the Corporation and direction of all other officers of the Corporation. In the event of a vacancy in the office of the Chairman of the Board of Directors, the President shall act in his or her place with authority to exercise all of such officer’s powers and perform such officer’s duties.

SECTION 4.06. Vice Presidents. The several Vice Presidents shall perform all such duties and services as shall be assigned to or required of them, from time to time, by the Board of Directors, the Chairman of the Board of Directors or the President, respectively. In the event of the absence or disability of both the Chairman of the Board and the President, either such officer may designate one of the several Vice Presidents to act in the place of such officers with authority to exercise all of their powers and perform their respective duties, provided that the Board of Directors may change such designation, or may make such designation in the first instance at a regular or special meeting called for that purpose.

SECTION 4.07. Secretary. The Secretary shall attend to the giving of notice of all meetings of stockholders and special meetings of the Board of Directors and shall keep and attest true records of all proceedings thereat. The Secretary shall have charge of the corporate seal and have authority to attest any and all instruments or writings to which the same may be affixed. The Board of Directors may give general authority to any other officer to affix the seal and to attest any and all instruments or writings to which the same may be affixed. The Secretary shall keep and account for all books, documents, papers and records of the Corporation, except those which are hereinafter directed to be in charge of the Treasurer. The Secretary shall have authority to sign stock certificates, and shall generally perform all the duties usually appertaining to the office of Secretary of a corporation. In the absence of the Secretary, an Assistant Secretary or Secretary pro tempore shall perform the Secretary’s duties.

 

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SECTION 4.08. Treasurer. The Treasurer shall be responsible for the collection, receipt, care, custody and disbursement of the funds of the Corporation. The Treasurer shall be responsible for the maintenance of detailed records thereof as may be required. The Treasurer shall have the care and custody of all securities owned by the Corporation. The Treasurer shall have such other duties and powers as are commonly incidental to the office of Treasurer or as may be prescribed by the Board of Directors, the Chairman, or the President. In the absence of the Treasurer, and Assistant Treasurer shall perform the Treasurer’s duties.

SECTION 4.09. Additional Powers and Duties. In addition to the foregoing especially enumerated duties and powers, the several officers of the Corporation shall perform such other duties and exercise such further powers as may be provided in these By-laws or as the Board of Directors may, from time to time, determine, or as may be assigned to them by any competent superior officer.

ARTICLE V

STOCK AND TRANSFERS OF STOCK

SECTION 5.01. Certificated and Uncertificated Shares. Shares of the Corporation’s stock may be certificated or uncertificated, as provided under the laws of the State of Delaware. All certificates of stock of the Corporation shall be numbered and shall be entered on the books of the Corporation as they are issued. The certificates shall be signed by, or signed in the name of the Corporation by, the Chairman, or by the President or a Vice President, and either the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by the stockholder in the Corporation.

SECTION 5.02. Transfer Agents and Registrars. The Board of Directors may, in its discretion, appoint responsible banks or trust companies from time to time, to act as Transfer Agents and Registrars of the stock of the Corporation.

SECTION 5.03. Transfers of Stock. Shares of stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by written power of attorney to sell, assign and transfer the same, signed by the record holder thereof; but no transfer shall affect the right of the Corporation to pay any dividend upon the stock to the holder of record thereof, or to treat the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the Corporation.

SECTION 5.04. Lost Certificates. In case any certificate of stock shall be lost, stolen or destroyed, the Board of Directors, in its discretion, may authorize the issue of a substitute certificate in place of the certificates so lost, stolen or destroyed, and may cause such substitute certificate to be countersigned by the appropriate Transfer Agent (if any) and registered by the appropriate Registrar (if any); provided that, in each such case, the applicant for a substitute certificate shall furnish to the Corporation and to such of its Transfer Agents and Registrars as may require the same, evidence to their satisfaction, in their discretion, of the loss, theft or destruction of such certificate and of the ownership thereof, and also such security or indemnity as may be required.

 

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ARTICLE VI

MISCELLANEOUS

SECTION 6.01. Fiscal Year. The Fiscal Year of the Corporation shall be the calendar year.

SECTION 6.02. Voting of Securities of Other Corporations. Unless otherwise ordered by the Board of Directors, the Chairman, the Chief Executive Officer or the President shall have authority to vote, on behalf of the Corporation, the securities of any other corporation which are owned or held by the Corporation, and may attend any meeting of stockholders or execute and deliver proxies for such purposes. The Board of Directors from time to time may confer like powers upon any other person or persons.

ARTICLE VII

AMENDMENTS

The holders of a majority of the outstanding shares of the Corporation may adopt, alter or repeal the By-laws of this Corporation and, subject to the right of the stockholders, the Board of Directors, by majority vote, may adopt, alter or repeal the By-laws of the Corporation.

 

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EXHIBIT B

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

ARTICLE I

The name of the corporation (hereinafter called the “Corporation”) is UNITED AIRLINES, INC.

ARTICLE II

The address of the Corporation’s registered office in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County 19801. The name of the Corporation’s registered agent at such address is The Corporation Trust Company.

ARTICLE III

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

ARTICLE IV

The total number of shares of all classes of stock that the Corporation shall have authority to issue is 1,000 shares of Common Stock having the par value of $0.01 per share.

ARTICLE V

The number of directors of the Corporation shall be fixed from time to time by the Board of Directors of the Corporation.

ARTICLE VI

In furtherance and not in limitation of the powers conferred upon it by law, the Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-laws of the Corporation.

ARTICLE VII

Unless and except to the extent that the DGCL or By-laws of the Corporation so require, the election of directors of the Corporation need not be by written ballot.


ARTICLE VIII

(a) A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.

(b) Each person who was or is made a party or is threatened to be made a party or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director, officer or employee shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (c) of this Article VIII, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. Notwithstanding anything to the contrary herein, the Corporation shall not be obligated to indemnify a director or officer for costs and expenses relating to proceedings (or any part thereof) instituted against the Corporation by such director or officer (other than proceedings pursuant to which such director or officer is seeking to enforce such director’s or officer’s indemnification rights hereunder). The right to indemnification conferred in this Article VIII with respect to directors and officers shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the DGCL requires, the payment of such expense incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article VIII or otherwise. The Corporation may provide indemnification to employees (other than officers) and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers to the extent (i) permitted by the laws of the State of Delaware as from time to time in effect, and (ii) authorized in the sole discretion of any of the Chief Executive Officer, the President, the Chief Financial Officer or the General Counsel of the Corporation; provided, however, that any such indemnification shall not constitute a contract right for any such employee or agent.

 

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(c) If a claim under paragraph (b) or this Article VIII is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the DGCL for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conducts set forth in the DGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

(d) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this amended and restated Certificate, by-law, agreement, vote of stockholders or disinterested directors or otherwise.

(e) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.

EX-3.1

Exhibit 3.1

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

ARTICLE I

The name of the corporation (hereinafter called the “Corporation”) is UNITED AIRLINES, INC.

 

ARTICLE II

The address of the Corporation’s registered office in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County 19801. The name of the Corporation’s registered agent at such address is The Corporation Trust Company.

 

ARTICLE III

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

 

ARTICLE IV

The total number of shares of all classes of stock that the Corporation shall have authority to issue is 1,000 shares of Common Stock having the par value of $0.01 per share.

 

ARTICLE V

The number of directors of the Corporation shall be fixed from time to time by the Board of Directors of the Corporation.

 

ARTICLE VI

In furtherance and not in limitation of the powers conferred upon it by law, the Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-laws of the Corporation.

 

ARTICLE VII

Unless and except to the extent that the DGCL or By-laws of the Corporation so require, the election of directors of the Corporation need not be by written ballot.


ARTICLE VIII

(a) A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.

(b) Each person who was or is made a party or is threatened to be made a party or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director, officer or employee shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (c) of this Article VIII, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. Notwithstanding anything to the contrary herein, the Corporation shall not be obligated to indemnify a director or officer for costs and expenses relating to proceedings (or any part thereof) instituted against the Corporation by such director or officer (other than proceedings pursuant to which such director or officer is seeking to enforce such director’s or officer’s indemnification rights hereunder). The right to indemnification conferred in this Article VIII with respect to directors and officers shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the DGCL requires, the payment of such expense incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article VIII or otherwise. The Corporation may provide indemnification to employees (other than officers) and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers to the extent (i) permitted by the laws of the State of Delaware as from time to time in effect, and (ii) authorized in the sole discretion of any of the Chief Executive Officer, the President, the Chief Financial Officer or the General Counsel of the Corporation; provided, however, that any such indemnification shall not constitute a contract right for any such employee or agent.

 

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(c) If a claim under paragraph (b) or this Article VIII is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the DGCL for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conducts set forth in the DGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

(d) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this amended and restated Certificate, by-law, agreement, vote of stockholders or disinterested directors or otherwise.

(e) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.

EX-3.2

Exhibit 3.2

AMENDED AND RESTATED BY-LAWS OF UNITED AIRLINES, INC.

ARTICLE I

STOCKHOLDERS’ MEETINGS

SECTION 1.01. Annual Meetings. The annual meeting of stockholders shall be held at an hour and date determined by the Board of Directors.

SECTION 1.02. Special Meetings. A special meeting of the stockholders may be called to be held at any time by the Chairman or by the President at the request of any member of the Board of Directors, or as otherwise authorized by the Certificate of Incorporation or by law.

SECTION 1.03. Place of Meetings. All meetings of the stockholders of the Corporation shall be held at such place, within or without the State of Delaware, as shall from time to time be designated by the Board of Directors or stated in the notice of the meeting or waivers thereof.

SECTION 1.04. Notice of Meetings. Except as otherwise required by statute, written notice of each meeting of stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting, not less than ten nor more than sixty days before the date of the meeting, either personally or by mail in a postage-prepaid envelope addressed to such stockholder at such stockholder’s address as it appears on the stock ledger of the Corporation. Every notice of a meeting of stockholders shall state the place, date and hour of the meeting. Notice of special meetings shall state the purpose(s) for which the meeting is called. Any stockholder may, prior to, at the meeting or subsequent thereto, waive notice of any meeting, in writing signed by such stockholder or such stockholder’s duly appointed attorney-in-fact.

SECTION 1.05. Quorum and Voting. Except as otherwise required by law or by the Certificate of Incorporation, the presence at meetings, in person or by duly authorized proxy, of the holders of a majority of the outstanding shares of stock entitled to vote thereat shall constitute a quorum for the transaction of business and the vote, in person or by proxy, of the holders of a majority of the shares constituting such quorum shall be binding upon all stockholders of the Corporation. In the absence of a quorum, the meeting may be adjourned for not more than 30 days, by a majority of the voting shares present; no notice of an adjourned meeting need be given.

SECTION 1.06. Voting by Corporations. Shares standing in the name of a corporation may be voted or represented on behalf of such corporation by the Chairman, Chief Executive Officer, President, any Vice President, the Secretary or any Assistant Secretary of such corporation or by any person authorized to do so by a proxy or power of attorney executed by any such officer or by authority of the Board of Directors of such corporation.


SECTION 1.07. Consents in Lieu of Voting. Any action of stockholders of the Corporation required or permitted to be taken at a meeting of such stockholders may be taken without a meeting, without prior notice, and without a vote if a written consent setting forth the action so taken shall be signed by all the stockholders having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon are present and voted.

ARTICLE II

BOARD OF DIRECTORS

SECTION 2.01. Number and Term of Office. The number of directors shall be fixed each year by the stockholders, but may not be less than one. Each director shall be elected by a plurality vote of the stockholders at their annual meeting, or, where applicable, in accordance with Section 2.02 of this Article II. Each director shall hold office until the next annual meeting and thereafter until his or her successor is duly elected or appointed and qualified, subject, however, to removal by the stockholders.

SECTION 2.02. Vacancies. In case of any vacancies in the Board of Directors not caused by removal, the additional director(s) may be elected either (a) by a majority of the directors then in office, although less than a quorum, or (b) by the stockholders, at either an annual or special meeting.

SECTION 2.03. Quorum. Except as otherwise required by law or by the Certificate of Incorporation or as otherwise provided herein, one-third (but not less than two in the event the Board consists of two or more directors) of the total number of directors or committee members actually holding office at the time of the meeting of the Board of Directors or committee thereof, as applicable, shall constitute a quorum for the transaction of business by the Board of Directors or such committee, as the case may be, at such meeting and the act of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors or such committee thereof, as applicable.

SECTION 2.04. Meetings. Regular meetings of the Board of Directors or any committee thereof may be held without notice at such time(s) and place(s) as the Board of Directors or such committee, as the case may be, may from time to time determine. Special meetings of the Board of Directors or any committee thereof may be held wherever called by any director or committee member, as the case may be. Notice of any special meeting shall be communicated to each director or committee member, not later than the day before such meeting. Notice of a meeting need not be given to a director if waived by him or her in writing or if he or she shall be present at the meeting.

SECTION 2.05. Action by Unanimous Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, by electronic transmission or transmissions, or as otherwise permitted by law, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of the Board of Directors or such committee.

 

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SECTION 2.06. Telephone Conference or Similar Meeting. Members of the Board of Directors or of any committee elected or appointed by the Board of Directors may participate in a meeting of the Board of Directors or such committee, as the case may be, by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting.

SECTION 2.07. Resignations and Removal of Directors. Any director of the Corporation may resign at any time by giving written notice thereof to the President or to the Secretary. The resignation of any director shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any director or the entire Board of Directors may be removed, either for or without cause, at any time, by the affirmative vote of the holders of record of a majority of the outstanding shares entitled to vote at an election of directors, except as may be provided by statute or the Certificate of Incorporation; and the vacancy in the Board of Directors caused thereby may be filled by the stockholders at the same time or any time thereafter.

ARTICLE III

COMMITTEES

SECTION 3.01. Appointment. The Board of Directors may, from time to time, by affirmative vote of a majority of the whole Board of Directors, appoint one or more committees, and each such committee shall consist of one or more directors of the Corporation. Except as otherwise provided by law or the Certificate of Incorporation, the Board of Directors shall delegate to any such committee such powers as the Board of Directors may deem appropriate; provided, however, that no committee shall be authorized to (a) elect any officer of the Corporation, (b) designate the Chief Executive Officer, (c) fill any vacancy in the Board of Directors or any newly created directorship, (d) amend these By-laws, (e) take any action which, under these By-laws, requires the vote of a specified proportion of the Board of Directors or (f) take any other action prohibited in the Certificate of Incorporation.

SECTION 3.02. Powers. Any action taken by a committee in accordance with its purpose and within the powers delegated to it by the Board of Directors shall have the same effect as if such action were taken by the Board of Directors.

SECTION 3.03. Records. Records shall be kept of the acts and proceedings of any committee and same shall be reported from time to time to the Board of Directors.

ARTICLE IV

OFFICERS, EMPLOYEES AND AGENTS

SECTION 4.01. Officers. The officers of the Corporation shall be elected by the Board of Directors and may be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Secretary, a Treasurer, and one or more Assistant Secretaries or Assistant Treasurers. The Board of Directors may also appoint such other officers and agents as from time to time may appear to be necessary or advisable in the conduct of the affairs of the Corporation. Any number of offices may be held by the same person.

 

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SECTION 4.02. Term of Office; Removal. So far as practicable, each elected officer shall be elected at the organization meeting of the Board in each year, and shall hold office until the organization meeting of the Board in the next subsequent year and until his or her successor is chosen or until his or her earlier death, resignation or removal in the manner hereinafter provided. Any officer may be removed at any time, with or without cause, by the Board of Directors.

SECTION 4.03. Chief Executive Officer. The Board of Directors may designate either the Chairman of the Board of Directors or the President as the Chief Executive Officer of the Corporation. As Chief Executive Officer, such officer shall have general and active control of the Corporation’s business and affairs.

SECTION 4.04. Chairman of the Board. The Board of Directors may elect a Chairman of the Board of Directors, who may, but need not, be designated Chief Executive Officer of the Corporation. The Chairman of the Board of Directors shall preside at all meetings of stockholders and of the Board of Directors at which he or she may be present, and shall have such other powers and duties as he or she may be called upon by the Board of Directors to perform.

SECTION 4.05. President. The President, if not designated as Chief Executive Officer of the Corporation, shall share with the Chairman of the Board of Directors in the general management of the business and affairs of the Corporation and direction of all other officers of the Corporation. In the event of a vacancy in the office of the Chairman of the Board of Directors, the President shall act in his or her place with authority to exercise all of such officer’s powers and perform such officer’s duties.

SECTION 4.06. Vice Presidents. The several Vice Presidents shall perform all such duties and services as shall be assigned to or required of them, from time to time, by the Board of Directors, the Chairman of the Board of Directors or the President, respectively. In the event of the absence or disability of both the Chairman of the Board and the President, either such officer may designate one of the several Vice Presidents to act in the place of such officers with authority to exercise all of their powers and perform their respective duties, provided that the Board of Directors may change such designation, or may make such designation in the first instance at a regular or special meeting called for that purpose.

SECTION 4.07. Secretary. The Secretary shall attend to the giving of notice of all meetings of stockholders and special meetings of the Board of Directors and shall keep and attest true records of all proceedings thereat. The Secretary shall have charge of the corporate seal and have authority to attest any and all instruments or writings to which the same may be affixed. The Board of Directors may give general authority to any other officer to affix the seal and to attest any and all instruments or writings to which the same may be affixed. The Secretary shall keep and account for all books, documents, papers and records of the Corporation, except those which are hereinafter directed to be in charge of the Treasurer. The Secretary shall have authority to sign stock certificates, and shall generally perform all the duties usually appertaining to the office of Secretary of a corporation. In the absence of the Secretary, an Assistant Secretary or Secretary pro tempore shall perform the Secretary’s duties.

 

4


SECTION 4.08. Treasurer. The Treasurer shall be responsible for the collection, receipt, care, custody and disbursement of the funds of the Corporation. The Treasurer shall be responsible for the maintenance of detailed records thereof as may be required. The Treasurer shall have the care and custody of all securities owned by the Corporation. The Treasurer shall have such other duties and powers as are commonly incidental to the office of Treasurer or as may be prescribed by the Board of Directors, the Chairman, or the President. In the absence of the Treasurer, and Assistant Treasurer shall perform the Treasurer’s duties.

SECTION 4.09. Additional Powers and Duties. In addition to the foregoing especially enumerated duties and powers, the several officers of the Corporation shall perform such other duties and exercise such further powers as may be provided in these By-laws or as the Board of Directors may, from time to time, determine, or as may be assigned to them by any competent superior officer.

ARTICLE V

STOCK AND TRANSFERS OF STOCK

SECTION 5.01. Certificated and Uncertificated Shares. Shares of the Corporation’s stock may be certificated or uncertificated, as provided under the laws of the State of Delaware. All certificates of stock of the Corporation shall be numbered and shall be entered on the books of the Corporation as they are issued. The certificates shall be signed by, or signed in the name of the Corporation by, the Chairman, or by the President or a Vice President, and either the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by the stockholder in the Corporation.

SECTION 5.02. Transfer Agents and Registrars. The Board of Directors may, in its discretion, appoint responsible banks or trust companies from time to time, to act as Transfer Agents and Registrars of the stock of the Corporation.

SECTION 5.03. Transfers of Stock. Shares of stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by written power of attorney to sell, assign and transfer the same, signed by the record holder thereof; but no transfer shall affect the right of the Corporation to pay any dividend upon the stock to the holder of record thereof, or to treat the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the Corporation.

SECTION 5.04. Lost Certificates. In case any certificate of stock shall be lost, stolen or destroyed, the Board of Directors, in its discretion, may authorize the issue of a substitute certificate in place of the certificates so lost, stolen or destroyed, and may cause such substitute certificate to be countersigned by the appropriate Transfer Agent (if any) and registered by the appropriate Registrar (if any); provided that, in each such case, the applicant for a substitute certificate shall furnish to the Corporation and to such of its Transfer Agents and Registrars as may require the same, evidence to their satisfaction, in their discretion, of the loss, theft or destruction of such certificate and of the ownership thereof, and also such security or indemnity as may be required.

 

5


ARTICLE VI

MISCELLANEOUS

SECTION 6.01. Fiscal Year. The Fiscal Year of the Corporation shall be the calendar year.

SECTION 6.02. Voting of Securities of Other Corporations. Unless otherwise ordered by the Board of Directors, the Chairman, the Chief Executive Officer or the President shall have authority to vote, on behalf of the Corporation, the securities of any other corporation which are owned or held by the Corporation, and may attend any meeting of stockholders or execute and deliver proxies for such purposes. The Board of Directors from time to time may confer like powers upon any other person or persons.

ARTICLE VII

AMENDMENTS

The holders of a majority of the outstanding shares of the Corporation may adopt, alter or repeal the By-laws of this Corporation and, subject to the right of the stockholders, the Board of Directors, by majority vote, may adopt, alter or repeal the By-laws of the Corporation.

 

6

EX-4.1

Exhibit 4.1

THIS FIRST SUPPLEMENTAL INDENTURE, dated as of April 1, 2013 (hereinafter called the “Supplemental Indenture”), is by and among UNITED CONTINENTAL HOLDINGS, INC. (formerly UAL Corporation), a Delaware corporation (hereinafter called the “Company”), as Issuer, UNITED AIRLINES, INC. (formerly Continental Airlines, Inc. (“Continental”)), a Delaware corporation and wholly owned subsidiary of the Company (hereinafter called the “Guarantor”), as Guarantor, and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. (formerly The Bank of New York Trust Company, N.A.), a national banking association duly organized and existing under the laws of the United States of America, as trustee (hereinafter called the “Trustee”). Capitalized terms used but not defined herein are used as they are defined in the Indenture (as defined below).

RECITALS

A. The Company, United Air Lines, Inc., a Delaware corporation (“United”), as guarantor, and the Trustee entered into an Amended and Restated Indenture, dated as of January 11, 2013 (the “Indenture”), relating to the issuance by the Company of 6% Notes due 2026 (the “Series A Notes”), 6% Notes due 2028 (the “Series B Notes”) and 8% Notes due 2024 (the “Series C Notes,” and together with the Series A Notes and Series B Notes, the “Notes”).

B. Continental and United entered into an Agreement and Plan of Merger, dated as of March 28, 2013, providing for the merger of United with and into Continental, with Continental, which changed its name to United Airlines, Inc. upon effectiveness of such merger, continuing as the surviving corporation (the “Merger”).

C. The Company and the Guarantor have duly authorized the execution and delivery of this Supplemental Indenture.

D. Section 10.04 of the Indenture provides that the Indenture does not prohibit the Merger, provided that the Guarantor shall unconditionally assume all obligations of United under its Guarantee of the Notes and the Indenture pursuant to a supplemental indenture.

E. Section 9.01 of the Indenture permits the Company, the Guarantor and the Trustee to enter into the Supplemental Indenture without the consent of the holders of the Notes.

F. The Company has furnished the Trustee with an Opinion of Counsel complying with the requirements of Sections 11.04 and 11.05 of the Indenture, stating that the execution of this Supplemental Indenture is authorized or permitted by the Indenture.

G. All things necessary to make this Supplemental Indenture a valid agreement of the Company, the Guarantor and the Trustee and a valid amendment of, and supplement to, the Indenture have been done. The entry into this Supplemental Indenture by the parties hereto is in all respects authorized by the provisions of the Indenture.

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, Guarantor and Trustee hereby agree as follows:


ARTICLE I

ASSUMPTION

Section 1.1 Assumption. The Guarantor hereby expressly assumes the due and punctual payment in full of the principal of and premium, if any, and interest on the Notes, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture to be performed by United.

Section 1.2 Successor Guarantor. In accordance with Section 10.04 of the Indenture, the Guarantor hereby succeeds to and is substituted for United under the Indenture, the Notes and the Guarantee.

ARTICLE II

MISCELLANEOUS

Section 2.1 Concerning the Trustee. The Trustee assumes no duties, responsibilities or liabilities by reason of this Supplemental Indenture other than as set forth in the Indenture. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Company and the Guarantor.

Section 2.2 Supplemental Indenture Controls. In the event of a conflict or inconsistency between the Indenture and this Supplemental Indenture, the provisions of this Supplemental Indenture shall control.

Section 2.3 Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

Section 2.4 Multiple Originals. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One originally signed copy is enough to prove this Supplemental Indenture. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one instrument.

Section 2.5 Ratification of Indenture. The Indenture, as amended and supplemented hereby, is in all respects hereby adopted, ratified and confirmed.

Section 2.6 Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof.

 

2


IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Supplemental Indenture on behalf of the respective parties hereto as of the date first above written.

 

UNITED CONTINENTAL HOLDINGS, INC.,
as Issuer
By   /s/ Gerald Laderman
Name:   Gerald Laderman
Title:   Senior Vice President Finance & Treasurer
UNITED AIRLINES, INC., as Guarantor
By   /s/ Gerald Laderman
Name:   Gerald Laderman
Title:   Senior Vice President Finance & Treasurer
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., not in its individual capacity but solely in its capacity as Trustee
By   /s/ Lawrence M. Kusch
Name:   Lawrence M. Kusch
Title:   Vice President

Signature Page

Supplemental Indenture for PBGC Notes

EX-4.2

Exhibit 4.2

THIS FIRST SUPPLEMENTAL INDENTURE, dated as of April 1, 2013 (hereinafter called the “Supplemental Indenture”), is by and among UNITED CONTINENTAL HOLDINGS, INC. (formerly UAL Corporation), a Delaware corporation (hereinafter called the “Company”), as Issuer, UNITED AIRLINES, INC. (formerly Continental Airlines, Inc. (“Continental”)), a Delaware corporation and wholly owned subsidiary of the Company (hereinafter called the “Guarantor”), as Guarantor, and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. (formerly The Bank of New York Trust Company, N.A.), a national banking association duly organized and existing under the laws of the United States of America, as trustee (hereinafter called the “Trustee”). Capitalized terms used but not defined herein are used as they are defined in the Original Indenture (as defined below).

RECITALS

A. The Company, United Air Lines, Inc., a Delaware corporation (“United”), as guarantor, and the Trustee entered into an Indenture, dated as of July 25, 2006 (the “Original Indenture”), relating to the issuance by the Company of 4.50% Senior Limited-Subordination Convertible Notes due 2021 (the “Notes”).

B. Continental and United entered into an Agreement and Plan of Merger, dated as of March 28, 2013, providing for the merger of United with and into Continental, with Continental, which changed its name to United Airlines, Inc. upon the effectiveness of such merger, continuing as the surviving corporation (the “Merger”).

C. The Company and the Guarantor have duly authorized the execution and delivery of this Supplemental Indenture.

D. Section 11.4 of the Original Indenture provides that the Original Indenture does not prohibit the Merger, provided that the Guarantor shall unconditionally assume all obligations of United under the Notes, the Original Indenture and the Note Guarantee pursuant to a supplemental indenture.

E. Section 8.1 of the Original Indenture permits the Company, the Guarantor and the Trustee to enter into the Supplemental Indenture without the consent of the holders of the Notes.

F. The Company has furnished the Trustee with an Opinion of Counsel complying with the requirements of Sections 1.2 and 1.3 of the Original Indenture, stating that the execution of this Supplemental Indenture is authorized or permitted by the Original Indenture.

G. All things necessary to make this Supplemental Indenture a valid agreement of the Company, the Guarantor and the Trustee and a valid amendment of, and supplement to, the Original Indenture have been done. The entry into this Supplemental Indenture by the parties hereto is in all respects authorized by the provisions of the Original Indenture.

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, Guarantor and Trustee hereby agree as follows:


ARTICLE I

ASSUMPTION

Section 1.1 Assumption. The Guarantor hereby expressly assumes the due and punctual payment in full of the principal of and premium, if any, and interest on the Notes, and the due and punctual performance and observance of all of the covenants and conditions of the Original Indenture to be performed by United.

Section 1.2 Successor Guarantor. In accordance with Section 11.4 of the Original Indenture, the Guarantor hereby succeeds to and is substituted for United with the same effect as if the Guarantor had been named therein as the guarantor of the Notes.

ARTICLE II

MISCELLANEOUS

Section 2.1 Concerning the Trustee. The Trustee assumes no duties, responsibilities or liabilities by reason of this Supplemental Indenture other than as set forth in the Original Indenture. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Company and the Guarantor.

Section 2.2 Supplemental Indenture Controls. In the event of a conflict or inconsistency between the Original Indenture and this Supplemental Indenture, the provisions of this Supplemental Indenture shall control.

Section 2.3 Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

Section 2.4 Multiple Originals. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One originally signed copy is enough to prove this Supplemental Indenture. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one instrument.

Section 2.5 Ratification of Original Indenture. The Original Indenture, as amended and supplemented hereby, is in all respects hereby adopted, ratified and confirmed.

Section 2.6 Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof.

 

2


IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Supplemental Indenture on behalf of the respective parties hereto as of the date first above written.

 

UNITED CONTINENTAL HOLDINGS, INC.,
as Issuer
By   /s/ Gerald Laderman
Name:   Gerald Laderman
Title:   Senior Vice President Finance & Treasurer
UNITED AIRLINES, INC., as Guarantor
By   /s/ Gerald Laderman
Name:   Gerald Laderman
Title:   Senior Vice President Finance & Treasurer
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., not in its individual capacity but solely in its capacity as Trustee
By   /s/ Lawrence M. Kusch
Name:   Lawrence M. Kusch
Title:   Vice President

Signature Page

Supplemental Indenture for 2021 Notes

EX-99.1

Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder of

United Air Lines, Inc.

We have audited the accompanying consolidated balance sheets of United Air Lines, Inc. (the “Company”) as of December 31, 2012 and December 31, 2011, and the related statements of consolidated operations, comprehensive income (loss), cash flows, and stockholder’s deficit for each of the three years in the period ended December 31, 2012. These financial statements 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial position of the Company at December 31, 2012 and December 31, 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for multiple deliverable revenue recognition as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements, effective January 1, 2011.

/s/ Ernst & Young LLP

Chicago, Illinois

February 25, 2013


UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS

(In millions)

 

     Year Ended December 31,  
     2012     2011     2010  

Operating revenue:

      

Passenger—Mainline

   $ 13,723     $ 14,153     $ 13,412  

Passenger—Regional

     3,869       3,935       3,658  
  

 

 

   

 

 

   

 

 

 

Total passenger revenue

     17,592       18,088       17,070  

Cargo

     665       718       714  

Special revenue item

     —         88       —    

Other operating revenue

     2,704       2,261       1,994  
  

 

 

   

 

 

   

 

 

 
     20,961       21,155       19,778  
  

 

 

   

 

 

   

 

 

 

Operating expense:

      

Aircraft fuel

     7,430       7,080       5,700  

Salaries and related costs

     4,234       4,172       4,212  

Regional capacity purchase

     1,507       1,574       1,610  

Landing fees and other rent

     1,030       1,028       1,077  

Aircraft maintenance materials and outside repairs

     1,163       1,160       980  

Depreciation and amortization

     930       921       903  

Distribution expenses

     684       748       756  

Aircraft rent

     313       323       326  

Special charges

     984       433       468  

Other operating expenses

     3,390       2,829       2,728  
  

 

 

   

 

 

   

 

 

 
     21,665       20,268       18,760  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (704     887       1,018  
  

 

 

   

 

 

   

 

 

 

Nonoperating income (expense):

      

Interest expense

     (496     (595     (695

Interest capitalized

     15       15       11  

Interest income

     8       10       11  

Miscellaneous, net

     (2     (33     42  
  

 

 

   

 

 

   

 

 

 
     (475     (603     (631
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (1,179     284       387  

Income tax expense (benefit)

     9       3       (12
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,188   $ 281     $ 399  
  

 

 

   

 

 

   

 

 

 

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


UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

 

     Year Ended December 31,  
     2012     2011     2010  

Net income (loss)

   $ (1,188   $ 281     $ 399  

Other comprehensive income (loss), net:

      

Fuel derivative financial instruments:

      

Reclassification into earnings

     76       (417     84  

Change in fair value

     (23     172       101  

Employee benefit plans:

      

Net change related to employee benefit plans

     (164     29       (148

Investments and other

     7       (3     19  
  

 

 

   

 

 

   

 

 

 
     (104     (219     56  
  

 

 

   

 

 

   

 

 

 
      
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net

   $ (1,292   $ 62     $ 455  
  

 

 

   

 

 

   

 

 

 

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


UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     At December 31,  
     2012     2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 2,766     $ 3,458  

Short-term investments

     326       275  
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     3,092       3,733  

Restricted cash

     65       40  

Receivables, less allowance for doubtful accounts (2012—$11; 2011—$5)

     1,194       763  

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012—$86; 2011—$73)

     402       340  

Deferred income taxes

     272       348  

Receivables from related parties

     2,767       228  

Prepaid expenses and other

     700       447  
  

 

 

   

 

 

 
     8,492       5,899  
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     9,476       9,135  

Other property and equipment

     2,262       2,260  
  

 

 

   

 

 

 
     11,738       11,395  

Less—Accumulated depreciation and amortization

     (3,877     (3,359
  

 

 

   

 

 

 
     7,861       8,036  
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     219       57  

Capital leases—

    

Flight equipment

     1,484       1,458  

Other property and equipment

     65       67  
  

 

 

   

 

 

 
     1,549       1,525  

Less—Accumulated amortization

     (683     (548
  

 

 

   

 

 

 
     866       977  
  

 

 

   

 

 

 
     8,946       9,070  
  

 

 

   

 

 

 

Other assets:

    

Intangibles, less accumulated amortization (2012—$588; 2011—$534)

     2,228       2,283  

Restricted cash

     272       393  

Receivables from related parties

     270        

Other, net

     594       600  
  

 

 

   

 

 

 
     3,364       3,276  
  

 

 

   

 

 

 
   $ 20,802     $ 18,245  
  

 

 

   

 

 

 

(continued on next page)


UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     At December 31,  
      2012     2011  

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Advance ticket sales

   $ 3,321     $ 1,652  

Frequent flyer deferred revenue

     2,364       1,484  

Accounts payable

     1,518       1,109  

Accrued salaries and benefits

     1,204       988  

Current maturities of long-term debt

     1,090       615  

Current maturities of capital leases

     119       122  

Payables to related parties

     75       104  

Other

     935       853  
  

 

 

   

 

 

 
     10,626       6,927  
  

 

 

   

 

 

 

Long-term debt

     4,285       5,130  

Long-term obligations under capital lease

     618       735  

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,756       2,018  

Postretirement benefit liability

     2,384       2,115  

Pension liability

     97       92  

Advanced purchase of miles

     1,537       1,442  

Deferred income taxes

     648       707  

Other

     1,035       983  
  

 

 

   

 

 

 
     8,457       7,357  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

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

     —         —    

Additional capital invested

     3,444       3,432  

Retained deficit

     (6,396     (5,208

Accumulated other comprehensive loss

     (232     (128
  

 

 

   

 

 

 
     (3,184     (1,904
  

 

 

   

 

 

 
   $ 20,802     $ 18,245  
  

 

 

   

 

 

 

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


UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

 

     Year Ended December 31,  
     2012     2011     2010  

Cash Flows from Operating Activities:

      

Net income (loss)

   $ (1,188   $ 281     $ 399  

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

      

Depreciation and amortization

     930       921       903  

Special charges, non-cash portion

     378       36       166  

Debt and lease discount amortization

     34       56       93  

Share-based compensation

     9       9       13  

Deferred income taxes

     17       —         (12

Other operating activities

     83       77       83  

Changes in operating assets and liabilities -

      

Decrease in frequent flyer deferred revenue and advanced purchase of miles

     (674     (235     (126

Increase in other current assets

     (506     (129     (2

Increase in other liabilities

     494       200       262  

Increase in accounts payable

     381       199       101  

Increase in advance ticket sales

     1,669       116       44  

Unrealized loss on fuel derivatives and change in related pending settlements

     70       27       4  

Increase in receivables

     (458     (30     (101

(Increase) decrease in fuel hedge collateral

     —         (59     10  

Increase in intercompany receivables

     (349     (93     (160

Increase (decrease) in intercompany payables

     (28     42       120  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     862       1,418       1,797  
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Capital expenditures and aircraft purchase deposits paid

     (791     (470     (360

(Increase) decrease in short-term and other investments, net

     (41     (269     18  

Proceeds from sale of property and equipment

     56       15       40  

(Increase) decrease in restricted cash, net

     96       (210     68  

Other, net

     (1     2       7  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (681     (932     (227
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Payments of long-term debt

     (738     (1,456     (1,667

Principal payments under capital leases

     (122     (246     (482

Decrease in aircraft lease deposits

     —         15       236  

Increase in deferred financing costs

     (11     (8     (33

Proceeds from exercise of stock options

     3       2       9  

Proceeds from issuance of long-term debt

     —         —         1,995  

Other, net

     (5     —         1  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (873     (1,693     59  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (692     (1,207     1,629  

Cash and cash equivalents at beginning of year

     3,458       4,665       3,036  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 2,766     $ 3,458     $ 4,665  
  

 

 

   

 

 

   

 

 

 

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


UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED STOCKHOLDER’S DEFICIT

(In millions)

 

     Common
Stock
     Additional
Capital
Invested
     Retained
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance at December 31, 2009

     —        $ 3,401      $ (5,888   $ 35     $ (2,452
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     —          —          399       —         399  

Other comprehensive income

     —          —          —         56       56  

Share-based compensation

     —          12        —         —         12  

Parent Company contribution related to stock plans

     —          8        —         —         8  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     —          3,421        (5,489     91       (1,977
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     —          —          281       —         281  

Other comprehensive loss

     —          —          —         (219     (219

Share-based compensation

     —          9        —         —         9  

Parent Company contribution related to stock plans

     —          2        —         —         2  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     —          3,432        (5,208     (128     (1,904
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net loss

     —          —          (1,188     —         (1,188

Other comprehensive loss

     —          —          —         (104     (104

Share-based compensation

     —          9        —         —         9  

Parent Company contribution related to stock plans

     —          3        —         —         3  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     —        $ 3,444      $ (6,396   $ (232   $ (3,184
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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


UNITED CONTINENTAL HOLDINGS, INC.,

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

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

We sometimes use the words “we,” “our,” “us,” and the “Company” in this Form 10-K for disclosures that relate to all of UAL, United and Continental. As UAL consolidated United and Continental beginning October 1, 2010 for financial statement purposes, disclosures that relate to United or Continental activities also apply to UAL, unless otherwise noted. When appropriate, UAL, United and Continental are named specifically for their related activities and disclosures.

Continental

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

NOTE 1—MERGER

On May 2, 2010, UAL Corporation, Continental and JT Merger Sub Inc., a wholly-owned subsidiary of UAL Corporation, entered into an Agreement and Plan of Merger (the “Merger agreement”). On October 1, 2010, JT Merger Sub Inc. merged with and into Continental, with Continental surviving as a wholly-owned subsidiary of UAL Corporation (the “Merger”). Upon closing of the Merger, UAL Corporation became the parent company of both United and Continental and UAL Corporation’s name was changed to United Continental Holdings, Inc.

Pursuant to the terms of the Merger agreement, each outstanding share of Continental common stock was converted into and became exchangeable for 1.05 fully paid and nonassessable shares of UAL common stock with any fractional shares paid in cash. UAL issued approximately 148 million shares of UAL common stock to former holders of Continental Class B common stock (“Continental common stock”). Based on the closing price of $23.66 per share of UAL common stock on September 30, 2010, the last trading day before the closing of the Merger, the aggregate value of the consideration paid in connection with the Merger was approximately $3.7 billion.

The Merger was accounted for as a business combination using the acquisition method of accounting with Continental considered the acquiree. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The acquisition values have been pushed down to Continental for its separate-entity financial statements as of October 1, 2010. The excess of the purchase price over the net fair value of assets and liabilities acquired was recorded as goodwill. Goodwill will not be amortized, but will be tested for impairment at least annually.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

The following policies are applicable to UAL, United and Continental, except as noted below under Continental Predecessor Accounting Policies, for accounting policies followed by Continental Predecessor that are materially different than the Company’s accounting policies.

 

(a) Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.


(b) Passenger Revenue Recognition—The value of unused passenger tickets is included in current liabilities as advance ticket sales. The Company records passenger ticket sales and tickets sold by other airlines for use on United or Continental as passenger revenue when the transportation is provided or upon estimated breakage. Tickets sold by other airlines are recorded at the estimated values to be billed to the other airlines. Non-refundable tickets generally expire on the date of the intended flight, unless the date is extended by notification from the customer on or before the intended flight date.

Fees charged in association with changes or extensions to non-refundable tickets are recorded as other revenue at the time the fee is incurred. The fare on the changed ticket, including any additional collection, is deferred and recognized in accordance with our transportation revenue recognition policy at the time the transportation is provided. Change fees related to non-refundable tickets are considered a separate transaction from the air transportation because they represent a charge for the Company’s additional service to modify a previous sale. Therefore, the pricing of the change fee and the initial customer order are separately determined and represent distinct earnings processes. Refundable tickets expire after one year.

The Company records an estimate of breakage revenue on the flight date for tickets that will expire unused. These estimates are based on the evaluation of actual historical results. During the year ended December 31, 2012, UAL revised its estimate of breakage resulting in a reduction of passenger revenue of approximately $100 million (the majority of which relates to Continental). The Company recognizes cargo and other revenue as service is provided.

Under our capacity purchase agreements with regional carriers, we purchase all of the capacity related to aircraft covered by the contracts and are responsible for selling all of the related seat inventory. We record the passenger revenue and related expenses as separate operating revenue and expense in the consolidated statement of operations.

In the separate financial statements of United and Continental, for tickets sold by one carrier but flown by the other, the carrier that operates the aircraft recognizes the associated revenue. Starting in March 2012, all tickets were sold through United. See Note 20 for additional information regarding related party transactions.

Accounts receivable primarily consist of amounts due from credit card companies and customers of our aircraft maintenance and cargo transportation services. We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical write-offs and other specific analyses. Bad debt expense and write-offs were not material for the years ended December 31, 2012, 2011 and 2010.

 

(c) Frequent Flyer Accounting—The Company has a frequent flyer program that is designed to increase customer loyalty. Program participants earn mileage credits (“miles”) by flying on United, Continental and certain other participating airlines. Program participants can also earn miles through purchases from other non-airline partners that participate in the Company’s loyalty program. We sell miles to these partners, which include credit card issuers, retail merchants, hotels, car rental companies, and our participating airline partners. Miles can be redeemed for free, discounted or upgraded air travel and non-travel awards. The Company records its obligation for future award redemptions using a deferred revenue model.

In the first quarter of 2012, the Company moved to a single loyalty program, MileagePlus. Continental’s loyalty program formally ended in the first quarter of 2012, at which point United automatically enrolled OnePass members in MileagePlus and deposited into those MileagePlus accounts award miles equal to OnePass members’ award miles balance.

Miles Earned in Conjunction with Flights

In the case of the sale of air services, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale representing the value of the related miles.


The Company adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”) on January 1, 2011. In accordance with ASU 2009-13, the Company determines the estimated selling price of the air transportation and miles as if each element is sold on a separate basis. The total consideration from each ticket sale is then allocated to each of these elements individually on a pro rata basis. The Company revised the estimated selling price of miles as a prospective change in estimate, effective January 1, 2012, and it is based on the price we sell miles to Star Alliance partners in our reciprocal frequent flyer agreements as the best estimate of selling price for these miles. Any changes to the composition of Star Alliance airline partners may result in the existing estimated selling price of air transportation miles no longer being representative of the best estimate of selling price and could result in a change to the amount and method we use to determine the estimated selling price. On February 14, 2013, US Airways announced an agreement to merge with AMR Corporation and its intent to exit Star Alliance as a result of such merger. We are currently unable to estimate the timing or amount of any changes to estimated selling price as a result of this merger.

Prior to 2011, the Company accounted for the sale of air transportation by deferring the fair value of miles and recognizing the residual amount of ticket proceeds as passenger revenue at the time the air transportation was provided. The fair value of miles was based on an equivalent ticket value that was a weighted average ticket value of each outstanding mile, based upon projected redemption patterns for available award choices when such miles were consumed.

Co-branded Credit Card Partner Mileage Sales

United also has a significant contract to sell frequent flyer miles to its co-branded credit card partner, Chase Bank USA, N.A. (“Chase”). On June 9, 2011, this contract was modified and the Company entered into The Consolidated Amended and Restated Co-Branded Card Marketing Services Agreement dated June 9, 2011 (the “Co-Brand Agreement”) with Chase.

The Company has identified five revenue elements in the Co-Brand Agreement: the air transportation element represented by the value of the mile (generally resulting from its redemption for future air transportation); use of the United brand and access to frequent flyer member lists; advertising; baggage services; and airport lounge usage (together, excluding “the air transportation element”, the “marketing-related deliverables”).

The fair value of the elements is determined using management’s estimated selling price of each element. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Co-Brand Agreement in order to determine the allocation of proceeds to each of the multiple elements to be delivered.

The estimated selling price of miles is based on the contractual rate at which we sell miles to our Star Alliance partners participating in reciprocal frequent flyer programs as the best estimate of selling price for these miles, which is generally consistent with the methodology described in Miles Earned in Conjunction with Flights, above. Management prospectively applied this change in estimate effective January 1, 2012. The financial impact of this change in estimate was substantially offset by the Company’s change in estimate of its breakage for a portion of its miles, which were previously not subject to an expiration policy. The revised estimates to breakage increased the estimate of miles in the population that are expected to ultimately expire.

The transition provisions of ASU 2009-13 required the Company’s existing deferred revenue balance be adjusted retroactively to reflect the value of any undelivered element remaining at the date of contract modification as if we had been applying ASU 2009-13 since the initiation of the Co-Brand Agreement.


We applied this transition provision by revaluing the undelivered air transportation element using its new estimated selling price as determined in connection with the contract modification. This estimated selling price was lower than the rate at which the undelivered element had been deferred under the previous co-branded credit card contracts, and as a result, we recorded a one-time non-cash adjustment to decrease frequent flyer deferred revenue and increase special revenues by $107 million in June 2011, which is included in the table below under Accounting Policy Changes.

The Company records passenger revenue related to the air transportation element when the transportation is delivered. The other elements are generally recognized as other operating revenue when earned.

Prior to 2011, the Company had two primary revenue elements, marketing and air transportation, using an equivalent ticket value to determine the fair value of miles, and applying a residual accounting methodology to allocate the arrangement consideration.

Expiration of Miles

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

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

Accounting Policy Changes

The application of ASU 2009-13 in 2011 to passenger ticket transactions and the Chase co-branded credit card relationship (including the special revenue item) resulted in the following estimated increases to revenue in the year of adoption (in millions, except per share amounts):

 

     Year Ended
December 31, 2011
 
     UAL      United      Continental  

Operating revenue (including special revenue item)

   $ 600      $ 395      $ 205  

Per basic share

     1.82        NM        NM  

Per diluted share

     1.57        NM        NM  

The annual impact of adopting ASU 2009-13 on operating revenue will decrease over time. Our ability to project the annual decline for each year is significantly impacted by credit card sales volumes, frequent flyer redemption patterns, and other factors, including the 2012 changes in breakage from the application of the 18 month expiration policy to certain miles and the change in estimated selling price for flight miles, all of which are described above. As a result, the impact of the accounting change in 2012 and future periods cannot be objectively determined.


Other Information

The following table provides additional information related to the frequent flyer program at the UAL consolidated level (in millions):

 

Year Ended

December 31,

  

Cash Proceeds

from Miles Sold

    

Other Revenue

Recognized Upon

Award of Miles

to Third-Party

Customers (a)

    

Increase in Frequent

Flyer Deferred

Revenue for Miles

Awarded (b)

    

Net Increase in

Advanced

Purchase of

Miles (c)

 

2012

   $ 2,852      $ 816      $ 2,036      $  —    

2011

     3,121        566        2,357        198  

2010

     2,156        331        1,739        86  

 

(a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing services component of the sale.
(b) This amount represents the increase to frequent flyer deferred revenue during the period.
(c) This amount represents the net increase in the advance purchase of miles obligation due to cash payments for the sale of miles in excess of miles awarded to customers.

Continental’s frequent flyer program accounting changed significantly as a result of the Merger. See Continental Predecessor Accounting Policies, below, for the Continental Predecessor policy.

 

(d) Cash and Cash Equivalents and Restricted Cash— Highly liquid investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents.

Restricted cash primarily includes cash collateral associated with workers’ compensation obligations, reserves for institutions that process credit card ticket sales and cash collateral received from fuel hedge counterparties. Restricted cash, cash equivalents and investments are classified as short-term or long-term in the consolidated balance sheets based on the expected timing of return of the assets to the Company. Airline industry practice includes classification of restricted cash flows as either investing cash flows or operating cash flows. Cash flows related to restricted cash activity are classified as investing activities because the Company considers restricted cash arising from these activities similar to an investment.

 

(e) Short-term Investments—Short-term investments are classified as available-for-sale and are stated at fair value. Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the consolidated statements of operations. Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive income/loss.

 

(f) Aircraft Fuel, Spare Parts and Supplies—The Company accounts for aircraft fuel, spare parts and supplies at average cost and provides an obsolescence allowance for aircraft spare parts and supplies.

 

(g) Property and Equipment—The Company records additions to owned operating property and equipment at cost when acquired. Property under capital leases and the related obligation for future lease payments are recorded at an amount equal to the initial present value of those lease payments. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized as property and equipment. It is the Company’s policy to record liquidated damages from late delivery of aircraft as a reduction of the cost of the related aircraft.

Depreciation and amortization of owned depreciable assets is based on the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the remaining term of the lease, including estimated facility renewal options when renewal is reasonably assured at key airports, or the estimated useful life of the related asset, whichever is less. 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 useful lives, whichever is shorter. Amortization of capital lease assets is included in depreciation and amortization expense. The estimated useful lives of property and equipment are as follows:

 

     Estimated Useful Life (in years)  

Aircraft and related rotable parts

     27 to 30  

Buildings

     25 to 45  

Other property and equipment

     4 to 15  

Computer software

     5  

Building improvements

     1 to 40  

As of December 31, 2012, UAL, United and Continental had a carrying value of computer software of $302 million, $68 million and $234 million, respectively. For the year ended December 31, 2012, UAL, United and Continental depreciation expense related to computer software was $81 million, $37 million and $44 million, respectively. Aircraft parts were assumed to have residual values with a range of 7% to 11% of original cost, depending on type, and other categories of property and equipment were assumed to have no residual value.

 

(h) Maintenance and Repairs—The cost of maintenance and repairs, including the cost of minor replacements, is charged to expense as incurred, except for costs incurred under our power-by-the-hour (“PBTH”) engine maintenance agreements. PBTH contracts transfer certain risk to third-party service providers and fix the amount we pay per flight hour or per cycle to the service provider in exchange for maintenance and repairs under a predefined maintenance program. Under PBTH agreements, the Company recognizes expense at a level rate per engine hour, unless the level of service effort and the related payments during the period are substantially consistent, in which case the Company recognizes expense based on the amounts paid.

 

(i) Lease Fair Value Adjustments—Lease fair value adjustments, which arose from recording operating leases at fair value under fresh start accounting or the Merger, are amortized on a straight line basis over the related lease term.

 

(j) Regional Capacity Purchase—Payments made to regional carriers under capacity purchase agreements are reported in regional capacity purchase in our consolidated statements of operations. As of December 31, 2012, United had 222 call options to purchase regional jet aircraft being operated by certain regional carriers. At December 31, 2012, none of the call options was exercisable because none of the required conditions to make an option exercisable by United was met.

 

(k) Advertising—Advertising costs, which are included in other operating expenses, are expensed as incurred. Advertising expenses for the three years ended December 31 were as follows (in millions):

 

     UAL      United      Continental
Successor
     Continental
Predecessor
 

2012

   $ 154      $ 83      $ 71      

2011

     142        73        69      

2010

     90        67        23       $ 74  

 

(l) Intangibles—The Company has finite-lived and indefinite-lived intangible assets, including goodwill. As of December 31, 2012, goodwill represents the excess purchase price over the fair values of tangible and identifiable intangible assets acquired and liabilities assumed from Continental in the Merger. Finite-lived intangible assets are amortized over their estimated useful lives. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment annually or more frequently if events or circumstances indicate that the asset may be impaired. Goodwill and indefinite-lived assets are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs.


In most cases, these indefinite-lived assets are separately associated with and directly assignable to a specific separate company. In cases where the asset is shared between the companies, a prorate allocation was performed based on historical financial and operating measures. This resulted in a fair value allocation of such assets to United and Continental of 54% and 46%, respectively. Any impairment charges resulting from the testing of the fair values of these indefinite-lived intangible assets are also assigned to the applicable company using the same methodology; the impairment charge is recognized at the company to which the asset is assigned. See Notes 4 and 21 for additional information related to intangibles, including impairments recognized in 2012, 2011 and 2010.

 

(m) Long-Lived Asset Impairments—The Company evaluates the carrying value of long-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist. For purposes of this testing, the Company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows for purposes of testing aircraft for impairment. An impairment charge is recognized when the 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. See Note 21 for information related to asset impairments.

 

(n) Share-Based Compensation—The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Obligations for cash-settled restricted stock units (“RSUs”) are remeasured at fair value throughout the requisite service period on the last day of each reporting period based upon the Company’s stock price. In addition to the service requirement, cash-settled performance-based RSUs have performance metrics that must be achieved prior to vesting. These awards are accrued based on the expected level of achievement at each reporting period. A cumulative adjustment is recorded to adjust compensation expense based on the current fair value of the awards and expected level of achievement for the performance-based awards. See Note 7 for additional information on the Company’s share-based compensation plans.

 

(o) Ticket Taxes—Certain governmental taxes are imposed on the Company’s ticket sales through a fee included in ticket prices. The Company collects these fees and remits them to the appropriate government agency. These fees are recorded on a net basis (excluded from operating revenue).

 

(p) Retirement of Leased Aircraft—The Company accrues for estimated lease costs over the remaining term of the lease at the present value of future minimum lease payments, net of estimated sublease rentals (if any), in the period that aircraft are permanently removed from service. When reasonably estimable and probable, the Company estimates maintenance lease return condition obligations for items such as minimum aircraft and engine conditions specified in leases and accrues these amounts over the lease term while the aircraft are operating, and any remaining unrecognized estimated obligations are accrued in the period that an aircraft is removed from service.

 

(q) Uncertain Income Tax Positions—The Company has recorded reserves for income taxes and associated interest that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the Company, potentially resulting in additional liabilities for taxes and interest. The Company’s uncertain tax position reserves are reviewed periodically and are adjusted as events occur that affect its estimates, such as the availability of new information, the lapsing of applicable statutes of limitation, the conclusion of tax audits, the measurement of additional estimated liability, the identification of new tax matters, the release of administrative tax guidance affecting its estimates of tax liabilities, or the rendering of relevant court decisions. See Note 8 for further information related to uncertain income tax positions.


(r) Labor Costs—The Company records expenses associated with amendable labor agreements when the employee group has earned the compensation and the amounts are probable and estimable. These include costs associated with lump sum cash payments that would be made in conjunction with the ratification of labor agreements. To the extent these upfront costs are in lieu of future pay increases, they would be capitalized and amortized over the term of the labor agreements. If not, these amounts would be expensed when they become probable and estimable.

 

(s) Third-Party Business—United has third-party business revenue that includes fuel sales, catering, ground handling, maintenance services and frequent flyer award non-air redemptions, and third-party business revenue is recorded in other revenue. The Company has a contract to sell aircraft fuel to a third party which is earnings-neutral but results in revenue and expense, specifically cost of sale which is unrelated to the operation of the airline. United also incurs third-party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and non-air mileage redemptions, and those third-party business expenses are recorded in other operating expenses.

Continental Predecessor Accounting Policies

The following summarizes Continental Predecessor accounting policies that materially differ from the Company’s accounting policies, described above.

Revenue Recognition—Continental Predecessor recognized passenger revenue for ticket breakage when the ticket expired unused.

Frequent Flyer Accounting—Continental accounted for mileage credits earned by flying on Continental under an incremental cost model, rather than a deferred revenue model. For those frequent flyer accounts that had sufficient mileage credits to claim the lowest level of free travel, Continental recorded a liability for either the estimated incremental cost of providing travel awards that were expected to be redeemed for travel on Continental or the contractual rate of expected redemption on alliance carriers. Incremental cost included the cost of fuel, meals, insurance and miscellaneous supplies, less any fees charged to the passenger for redeeming the rewards, but did not include any costs for aircraft ownership, maintenance, labor or overhead allocation. The liability was adjusted periodically based on awards earned, awards redeemed, changes in the incremental costs and changes in the frequent flyer program. Changes in the liability were recognized as passenger revenue in the period of change.

NOTE 3 — RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Fair Value Measurement: Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. Some of the key amendments to the fair value measurement guidance include the highest and best use and valuation premise for nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement and fair value of an instrument classified in a reporting entity’s shareholders’ equity. Additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy include a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation processes in place, a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs and the level in the fair value hierarchy of items that are not measured at fair value in the consolidated balance sheet but whose fair value must be disclosed. ASU 2011-04 became effective for the Company’s annual and interim periods beginning January 1, 2012, and the required disclosures are disclosed in Note 12 of this report.


NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents information about the Company’s goodwill and other intangible assets at December 31 (in millions):

 

           2012      2011  

UAL

  

Asset life (a)

   

Gross Carrying

Amount

    

Accumulated

Amortization

    

Gross Carrying

Amount

    

Accumulated

Amortization

 

Goodwill

     $ 4,523         $ 4,523     

Finite-lived intangible assets

             

Airport slots and gates

     $ 99      $ 75      $ 100      $ 61  

Hubs

       145        52        145        44  

Patents and tradenames

       108        99        108        86  

Frequent flyer database

       1,177        447        1,177        381  

Contracts

       167        75        167        64  

Other

       109        44        109        34  
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 1,805      $ 792      $ 1,806      $ 670  
    

 

 

    

 

 

    

 

 

    

 

 

 

Indefinite-lived intangible assets

             

Airport slots and gates

     $ 981         $ 1,011     

Route authorities

       1,606           1,606     

Tradenames and logos

       593           593     

Alliances

       404           404     
    

 

 

       

 

 

    

Total

     $ 3,584         $ 3,614     
    

 

 

       

 

 

    

United

         2012      2011  

Finite-lived intangible assets

             

Airport slots and gates

     9      $ 72      $ 59      $ 72      $ 52  

Hubs

     20        145        52        145        44  

Patents

     3        70        70        70        70  

Frequent flyer database

     21  (b)      521        327        521        296  

Contracts

     13        140        68        140        60  

Other

     7        12        12        13        12  
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 960      $ 588      $ 961      $ 534  
    

 

 

    

 

 

    

 

 

    

 

 

 

Indefinite-lived intangible assets

             

Airport slots

     $ 201         $ 201     

Route authorities

       1,117           1,117     

Tradenames

       420           420     

Alliances

       118           118     
    

 

 

       

 

 

    

Total

     $ 1,856         $ 1,856     
    

 

 

       

 

 

    

Continental

         2012      2011  

Goodwill

     $ 4,523         $ 4,523     

Finite-lived intangible assets

             

Airport slots

     4      $ 27      $ 16      $ 28      $ 9  

Frequent flyer database

     23  (b)      656        120        656        85  

Tradenames

     3        38        29        38        16  

Contracts

     10        27        7        27        4  

Other

     27        97        32        96        22  
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 845      $ 204      $ 845      $ 136  
    

 

 

    

 

 

    

 

 

    

 

 

 

Indefinite-lived intangible assets

             

Airport slots

     $ 782         $ 812     

Route authorities

       489           489     

Alliances

       286           286     

Tradenames and logos

       173           173     
    

 

 

       

 

 

    

Total

     $ 1,730         $ 1,760     
    

 

 

       

 

 

    

 

(a) Weighted average life expressed in years. UAL is covered by the weighted average of each of its individual subsidiaries.
(b) The United and Continental frequent flyer databases are amortized based on an accelerated amortization schedule to reflect utilization of the assets. Estimated cash flows correlating to the expected attrition rate of customers in the frequent flyer databases were considered in the determination of the amortization schedules.


The following table presents information related to the Company’s actual and expected future amortization expense (in millions):

 

Actual Amortization:

  

UAL

    

United

    

Continental

Successor

    

Continental

Predecessor

 

2012

   $ 121      $ 55      $ 66      

2011

     169        61        108      

2010

     96        65        31       $ 11  
 

Projected Amortization:

                           

2013

   $ 142      $ 52      $ 90      

2014

     129        46        83      

2015

     106        37        69      

2016

     91        34        57      

2017

     81        32        49      

See Note 21 for information related to impairment of intangible assets.

NOTE 5 — COMMON STOCKHOLDERS’ EQUITY AND PREFERRED SECURITIES

UAL

At December 31, 2012, approximately 72 million shares of UAL common stock were reserved for future issuance related to the conversion of convertible debt securities and the issuance of equity based awards under UAL’s incentive compensation plans.

As of December 31, 2012, UAL had two shares of junior preferred stock (par value $0.01 per share) outstanding. In addition, UAL is authorized to issue 250 million shares of preferred stock (without par value) under UAL’s amended and restated certificate of incorporation.

In 2010, approximately nine million shares of UAL common stock were issued upon the redemption of Continental’s $175 million aggregate principal amount of 5% Convertible Notes due 2023. See Note 14 for additional information related to this transaction.

In October 2010, approximately 148 million shares of UAL common stock were issued to Continental stockholders in exchange for Continental common stock in connection with the Merger. See Note 1 for additional information related to this transaction.

Continental

In connection with the Merger, on October 1, 2010, all outstanding 141 million shares of Continental common stock were converted into and exchanged for 1.05 fully paid and nonassessable shares of UAL common stock with any fractional shares paid in cash. The shares of Continental common stock that were acquired by UAL were subsequently canceled and replaced with 1,000 shares of common stock ($0.01 par value), all of which are owned by UAL as of December 31, 2012.


NOTE 6 — EARNINGS (LOSS) PER SHARE

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

 

     2012     2011     2010  

Basic earnings (loss) per share:

      

Net income (loss)

   $ (723   $ 840     $ 253  

Less: Income allocable to participating securities

     —          (3     (1
  

 

 

   

 

 

   

 

 

 

Earnings (loss) available to common stockholders

   $ (723   $ 837     $ 252  
  

 

 

   

 

 

   

 

 

 

Basic weighted-average shares outstanding

     331       329       207  
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, basic

   $ (2.18   $ 2.54     $ 1.22  
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share:

      

Earnings (loss) available to common stockholders

   $ (723   $ 837     $ 252  

Effect of UAL 6% senior convertible notes

     —          18       18  

Effect of Continental 4.5% convertible notes

     —          9       2  

Effect of Continental 5% convertible notes

     —          —          1  
  

 

 

   

 

 

   

 

 

 

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

   $ (723   $ 864     $ 273  
  

 

 

   

 

 

   

 

 

 

Basic weighted-average shares outstanding

     331       329       207  

Effect of UAL 6% senior convertible notes

     —          40       40  

Effect of Continental 4.5% convertible notes

     —          12       3  

Effect of employee stock options

     —          2       2  

Effect of Continental 5% convertible notes

     —          —          1  
  

 

 

   

 

 

   

 

 

 

Diluted weighted-average shares outstanding

     331       383       253  
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, diluted

   $ (2.18   $ 2.26     $ 1.08  
  

 

 

   

 

 

   

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

      

UAL 6% senior convertible notes

     40       —          —     

Continental 4.5% convertible notes

     12       —          —     

UAL 4.5% senior limited-subordination convertible notes

     5       11       22  

Stock options

     4       5       9  

Continental 6% convertible junior subordinated debentures

     4       4       1  

Restricted shares

     1       1       —     

UAL 5% senior convertible notes

     —          —          3  
  

 

 

   

 

 

   

 

 

 
     66       21       35  
  

 

 

   

 

 

   

 

 

 


The adjustments to earnings (loss) available to common stockholders are net of the related effect of profit sharing and income taxes, where applicable.

Continental Predecessor

The computations of Continental Predecessor’s basic and diluted earnings per share for the periods Continental had outstanding publicly-traded equity securities are set forth below (in millions, except per share amounts):

 

     Nine Months  Ended
September 30,
2010
 

Basic earnings per share:

  

Net income

   $ 441   
  

 

 

 

Earnings available to common stockholders

   $ 441   
  

 

 

 

Basic weighted-average shares outstanding

     140   
  

 

 

 

Earnings per share, basic

   $ 3.16   
  

 

 

 

Diluted earnings per share:

  

Earnings available to common stockholders

   $ 441   

Effect of 5% convertible notes

     10   

Effect of 6% convertible junior subordinated debentures

     10   

Effect of 4.5% convertible notes

     7   
  

 

 

 

Earnings available to common stockholders

including the effect of dilutive securities

   $ 468   
  

 

 

 

Basic weighted-average shares outstanding

     140   

Effect of 4.5% convertible notes

     12   

Effect of 5% convertible notes

     9   

Effect of 6% convertible junior subordinated debentures

     4   

Effect of employee stock options

     2   
  

 

 

 

Dilutive weighted-average shares outstanding

     167   
  

 

 

 

Earnings per share, diluted

   $ 2.81   
  

 

 

 

The adjustments to earnings available to common stockholders are net of the related effect of profit sharing and income taxes, where applicable.

Approximately two million weighted average options to purchase shares of Continental common stock for the nine months ended September 30, 2010 were excluded from the computation of diluted earnings per share because the effect of including the options would have been antidilutive.

NOTE 7 — SHARE-BASED COMPENSATION PLANS

Prior to the Merger, UAL and Continental maintained separate share-based compensation plans. These plans provide for grants of qualified and non-qualified stock options, stock appreciation rights, restricted stock awards, RSUs, performance compensation awards, performance units, cash incentive awards and other types of equity-based and equity-related awards. As part of the Merger, UAL assumed all of Continental’s outstanding share-based compensation plans.


All awards are recorded as equity or a liability in UAL’s consolidated balance sheet. The share-based compensation expense specifically attributable to the employees of United and Continental is directly recorded to salaries and related costs, or integration-related expense, within each of their respective statements of operations. United and Continental record an allocation of share-based expense for employees that devote a significant amount of time to both companies. As United and Continental do not sponsor their own share-based compensation plans, the disclosures below primarily relate to UAL. See the “Continental Predecessor” section below, for share-based compensation disclosures applicable to Continental prior to the Merger.

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

The following table provides information related to UAL share-based compensation plan cost, for the years ended December 31 (in millions):

 

     2012      2011      2010  

Compensation cost: (a), (b)

        

Restricted stock units

   $ 37      $ 18      $ 20  

Restricted stock

     13        12        6  

Share-based awards converted to cash awards (c)

     6        19        84  

Stock options

     1        5        7  
  

 

 

    

 

 

    

 

 

 

Total

   $ 57      $ 54      $ 117  
  

 

 

    

 

 

    

 

 

 

 

(a) All compensation cost is recorded to Salaries and related costs, with the exception of $9 million, $17 million and $70 million in 2012, 2011 and 2010, respectively, that was recorded in integration and Merger-related costs as a component of special charges, respectively.
(b) United recorded $32 million, $28 million and $63 million of compensation cost related to UAL’s share-based plans during 2012, 2011 and 2010, respectively. These amounts included $5 million, $7 million and $24 million that were classified as integration and Merger-related costs as a component of special charges during 2012, 2011 and 2010, respectively. Continental Successor recorded $25 million, $26 million and $54 million of compensation cost related to UAL’s share-based plans during 2012, 2011 and 2010, respectively. These amounts included $4 million, $10 million and $46 million that were classified as integration and Merger-related costs as a component of special charges during 2012, 2011 and 2010, respectively.
(c) As described below, in connection with the Merger, certain awards were converted into fixed cash equivalents.

The table below summarizes UAL’s unearned compensation and weighted-average remaining period to recognize costs for all outstanding share-based awards for the year ended December 31, 2012 (in millions, except as noted):

 

     Unearned
Compensation
(a)
     Weighted-
Average
Remaining
Period (in
years)
 

Restricted stock units

   $ 24        1.1  

Restricted stock

     7        1.4  

Share-based awards converted to cash awards

     1        0.2  

Stock options

     1        1.2  
  

 

 

    

Total

   $ 33     
  

 

 

    

 

(a) Compensation cost attributable to future service related to unvested awards remaining to be recognized by United and Continental consists of $18 million and $15 million, respectively.


Merger Impacts—Continental Predecessor Share-Based Awards. Prior to completion of the Merger, Continental had outstanding stock options, non-employee director restricted stock awards and performance compensation awards (profit based RSUs) that were issued pursuant to its incentive compensation plans. Under the terms of Continental’s incentive plans, substantially all of the outstanding equity awards fully vested as a result of the Merger. The equity awards were assumed and issued by UAL using a 1.05 conversion rate and had a fair value of approximately $78 million at the Merger closing date which was included in the acquisition cost. In addition, as a result of the Merger, the performance criteria related to the profit based RSUs (“PBRSUs”) was deemed to be achieved for each open performance period (the three-year periods beginning January 1, 2008, 2009 and 2010) at a payment percentage of 150% and the minimum cash balance requirement was deemed satisfied. Following the Merger closing date, with limited exceptions as described below, payments under all outstanding PBRSUs remain subject to continued employment by the participant and will continue to be paid on their normal payment date over a three-year period. The PBRSUs were converted into a fixed cash equivalent based on a stock price of $23.48, the average closing price per share of Continental common stock for the 20 trading days preceding the completion of the Merger.

Merger Impacts—United Share-Based Awards. In May 2010, the UAL Board of Directors made a determination that the Merger should be considered a change of control for purposes of all outstanding awards. Accordingly, upon the completion of the Merger on October 1, 2010, eligible outstanding equity-based awards immediately vested except for certain officer awards that are subject to separate agreements, as discussed below. In September 2010, the Human Resources Subcommittee of the UAL Board of Directors elected to settle all eligible RSUs in cash. As a result, participants received $23.66 in exchange for each share unit, based on the closing price of UAL stock on the day prior to the Merger closing. The cash payment to settle these awards was $18 million and was paid during the fourth quarter of 2010.

Certain officers entered into separate agreements with the Company pursuant to which they agreed to waive the provisions providing for accelerated vesting upon the change of control. As part of the agreements, the outstanding restricted stock awards and RSUs were converted into fixed cash equivalents based on a stock price of $22.33 per share, UAL’s average closing share price for the preceding 20 days prior to the closing of the Merger. Following the Merger, with limited exceptions as described below, the payment of these awards remains subject to continued employment by the participant and will be paid on the original vesting dates. Upon termination of employment under certain circumstances following the Merger, the participant is entitled to a cash settlement. In the fourth quarter of 2010, UAL paid $19 million in cash for settlement of these awards in connection with Merger-related terminations.

Stock Options. The Company has not granted any stock options since 2010. Historically, stock options were awarded with exercise prices equal to the fair market value of UAL’s common stock on the date of grant. UAL stock options generally vest over a period of either three or four years and have a contractual life of 10 years. The Continental Predecessor stock options generally have an original contractual life of five years (management level employee options) or 10 years (outside directors). Expense related to each portion of an option grant is recognized on a straight-line basis over the specific vesting period for those options.


The table below summarizes UAL stock option activity for the years ended December 31, 2012, 2011 and 2010 (shares in thousands):

 

     Options     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Life (in years)
     Aggregate
Intrinsic  Value
(in millions)
 

Outstanding at January 1, 2010

     6,406     $ 22.42        

Issued in exchange for Continental options

     7,366       16.77        

Exercised

     (2,467     8.13         $ 42  

Surrendered

     (253     28.77        
  

 

 

         

Outstanding at December 31, 2010

     11,052       21.70        

Exercised

     (2,449     10.77           33  

Surrendered

     (1,657     29.07        
  

 

 

         

Outstanding at December 31, 2011

     6,946       23.80        

Exercised

     (1,327     12.42           14  

Surrendered

     (1,012     30.50        
  

 

 

         

Outstanding at December 31, 2012

     4,607       25.60        2.9        20  
  

 

 

         

Exercisable at December 31, 2012

     4,358       25.76        2.9        20  

The following table provides additional information for Continental Predecessor options granted in 2010 which were valued at the Merger date:

 

Weighted-average fair value assumptions:

   2010  

Risk-free interest rate

     0.1 - 1.8

Dividend yield

    

Expected market price volatility of UAL common stock

     75

Expected life of options (years)

     0.1 - 6.3  

Weighted-average fair value

   $ 11.52   

The fair value of options is determined at the grant date, and at the Merger date in the case of Continental Predecessor options, using a Black Scholes option pricing model, which requires UAL to make several assumptions. The risk-free interest rate is based on the U.S. treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on UAL’s common stock was assumed to be zero since UAL did not have any plans to pay dividends at the time of the option grants.

The volatility assumptions were based upon historical volatilities of UAL and other comparable airlines whose shares are traded using daily stock price returns equivalent to the contractual term of the option. In addition, implied volatility data for both UAL and other comparable airlines, using current exchange-traded options, was utilized.

The expected lives of the options were determined based upon either a simplified assumption that the option will be exercised evenly from vesting to expiration or estimated using historical experience for the assumed options. The terms of certain UAL awards do not provide for the acceleration of vesting upon retirement. In addition, certain UAL awards and the assumed options awarded to employees that are retirement eligible either at the grant date or within the vesting period is considered vested at the respective retirement eligibility date.


Restricted Stock Awards and Restricted Stock Units. During 2011, the Compensation Committee of the UAL Board of Directors determined that all outstanding UAL RSUs will be settled in cash. As of December 31, 2012, UAL, United and Continental had recorded a liability of $57 million, $42 million and $15 million, respectively, related to its unvested RSUs. UAL paid $35 million, $57 million and $84 million related to its share-based liabilities during 2012, 2011 and 2010, respectively, consisting of $16 million, $6 million and $48 million related to United and $19 million, $51 million and $36 million related to Continental Successor, respectively.

The table below summarizes UAL’s RSU and restricted stock activity for the years ended December 31, 2012, 2011 and 2010 (shares in thousands):

 

     Restricted  Stock
Units
    Weighted-
Average
Grant Price
     Restricted Stock     Weighted-
Average
Grant Price
 

Non-vested at January 1, 2010

     1,719     $ 4.90        811     $ 27.82  

Assumed in Merger

     —          —           20       23.66  

Granted

     1,395       22.20        212       24.55  

Modified

     (449     21.63        449       21.63  

Converted to fixed cash equivalent

     (1,496     —           (164     —     

Vested

     (1,069     22.41        (651     31.47  

Surrendered

     (49     10.55        (6     11.03  
  

 

 

      

 

 

   

Non-vested at December 31, 2010

     51       22.85        671       17.20  

Granted

     3,655       19.89        536       23.87  

Vested

     (141     18.13        (195     22.26  

Surrendered

     (199     19.90        (27     23.95  
  

 

 

      

 

 

   

Non-vested at December 31, 2011

     3,366       19.98        985       23.33  

Granted

     1,986       22.20        545       24.01  

Vested

     (552     21.21        (643     23.05  

Surrendered

     (569     22.19        (115     24.01  
  

 

 

      

 

 

   

Non-vested at December 31, 2012

     4,231       22.22        772       23.94  
  

 

 

      

 

 

   

The fair value of RSUs and restricted shares vested in 2012, 2011 and 2010 was $27 million, $7 million and $33 million, respectively. The fair value of the restricted stock awards was primarily based upon the share price on the date of grant. These awards are accounted for as equity awards. The fair value of the cash-settled RSUs was based upon the Company’s stock price as of the last day preceding the settlement date. These awards were accounted for as liability awards. Restricted stock vesting and the recognition of the expense is similar to the stock option vesting described above.

Continental Predecessor

Share-Based Compensation Expense. Total share-based compensation expense included in salaries and related costs for the nine months ended September 30, 2010 was $57 million.

Stock Options. Stock options were awarded with exercise prices equal to the fair market value of Continental’s common stock on the date of grant. Management level employee stock options typically vested over a four year period and generally had five year terms. Expense related to each portion of an option grant was recognized on a straight-line basis over the specific vesting period for those options. Outside director stock options vested in full on the date of grant and had ten year terms. All outstanding options under the Continental 2005 Pilot Supplemental Option Plan, which vested over three years and have terms of six to eight years, and the


Continental 2005 Broad Based Employee Stock Option Plan, which vested over three years and have a term of six years, were already fully vested on the Merger closing date. Outstanding stock options granted under the Continental Incentive Plan 2000, the Continental 1998 Stock Incentive Plan, and the Continental 1997 Stock Incentive Plan became exercisable in full upon the closing of the Merger. Outstanding stock options granted under the Continental Incentive Plan 2010 vest on their original vesting schedule or earlier if the holder experiences an involuntary termination within two years of the Merger closing date.

The table below summarizes stock option transactions pursuant to Continental plans for Continental Predecessor activity for the nine months ended September 30, 2010 (shares in thousands):

 

     Options     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Life (in years)
     Aggregate
Intrinsic  Value
(in millions)
 

Outstanding at January 1, 2010

     8,114     $ 16.08        

Granted

     654       23.83        

Exercised

     (1,652     11.92         $ 18  

Surrendered

     (92     29.59        
  

 

 

         

Outstanding at September 30, 2010

     7,024       17.60        2.0        61  
  

 

 

         

The following table provides additional information for options granted by Continental Predecessor in 2010.

 

Weighted-average fair value assumptions:

   2010  

Risk-free interest rate

     1.4

Dividend yield

    

Expected market price volatility of Continental common stock

     88

Expected life of options (years)

     3.8  

Weighted-average fair value

   $ 14.55  

The Black-Scholes-Merton option-pricing model was used to value the options at the grant date. The risk-free interest rate was based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on Continental common stock was assumed to be zero since Continental historically had not paid dividends. The market price volatility of Continental common stock was based on the historical volatility of the common stock over a time period equal to the expected term of the option and ending on the grant date. The expected life of the options was based on Continental’s historical experience for various work groups. Expense was recognized only for those option awards expected to vest, using an estimated forfeiture rate based on historical experience.

Profit Based RSU Awards. See Merger Impacts-Continental Predecessor Share-Based Awards, above, for a discussion of the impact of the Merger on PBRSU awards. Continental issued PBRSU awards pursuant to its long-term incentive and RSU programs, which provided for cash payments to Continental’s officers upon the achievement of specified profit sharing-based performance targets. The performance targets required that Continental reach target levels of cumulative employee profit sharing during the performance period and that Continental had net income calculated in accordance with GAAP for the applicable fiscal year in which the cumulative profit sharing target was met. To serve as a retention feature, payments related to the achievement of a performance target generally were made in annual increments over a three-year period to participants who remain continuously employed by Continental through each payment date. Payments also were conditioned on Continental having, at the end of the fiscal year preceding the date any payment was made, a minimum unrestricted cash, cash equivalents and short-term investments balance as set by the Human Resources Committee of Continental’s Board of Directors. If Continental did not achieve the minimum cash balance


applicable to a payment date, the payment was deferred until the next payment date (March 1 of the next year), subject to a limit on the number of years payments could be carried forward. Payment amounts were calculated based on the number of PBRSUs subject to the award, the average closing price of Continental common stock during the 20 trading days preceding the payment date and the payment percentage set by the Human Resources Committee of Continental’s Board of Directors for achieving the applicable profit sharing-based performance target.

Continental accounted for the PBRSU awards as liability awards. Once it became probable that a profit sharing-based performance target would be met, Continental measured the awards at fair value based on its current stock price. The related expense was recognized ratably over the required service period, which ended on each payment date, after adjustment for changes in the then-current market price of Continental’s common stock.

NOTE 8 — INCOME TAXES

The significant components of the income tax expense (benefit) are as follows (in millions):

 

2012

  

UAL

   

United

   

Continental

Successor

         

Continental

Predecessor

 

Current

   $ (14   $ (8   $ (1       

Deferred

     13       17       (4       
  

 

 

   

 

 

   

 

 

        
   $ (1   $ 9     $ (5       
  

 

 

   

 

 

   

 

 

        

2011

                              

Current

   $ 11     $ 3     $ —            

Deferred

     (6     —         (6       
  

 

 

   

 

 

   

 

 

        
   $ 5     $ 3     $ (6       
  

 

 

   

 

 

   

 

 

        

2010

                              

Current

   $ 10     $ —        $ 2          $ 1  

Deferred

     (10     (12     (6          —    
  

 

 

   

 

 

   

 

 

        

 

 

 
   $  —        $ (12   $ (4        $ 1  
  

 

 

   

 

 

   

 

 

        

 

 

 


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

 

Year ended December 31, 2012

  

UAL

   

United

   

Continental

Successor

         

Continental

Predecessor

 

Income tax provision at statutory rate

   $ (253   $ (413   $ 183         

State income taxes, net of federal income tax

     (15     (20     13         

Foreign income taxes

     7       6       1         

Nondeductible employee meals

     12       7       5         

Nondeductible interest expense

     19       19       —            

Derivative market adjustment

     —          —          (15       

Nondeductible compensation

     5       3       2         

Valuation allowance

     234       415       (192       

Other, net

     (10     (8     (2       
  

 

 

   

 

 

   

 

 

        
   $ (1   $ 9     $ (5       
  

 

 

   

 

 

   

 

 

        

Year Ended December 31, 2011

                              

Income tax provision at statutory rate

   $ 298     $ 100     $ 199         

State income taxes, net of federal income tax

     (19     (25     8         

Nondeductible acquisition costs

     (17     (8     (9       

Nondeductible employee meals

     12       7       5         

Nondeductible interest expense

     13       13       —            

Derivative market adjustment

     —          —          10         

Nondeductible compensation

     9       5       5         

Valuation allowance

     (294     (92     (223       

Other, net

     3       3       (1       
  

 

 

   

 

 

   

 

 

        
   $ 5     $ 3     $ (6       
  

 

 

   

 

 

   

 

 

        

Year Ended December 31, 2010

                              

Income tax provision at statutory rate

   $ 87     $ 135     $ (35        $ 155  

State income taxes, net of federal income tax

     24       24       1            8  

Nondeductible acquisition costs

     45       31       14            —     

Nondeductible employee meals

     8       7       1            3  

Nondeductible interest expense

     12       12       —               —     

Change in tax law—Medicare Part D Subsidy

     119       119       —               —     

Nondeductible compensation

     13       1       12            —     

Goodwill credit

     (22     (22     —               —     

Valuation allowance

     (290     (322     9            (166

Tax benefit resulting from intraperiod tax allocation

     —          —          (6          —     

Other, net

     4       3       —               1  
  

 

 

   

 

 

   

 

 

        

 

 

 
   $ —        $ (12   $ (4        $ 1  
  

 

 

   

 

 

   

 

 

        

 

 

 


State tax benefit recorded in 2011 resulted from certain adjustments to existing state tax net operating losses, such benefit was fully offset by an increase in the valuation allowance.

We are required to consider all items of income (including items recorded in other comprehensive income) in determining the amount of tax benefit that should be allocated to a loss from continuing operations. As a result, Continental Successor recorded $6 million of non-cash tax benefits on its loss from continuing operations for the three months ended December 31, 2010, which was exactly offset by income tax expense in other comprehensive income, a component of stockholder’s equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations, Continental’s net deferred tax positions at December 31, 2010 was not impacted by this tax allocation.

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2012 and 2011 were as follows (in millions):

 

     UAL     United     Continental  
     December 31,     December 31,     December 31,  
     2012     2011     2012     2011     2012     2011  

Deferred income tax asset (liability):

            

Federal and state net operating loss (“NOL”) carryforwards (a)

   $ 3,025     $ 2,911     $ 1,707     $ 2,024     $ 1,250     $ 835  

Frequent flyer deferred revenue (a)

     2,425       2,386       1,931       1,487       495       903  

Employee benefits, including pension, postretirement, medical and the Pension Benefit Guaranty Corporation (“PBGC”) notes (a)

     2,488       1,897       1,648       1,275       843       703  

Lease fair value adjustment

     259       376       —          —          259       376  

AMT credit carryforwards

     251       268       246       263       5       5  

Other assets (a)

     947       1,251       343       560       539       581  

Less: Valuation allowance

     (4,603     (4,137     (3,068     (2,614     (1,435     (1,434
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred tax assets

   $ 4,792     $ 4,952     $ 2,807     $ 2,995     $ 1,956     $ 1,969  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation, capitalized interest and other

   $ (3,705   $ (3,860   $ (2,137   $ (2,303   $ (1,565   $ (1,554

Intangibles

     (1,578     (1,627     (819     (833     (760     (795

Other liabilities

     (509     (453     (227     (218     (179     (173
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred tax liabilities

   $ (5,792   $ (5,940   $ (3,183   $ (3,354   $ (2,504   $ (2,522
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net deferred tax liability

   $ (1,000   $ (988   $ (376   $ (359   $ (548   $ (553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Deferred tax assets for 2012 reflect adjustments made in the current year to increase UAL and United’s deferred tax assets for frequent flyer deferred revenue and employee benefits by approximately $257 million and $187 million, respectively, and to reduce net operating loss carryforwards and other deferred tax assets by the same amounts.

As a result of the Merger, beginning October 1, 2010, Continental and its domestic consolidated subsidiaries joined the UAL federal consolidated tax return filing group, which also includes United and its domestic consolidated subsidiaries. Consolidated current and deferred tax expense was allocated to each of United and Continental using a method that treats each entity as though it had filed a separate tax return. Under the Company’s tax agreement, group members are compensated for their losses and other tax benefits only if they would be able to use those losses and tax benefits on a separate return basis. Tax liabilities between group


members are settled in cash when the losses and tax benefits of one group have been fully exhausted and the Company begins making tax payments to tax authorities. Additionally, settlement in cash is required if a member leaves the consolidated tax group. Were a member to leave the group, its separate tax losses and benefits along with the corresponding receivable or liability to other group members may vary significantly from tax losses and benefits ascribed to it while a member of the group.

In addition to the deferred tax assets listed in the table above, UAL has an $883 million unrecorded tax benefit at December 31, 2012, primarily attributable to the difference between the amount of the financial statement expense and the allowable tax deduction for UAL common stock issued to certain unsecured creditors and employees pursuant to UAL Corporation’s Chapter 11 bankruptcy protection. This unrecorded tax benefit is accounted for by analogy to Accounting Standards Codification Topic 718 which requires recognition of the tax benefit to be deferred until it is realized as a reduction of taxes payable. Although not recognized for financial reporting purposes, this unrecognized tax benefit is available to reduce future income and is incorporated into the disclosed amounts of our federal and state NOL carryforwards, which are discussed below.

The federal and state NOL carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in future years. These tax benefits are mostly attributable to federal pre-tax NOL carryforwards of $10.3 billion for UAL (including the NOLs discussed in the preceding paragraph). If not utilized these federal pre-tax NOLs will expire as follows (in billions): $1.5 in 2022, $1.6 in 2023, $2.4 in 2024, $2.0 in 2025 and $2.8 after 2025. In addition, the majority of state tax benefits of the net operating losses of $196 million for UAL expires over a five to 20-year period.

Both United and Continental experienced an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended, as a result of the Merger. However, the Company currently expects that these ownership changes will not significantly limit its ability to use its NOL and alternative minimum tax (“AMT”) credit carryforwards in the carryforward period because the size of the limitation exceeds our NOL and AMT credit carryforwards.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the realizability of its deferred tax assets and records a valuation allowance when it is more likely than not that deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Although the Company was no longer in a three-year cumulative loss position at the end of 2012, management determined that the loss in 2012, the overall modest level of cumulative pretax income in the three years ended December 31, 2012 of 0.4% of total revenues in that period and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance was still necessary on net deferred assets. As a result of the loss sustained in 2012 and the need to complete final integration activities that produce synergies and overcome cost increases from new labor agreements, management’s position is that sufficient positive evidence to support a reversal of the remaining valuation allowance does not exist and has retained a full valuation allowance on its deferred tax assets. Management will continue to evaluate future financial performance, as well as the impacts of special charges on such performance, to determine whether such performance provides sufficient evidence to support reversal of the valuation allowance.

The December 31, 2012 valuation allowances of $4.6 billion, $3.1 billion and $1.4 billion for UAL, United and Continental, respectively, if reversed in future years will reduce income tax expense. The current valuation allowance reflects increases from December 31, 2011 of $466 million, $454 million and $1 million for UAL, United and Continental, respectively, including amounts charged directly to other comprehensive income.

UAL’s unrecognized tax benefits related to uncertain tax positions were $19 million, $24 million and $32 million at 2012, 2011 and 2010, respectively. Included in the ending balance at 2012 is $17 million that would affect UAL’s effective tax rate if recognized. The Company does not expect significant increases or decreases in their unrecognized tax benefits within the next twelve months.


There are no significant amounts included in the balance at December 31, 2012 for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

The Company records penalties and interest relating to uncertain tax positions in other operating expenses and interest expense, respectively, in its consolidated statements of operations. The Company has not recorded any significant expense or liabilities related to interest or penalties in its consolidated financial statements.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits related to UAL’s uncertain tax positions (in millions):

 

     2012     2011     2010  

Balance at January 1,

   $ 24     $ 32     $ 16  

Decrease in unrecognized tax benefits relating to settlements with taxing authorities

     (12     —         —     

Increase (decrease) in unrecognized tax benefits as a result of tax positions taken during a prior period

     8       (9     —     

Decrease in unrecognized tax benefits relating from a lapse of the statute of limitations

     (1     —          —     

Increase due to Continental’s uncertain tax positions at the Merger closing date

     —          —          6  

Increase in unrecognized tax benefits as a result of tax positions taken during the current period

     —          1       10  
  

 

 

   

 

 

   

 

 

 

Balance at December 31,

   $ 19     $ 24     $ 32  
  

 

 

   

 

 

   

 

 

 

UAL’s federal income tax returns for tax years after 2002 remain subject to examination by the Internal Revenue Service (“IRS”) and state taxing jurisdictions. The IRS commenced an examination of UAL’s U.S. income tax returns for 2010 through 2011 in the fourth quarter of 2012. As of December 31, 2012, the IRS had not proposed any material adjustments to UAL’s returns. Continental’s federal income tax returns for tax years after 2001 remain subject to examination by the IRS and state taxing jurisdictions.

NOTE 9—PENSION AND OTHER POSTRETIREMENT PLANS

The following summarizes the significant pension and other postretirement plans of United and Continental:

Pension Plans

Continental maintains two primary defined benefit pension plans, one covering pilot employees and another covering substantially all of its U.S. non-pilot employees other than Continental Micronesia and Chelsea Food Services employees. Each of these plans provide benefits based on a combination of years of benefit accruals service and an employee’s final average compensation. Additional benefit accruals were frozen under the plan covering Continental’s pilot employees during 2005, at which time any existing accrued benefits for pilots were preserved. Benefit accruals for Continental’s non-pilot employees under its other primary defined benefit pension plan continue.

United maintains a frozen defined benefit pension plan for a small number of former employees. United and Continental each maintain additional defined benefit pension plans, which cover certain international employees.

Other Postretirement Plans

United and Continental each maintain postretirement medical programs which provide medical benefits to certain retirees and eligible dependents, as well as life insurance benefits to certain retirees participating in United’s plan. Benefits provided are subject to applicable contributions, co-payments, deductible and other limits as described in the specific plan documentation.


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 these financial statements for the defined benefit and other postretirement plans (in millions):

 

      Pension Benefits  
     Year Ended
December 31, 2012
    Year Ended
December 31, 2011
 
     UAL     United     Continental     UAL     United     Continental  

Accumulated benefit obligation:

   $ 3,978     $ 235     $ 3,743     $ 3,321     $ 220     $ 3,101  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in projected benefit obligation:

            

Projected benefit obligation at beginning of year

   $ 3,708     $ 259     $ 3,449     $ 3,322     $ 256     $ 3,066  

Service cost

     99       7       92       88       7       81  

Interest cost

     184       9       175       178       10       168  

Actuarial (gain) loss

     702       21       681       251       (2     253  

Gross benefits paid

     (162     (12     (150     (137     (8     (129

Other

     (5     (1     (4     6       (4     10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Projected benefit obligation at end of year

   $ 4,526     $ 283     $ 4,243     $ 3,708     $ 259     $ 3,449  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

            

Fair value of plan assets at beginning of year

   $ 1,868     $ 195     $ 1,673     $ 1,871     $ 183     $ 1,688  

Actual gain (loss) on plan assets

     223       19       204       (47     5       (52

Employer contributions

     228       16       212       194       24       170  

Benefits paid

     (162     (12     (150     (137     (8     (129

Other

     —          3       (3     (13     (9   $ (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

   $ 2,157     $ 221     $ 1,936     $ 1,868     $ 195     $ 1,673  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status—Net amount recognized

   $ (2,369   $ (62   $ (2,307   $ (1,840   $ (64   $ (1,776
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Pension Benefits  
     December 31, 2012     December 31, 2011  
     UAL     United     Continental     UAL     United     Continental  

Amounts recognized in the consolidated balance sheets consist of:

            

Noncurrent asset

   $ 35     $ 35     $ —        $ 31     $ 31     $ —     

Current liability

     (4     —          (4     (9     (3     (6

Noncurrent liability

     (2,400     (97     (2,303     (1,862     (92     (1,770
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liability

   $ (2,369   $ (62   $ (2,307   $ (1,840   $ (64   $ (1,776
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in accumulated other comprehensive income (loss) consist of:

            

Net actuarial gain (loss)

   $ (826   $ (22   $ (804 )   $ (231   $ (10   $ (221

Prior service credit (cost)

     2       15       (13     3       18       (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

   $ (824   $ (7   $ (817   $ (228   $ 8     $ (236
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


     Other Postretirement Benefits  
     Year Ended
December 31, 2012
    Year Ended
December 31, 2011
 
     UAL     United     Continental     UAL     United     Continental  

Change in benefit obligation:

            

Benefit obligation at beginning of year

   $ 2,541     $ 2,233     $ 308     $ 2,494     $ 2,225     $ 269  

Service cost

     50       35       15       47       34       13  

Interest cost

     124       109       15       127       113       14  

Plan participants’ contributions

     77       75       2       73       70       3  

Pilots’ liability transfer

     —          76       (76     —          —          —     

Actuarial (gain) loss

     110       120       (10     (2     (25     23  

Federal subsidy

     13       13       —          13       13       —     

Plan amendments

     22       22       —          3       3       —     

Gross benefits paid

     (194     (180     (14     (214     (200     (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

   $ 2,743     $ 2,503     $ 240     $ 2,541     $ 2,233     $ 308  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

            

Fair value of plan assets at beginning of year

   $ 58     $ 58     $ —        $ 58     $ 58     $ —     

Actual return on plan assets

     1       1       —          1       1       —     

Employer contributions

     116       104       12       141       129       12  

Plan participants’ contributions

     77       75       2       72       70       2  

Benefits paid

     (194     (180     (14     (214     (200     (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

   $ 58     $ 58     $ —        $ 58     $ 58     $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status—Net amount recognized

   $ (2,685   $ (2,445   $ (240   $ (2,483   $ (2,175   $ (308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Other Postretirement Benefits  
     December 31, 2012     December 31, 2011  
     UAL     United     Continental     UAL     United     Continental  

Amounts recognized in the consolidated balance sheets consist of:

            

Current liability

   $ (71   $ (61   $ (10   $ (76   $ (60   $ (16

Noncurrent liability

     (2,614     (2,384     (230     (2,407     (2,115     (292
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liability

   $ (2,685   $ (2,445   $ (240   $ (2,483   $ (2,175   $ (308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in accumulated other comprehensive income (loss) consist of:

            

Net actuarial gain (loss)

   $ (79   $ (80   $ 1     $ 33     $ 46     $ (13

Prior service cost

     (24     (24     —          (2     (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

   $ (103   $ (104   $ 1     $ 31     $ 44     $ (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


The following information relates to all pension plans with an accumulated benefit obligation and a projected benefit obligation in excess of plan assets at December 31 (in millions):

 

     UAL      United      Continental  
     2012      2011      2012      2011      2012      2011  

Projected benefit obligation

   $ 4,387      $ 3,594      $ 144      $ 145      $ 4,243      $ 3,449  

Accumulated benefit obligation

     3,869        3,230        125        129        3,744        3,101  

Fair value of plan assets

     1,991        1,731        55        58        1,936        1,673  

Net periodic benefit cost for the years ended December 31, included the following components (in millions):

 

     2012  
     Pension Benefits     Other Postretirement Benefits  
     UAL     United     Continental     UAL     United     Continental  

Service cost

   $ 99     $ 7     $ 92     $ 50     $ 35     $ 15  

Interest cost

     184       9       175       124       109       15  

Expected return on plan assets

     (138     (11     (127     (2