Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from                       to                      

 

 

 

Commission

File Number

 

Exact Name of Registrant as Specified in its Charter,

Principal Office Address and Telephone Number

 

State of

Incorporation

 

I.R.S. Employer

Identification No

001-06033

  United Continental Holdings, Inc.   Delaware   36-2675207
  233 South Wacker Drive, Chicago, Illinois 60606    
  (312) 997-8000    

001-10323

  United Airlines, Inc.   Delaware   74-2099724
  233 South Wacker Drive, Chicago, Illinois 60606    
  (312) 997-8000    

 

 

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

 

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

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

 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

 

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

The number of shares outstanding of each of the issuer’s classes of common stock as of July 15, 2013 is shown below:

 

United Continental Holdings, Inc.    355,903,723 shares of common stock ($0.01 par value)
United Airlines, Inc.   

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

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

OMISSION OF CERTAIN INFORMATION

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

 

 

 


Table of Contents

United Continental Holdings, Inc.

United Airlines, Inc.

Report on Form 10-Q

For the Quarter Ended June 30, 2013

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

United Continental Holdings, Inc.:

  

Statements of Consolidated Operations

     3   

Statements of Consolidated Comprehensive Income (Loss)

     4   

Consolidated Balance Sheets

     5-6   

Condensed Statements of Consolidated Cash Flows

     7   

United Airlines, Inc.:

  

Statements of Consolidated Operations

     8   

Statements of Consolidated Comprehensive Income (Loss)

     9   

Consolidated Balance Sheets

     10-11   

Condensed Statements of Consolidated Cash Flows

     12   

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

     13   

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

     31   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4. Controls and Procedures

     43   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     44   

Item 1A. Risk Factors

     44   

Item 6. Exhibits

     47   

Signatures

     48   

Exhibit Index

     49   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Operating revenue:

        

Passenger—Mainline

   $ 6,829      $ 6,944      $ 12,767      $ 12,898   

Passenger—Regional

     1,839        1,824        3,460        3,378   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     8,668        8,768        16,227        16,276   

Cargo

     236        265        463        529   

Other operating revenue

     1,097        906        2,032        1,736   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,001        9,939        18,722        18,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Aircraft fuel

     3,068        3,408        6,118        6,637   

Salaries and related costs

     2,175        2,024        4,302        3,921   

Regional capacity purchase

     628        643        1,216        1,259   

Landing fees and other rent

     507        503        1,004        972   

Aircraft maintenance materials and outside repairs

     480        432        918        839   

Depreciation and amortization

     425        378        833        758   

Distribution expenses

     347        345        675        682   

Aircraft rent

     235        251        475        502   

Special charges (Note 10)

     52        206        144        370   

Other operating expenses

     1,314        1,174        2,531        2,297   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,231        9,364        18,216        18,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     770        575        506        304   

Nonoperating income (expense):

        

Interest expense

     (194     (213     (395     (429

Interest capitalized

     12        9        23        17   

Interest income

     6        7        11        12   

Miscellaneous, net

     (123     (38     (100     (11
  

 

 

   

 

 

   

 

 

   

 

 

 
     (299     (235     (461     (411
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     471        340        45        (107

Income tax expense (benefit)

     2        1        (7     2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 469      $ 339      $ 52      $ (109
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, basic

   $ 1.37      $ 1.02      $ 0.15      $ (0.33
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, diluted

   $ 1.21      $ 0.89      $ 0.15      $ (0.33
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ 469      $ 339      $ 52      $ (109

Other comprehensive income (loss), net:

        

Net change related to fuel derivative financial instruments

     (10     (224     (10     (100

Net change related to employee benefit plans

     459        5        480        9   

Net change related to investments and other

     9        —          7        9   
  

 

 

   

 

 

   

 

 

   

 

 

 
     458        (219     477        (82
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net

   $ 927      $ 120      $ 529      $ (191
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     June 30, 2013     December 31, 2012  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,143      $ 4,770   

Short-term investments

     1,821        1,773   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     5,964        6,543   

Restricted cash

     40        65   

Receivables, less allowance for doubtful accounts (2013 — $21; 2012 — $13)

     1,732        1,338   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2013 — $145; 2012 — $125)

     555        695   

Deferred income taxes

     540        543   

Prepaid expenses and other

     790        865   
  

 

 

   

 

 

 
     9,621        10,049   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     18,145        17,561   

Other property and equipment

     3,527        3,269   
  

 

 

   

 

 

 
     21,672        20,830   

Less — Accumulated depreciation and amortization

     (5,638     (5,006
  

 

 

   

 

 

 
     16,034        15,824   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     610        462   

Capital leases—

    

Flight equipment

     1,489        1,484   

Other property and equipment

     235        235   
  

 

 

   

 

 

 
     1,724        1,719   

Less — Accumulated amortization

     (784     (713
  

 

 

   

 

 

 
     940        1,006   
  

 

 

   

 

 

 
     17,584        17,292   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2013 — $864; 2012 — $792)

     4,523        4,597   

Restricted cash

     395        382   

Other, net

     822        785   
  

 

 

   

 

 

 
     10,263        10,287   
  

 

 

   

 

 

 
   $ 37,468      $ 37,628   
  

 

 

   

 

 

 

 

(continued on next page)

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)        
     June 30, 2013     December 31, 2012  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 4,801      $ 3,360   

Frequent flyer deferred revenue

     2,343        2,364   

Accounts payable

     2,298        2,312   

Accrued salaries and benefits

     1,480        1,763   

Current maturities of long-term debt

     909        1,812   

Current maturities of capital leases

     119        122   

Other

     977        1,085   
  

 

 

   

 

 

 
     12,927        12,818   
  

 

 

   

 

 

 

Long-term debt

     10,214        10,440   

Long-term obligations under capital leases

     724        792   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,644        2,756   

Postretirement benefit liability

     2,642        2,614   

Pension liability

     1,937        2,400   

Advanced purchase of miles

     1,438        1,537   

Deferred income taxes

     1,542        1,543   

Lease fair value adjustment, net

     791        881   

Other

     1,392        1,366   
  

 

 

   

 

 

 
     12,386        13,097   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock

     —          —     

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 355,889,762 and 332,472,779 shares at June 30, 2013 and December 31, 2012, respectively

     4        3   

Additional capital invested

     7,354        7,145   

Accumulated deficit

     (5,534     (5,586

Stock held in treasury, at cost

     (38     (35

Accumulated other comprehensive loss

     (569     (1,046
  

 

 

   

 

 

 
     1,217        481   
  

 

 

   

 

 

 
   $ 37,468      $ 37,628   
  

 

 

   

 

 

 

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

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Six Months Ended
June 30,
 
     2013     2012  

Cash Flows from Operating Activities:

    

Net cash provided by operating activities

   $ 1,541      $ 1,083   

Cash Flows from Investing Activities:

    

Capital expenditures and aircraft purchase deposits paid

     (821     (619

Increase in short-term and other investments, net

     (41     (96

Proceeds from sale of property and equipment

     17        145   

(Increase) decrease in restricted cash, net

     12        (5
  

 

 

   

 

 

 

Net cash used in investing activities

     (833     (575
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (1,737     (696

Proceeds from issuance of long-term debt

     520        86   

Principal payments under capital leases

     (73     (64

Other, net

     (45     6   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,335     (668
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (627     (160

Cash and cash equivalents at beginning of the period

     4,770        6,246   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 4,143      $ 6,086   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

Net property and equipment acquired through the issuance of debt

   $ 225      $ 341   

Exchanges of certain 6% convertible senior notes for common stock (Note 3)

     189        —     

Airport construction financing

     29        27   

8% Contingent Senior Unsecured Notes, net of discount

     —          48   

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

 

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Table of Contents

UNITED AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Operating revenue:

        

Passenger—Mainline

   $ 6,829      $ 6,944      $ 12,767      $ 12,898   

Passenger—Regional

     1,839        1,824        3,460        3,378   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     8,668        8,768        16,227        16,276   

Cargo

     236        265        463        529   

Other operating revenue

     1,099        907        2,036        1,739   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,003        9,940        18,726        18,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Aircraft fuel

     3,068        3,408        6,118        6,637   

Salaries and related costs

     2,175        2,024        4,302        3,921   

Regional capacity purchase

     628        643        1,216        1,259   

Landing fees and other rent

     507        503        1,004        972   

Aircraft maintenance materials and outside repairs

     480        432        918        839   

Depreciation and amortization

     425        378        833        758   

Distribution expenses

     347        345        675        682   

Aircraft rent

     235        251        475        502   

Special charges (Note 10)

     52        206        144        370   

Other operating expenses

     1,313        1,173        2,530        2,295   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,230        9,363        18,215        18,235   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     773        577        511        309   

Nonoperating income (expense):

        

Interest expense

     (188     (216     (391     (433

Interest capitalized

     12        9        23        17   

Interest income

     6        7        11        12   

Miscellaneous, net

     (117     (7     (32     35   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (287     (207     (389     (369
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     486        370        122        (60

Income tax expense

     2        1        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 484      $ 369      $ 122      $ (62
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

UNITED AIRLINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ 484      $ 369      $ 122      $ (62

Other comprehensive income (loss), net:

        

Net change related to fuel derivative financial instruments

     (10     (224     (10     (100

Net change related to employee benefit plans

     459        5        480        9   

Net change related to investments and other

     9        (1     8        9   

Other

     —          —          6        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     458        (220     484        (82
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net

   $ 942      $ 149      $ 606      $ (144
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
June 30, 2013
    December 31, 2012  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,137      $ 4,765   

Short-term investments

     1,821        1,773   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     5,958        6,538   

Restricted cash

     40        65   

Receivables from related parties

     229        226   

Receivables, less allowance for doubtful accounts (2013 — $21; 2012 — $13)

     1,732        1,338   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2013 — $145; 2012 — $125)

     555        695   

Deferred income taxes

     546        546   

Prepaid expenses and other

     777        841   
  

 

 

   

 

 

 
     9,837        10,249   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     18,145        17,561   

Other property and equipment

     3,527        3,269   
  

 

 

   

 

 

 
     21,672        20,830   

Less — Accumulated depreciation and amortization

     (5,638     (5,006
  

 

 

   

 

 

 
     16,034        15,824   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     610        462   

Capital leases—

    

Flight equipment

     1,489        1,484   

Other property and equipment

     235        235   
  

 

 

   

 

 

 
     1,724        1,719   

Less — Accumulated amortization

     (784     (713
  

 

 

   

 

 

 
     940        1,006   
  

 

 

   

 

 

 
     17,584        17,292   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2013 — $864; 2012 — $792)

     4,523        4,597   

Restricted cash

     395        382   

Other, net

     1,215        1,052   
  

 

 

   

 

 

 
     10,656        10,554   
  

 

 

   

 

 

 
   $ 38,077      $ 38,095   
  

 

 

   

 

 

 

 

(continued on next page)

 

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Table of Contents

UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
June 30, 2013
    December 31, 2012  

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 4,801      $ 3,360   

Frequent flyer deferred revenue

     2,343        2,364   

Accounts payable

     2,302        2,316   

Accrued salaries and benefits

     1,480        1,763   

Current maturities of long-term debt

     909        1,812   

Current maturities of capital leases

     119        122   

Payables to related parties

     47        75   

Other

     1,043        1,140   
  

 

 

   

 

 

 
     13,044        12,952   
  

 

 

   

 

 

 

Long-term debt

     10,007        10,038   

Long-term obligations under capital leases

     724        792   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,644        2,756   

Postretirement benefit liability

     2,642        2,614   

Pension liability

     1,937        2,400   

Advanced purchase of miles

     1,438        1,537   

Deferred income taxes

     1,472        1,470   

Lease fair value adjustment

     791        881   

Other

     1,591        1,494   
  

 

 

   

 

 

 
     12,515        13,152   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s equity:

    

Common stock at par, $0.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at both June 30, 2013 and December 31, 2012

     —          —     

Additional capital invested

     7,631        7,611   

Accumulated deficit

     (5,275     (5,397

Accumulated other comprehensive loss

     (569     (1,053
  

 

 

   

 

 

 
     1,787        1,161   
  

 

 

   

 

 

 
   $ 38,077      $ 38,095   
  

 

 

   

 

 

 

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

 

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Table of Contents

UNITED AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Six Months Ended
June 30,
 
     2013     2012  

Cash Flows from Operating Activities:

    

Net cash provided by operating activities

   $ 1,538      $ 1,081   

Cash Flows from Investing Activities:

    

Capital expenditures and aircraft purchase deposits paid

     (821     (619

Increase in short-term and other investments, net

     (41     (96

Proceeds from sale of property and equipment

     16        145   

(Increase) decrease in restricted cash, net

     12        (5
  

 

 

   

 

 

 

Net cash used in investing activities

     (834     (575
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (1,737     (696

Proceeds from issuance of long-term debt

     520        86   

Principal payments under capital leases

     (73     (64

Other, net

     (42     8   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,332     (666
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (628     (160

Cash and cash equivalents at beginning of the period

     4,765        6,240   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 4,137      $ 6,080   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

Net property and equipment acquired through the issuance of debt

   $ 225      $ 341   

Airport construction financing

     29        27   

8% Contingent Senior Unsecured Notes, net of discount

     —          48   

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

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC. AND UNITED AIRLINES, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL” or the “Company”) is a holding company and its principal, wholly-owned subsidiary is United Airlines, Inc. (together with its consolidated subsidiaries, “United”). This Quarterly Report on Form 10-Q is a combined report of UAL and United including their respective consolidated financial statements. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United’s operating revenues and operating expenses comprise nearly 100% of UAL’s revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL’s assets, liabilities and operating cash flows. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained. We sometimes use the words “we,” “our,” “us,” and the “Company” in this report for disclosures that relate to all of UAL and United.

The UAL and United unaudited condensed consolidated financial statements shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. The UAL and United financial statements should be read together with the information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report”) and Current Report on Form 8-K filed on April 25, 2013. The Company’s quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results.

NOTE 1—FREQUENT FLYER ACCOUNTING

Frequent Flyer Awards. The Company revised the estimated selling price of miles as a prospective change in estimate, effective January 1, 2012, based on the price at which the Company sells miles to Star Alliance partners in its reciprocal frequent flyer agreements as the best estimate of the selling price for these miles. Any changes to the composition of Star Alliance airline partners could result in a change to the amount and method we use to determine the estimated selling price. On February 14, 2013, US Airways Group, Inc. announced an agreement to merge with AMR Corporation and its intent to exit Star Alliance as a result of such merger. We are currently evaluating the potential impact of any changes to the estimated selling price of miles as a result of this merger.

NOTE 2—NEW ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02 (“ASU 2013-02”), Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Some of the key amendments require the Company to present, either on the face of the statement of operations or in the notes, the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, the Company is required to cross-reference to other disclosures that provide additional detail about those amounts. ASU 2013-02 became effective for the Company’s annual and interim periods beginning January 1, 2013, and the required disclosures are included in Note 11 of this report.

NOTE 3—EARNINGS (LOSS) PER SHARE

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

 

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Table of Contents
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013      2012  

Basic earnings (loss) per share:

         

Net income (loss)

   $ 469      $ 339      $ 52       $ (109

Less: Income allocable to participating securities

     (1     (1     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings (loss) available to common stockholders

   $ 468      $ 338      $ 52       $ (109
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic weighted average shares outstanding

     341        331        337         331   
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings (loss) per share, basic

   $ 1.37      $ 1.02      $ 0.15       $ (0.33
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted earnings (loss) per share:

         

Earnings (loss) available to common stockholders

   $ 468      $ 338      $ 52       $ (109

Effect of convertible notes

     11        11        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 479      $ 349      $ 52       $ (109
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted shares outstanding:

         

Basic weighted-average shares outstanding

     341        331        337         331   

Effect of convertible notes

     53        61        —           —     

Effect of employee stock options

     —          1        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted weighted-average shares outstanding

     394        393        337         331   
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings (loss) per share, diluted

   $ 1.21      $ 0.89      $ 0.15       $ (0.33
  

 

 

   

 

 

   

 

 

    

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

         

Restricted stock and stock options

     3        5        3         7   

Convertible notes

     —          —          57         61   

During the second quarter of 2013, UAL issued approximately 22 million shares of UAL common stock pursuant to agreements that UAL entered into with certain of its securityholders in exchange for approximately $189 million in aggregate principal amount of UAL’s outstanding 6% convertible senior notes due 2029 held by such securityholders. The newly issued shares of UAL common stock are included in the determination of basic weighted average shares outstanding for the three and six months ended June 30, 2013. The Company retired the 6% convertible senior notes acquired in the exchange.

NOTE 4—INCOME TAXES

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

United files a consolidated federal income tax return with UAL. Under an intercompany tax allocation policy, United computes, records and pays UAL for its own tax liability as if United were a separate company filing a separate return. In determining its own tax liabilities, United takes into account all tax credits or benefits generated and utilized as a separate company and it is compensated for the aforementioned tax benefits only if it would be able to use those benefits on a separate company basis.

NOTE 5—EMPLOYEE BENEFIT PLANS

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

 

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Table of Contents
     Pension Benefits     Other Postretirement Benefits  
     Three Months Ended
June 30,
    Three Months Ended
June 30,
 
     2013     2012     2013      2012  

Service cost

   $ 32      $ 25      $ 14       $ 13   

Interest cost

     47        46        28         32   

Expected return on plan assets

     (40     (35     —           (1

Amortization of unrecognized (gain) loss and prior service cost

     15        6        2         (1

Curtailment loss

     2        —          —           —     

Settlement gain

     (1     —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 55      $ 42      $ 44       $ 43   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Pension Benefits     Other Postretirement Benefits  
     Six Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Service cost

   $ 65      $ 50      $ 28      $ 26   

Interest cost

     94        92        56        63   

Expected return on plan assets

     (80     (70     (1     (2

Amortization of unrecognized (gain) loss and prior service cost

     33        11        5        (2

Curtailment loss

     2        —          —          —     

Settlement gain

     (1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 113      $ 83      $ 88      $ 85   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three and six months ended June 30, 2013, the Company contributed $38 million and $79 million, respectively, to its tax-qualified defined benefit pension plans.

Curtailments, Settlements and Plan Remeasurements. During June 2013, the Company announced it would freeze benefits for management and administrative employees under one of its defined benefit pension plans, effective December 31, 2013. As a result, the Company recognized a $2 million curtailment loss in earnings in the second quarter. The Company also recognized a settlement gain of $1 million in earnings resulting from certain lump-sum payments under a separate defined benefit pension plan. Application of curtailment and settlement accounting required the Company to remeasure the assets and liabilities of the two plans in the second quarter. The Company remeasured the pension plans’ liabilities using an average weighted discount rate of 4.74% compared to the year-end 2012 discount rate of 4.24%. As a result of the remeasurements, curtailment and settlement, the projected benefit obligation of the plans decreased by $434 million and Other comprehensive loss decreased by an actuarial gain of $442 million, of which approximately $84 million resulted from the curtailment. These items will also result in a decrease of approximately $30 million in the expected net periodic benefit cost for the remainder of 2013. The Company recognizes the earnings impacts of its pension plans in Salaries and related costs in the statements of consolidated operations.

Share-Based Compensation. In February 2013, 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 0.5 million restricted stock units (“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, the Company granted 1.3 million performance-based RSUs that will vest based on the Company’s return on invested capital for the three years ending December 31, 2015. If this performance condition is achieved, cash payments will be made after the end of the performance period based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the RSUs as liability awards. The table below presents information related to share-based compensation (in millions):

 

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Table of Contents
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Share-based compensation expense (a)

   $ 13       $ 11       $ 40       $ 26   

 

     June 30, 2013    December 31, 2012

Unrecognized share-based compensation

   $45    $33

 

(a) Includes $3 million and $11 million of expense recognized in merger integration-related costs for the three and six months ended June 30, 2013, respectively. Includes $3 million and $7 million of expense recognized in merger integration-related costs for the three and six months ended June 30, 2012, respectively.

Profit Sharing Plans. In 2013 and 2012, a majority of all employees participate in profit sharing plans, which pay 15% of total pre-tax earnings, excluding special items and share-based compensation expense, to eligible employees when pre-tax profit, excluding special items, profit sharing expense and share-based compensation program expense, exceeds $10 million. Eligible U.S. co-workers in each participating work group receive a profit sharing payout using a formula based on the ratio of each qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic workgroups. The international profit sharing plan pays eligible non-U.S. co-workers the same percentage of eligible pay that is calculated under the U.S. profit sharing plan. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations. Our profit sharing plan will change in 2014. Beginning with 2014, pilots’ share of profit sharing payments will be limited to an amount that is their pro-rata share of 10% of the Company’s profit up to a pre-tax margin of 6.9% and 20% of the Company’s profit in excess of a pre-tax margin of 6.9%. The profit sharing plan for the other workgroups is unchanged.

NOTE 6—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements (in millions):

 

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Table of Contents
     June 30, 2013     December 31, 2012  
     Total     Level 1      Level 2     Level 3     Total     Level 1      Level 2      Level 3  
     UAL  

Cash and cash equivalents

   $ 4,143      $ 4,143       $ —        $ —        $ 4,770      $ 4,770       $ —         $ —     

Short-term investments:

                   

Asset-backed securities

     762        —           762        —          715        —           715         —     

Corporate debt

     511        —           511        —          537        —           537         —     

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

     358        —           358        —          367        —           367         —     

Auction rate securities

     115        —           —          115        116        —           —           116   

Other short-term investments

     75        —           75        —          38        —           38         —     

Enhanced equipment trust certificates (“EETC”)

     62        —           —          62        63        —           —           63   

Fuel derivative asset (liability), net

     (23     —           (23     —          46        —           46         —     

Foreign currency derivatives, net

     1        —           1        —          —          —           —           —     

Restricted cash

     435        435         —          —          447        447         —           —     
     United  

Cash and cash equivalents

   $ 4,137      $ 4,137       $ —        $ —        $ 4,765      $ 4,765       $ —         $ —     

Short-term investments:

                   

Asset-backed securities

     762        —           762        —          715        —           715         —     

Corporate debt

     511        —           511        —          537        —           537         —     

CDARS

     358        —           358        —          367        —           367         —     

Auction rate securities

     115        —           —          115        116        —           —           116   

Other short-term investments

     75        —           75        —          38        —           38         —     

EETC

     62        —           —          62        63        —           —           63   

Fuel derivative asset (liability), net

     (23     —           (23     —          46        —           46         —     

Foreign currency derivatives, net

     1        —           1        —          —          —           —           —     

Restricted cash

     435        435         —          —          447        447         —           —     

Convertible debt derivative asset

     395        —           —          395        268        —           —           268   

Convertible debt option liability

     (199     —           —          (199     (128     —           —           (128

Available-for-sale investment maturities — The short-term investments and EETC securities shown in the table above are classified as available-for-sale. Short-term investments have maturities of less than one year except for asset-backed securities, corporate debt and auction rate securities. As of June 30, 2013, asset-backed securities have remaining maturities of approximately one to 42 years, corporate debt securities have remaining maturities of approximately one to 22 years, and auction rate securities have remaining maturities of approximately one to 33 years. The EETC securities have various maturities with the final maturity in 2019.

The tables below present disclosures about the activity for “Level 3” financial assets and financial liabilities (in millions):

 

17


Table of Contents
     Three Months Ended June 30,  
     2013      2012  

UAL

   Auction Rate
Securities
     EETC      Auction Rate
Securities
     EETC  

Balance at March 31

   $ 108       $ 61       $ 112       $ 62   

Settlements

     —           —           —           —     

Gains (losses):

           

Reported in earnings—realized

     —           —           —           —     

Reported in earnings—unrealized

     —           —           —           —     

Reported in other comprehensive income (loss)

     7         1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30

   $ 115       $ 62       $ 112       $ 63   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     2013     2012  

UAL

   Auction Rate
Securities
    EETC     Auction Rate
Securities
    EETC  

Balance at January 1

   $ 116      $ 63      $ 113      $ 60   

Settlements

     (10     (2     —          (2

Gains (losses):

        

Reported in earnings—realized

     2        —          —          —     

Reported in earnings—unrealized

     1        —          (1     —     

Reported in other comprehensive income (loss)

     6        1        —          5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30

   $ 115      $ 62      $ 112      $ 63   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents
     Three Months Ended June 30,  
     2013      2012  

United

   Auction
Rate
Securities
     Convertible
Debt
Supplemental
Derivative
Asset
    Convertible
Debt
Conversion
Option
Liability
    EETC      Auction
Rate
Securities
     Convertible
Debt
Supplemental
Derivative
Asset
     Convertible
Debt
Conversion
Option
Liability
    EETC  

Balance at March 31

   $ 108       $ 413      $ (209   $ 61       $ 112       $ 231       $ (119   $ 62   
Settlements      —           —          —          —           —           —           —          —     

Gains (losses):

                    

Reported in earnings:

                    

Realized

     —           —          —          —           —           —           —          —     

Unrealized

     —           (18     10        —           —           58         (28     —     

Reported in other comprehensive income (loss)

     7         —          —          1         —           —           —          1   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at June 30

   $ 115       $ 395      $ (199   $ 62       $ 112       $ 289       $ (147   $ 63   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2013     2012  

United

   Auction
Rate
Securities
    Convertible
Debt
Supplemental
Derivative
Asset
     Convertible
Debt
Conversion
Option
Liability
    EETC     Auction
Rate
Securities
    Convertible
Debt
Supplemental
Derivative
Asset
     Convertible
Debt
Conversion
Option
Liability
    EETC  

Balance at January 1

   $ 116      $ 268       $ (128   $ 63      $ 113      $ 193       $ (95   $ 60   
Settlements      (10     —           —          (2     —          —           —          (2

Gains (losses):

                  

Reported in earnings:

                  

Realized

     2        —           —          —          —          —           —          —     

Unrealized

     1        127         (71     —          (1     96         (52     —     

Reported in other comprehensive income (loss)

     6        —           —          1        —          —           —          5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30

   $ 115      $ 395       $ (199   $ 62      $ 112      $ 289       $ (147   $ 63   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

As of June 30, 2013, the Company’s auction rate securities, which had a par value of $125 million, were variable-rate debt instruments with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that the Company holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

As of June 30, 2013, United’s EETC securities, which were repurchased in open market transactions in 2007, have unrealized gains of $3 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

United’s debt-related derivatives presented in the tables above relate to (a) supplemental indenture agreements that provide that United’s convertible debt is convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in United’s convertible debt that are required to be separated and accounted for as though they are free-standing derivatives as a result of the United debt becoming convertible into the common stock of a different reporting entity. The derivatives described above relate to the 6% convertible junior subordinated debentures due 2030 and the 4.5% convertible notes due 2015. These derivatives are reported in United’s separate financial statements and eliminated in consolidation for UAL.

 

19


Table of Contents

Derivative instruments and investments presented in the tables above have the same fair value as their carrying value. The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above (in millions):

 

Fair Value of Debt by Fair Value Hierarchy Level

 
     June 30, 2013      December 31, 2012  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  
            Total      Level 1      Level 2      Level 3             Total      Level 1      Level 2      Level 3  

UAL debt

   $ 11,123       $ 12,153       $       $ 7,589       $ 4,564       $ 12,252       $ 13,419       $       $ 8,045       $ 5,374   

United debt

     10,916         11,553                 6,989         4,564         11,850         12,460                 7,086         5,374   

 

Quantitative Information About Level 3 Fair Value Measurements (in millions)

Item

   Fair Value at
June 30, 2013
   

Valuation

Technique

  

Unobservable Input

  

Range (Weighted
Average)

Auction rate securities    $ 115      Valuation Service / Broker Quotes    Broker quotes (a)    NA
EETC      62      Discounted Cash Flows    Structure credit risk (b)    5%
Convertible debt derivative asset      395      Binomial Lattice Model   

Expected volatility (c)

Own credit risk (d)

  

45% - 60% (47%)

6%

Convertible debt option liability      (199   Binomial Lattice Model   

Expected volatility (c)

Own credit risk (d)

  

45% - 60% (47%)

6%

 

(a) Broker quotes obtained by a third-party valuation service.
(b) Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use in pricing the instruments.
(c) Represents the range in volatility estimates that the Company has determined market participants would use when pricing the instruments.
(d) Represents the range of Company-specific risk adjustments that the Company has determined market participants would use as a model input.

Valuation Processes—Level 3 Measurements—Depending on the instrument, the Company utilizes broker quotes obtained from third-party valuation services, discounted cash flow methods, or option pricing methods, as indicated above. Valuations using discounted cash flow methods are generally conducted by the Company. Valuations using option pricing models are generally provided to the Company by third-party valuation experts. Each reporting period, the Company reviews the unobservable inputs used by third-party valuation experts for reasonableness utilizing relevant information available to the Company from other sources.

As of June 30, 2013, the Company began using broker quotes obtained from a valuation service (in replacement of a discounted cash flows method) for valuing auction rate securities. This approach provides the best available information.

Sensitivity Analysis—Level 3 Measurements—Changes in the structure credit risk would be unlikely to cause material changes in the fair value of the EETCs.

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

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

 

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Description

  

Fair Value Methodology

Cash and cash equivalents

   The carrying amounts approximate fair value because of the short-term maturity of these assets.

Short-term investments and Restricted cash

   Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, (c) internally-developed models of the expected future cash flows related to the securities, or (d) broker quotes obtained by third-party valuation services.

Fuel derivatives

   Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.

Foreign currency derivatives

   Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.

Debt

   Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.

Convertible debt derivative asset and option liability

   United used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and discount rate.

NOTE 7—HEDGING ACTIVITIES

Aircraft Fuel Hedges. To protect against increases in the prices of aircraft fuel, the Company routinely hedges a portion of its future fuel requirements. As of June 30, 2013, the Company had hedged approximately 47% and 18% of its projected fuel requirements (942 million and 706 million gallons, respectively) for the remainder of 2013 and 2014, respectively, with commonly used financial hedge instruments based on aircraft fuel or closely related commodities, such as heating oil, diesel fuel and crude oil. As of June 30, 2013, the Company had fuel hedges expiring through December 2014. The Company does not enter into derivative instruments for non-risk management purposes.

Upon proper qualification, the Company accounts for certain fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted hedge accounting treatment. The types of instruments the Company utilizes that qualify for special hedge accounting treatment typically include swaps, call options, collars (which consist of a purchased call option and a sold put option) and four-way collars (a collar with a higher strike sold call option and a lower strike purchased put option). Generally, utilizing hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. The Company is exposed to the risk that its hedges may not be effective in offsetting changes in the cost of fuel and that its hedges may not continue to qualify for hedge accounting. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is classified as Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.

The Company also utilizes certain derivative instruments that are economic hedges but do not qualify for hedge accounting under U.S. GAAP. As with derivatives that qualify for hedge accounting, the purpose of these economic hedges is to mitigate the adverse financial impact of potential increases in the price of fuel. Currently, the only such economic hedges in the Company’s hedging portfolio are three-way collars (which consist of a collar with a cap on maximum price protection available). The Company records changes in the fair value of three-way collars to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.

If the Company terminates a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs. In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the condensed statements of consolidated cash flows.

 

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

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

 

Classification

  

Balance Sheet Location

   June 30, 2013      December 31, 2012  

Derivatives designated as cash flow hedges

        

Assets:

        

Fuel contracts due within one year

   Receivables    $ 6       $ 7   
     

 

 

    

 

 

 

Liabilities:

        

Fuel contracts due within one year

   Current liabilities: Other    $ 4       $ 2   
Fuel contracts with maturities greater than one year    Other liabilities and deferred credits: Other    $ 3       $ —     
     

 

 

    

 

 

 

Total liabilities

      $ 7       $ 2   
     

 

 

    

 

 

 

Derivatives not designated as hedges

        

Assets:

        

Fuel contracts due within one year

   Receivables    $ 4       $ 44   
     

 

 

    

 

 

 

Liabilities:

        

Fuel contracts due within one year

   Current liabilities: Other    $ 22       $ 2   
Fuel contracts with maturities greater than one year    Other liabilities and deferred credits: Other      4         1   
     

 

 

    

 

 

 

Total liabilities

      $ 26       $ 3   
     

 

 

    

 

 

 

Total derivatives

        

Assets:

        

Fuel contracts due within one year

   Receivables    $ 10       $ 51   
     

 

 

    

 

 

 

Liabilities:

        

Fuel contracts due within one year

   Current liabilities: Other    $ 26       $ 4   
Fuel contracts with maturities greater than one year    Other liabilities and deferred credits: Other      7         1   
     

 

 

    

 

 

 

Total liabilities

      $ 33       $ 5   
     

 

 

    

 

 

 

The following tables present the impact of derivative instruments and their location within the Company’s unaudited statements of consolidated operations (in millions):

 

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Derivatives designated as cash flow hedges

 

     Amount of  Loss
Recognized
in AOCI on Derivatives
(Effective Portion)
    Loss Reclassified from
AOCI into Fuel Expense
    Amount of Loss
Recognized  in Nonoperating
income (expense):
Miscellaneous, net
(Ineffective Portion)
 
     Three Months Ended
June 30,
    Three Months Ended
June 30,
    Three Months Ended
June 30,
 
     2013     2012     2013     2012     2013     2012  

Fuel contracts

   $ (19   $ (262   $ (9   $ (38   $ (1   $ (29

Derivatives designated as cash flow hedges

 

     Amount of Loss
Recognized
in AOCI on Derivatives
Effective Portion)
    Loss Reclassified from
AOCI into Fuel Expense
    Amount of Loss
Recognized  in Nonoperating
income (expense):
Miscellaneous, net
(Ineffective Portion)
 
     Six Months Ended
June 30,
    Six Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012     2013     2012  

Fuel contracts

   $ (28   $ (169   $ (18   $ (69   $ (1   $ (4

Derivatives not designated as hedges

 

Fuel contracts

                   
     Three Months Ended June 30,      Six Months Ended June 30,  
     2013     2012      2013     2012  
Amount of loss recognized in Nonoperating income (expense):          
Miscellaneous, net    $ (81   $ —         $ (31   $ —     

Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The following table presents information related to the Company’s derivative credit risk as of June 30, 2013 (in millions):

 

Net derivative liability with counterparties

   $ 23   
Collateral posted by the Company with counterparties (classified as an other current receivable)      —     

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

     1   

NOTE 8—COMMITMENTS AND CONTINGENCIES

Commitments. On April 29, 2013, United entered into an agreement to purchase 30 Embraer EMB175 regional jets, scheduled for delivery in 2014 and 2015.

On June 17, 2013, United entered into supplemental agreements to United’s 787 aircraft purchase agreements with The Boeing Company (“Boeing”) to add to its existing firm order of Boeing 787 widebody aircraft ten Boeing 787-10 aircraft, convert an existing firm order for ten Boeing 787 aircraft into Boeing 787-10 aircraft and make certain other changes to those agreements. On June 19, 2013, United entered into amendments to its A350 purchase agreement with Airbus S.A.S. (“Airbus”) to add to its existing firm order of Airbus A350 widebody aircraft ten Airbus A350-1000 aircraft, convert its existing firm order for 25 Airbus A350-900 aircraft into Airbus A350-1000 aircraft and make certain other changes to the agreement. The Company expects to take delivery of the Boeing 787-10 aircraft and Airbus A350-1000 aircraft between 2018 and 2024.

 

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As of June 30, 2013, UAL and United had the following commitments to purchase aircraft:

UAL Aircraft Commitments. UAL had firm commitments to purchase 100 new Boeing 737 MAX 9 aircraft scheduled for delivery from 2018 through 2025. UAL also had options to purchase additional Boeing 737 MAX 9 aircraft. UAL intends in the future to assign its interest under the purchase agreement for the 737 MAX 9 aircraft to United.

United Aircraft Commitments. United had firm commitments to purchase 199 new aircraft (59 Boeing 787 aircraft, 75 Boeing 737 aircraft, 35 Airbus A350-1000 aircraft, and 30 Embraer EMB175 aircraft) scheduled for delivery from July 1, 2013 through 2025. United also had options and purchase rights for additional aircraft. In the second quarter of 2013, United took delivery of six Boeing 737-900ER. In the remainder of 2013, United expects to take delivery of twelve Boeing 737-900ER aircraft and two Boeing 787-8 aircraft.

United had arranged for EETC financing of 14 Boeing 737-900ER aircraft, six of which were delivered during the second quarter of 2013 and two of which are scheduled to be delivered during the remainder of 2013. United also has arranged for EETC financing of one Boeing 787-8 aircraft and a bank debt financing commitment for one Boeing 737-900ER aircraft scheduled for delivery in the second half of 2013. In addition, United had secured backstop financing commitments from certain of its aircraft manufacturers for a limited number of its future aircraft deliveries, subject to certain customary conditions. However, the Company does not have backstop financing or any financing currently in place for its other firm aircraft orders. Financing will be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures. The Company can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to the Company on acceptable terms when necessary or at all. See Note 9 of this report for additional information on aircraft financing.

The Company has concluded its discussions with Boeing regarding certain contractual matters, including expected fuel burn, for current and future deliveries of certain Boeing 787 aircraft, and has reached a resolution with Boeing regarding compensation to be received in connection with those matters.

The table below summarizes the capital commitments of UAL and United (including those intended to be assigned from UAL) as of June 30, 2013, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and acquisition of information technology services and assets:

 

(In billions)  

Last six months of 2013

   $ 1.2   

2014

     2.5   

2015

     2.0   

2016

     2.4   

2017

     1.4   

After 2017

     14.0   
  

 

 

 
   $ 23.5   
  

 

 

 

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

Aircraft Operating Leases and Capacity Purchase Agreements

In May 2013, United entered into a capacity purchase agreement with SkyWest Airlines, Inc. (“SkyWest”), a wholly-owned subsidiary of SkyWest, Inc., to operate 40 Embraer EMB175 aircraft under the United Express brand. SkyWest will purchase these 76-seat aircraft with deliveries in 2014 and 2015. These 40 aircraft are in addition to United’s April 2013 agreement to purchase 30 Embraer EMB175 aircraft, which will be operated by a different United Express carrier.

The table below summarizes the Company’s future payments through the end of the terms of our capacity purchase commitments, excluding variable pass-through costs such as fuel and landing fees, among others. In addition, the table below summarizes the Company’s scheduled future minimum lease payments under aircraft operating leases having initial or remaining noncancelable lease terms of more than one year and includes aircraft rent under capacity purchase agreements, including estimated commitments from the Embraer EMB175 aircraft which will be delivered starting in 2014.

 

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(In millions)    Capacity
Purchase
Agreements
     Aircraft
Operating
Leases
 

Last six months of 2013

   $ 968       $ 714   

2014

     1,722         1,571   

2015

     1,626         1,355   

2016

     1,400         1,122   

2017

     1,278         1,009   

After 2017

     4,388         2,590   
  

 

 

    

 

 

 
   $ 11,382       $ 8,361   
  

 

 

    

 

 

 

Facility and Other Operating Leases

In April 2013, United signed a 20-year lease extension with the Port Authority of New York and New Jersey to continue its use of Terminal C1 and C2 at Newark Liberty International Airport (“Newark”). United also committed to invest an additional $150 million in facility upgrades at Newark to enhance the customer experience and efficiency of the operation. The table below summarizes the Company’s scheduled future minimum lease payments under facility operating leases having initial or remaining noncancelable lease terms of more than one year.

 

(In millions)    Facility and Other
Operating Leases
 

Last six months of 2013

   $ 594   

2014

     1,038   

2015

     900   

2016

     829   

2017

     782   

After 2017

     6,814   
  

 

 

 
   $ 10,957   
  

 

 

 

Guarantees and Off-Balance Sheet Financing

Guarantees. United is the guarantor of approximately $1.9 billion in aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon. These bonds, issued by various airport municipalities, are payable solely from rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with $1.7 billion of these obligations are accounted for as operating leases with the associated expense recorded on a straight-line basis resulting in ratable accrual of the lease obligation over the expected lease term. The leasing arrangements associated with $180 million of these obligations are accounted for as capital leases. All these bonds are due between 2015 and 2038.

In the Company’s financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate (“LIBOR”), for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject in most cases to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs. At June 30, 2013, the Company had $2.0 billion of floating rate debt and $317 million of fixed rate debt, with remaining terms of up to nine years, that are subject to these increased cost provisions. In several financing transactions involving loans or leases from non-U.S. entities, with remaining terms of up to eight years and an aggregate balance of $2.2 billion, the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions.

Credit Facilities. On March 27, 2013, United and UAL entered into a new Credit and Guaranty Agreement (the “Credit Agreement”) as the borrower and guarantor, respectively, that provides United with a $1.0 billion revolving credit facility. As of June 30, 2013, United had its entire capacity of $1.0 billion available under the revolving credit facility. See Note 9 of this report for more information.

 

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Labor Negotiations. As of June 30, 2013, United had approximately 88,000 active employees, of whom approximately 80% were represented by various labor organizations. Having reached a ratified joint collective bargaining agreement with our pilots represented by the Air Line Pilots Association, International, we are currently in the process of negotiating joint collective bargaining agreements with our other major work groups, including our public contact co-workers, technicians, flight attendants and dispatchers.

NOTE 9—DEBT

As of June 30, 2013, a substantial portion of our assets are pledged as collateral for our debt. These assets principally consist of aircraft, route authorities and loyalty program intangible assets. As of June 30, 2013, the Company was in compliance with its debt covenants.

Unsecured 6.375% Senior Notes. In May 2013, UAL issued $300 million aggregate principal amount of 6.375% Senior Notes due June 1, 2018. The notes are fully and unconditionally guaranteed and recorded by United on its balance sheet as debt.

6% Convertible Senior Notes. During the second quarter of 2013, UAL issued approximately 22 million shares of UAL common stock pursuant to agreements that UAL entered into with certain of its securityholders in exchange for approximately $189 million in aggregate principal amount of UAL’s outstanding 6% convertible senior notes due 2029 held by such securityholders. See Note 3 of this report for more information.

2013 Credit and Guaranty Agreement. On March 27, 2013, United and UAL entered into the Credit Agreement as the borrower and guarantor, respectively. The Credit Agreement consists of a $900 million term loan due April 1, 2019 and a $1.0 billion revolving credit facility available for drawing until April 1, 2018. As of June 30, 2013, United had its entire capacity of $1.0 billion available under the revolving credit facility. The obligations of United under the Credit Agreement are secured by liens on certain international route authorities between certain specified cities, certain take-off and landing rights and related assets of United.

Borrowings under the Credit Agreement bear interest at a variable rate equal to LIBOR, subject to a 1% floor, plus a margin of 3.0% per annum, or another rate based on certain market interest rates, plus a margin of 2.0% per annum. The principal amount of the term loan must be repaid in consecutive quarterly installments of 0.25% of the original principal amount thereof, commencing on June 30, 2013, with any unpaid balance due on April 1, 2019. United may prepay all or a portion of the loan from time to time, at par plus accrued and unpaid interest. United pays a commitment fee equal to 0.75% per annum on the undrawn amount available under the revolving credit facility.

The Credit Agreement includes covenants that, among other things, require the Company to maintain at least $3.0 billion of unrestricted liquidity and a minimum ratio of appraised value of collateral to the outstanding obligations under the Credit Agreement of 1.67 to 1.0, and restrict the Company’s ability to incur additional indebtedness, issue preferred stock, make investments or pay dividends. The Credit Agreement contains events of default customary for this type of financing, including a cross default and cross acceleration provision to certain other material indebtedness of the Company. Under the provisions of the Credit Agreement, UAL’s ability to pay dividends on or repurchase UAL’s common stock is restricted.

United Amended Credit Facility. On March 27, 2013, the Company used $900 million from the Credit Agreement, together with approximately $300 million of cash to retire the entire principal balance of a $1.2 billion term loan due 2014 that was outstanding under United’s Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, dated as of February 2, 2007 (the “Amended Credit Facility”). The Amended Credit Facility was terminated concurrently with the repayment of the term loan.

$500 Million Revolving Credit Facility. On March 27, 2013, the Company terminated the $500 million revolving credit facility that it had previously entered into in December 2011. There were no outstanding borrowings under the revolving credit facility.

Debt Redemptions. On February 1, 2013, United redeemed all of the $400 million aggregate principal amount of its 9.875% Senior Secured Notes due 2013 and $200 million aggregate principal amount of 12.0% Senior Second Lien Notes due 2013. On February 8, 2013, United redeemed all $123 million aggregate principal amount of the B tranche of the 2006-1 EETC equipment notes due 2013. On April 1, 2013, United redeemed all of the $180 million aggregate principal amount of the senior tranche of the 2006-1 EETC equipment notes due 2013.

EETCs. In October 2012, United created two pass-through trusts, one of which issued $712 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 4% and the second of which issued $132 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 5.5%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $844 million, are used to purchase equipment notes issued by United. Of the $844 million in proceeds raised by the pass-through trusts, United received $696 million as of June 30, 2013,

 

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of which $202 million and $403 million was received in the three and six months ended June 30, 2013, respectively. United expects to receive the remaining proceeds from the issuance through the second half of 2013 as aircraft are delivered and United issues equipment notes to the trusts. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The proceeds have been and are expected to fund the acquisition of new aircraft.

In December 2012, United created one pass-through trust which issued $425 million aggregate principal amount of Class C pass-through certificates with a stated interest rate of 6.125%. The proceeds of the issuance of the Class C pass-through certificates are used to purchase equipment notes issued by United related to the aircraft financed in both the March and October 2012 EETC financings. Of the $425 million in proceeds raised by the pass-through trust, United received $385 million as of June 30, 2013, of which $53 million and $107 million was received in the three and six months ended June 30, 2013, respectively. United expects to receive the remaining proceeds from the issuance through the second half of 2013 as aircraft are delivered and United issues equipment notes to the trust. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates.

The table below presents contractual principal payments at June 30, 2013 under then-outstanding long-term debt agreements in each of the next five calendar years (in millions):

 

     UAL      United  

Last six months of 2013

   $ 455       $ 455   

2014

     940         940   

2015

     2,037         2,037   

2016

     1,014         1,014   

2017

     577         577   

After 2017

     6,260         6,104   
  

 

 

    

 

 

 
   $ 11,283       $ 11,127   
  

 

 

    

 

 

 

NOTE 10—SPECIAL ITEMS

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013      2012     2013     2012  

Merger integration-related costs

   $ 45       $ 137      $ 115      $ 271   

Additional costs associated with the temporarily grounded Boeing 787 aircraft

     7         —          18        —     

Voluntary severance and benefits

     —           76        14        125   

Gains on sale of assets and other special items, net

     —           (7     (3     (26
  

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal special charges

     52         206        144        370   

Income tax benefit

     —           —          —          (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Total special charges, net of income taxes

   $ 52       $ 206      $ 144      $ 368   
  

 

 

    

 

 

   

 

 

   

 

 

 

Merger integration-related costs include compensation costs related to systems integration and training, costs to repaint aircraft and other branding activities, new uniforms, costs to write-off or accelerate depreciation on systems and facilities that are no longer used or planned to be used for significantly shorter periods, relocation costs for employees and severance primarily associated with administrative headcount reductions.

During the six months ended June 30, 2013, the Company recorded $14 million associated with a voluntary program offered by United in which flight attendants took an unpaid 13-month leave of absence. The flight attendants continue to receive medical benefits and other company benefits while on leave under this program. Approximately 1,300 flight attendants opted to participate in the program. In addition, the Company recorded $18 million associated with the temporary grounding of its Boeing 787 aircraft, $7 million of which was recorded during the second quarter of 2013. The charges are comprised of aircraft depreciation expense and dedicated personnel costs that the Company incurred while the aircraft were grounded. The aircraft returned to service in May 2013. Also, the Company recorded a $5 million gain related to a contract termination and $2 million in losses on the sale of assets.

 

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During the three and six months ended June 30, 2012, the Company recorded $76 million and $125 million of severance and benefits associated with three voluntary employee programs, respectively. During the first quarter of 2012, approximately 400 mechanics offered to retire early in exchange for a cash severance payment that was based on the number of years of service each employee had accumulated. The Company also offered a voluntary leave of absence program that approximately 1,800 flight attendants accepted, which allows for continued medical coverage during the leave of absence period. During the second quarter of 2012, as part of the recently amended collective bargaining agreement with the Association of Flight Attendants, the Company offered a voluntary program for flight attendants at United to retire early in exchange for a cash severance payment. The payments are dependent on the number of years of service each employee has accumulated. Approximately 1,300 flight attendants accepted this program and the Company estimates the amount for this voluntary program to be approximately $76 million.

In March 2013, the Company agreed to sell up to 30 Boeing 757-200 aircraft to FedEx Corporation beginning in April 2013. As of December 31, 2012, the Company operated 133 such aircraft. Given the planned sale of up to 30 of these aircraft, the Company evaluated the entire fleet and determined that no impairment existed. However, the Company adjusted the salvage value of the aircraft designated for sale to its sales price and will record additional depreciation from the agreement date to the date of sale. This additional depreciation is not classified as special. The additional depreciation in the first six months of 2013 totaled $40 million and is estimated to be approximately $80 million for the full year 2013.

Accruals

The accrual for severance and medical costs was $38 million as of June 30, 2013, compared to $153 million as of June 30, 2012. In addition, the accrual balance of future lease payments on permanently grounded aircraft was $3 million as of June 30, 2013, compared to $8 million as of June 30, 2012.

The severance-related accrual as of June 30, 2013 is expected to be paid through 2015. Lease payments for grounded aircraft are expected to continue through 2013.

NOTE 11—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The tables below present the components of the Company’s AOCI, net of tax (in millions):

 

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UAL    Pension and
Other
Postretirement
Unrecognized
Actuarial
Gains (Losses)
and  Prior Service
Cost
    Unrealized
Gain (Loss)
on
Derivatives
    Other     Total  

Balance at March 31, 2013

   $ (1,021   $ (10   $ 4      $ (1,027

Other comprehensive income (loss) before reclassifications

     —          (19     9        (10

Actuarial gain due to curtailment and remeasurement

     442        —          —          442   

Amounts reclassified from accumulated other comprehensive income

     17        9        —          26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     459        (10     9        458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (562   $ (20   $ 13      $ (569
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ (1,042   $ (10   $ 6      $ (1,046

Other comprehensive income (loss) before reclassifications

     —          (28     7        (21

Actuarial gain due to curtailment and remeasurement

     442        —          —          442   

Amounts reclassified from accumulated other comprehensive income

     38        18        —          56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     480        (10     7        477   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (562   $ (20   $ 13      $ (569
  

 

 

   

 

 

   

 

 

   

 

 

 
UAL    Pension and
Other
Postretirement
Unrecognized
Actuarial
Gains (Losses)
and Prior Service
Cost
    Unrealized
Gain (Loss)
on
Derivatives
    Other     Total  

Balance at March 31, 2012

   $ (308   $ 25      $ 3      $ (280

Other comprehensive loss before reclassifications

     —          (262     —          (262

Amounts reclassified from accumulated other comprehensive income

     5        38        —          43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     5        (224     —          (219
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ (303   $ (199   $ 3      $ (499
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Balance at December 31, 2011

   $ (312   $ (99   $ (6   $ (417

Other comprehensive income (loss) before reclassifications

     —          (169     9        (160

Amounts reclassified from accumulated other comprehensive income

     9        69        —          78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     9        (100     9        (82
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ (303   $ (199   $ 3      $ (499
  

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents
United    Pension and
Other
Postretirement
Unrecognized
Actuarial
Gains (Losses)
and Prior Service
Cost
    Unrealized
Gain (Loss)
on
Derivatives
    Other     Income Tax
Benefit
(Expense)
    Total  

Balance at March 31, 2013

   $ (1,021   $ (10   $ 4      $ —        $ (1,027

Other comprehensive income (loss) before reclassifications

     —          (19     9        —          (10

Actuarial gain due to curtailment and remeasurement

     442        —          —          —          442   

Amounts reclassified from accumulated other comprehensive income

     17        9                      26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     459        (10     9               458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (562   $ (20   $ 13      $      $ (569
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          

Balance at December 31, 2012

   $ (1,042   $ (10   $ 5      $ (6   $ (1,053

Other comprehensive income (loss) before reclassifications

            (28     8               (20

Actuarial gain due to curtailment and remeasurement

     442                             442   

Amounts reclassified from accumulated other comprehensive income

     38        18               6        62   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     480        (10     8        6        484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (562   $ (20   $ 13      $      $ (569
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
United    Pension and
Other
Postretirement
Unrecognized
Actuarial
Gains (Losses)
and Prior Service
Cost
    Unrealized
Gain (Loss)
on
Derivatives
    Other     Income Tax
Expense
    Total  

Balance at March 31, 2012

   $ (308   $ 25      $ 2      $ (6   $ (287

Other comprehensive loss before reclassifications

     —          (262     (1     —          (263

Amounts reclassified from accumulated other comprehensive income

     5        38        —          —          43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     5        (224     (1     —          (220
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ (303   $ (199   $ 1      $ (6   $ (507
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          

Balance at December 31, 2011

   $ (312   $ (99   $ (8   $ (6   $ (425

Other comprehensive income (loss) before reclassifications

     —          (169     9        —          (160

Amounts reclassified from accumulated other comprehensive income

     9        69        —          —          78   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     9        (100     9        —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ (303   $ (199   $ 1      $ (6   $ (507
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

UAL

Details about AOCI Components

  Amount Reclassified from AOCI to Income           Affected Line Item in the
Statement Where Net Income  is
Presented
    Three Months Ended
June 30,
          Six Months Ended
June 30,
           
    2013      2012           2013     2012            

Derivatives designated as cash flow hedges

              

Fuel contracts-reclassifications of losses into earnings (a)

  $ 9       $ 38        $ 18      $ 69        Aircraft fuel

Amortization of pension and post-retirement items

              

Amortization of unrecognized loss and prior service cost (a)

    17         5        (b     38        9        (b   Salaries and related costs

 

(a) Income tax expense offset by Company’s valuation allowance.
(b) This accumulated other comprehensive income component is included in the computation of net periodic pension costs (see Note 5 of this report for additional details.)

 

United

Details about AOCI Components

   Amount Reclassified from AOCI to Income    

Affected Line Item in

the Statement Where

Net Income is Presented

     Three Months Ended
June  30,
    Six Months Ended
June 30,
     
     2013      2012     2013      2012      

Derivatives designated as cash flow hedges

            

Fuel contracts-reclassifications of losses into earnings (a)

   $ 9       $ 38      $ 18       $ 69      Aircraft fuel

Amortization of pension and post-retirement items

            

Amortization of unrecognized loss and prior service cost (a)

     17         5 (b)      38         9 (b)    Salaries and related costs

Income tax expense on other comprehensive income

     —           —          6         —        Income tax expense (benefit)

 

(a) Income tax expense offset by Company’s valuation allowance.
(b) This accumulated other comprehensive income component is included in the computation of net periodic pension costs (see Note 5 of this report for additional details.)

 

30


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL” or the “Company”) is a holding company and its principal, wholly-owned subsidiary is United Airlines, Inc. (together with its consolidated subsidiaries, “United”). This Quarterly Report on Form 10-Q is a combined report of UAL and United including their respective consolidated financial statements. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United’s operating revenues and operating expenses comprise nearly 100% of UAL’s revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL’s assets, liabilities and operating cash flows. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained. We sometimes use the words “we,” “our,” “us,” and the “Company” in this report for disclosures that relate to all of UAL and United.

The Company transports people and cargo through its mainline operations, which utilize jet aircraft with at least 108 seats, and regional operations, which utilize smaller aircraft that are operated under contract by United Express carriers. The Company serves virtually every major market around the world, either directly or through participation in Star Alliance®, the world’s largest airline alliance. The Company offers approximately 5,500 daily departures to 381 destinations.

Second Quarter Financial Highlights

 

  Second quarter 2013 net income was $521 million, or $1.35 diluted earnings per share, excluding $52 million of special charges. Including special charges, second quarter 2013 net income was $469 million, or $1.21 diluted earnings per share.

 

  Passenger revenue decreased 1.1%, to $8.7 billion, during the second quarter of 2013 as compared to the second quarter of 2012.

 

  Second quarter 2013 aircraft fuel cost decreased 10.0% year-over-year due mainly to an 8.2% decline in fuel prices.

 

  Unrestricted liquidity was $7.0 billion, including $1.0 billion of undrawn commitments.

Second Quarter Operational Highlights

 

  For the quarter ended June 30, 2013, United recorded a U.S. Department of Transportation on-time arrival rate of 75.6% and a system completion factor of 99.1%.

 

  Consolidated traffic and capacity decreased 1.7% and 2.1%, respectively, during the second quarter of 2013 as compared to the second quarter of 2012. The Company’s load factor for the second quarter of 2013 was 84.7%.

 

  The Company took delivery of six new Boeing 737-900ER aircraft during the second quarter of 2013.

Outlook

In order to generate sustained profitability over the business cycle, the Company manages its capacity to balance with expected demand for travel. For the first six months of 2013, consolidated capacity decreased 3.5% compared to the first six months of 2012. The Company expects full-year 2013 consolidated capacity to decrease 0.75% to 1.75% year-over-year, with full-year 2013 domestic capacity to decrease 0.8% to 1.8% and full-year 2013 international capacity to decrease 0.7% to 1.7%. The Company expects full year 2013 cost per available seat mile (“CASM”) excluding profit sharing, third-party business expense, fuel and special charges to increase 5.5% to 6.5% year-over-year.

RESULTS OF OPERATIONS

The following discussion provides an analysis of results of operations and reasons for material changes therein for the three and six months ended June 30, 2013 as compared to the corresponding periods in 2012.

Second Quarter 2013 Compared to Second Quarter 2012

The Company recorded net income of $469 million in the second quarter of 2013 as compared to net income of $339 million in the second quarter of 2012. Excluding special items, the Company had net income of $521 million in the second quarter of 2013 as compared to net income of $545 million in the second quarter of 2012. See “Reconciliation of GAAP to non-GAAP Financial Measures” at the end of this item for additional information related to accounting principles generally accepted in the United States (“GAAP”) to non-GAAP financial measures. We consider a key measure of our performance to be operating income, which was $770 million for the second quarter of 2013, as compared to $575 million for the second quarter of 2012. Significant components of our operating results for the three months ended June 30 are as follows (in millions, except percentage changes):

 

31


Table of Contents
     2013     2012     Increase
(Decrease)
    % Increase
(Decrease)
 

Operating Revenue

   $ 10,001      $ 9,939      $ 62        0.6   

Operating Expense

     9,231        9,364        (133     (1.4
  

 

 

   

 

 

   

 

 

   

Operating Income

     770        575        195        33.9   

Nonoperating Expense

     (299     (235     64        27.2   

Income Tax Expense

     2        1        1        NM   
  

 

 

   

 

 

   

 

 

   

Net Income

   $ 469      $ 339      $ 130        38.3   
  

 

 

   

 

 

   

 

 

   

 

NM—Not meaningful

Certain consolidated statistical information for the Company’s operations for the three months ended June 30 are as follows:

 

     2013     2012     Increase
(Decrease)
    %  Increase
(Decrease)
 

Passengers (thousands) (a)

     35,952        37,071        (1,119     (3.0

Revenue passenger miles (“RPMs”) (millions) (b)

     53,581        54,491        (910     (1.7

Available seat miles (“ASMs”) (millions) (c)

     63,251        64,616        (1,365     (2.1

Passenger load factor (d)

     84.7     84.3     0.4  pts.      N/A   

Passenger revenue per available seat mile (“PRASM”) (cents)

     13.70        13.57        0.13        1.0   

Average yield per revenue passenger mile (cents) (e)

     16.18        16.09        0.09        0.6   

CASM (cents)

     14.59        14.49        0.10        0.7   

Average price per gallon of fuel, including fuel taxes

   $ 3.02      $ 3.29      $ (0.27     (8.2

Fuel gallons consumed (millions)

     1,016        1,035        (19     (1.8

Average full-time equivalent employees

     85,100        84,500        600        0.7   

 

(a) The number of revenue passengers measured by each flight segment flown.
(b) The number of scheduled miles flown by revenue passengers.
(c) The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
(d) Revenue passenger miles divided by available seat miles.
(e) The average passenger revenue received for each revenue passenger mile flown.

Operating Revenue

The table below shows year-over-year comparisons by type of operating revenue for the three months ended June 30 (in millions, except for percentage changes):

 

     2013      2012      Increase
(Decrease)
    % Change  

Passenger—Mainline

   $ 6,829       $ 6,944       $ (115     (1.7

Passenger—Regional

     1,839         1,824         15        0.8   
  

 

 

    

 

 

    

 

 

   

Total passenger revenue

     8,668         8,768         (100     (1.1

Cargo

     236         265         (29     (10.9

Other operating revenue

     1,097         906         191        21.1   
  

 

 

    

 

 

    

 

 

   
   $ 10,001       $ 9,939       $ 62        0.6   
  

 

 

    

 

 

    

 

 

   

The table below presents selected passenger revenue and operating data, broken out by geographic region, expressed as second quarter year-over-year changes:

 

32


Table of Contents
     Domestic     Pacific     Atlantic     Latin     Total
Mainline
    Regional     Consolidated  

Increase (decrease) from 2012 (a):

              

Passenger revenue (in millions)

   $ (132   $ (64   $ 75      $ 6      $ (115   $ 15      $ (100

Passenger revenue

     (3.8 )%      (5.1 )%      4.7     0.9     (1.7 )%      0.8     (1.1 )% 

Average fare per passenger

     2.8     (3.4 )%      5.6     1.3     3.5     (0.1 )%      1.9

Yield

     (0.4 )%      (4.2 )%      6.1     (0.7 )%      0.5     (0.5 )%      0.6

PRASM

         (3.4 )%      6.1     (0.5 )%      0.7     1.1     1.0

Average stage length

     3.2     0.8     (0.8 )%      3.2     3.1     1.5     2.1

Passengers

     (6.4 )%      (1.7 )%      (0.8 )%      (0.4 )%      (5.0 )%      0.9     (3.0 )% 

RPMs (traffic)

     (3.5 )%      (0.9 )%      (1.3 )%      1.7     (2.1 )%      1.3     (1.7 )% 

ASMs (capacity)

     (3.8 )%      (1.8 )%      (1.3 )%      1.4     (2.4 )%      (0.3 )%      (2.1 )% 

Passenger load factor (points)

     0.3        0.7        (0.1     0.2        0.2        1.3        0.4   

 

(a) See Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for the definition of these statistics.

Consolidated passenger revenue in the second quarter of 2013 decreased 1.1% as compared to the year-ago period due to a decline of 3.0% in the number of passengers flown year-over-year as a result of a reduction in capacity of 2.1%, offset in part by an increase in the consolidated average fare per passenger of 1.9%.

Cargo revenue decreased $29 million, or 10.9%, in the second quarter of 2013 as compared to the year-ago period due to lower volumes on freight and mail across all regions.

Other operating revenue in the second quarter of 2013 increased $191 million, or 21.1%, as compared to the year-ago period due primarily to the sale of aircraft fuel to a third party as well as other MileagePlus and marketing-related revenue.

Operating Expenses

The table below includes data related to the Company’s operating expenses for the three months ended June 30 (in millions, except for percentage changes):

 

     2013      2012      Increase
(Decrease)
    %
Change
 

Aircraft fuel

   $ 3,068       $ 3,408       $ (340     (10.0

Salaries and related costs

     2,175         2,024         151        7.5   

Regional capacity purchase

     628         643         (15     (2.3

Landing fees and other rent

     507         503         4        0.8   

Aircraft maintenance materials and outside repairs

     480         432         48        11.1   

Depreciation and amortization

     425         378         47        12.4   

Distribution expenses

     347         345         2        0.6   

Aircraft rent

     235         251         (16     (6.4

Special charges

     52         206         (154     NM   

Other operating expenses

     1,314         1,174         140        11.9   
  

 

 

    

 

 

    

 

 

   
   $ 9,231       $ 9,364       $ (133     (1.4
  

 

 

    

 

 

    

 

 

   

Aircraft fuel expense decreased $340 million, or 10.0%, year-over-year due primarily to an 8.2% decrease in the average price per gallon of fuel and a 1.8% decrease in fuel consumption in the second quarter of 2013 as a result of reduced capacity. The table below presents the significant changes in aircraft fuel cost per gallon in the three month period ended June 30, 2013 as compared to the year-ago period:

 

33


Table of Contents
     (In millions)           Average price per gallon  
     2013     2012     % Change     2013     2012     % Change  

Total aircraft fuel purchase cost excluding fuel hedge impacts

   $ 3,059      $ 3,370        (9.2   $ 3.01      $ 3.26        (7.7

Hedge losses reported in fuel expense

     (9     (38     NM        (0.01     (0.03     NM   
  

 

 

   

 

 

     

 

 

   

 

 

   

Fuel expense as reported

     3,068        3,408        (10.0     3.02        3.29        (8.2

Settled hedge gains (losses) not recorded in fuel expense (a)

     (1     1        NM        —          —          —     
  

 

 

   

 

 

     

 

 

   

 

 

   

Fuel expense including all gains (losses) from settled hedges (b)

   $ 3,069      $ 3,407        (9.9   $ 3.02      $ 3.29        (8.2
  

 

 

   

 

 

     

 

 

   

 

 

   

Total fuel consumption (gallons)

     1,016        1,035        (1.8      

 

(a) Includes ineffectiveness gains (losses) on settled hedges and gains (losses) on settled hedges that were not designated for hedge accounting. These amounts are recorded in Nonoperating income (expense): Miscellaneous, net.
(b) This figure does not include mark-to-market (“MTM”) gains or losses, which the Company records in Nonoperating income (expense): Miscellaneous, net. MTM losses were $81 million and $30 million for the three months ended June 30, 2013 and 2012, respectively.

Salaries and related costs increased $151 million, or 7.5%, in the second quarter of 2013 as compared to the year-ago period primarily due to a 0.7% increase in the number of employees, higher pay rates driven by new collective bargaining agreements as well as increased pension plan costs.

Aircraft maintenance materials and outside repairs increased $48 million, or 11.1%, in the second quarter of 2013 as compared to the year-ago period primarily due to United’s reliability improvement initiatives which increased volumes of airframe checks, engine overhauls, and aircraft modification projects.

Depreciation and amortization increased $47 million, or 12.4%, in the second quarter of 2013 as compared to the year-ago period due to additions in owned property and equipment in the current year, specifically related to aircraft and improvements at airport facilities, as well as accelerated depreciation on Boeing 757-200 aircraft in process of being sold to a third party.

Other operating expenses increased $140 million, or 11.9%, in the second quarter of 2013 as compared to the year-ago period primarily due to the cost of aircraft fuel sold to a third party and an increase in other personnel-related expenses.

Details of the Company’s special charges include the following for the three months ended June 30 (in millions):

 

     2013      2012  

Merger integration-related costs

   $ 45       $ 137   

Additional costs associated with the temporarily grounded Boeing 787 aircraft

     7         —     

Voluntary severance and benefits

     —           76