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 September 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 October 15, 2013 is shown below:

 

United Continental Holdings, Inc.    361,871,592 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 September 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   

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   

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

     33   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     45   

Item 4. Controls and Procedures

     45   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     46   

Item 1A. Risk Factors

     46   

Item 6. Exhibits

     48   

Signatures

     49   

Exhibit Index

     50   

 

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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Operating revenue:

        

Passenger—Mainline

   $ 7,025      $ 6,993      $ 19,792      $ 19,891   

Passenger—Regional

     1,893        1,781        5,353        5,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     8,918        8,774        25,145        25,050   

Cargo

     199        246        662        775   

Other operating revenue

     1,111        889        3,143        2,625   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,228        9,909        28,950        28,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Aircraft fuel

     3,262        3,406        9,380        10,043   

Salaries and related costs

     2,209        2,038        6,511        5,959   

Regional capacity purchase

     621        628        1,837        1,887   

Landing fees and other rent

     540        504        1,544        1,476   

Aircraft maintenance materials and outside repairs

     472        469        1,390        1,308   

Depreciation and amortization

     435        379        1,268        1,137   

Distribution expenses

     377        356        1,052        1,038   

Aircraft rent

     231        245        706        747   

Special charges (Note 10)

     211        514        355        884   

Other operating expenses

     1,362        1,170        3,893        3,467   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,720        9,709        27,936        27,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     508        200        1,014        504   

Nonoperating income (expense):

        

Interest expense

     (195     (202     (590     (631

Interest capitalized

     12        9        35        26   

Interest income

     5        4        16        16   

Miscellaneous, net

     52        4        (48     (7
  

 

 

   

 

 

   

 

 

   

 

 

 
     (126     (185     (587     (596
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     382        15        427        (92

Income tax expense (benefit)

     3        9        (4     11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 379      $ 6      $ 431      $ (103
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, basic

   $ 1.06      $ 0.02      $ 1.25      $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share, diluted

   $ 0.98      $ 0.02      $ 1.15      $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013      2012  

Net income (loss)

   $ 379      $ 6       $ 431       $ (103

Other comprehensive income, net:

          

Net change related to fuel derivative financial instruments

     30        171         20         71   

Net change related to employee benefit plans

     51        4         531         13   

Net change related to investments and other

     (5     5         2         14   
  

 

 

   

 

 

    

 

 

    

 

 

 
     76        180         553         98   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss), net

   $ 455      $ 186       $ 984       $ (5
  

 

 

   

 

 

    

 

 

    

 

 

 

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.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

    (Unaudited)        
    September 30, 2013     December 31, 2012  

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $ 3,935      $ 4,770   

Short-term investments

    1,801        1,773   
 

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

    5,736        6,543   

Restricted cash

    46        65   

Receivables, less allowance for doubtful accounts (2013 — $16; 2012 — $13)

    1,693        1,338   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2013 — $157;
2012 — $125)

    646        695   

Deferred income taxes

    568        543   

Prepaid expenses and other

    700        865   
 

 

 

   

 

 

 
    9,389        10,049   
 

 

 

   

 

 

 

Operating property and equipment:

   

Owned—

   

Flight equipment

    18,486        17,561   

Other property and equipment

    3,474        3,269   
 

 

 

   

 

 

 
    21,960        20,830   

Less — Accumulated depreciation and amortization

    (5,846     (5,006
 

 

 

   

 

 

 
    16,114        15,824   
 

 

 

   

 

 

 

Purchase deposits for flight equipment

    674        462   

Capital leases—

   

Flight equipment

    1,483        1,484   

Other property and equipment

    306        235   
 

 

 

   

 

 

 
    1,789        1,719   

Less — Accumulated amortization

    (811     (713
 

 

 

   

 

 

 
    978        1,006   
 

 

 

   

 

 

 
    17,766        17,292   
 

 

 

   

 

 

 

Other assets:

   

Goodwill

    4,523        4,523   

Intangibles, less accumulated amortization (2013 — $900; 2012 — $792)

    4,487        4,597   

Restricted cash

    366        382   

Other, net

    729        785   
 

 

 

   

 

 

 
    10,105        10,287   
 

 

 

   

 

 

 
  $ 37,260      $ 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)        
     September 30, 2013     December 31, 2012  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 4,123      $ 3,360   

Frequent flyer deferred revenue

     2,378        2,364   

Accounts payable

     2,126        2,312   

Accrued salaries and benefits

     1,844        1,763   

Current maturities of long-term debt

     957        1,812   

Current maturities of capital leases

     117        122   

Other

     1,059        1,085   
  

 

 

   

 

 

 
     12,604        12,818   
  

 

 

   

 

 

 

Long-term debt

     10,204        10,440   

Long-term obligations under capital leases

     781        792   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,556        2,756   

Postretirement benefit liability

     2,653        2,614   

Pension liability

     1,803        2,400   

Advanced purchase of miles

     1,388        1,537   

Deferred income taxes

     1,573        1,543   

Lease fair value adjustment, net

     672        881   

Other

     1,298        1,366   
  

 

 

   

 

 

 
     11,943        13,097   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock

     —          —     

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 361,871,040 and 332,472,779 shares at September 30, 2013 and December 31, 2012, respectively

     4        3   

Additional capital invested

     7,410        7,145   

Accumulated deficit

     (5,155     (5,586

Stock held in treasury, at cost

     (38     (35

Accumulated other comprehensive loss

     (493     (1,046
  

 

 

   

 

 

 
     1,728        481   
  

 

 

   

 

 

 
   $ 37,260      $ 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)

 

     Nine Months Ended
September 30,
 
     2013     2012  

Cash Flows from Operating Activities:

    

Net cash provided by operating activities

   $ 1,778      $ 845   

Cash Flows from Investing Activities:

    

Capital expenditures and aircraft purchase deposits paid

     (1,399     (1,027

Proceeds from sale of property and equipment

     65        146   

Decrease in restricted cash, net

     35        98   

Increase in short-term and other investments, net

     (22     (22

Other, net

     22        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,299     (805
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (1,965     (1,158

Proceeds from issuance of long-term debt

     819        86   

Principal payments under capital leases

     (98     (89

Other, net

     (70     4   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,314     (1,157
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (835     (1,117

Cash and cash equivalents at beginning of the period

     4,770        6,246   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 3,935      $ 5,129   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

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

   $ 240      $ —     

Net property and equipment acquired through the issuance of debt

     239        526   

Special facility and airport construction financing

     35        132   

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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Operating revenue:

        

Passenger—Mainline

   $ 7,025      $ 6,993      $ 19,792      $ 19,891   

Passenger—Regional

     1,893        1,781        5,353        5,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total passenger revenue

     8,918        8,774        25,145        25,050   

Cargo

     199        246        662        775   

Other operating revenue

     1,113        893        3,149        2,632   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,230        9,913        28,956        28,457   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Aircraft fuel

     3,262        3,406        9,380        10,043   

Salaries and related costs

     2,209        2,038        6,511        5,959   

Regional capacity purchase

     621        628        1,837        1,887   

Landing fees and other rent

     540        504        1,544        1,476   

Aircraft maintenance materials and outside repairs

     472        469        1,390        1,308   

Depreciation and amortization

     435        379        1,268        1,137   

Distribution expenses

     377        356        1,052        1,038   

Aircraft rent

     231        245        706        747   

Special charges (Note 10)

     211        514        355        884   

Other operating expenses

     1,362        1,170        3,892        3,465   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,720        9,709        27,935        27,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     510        204        1,021        513   

Nonoperating income (expense):

        

Interest expense

     (195     (204     (586     (637

Interest capitalized

     12        9        35        26   

Interest income

     5        4        16        16   

Miscellaneous, net

     50        (29     18        6   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (128     (220     (517     (589
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     382        (16     504        (76

Income tax expense

     4        9        4        11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 378      $ (25   $ 500      $ (87
  

 

 

   

 

 

   

 

 

   

 

 

 

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 (UNAUDITED)

(In millions)

 

     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013      2012  

Net income (loss)

   $ 378      $ (25   $ 500       $ (87

Other comprehensive income, net:

         

Net change related to fuel derivative financial instruments

     30        171        20         71   

Net change related to employee benefit plans

     51        4        531         13   

Net change related to investments and other

     (5     6        3         15   

Other

     —          —          6         —     
  

 

 

   

 

 

   

 

 

    

 

 

 
     76        181        560         99   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income, net

   $ 454      $ 156      $ 1,060       $ 12   
  

 

 

   

 

 

   

 

 

    

 

 

 

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)
September 30,  2013
    December 31, 2012  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 3,928      $ 4,765   

Short-term investments

     1,801        1,773   
  

 

 

   

 

 

 

Total unrestricted cash, cash equivalents and short-term investments

     5,729        6,538   

Restricted cash

     46        65   

Receivables from related parties

     231        226   

Receivables, less allowance for doubtful accounts (2013 — $16; 2012 — $13)

     1,693        1,338   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2013 — $157;

2012 — $125)

     646        695   

Deferred income taxes

     578        546   

Prepaid expenses and other

     685        841   
  

 

 

   

 

 

 
     9,608        10,249   
  

 

 

   

 

 

 

Operating property and equipment:

    

Owned—

    

Flight equipment

     18,486        17,561   

Other property and equipment

     3,474        3,269   
  

 

 

   

 

 

 
     21,960        20,830   

Less — Accumulated depreciation and amortization

     (5,846     (5,006
  

 

 

   

 

 

 
     16,114        15,824   
  

 

 

   

 

 

 

Purchase deposits for flight equipment

     674        462   

Capital leases—

    

Flight equipment

     1,483        1,484   

Other property and equipment

     306        235   
  

 

 

   

 

 

 
     1,789        1,719   

Less — Accumulated amortization

     (811     (713
  

 

 

   

 

 

 
     978        1,006   
  

 

 

   

 

 

 
     17,766        17,292   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     4,523        4,523   

Intangibles, less accumulated amortization (2013 — $900; 2012 — $792)

     4,487        4,597   

Restricted cash

     365        382   

Other, net

     1,104        1,052   
  

 

 

   

 

 

 
     10,479        10,554   
  

 

 

   

 

 

 
   $ 37,853      $ 38,095   
  

 

 

   

 

 

 

 

(continued on next page)

 

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Table of Contents

UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30,  2013
    December 31, 2012  

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities:

    

Advance ticket sales

   $ 4,123      $ 3,360   

Frequent flyer deferred revenue

     2,378        2,364   

Accounts payable

     2,131        2,316   

Accrued salaries and benefits

     1,844        1,763   

Current maturities of long-term debt

     957        1,812   

Current maturities of capital leases

     117        122   

Payables to related parties

     42        75   

Other

     1,120        1,140   
  

 

 

   

 

 

 
     12,712        12,952   
  

 

 

   

 

 

 

Long-term debt

     10,051        10,038   

Long-term obligations under capital leases

     781        792   

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,556        2,756   

Postretirement benefit liability

     2,653        2,614   

Pension liability

     1,803        2,400   

Advanced purchase of miles

     1,388        1,537   

Deferred income taxes

     1,508        1,470   

Lease fair value adjustment

     672        881   

Other

     1,483        1,494   
  

 

 

   

 

 

 
     12,063        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 September 30, 2013 and December 31, 2012

     —          —     

Additional capital invested

     7,636        7,611   

Accumulated deficit

     (4,897     (5,397

Accumulated other comprehensive loss

     (493     (1,053
  

 

 

   

 

 

 
     2,246        1,161   
  

 

 

   

 

 

 
   $ 37,853      $ 38,095   
  

 

 

   

 

 

 

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

 

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UNITED AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months Ended
September 30,
 
     2013     2012  

Cash Flows from Operating Activities:

    

Net cash provided by operating activities

   $ 1,774      $ 844   

Cash Flows from Investing Activities:

    

Capital expenditures and aircraft purchase deposits paid

     (1,399     (1,027

Proceeds from sale of property and equipment

     65        146   

Decrease in restricted cash, net

     36        98   

Increase in short-term and other investments, net

     (22     (22

Other, net

     20        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,300     (805
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Payments of long-term debt

     (1,965     (1,158

Proceeds from issuance of long-term debt

     819        86   

Principal payments under capital leases

     (98     (89

Other, net

     (67     6   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,311     (1,155
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (837     (1,116

Cash and cash equivalents at beginning of the period

     4,765        6,240   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 3,928      $ 5,124   
  

 

 

   

 

 

 

Investing and Financing Activities Not Affecting Cash:

    

Net property and equipment acquired through the issuance of debt

   $ 239      $ 526   

Special facility and airport construction financing

     35        132   

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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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. The Department of Justice has challenged the proposed merger. If the merger ultimately occurs, it could impact our estimated selling price of miles.

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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     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013     2012  

Basic earnings (loss) per share:

         

Net income (loss)

   $ 379      $ 6       $ 431      $ (103

Less: Income allocable to participating securities

     (1     —           (1     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) available to common stockholders

   $ 378      $ 6       $ 430      $ (103
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average shares outstanding

     357        331         343        331   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share, basic

   $ 1.06      $ 0.02       $ 1.25      $ (0.31
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings (loss) per share:

         

Earnings (loss) available to common stockholders

   $ 378      $ 6       $ 430      $ (103

Effect of convertible notes

     9        —           20        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ 387      $ 6       $ 450      $ (103
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted shares outstanding:

         

Basic weighted-average shares outstanding

     357        331         343        331   

Effect of convertible notes

     37        —           46        —     

Effect of employee stock options

     1        1         1        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted-average shares outstanding

     395        332         390        331   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share, diluted

   $ 0.98      $ 0.02       $ 1.15      $ (0.31
  

 

 

   

 

 

    

 

 

   

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

         

Restricted stock and stock options

     3        5         3        6   

Convertible notes

     —          61         4        61   

During the three and nine months ended September 30, 2013, UAL issued approximately 6 million and 28 million shares, respectively, of UAL common stock pursuant to agreements that UAL entered into with certain of its securityholders in exchange for approximately $51 million and $240 million, respectively, 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 nine months ended September 30, 2013 from the date the shares were issued. 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.

 

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NOTE 5—EMPLOYEE BENEFIT PLANS

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

 

     Pension Benefits     Other Postretirement Benefits  
     Three Months Ended
September 30,
    Three Months Ended
September 30,
 
     2013     2012     2013     2012  

Service cost

   $ 29      $ 25      $ 14      $ 11   

Interest cost

     48        45        29        30   

Expected return on plan assets

     (41     (33     (1     —     

Amortization of unrecognized loss and prior service
cost

     8        4        2        —     

Curtailment loss

     —          —          —          —     

Settlement gain

     (1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 43      $ 41      $ 44      $ 41   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Pension Benefits     Other Postretirement Benefits  
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Service cost

   $ 94      $ 75      $ 42      $ 37   

Interest cost

     142        137        85        93   

Expected return on plan assets

     (121     (103     (2     (2

Amortization of unrecognized (gain) loss and prior service
cost

     41        15        7        (2

Curtailment loss

     2        —          —          —     

Settlement gain

     (2     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 156      $ 124      $ 132      $ 126   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three and nine months ended September 30, 2013, the Company contributed $122 million and $201 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 second quarter 2013. 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 in second quarter 2013.

As a result of the freeze of benefits for management and administrative employees and the settlements from the lump-sum payments, the Company remeasured the assets and liabilities of the two plans in second quarter 2013. In addition, due to additional lump-sum payments, the Company remeasured the assets and liabilities of the defined benefit pension plan and recognized a settlement gain of $1 million in third quarter 2013. The Company remeasured this plan’s liabilities using a discount rate of 4.59% in the second quarter and 5.13% in the third quarter compared to the year-end 2012 discount rate of 4.20%. During the nine months ended September 30, 2013, as a result of the remeasurements, curtailment and settlements, the projected benefit obligation of the plans decreased by $522 million and Other comprehensive loss decreased by an actuarial gain of $41 million and $483 million for the three and nine months ended September 30, 2013, respectively. These items will also result in a decrease of approximately $13 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
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Share-based compensation expense (a)

   $ 32       $ 18       $ 72       $ 44   

 

     September 30, 2013      December 31, 2012  

Unrecognized share-based compensation

   $ 55       $ 33   

 

(a) Includes $(2) million and $9 million of (benefit) expense recognized in merger integration-related costs for the three and nine months ended September 30, 2013, respectively. Includes $0 and $7 million of expense recognized in merger integration-related costs for the three and nine months ended September 30, 2012, respectively.

Profit Sharing Plans. 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 their pro-rata share of 20% of the Company’s profit in excess of a pre-tax margin of 6.9%. The profit sharing plan is otherwise 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
     September 30, 2013     December 31, 2012  
     Total     Level 1      Level 2      Level 3     Total     Level 1      Level 2      Level 3  
     UAL  

Cash and cash equivalents

   $ 3,935      $ 3,935       $ —         $ —        $ 4,770      $ 4,770       $ —         $ —     

Short-term investments:

                    

Asset-backed securities

     683        —           683         —          715        —           715         —     

Corporate debt

     581        —           581         —          537        —           537         —     

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

     308        —           308         —          367        —           367         —     

Auction rate securities

     104        —           —           104        116        —           —           116   

Other short-term investments

     125        —           125         —          38        —           38         —     

Enhanced equipment trust certificates (“EETC”)

     59        —           —           59        63        —           —           63   

Fuel derivative asset (liability), net

     52        —           52         —          46        —           46         —     

Restricted cash

     412        412         —           —          447        447         —           —     
     United  

Cash and cash equivalents

   $ 3,928      $ 3,928       $ —         $ —        $ 4,765      $ 4,765       $ —         $ —     

Short-term investments:

                    

Asset-backed securities

     683        —           683         —          715        —           715         —     

Corporate debt

     581        —           581         —          537        —           537         —     

CDARS

     308        —           308         —          367        —           367         —     

Auction rate securities

     104        —           —           104        116        —           —           116   

Other short-term investments

     125        —           125         —          38        —           38         —     

EETC

     59        —           —           59        63        —           —           63   

Fuel derivative asset (liability), net

     52        —           52         —          46        —           46         —     

Restricted cash

     411        411         —           —          447        447         —           —     

Convertible debt derivative asset

     376        —           —           376        268        —           —           268   

Convertible debt option liability

     (185     —           —           (185     (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 September 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.

 

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Table of Contents

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

 

     Three Months Ended September 30,  
     2013     2012  

UAL

   Auction Rate
Securities
    EETC     Auction Rate
Securities
     EETC  

Balance at June 30

   $ 115      $ 62      $ 112       $ 63   

Settlements

     (9     (2     —           (2

Gains (losses):

         

Reported in earnings—realized

     1        —          —           —     

Reported in earnings—unrealized

     —          —          1         —     

Reported in other comprehensive income (loss)

     (3     (1     2         1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30

   $ 104      $ 59      $ 115       $ 62   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2013     2012  

UAL

   Auction Rate
Securities
    EETC     Auction Rate
Securities
     EETC  

Balance at January 1

   $ 116      $ 63      $ 113       $ 60   

Settlements

     (19     (4     —           (5

Gains (losses):

         

Reported in earnings—realized

     3        —          —           —     

Reported in earnings—unrealized

     1        —          —           7   

Reported in other comprehensive income (loss)

     3        —          2         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30

   $ 104      $ 59      $ 115       $ 62   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Three Months Ended September 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 June 30

   $ 115      $ 395      $ (199   $ 62      $ 112       $ 289      $ (147   $ 63   
Settlements      (9     —          —          (2     —           —          —          (2

Gains (losses):

                 

Reported in earnings:

                 

Realized

     1        —          —          —          —           —          —          —     

Unrealized

     —          (19     14        —          1         (87     56        —     

Reported in other comprehensive income (loss)

     (3     —          —          (1     2         —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30

   $ 104      $ 376      $ (185   $ 59      $ 115       $ 202      $ (91   $ 62   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 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      (19     —           —          (4     —           —           —          (5

Gains (losses):

                   

Reported in earnings:

                   

Realized

     3        —           —          —          —           —           —          —     

Unrealized

     1        108         (57     —          —           9         4        7   

Reported in other comprehensive income (loss)

     3        —           —          —          2         —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30

   $ 104      $ 376       $ (185   $ 59      $ 115       $ 202       $ (91   $ 62   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2013, the Company’s auction rate securities, which had a par value of $115 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 September 30, 2013, United’s EETC securities, which were repurchased in open market transactions in 2007, have unrealized gains of $2 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.

 

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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

 
     September 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

   $ 11,161       $ 12,036       $       $ 7,428       $ 4,608       $ 12,252       $ 13,419       $       $ 8,045       $ 5,374   

United debt

     11,008         11,651                 7,043         4,608         11,850         12,460                 7,086         5,374   

 

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

Item

   Fair Value at
September 30, 2013
   

Valuation
Technique

  

Unobservable Input

  

Range (Weighted
Average)

Auction rate securities    $ 104      Valuation Service / Broker Quotes    Broker quotes (a)    NA
EETC    $ 59      Discounted Cash Flows    Structure credit risk (b)    5% - 6%(6%)
Convertible debt derivative asset    $ 376      Binomial Lattice Model   

Expected volatility (c)

Own credit risk (d)

  

45% - 60%(47%)

5% - 6%(5%)

Convertible debt option liability    $ (185   Binomial Lattice Model   

Expected volatility (c)

Own credit risk (d)

  

45% - 60%(47%)

5% - 6%(5%)

 

(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.

The Company uses 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 the Company’s credit risk component of the 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 September 30, 2013, the Company had hedged approximately 45%, 23% and 1% of its projected fuel requirements (428 million, 901 million and 25 million gallons, respectively) for the remainder of 2013, 2014 and 2015, 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 September 30, 2013, the Company had fuel hedges expiring through March 2015. 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

  September 30, 2013     December 31, 2012  

Derivatives designated as cash flow hedges

     

Assets:

     

Fuel contracts due within one year

  Receivables   $ 23      $ 7   
   

 

 

   

 

 

 

Liabilities:

     

Fuel contracts due within one year

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

 

 

   

 

 

 

Total liabilities

    $ 1      $ 2   
   

 

 

   

 

 

 

Derivatives not designated for hedge accounting

   

Assets:

     

Fuel contracts due within one year

  Receivables   $ 29      $ 44   
Fuel contracts with maturities greater than one year   Other assets: Other, net     2        —     
   

 

 

   

 

 

 

Total assets

    $ 31      $ 44   
   

 

 

   

 

 

 

Liabilities:

     

Fuel contracts due within one year

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

 

 

   

 

 

 

Total liabilities

    $ 1      $ 3   
   

 

 

   

 

 

 

Total derivatives

     

Assets:

     

Fuel contracts due within one year

  Receivables   $ 52      $ 51   
Fuel contracts with maturities greater than one year   Other assets: Other, net     2        —     
   

 

 

   

 

 

 

Total assets

    $ 54      $ 51   
   

 

 

   

 

 

 

Liabilities:

     

Fuel contracts due within one year

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

 

 

   

 

 

 

Total liabilities

    $ 2      $ 5   
   

 

 

   

 

 

 

 

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

Derivatives designated as cash flow hedges

 

     Amount of  Gain
Recognized

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

Fuel contracts

   $ 44       $ 133       $ 14       $ (38   $ 1       $ 2   

Derivatives designated as cash flow hedges

 

     Amount of Gain (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)
 
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013     2012     2013      2012  

Fuel contracts

   $ 16       $ (36   $ (4   $ (107   $ —         $ (2

Derivatives not designated for hedge accounting

 

Fuel contracts

                   
     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
Amount of gain recognized in Nonoperating income (expense): Miscellaneous, net    $ 61       $ 10       $ 30       $ 10   

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 September 30, 2013 (in millions):

 

Net derivative asset with counterparties

   $ 52   

Collateral held by the Company (classified as an other current liability)

     —     

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

     52   

 

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NOTE 8—COMMITMENTS AND CONTINGENCIES

Commitments. As of September 30, 2013, United had firm commitments and options to purchase aircraft from The Boeing Company (“Boeing”), Embraer S.A. (“Embraer”) and Airbus S.A.S. (“Airbus”) presented in the table below:

 

Aircraft Type

   Number of  Firm
Commitments (a)
 

Airbus A350-1000

     35   

Boeing 737-900ER

     69   

Boeing 737 MAX 9

     100   

Boeing 787-8/-9/-10

     58   

Embraer EMB175

     30   

 

(a) United also has options and purchase rights for additional aircraft.

The aircraft listed in the table above are scheduled for delivery from 2013 through 2025. In the remainder of 2013, United expects to take delivery of six Boeing 737-900ER aircraft and one Boeing 787-8 aircraft.

On October 23, 2013, UAL and United entered into a purchase agreement assignment, pursuant to which UAL assigned its interest under the purchase agreement for the 100 Boeing 737 MAX 9 aircraft to United.

The table below summarizes the capital commitments of UAL and United (including those assigned from UAL) as of September 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 three months of 2013

   $ 0.8   

2014

     2.9   

2015

     2.7   

2016

     1.9   

2017

     1.5   

After 2017

     14.2   
  

 

 

 
   $ 24.0   
  

 

 

 

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

United has arranged for EETC financing of 18 Boeing 737-900ER aircraft, five 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 fourth quarter of 2013. In addition, United has 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.

Capacity Purchase Agreements and Operating Leases

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.

In April 2013, United agreed to purchase 30 Embraer EMB175 aircraft. In August 2013, United entered into a capacity purchase agreement with Mesa Air Group, Inc. and Mesa Airlines, Inc. (“Mesa”), a wholly-owned subsidiary of Mesa Air Group, Inc., for Mesa to operate these 30 Embraer EMB175 aircraft under the United Express brand.

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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Table of Contents
(In millions)    Capacity
Purchase
Agreements
     Aircraft
Operating
Leases
 

Last three months of 2013

   $ 474       $ 306   

2014

     1,950         1,631   

2015

     1,773         1,399   

2016

     1,558         1,165   

2017

     1,476         1,066   

After 2017

     4,920         2,756   
  

 

 

    

 

 

 
   $ 12,151       $ 8,323   
  

 

 

    

 

 

 

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 as of September 30, 2013.

 

(In millions)    Facility and Other
Operating Leases
 

Last three months of 2013

   $ 297   

2014

     1,038   

2015

     900   

2016

     829   

2017

     782   

After 2017

     6,814   
  

 

 

 
   $ 10,660   
  

 

 

 

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 $1.6 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 $262 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 September 30, 2013, the Company had $2.0 billion of floating rate debt and $296 million of fixed rate debt, with remaining terms of up to twelve 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 twelve years and an aggregate balance of $2.3 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 September 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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Table of Contents

Labor Negotiations. As of September 30, 2013, United had approximately 88,000 active employees, of whom approximately 80% were represented by various labor organizations. During third quarter 2013, the Company accepted an integrated seniority list for its pilots from the Air Line Pilots Association, International (“ALPA”). The Company also reached tentative agreements with respect to joint collective bargaining agreements with the International Association of Machinists (“IAM”) for the fleet service, passenger service and storekeeper work groups, subject to ratification by IAM members. The Company has offered an early out program for its fleet service, passenger service and storekeeper workgroups. The early out program accepted volunteers through October 18, 2013 and is subject to ratification of the tentative agreements with the IAM. The Company is not currently able to estimate the potential impact of the early out program. We are currently in the process of negotiating joint collective bargaining agreements with our technicians, flight attendants and dispatchers.

NOTE 9—DEBT

As of September 30, 2013, a substantial portion of our assets is pledged as collateral for our debt. These assets principally consist of aircraft, route authorities and loyalty program intangible assets. As of September 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. The indenture for the 6.375% Senior Notes includes covenants that restrict the ability of UAL and its restricted subsidiaries (as defined in the indenture) to incur additional indebtedness, issue preferred stock, make investments, pay dividends or repurchase UAL’s common stock.

6% Convertible Senior Notes. During the three and nine months ended September 30, 2013, UAL issued approximately 6 million and 28 million shares, respectively, of UAL common stock pursuant to agreements that UAL entered into with certain of its securityholders in exchange for approximately $51 million and $240 million, respectively, in aggregate principal amount of UAL’s outstanding 6% convertible senior notes due 2029 held by such securityholders. As of September 30, 2013, the outstanding balance is approximately $104 million.

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 September 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, pay dividends or repurchase UAL’s common stock. 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.

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.

 

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EETCs. In August 2013, December 2012 and October 2012, United created separate EETC pass-through trusts, each of which issued pass-through certificates. The proceeds of the issuance of the pass-through certificates are used to purchase equipment notes issued by United and secured by its aircraft. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The pass-through certificates represent fractional undivided interests in the respective pass-through trusts and are not obligations of United. The payment obligations under the equipment notes are those of United. Proceeds received from the sale of pass-through certificates are initially held by a depository in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by United and are not reported as debt on our consolidated balance sheet because the proceeds held by the depositary are not United’s assets. United received the remaining proceeds from the 2012 EETC pass-through trusts in the third quarter of 2013 and United expects to receive all proceeds from the 2013 EETC pass-through trusts by the end of 2014. Certain details of the pass-through trusts, which were issued in 2013 or for which we received proceeds in 2013, are as follows (in millions, except interest rate):

 

EETC Date

   Class    Principal      Final
expected
distribution
date
   Stated
interest
rate
    Total debt
recorded
as of September 30,

2013
     Proceeds
received  from
issuance of
debt in the nine
months ended
September 30,
2013
     Remaining
proceeds
from
issuance of
debt to be
received in
future
periods
 

August 2013

   A    $ 720       August 2025      4.3   $ —         $ —         $ 720   

August 2013

   B      209       August 2021      5.375     —           —           209   

December 2012

   C      425       April 2018      6.125     425         147         —     

October 2012

   A      712       October 2024      4.0     712         465         —     

October 2012

   B      132       October 2020      5.5     132         86         —     
     

 

 

         

 

 

    

 

 

    

 

 

 
      $ 2,198            $ 1,269       $ 698       $ 929   
     

 

 

         

 

 

    

 

 

    

 

 

 

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

 

     UAL      United  

Last three months of 2013

   $ 222       $ 222   

2014

     962         962   

2015

     2,055         2,055   

2016

     1,032         1,032   

2017

     595         595   

After 2017

     6,460         6,356   
  

 

 

    

 

 

 
   $ 11,326       $ 11,222   
  

 

 

    

 

 

 

PBGC Notes. During the third quarter of 2013, UAL and United entered into a Second Supplemental Indenture (the “PBGC Second Supplemental Indenture”) to the Amended and Restated Indenture, dated as of January 11, 2013 (the “PBGC Indenture”), under which UAL’s 6% Notes due 2026, 6% Notes due 2028 and 8% Notes due 2024 are outstanding. Due to a request by the Pension Benefit Guaranty Corporation (the “PBGC”) pursuant to a contractual right of the PBGC, the PBGC Second Supplemental Indenture, among other things, amended and restated the covenants in the PBGC Indenture that restrict dividends and certain other payments by UAL and its restricted subsidiaries (as defined in the PBGC Indenture), restrict the incurrence of indebtedness by UAL and its restricted subsidiaries and provide for the designation of restricted and unrestricted subsidiaries of UAL so that these covenants would be substantially the same as the corresponding covenants in the indenture for the 6.375% Senior Notes due June 1, 2018.

 

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NOTE 10—SPECIAL ITEMS

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Labor agreement costs

   $ 127       $ 454       $ 127       $ 454   

Merger integration-related costs

     50         60         165         331   

Additional costs associated with the temporarily grounded Boeing 787 aircraft

     —           —           18         —     

Voluntary severance and benefits

     —           —           14         125   

(Gains) losses on sale of assets and other special items, net

     34         —           31         (26
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal special charges

     211         514         355         884   

Income tax benefit

     —           —           —           (2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total special charges, net of income taxes

   $ 211       $ 514       $ 355       $ 882   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

On September 26, 2013, the Company announced that it had reached tentative agreements with respect to joint collective bargaining agreements with the IAM for the fleet service, passenger service and storekeeper workgroups, subject to ratification by IAM members. The Company recorded a $127 million special charge as a result. This expense is associated with lump sum cash payments that would be made in conjunction with the ratification of the agreements. The lump sum payments were accrued in third quarter 2013 as a result of the payments becoming probable, primarily due to reaching the tentative agreement, and are not in lieu of future pay increases and thus did not meet the deferral criteria under Accounting Standards Codification Topic 710. If ratified, the Company currently expects to make the related lump sum cash payments by early 2014.

During the nine months ended September 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. 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.

During the three months ended September 30, 2013, the Company adjusted its reserves for certain legal matters by $34 million due to recent potential adverse developments. Additionally, during the nine months ended September 30, 2013, the Company recorded a $5 million gain related to a contract termination and $2 million in losses on the sale of assets.

During the nine months ended September 30, 2012, the Company recorded $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 estimated the amount for this voluntary program to be approximately $76 million.

On August 3, 2012, the Company announced it had reached an agreement in principle with respect to a new joint collective bargaining agreement with ALPA representing pilots at United and Continental Airlines. The Company recorded $454 million of expense in third quarter 2012 associated with lump sum cash payments that would be made in conjunction with the ratification of the contract and the completion of the integrated pilot seniority list. This charge also included costs associated with changes to existing pilot disability plans negotiated in connection with the agreement in principle. The lump sum payments are not in lieu of future pay increases and were accrued in third quarter 2012 as a result of the payments becoming probable, primarily due to reaching the agreement in principle. The agreement was ratified in December 2012.

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 these 30 aircraft, the Company evaluated the entire fleet and determined that no impairment existed. In conjunction with that sale, the Company recorded accelerated depreciation of $31 million and $71 million on these aircraft during the three and nine months ended September 30, 2013, respectively, and this is classified as Operating expense: Depreciation and amortization in the statements of consolidated operations. The accelerated depreciation resulted from changes in the estimated useful lives and salvage values of the 30 aircraft as a result of the planned sale. These changes in estimate decreased net income by amounts disclosed above and reduced per share amounts by approximately $0.09 per UAL basic share ($0.08 per UAL diluted share) and $0.21 per UAL basic share ($0.18 per UAL diluted share) in the three and nine months ended September 30, 2013, respectively.

 

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Accruals

The accrual for severance and medical costs was $29 million as of September 30, 2013, compared to $59 million as of September 30, 2012. In addition, the accrual balance of future lease payments on permanently grounded aircraft was $1 million as of September 30, 2013, compared to $6 million as of September 30, 2012.

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

 

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NOTE 11—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

UAL    Pension and
Other
Postretirement
Unrecognized
Actuarial
Gains (Losses)
and Prior Service

Cost
    Unrealized
Gain (Loss)
on
Derivatives
    Other     Total  

Balance at June 30, 2013

   $ (562   $ (20   $ 13      $ (569

Other comprehensive income (loss) before reclassifications

     —          44        (5     39   

Actuarial gain due to curtailment and remeasurement

     41        —          —          41   

Amounts reclassified from accumulated other comprehensive income

     10        (14     —          (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     51        30        (5     76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ (511   $ 10      $ 8      $ (493
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

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

Other comprehensive income before reclassifications

     —          16        2        18   

Actuarial gain due to curtailment and remeasurement

     483        —          —          483   

Amounts reclassified from accumulated other comprehensive income

     48        4        —          52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     531        20        2        553   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ (511   $ 10      $ 8      $ (493
  

 

 

   

 

 

   

 

 

   

 

 

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

Balance at June 30, 2012

   $ (303   $ (199   $ 3      $ (499

Other comprehensive income before reclassifications

     —          133        5        138   

Amounts reclassified from accumulated other comprehensive income

     4        38        —          42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     4        171        5        180   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ (299   $ (28   $ 8      $ (319
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ (312   $ (99   $ (6   $ (417

Other comprehensive income (loss) before reclassifications

     —          (36     14        (22

Amounts reclassified from accumulated other comprehensive income

     13        107        —          120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     13        71        14        98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ (299   $ (28   $ 8      $ (319
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 June 30, 2013

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

Other comprehensive income (loss) before reclassifications

    —          44        (5     —          39   

Actuarial gain due to curtailment and remeasurement

    41        —          —          —          41   

Amounts reclassified from accumulated other comprehensive income

    10        (14     —          —          (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    51        30        (5     —          76   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ (511   $ 10      $ 8      $ —        $ (493
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

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

Other comprehensive income before reclassifications

    —          16        3        —          19   

Actuarial gain due to curtailment and remeasurement

    483        —          —          —          483   

Amounts reclassified from accumulated other comprehensive income

    48        4        —          6        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

    531        20        3        6        560   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ (511   $ 10      $ 8      $ —        $ (493
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
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 June 30, 2012

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

Other comprehensive income before reclassifications

    —          133        6        —          139   

Amounts reclassified from accumulated other comprehensive income

    4        38        —          —          42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

    4        171        6        —          181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ (299   $ (28   $ 7      $ (6   $ (326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

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

Other comprehensive income (loss) before reclassifications

    —          (36     15        —          (21

Amounts reclassified from accumulated other comprehensive income

    13        107        —          —          120   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

    13        71        15        —          99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ (299   $ (28   $ 7      $ (6   $ (326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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
September 30,
    Nine Months Ended
September 30,
     
     2013     2012     2013      2012      

Derivatives designated as cash flow hedges

           

Fuel contracts-reclassifications of (gains) losses into earnings (a)

   $ (14   $ 38      $ 4       $ 107      Aircraft fuel

Amortization of pension and post-retirement items

           

Amortization of unrecognized loss and prior service cost (a)

   $ 10      $ 4 (b)    $ 48       $ 13 (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.)

 

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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
September 30,
    Nine Months Ended
September 30,
     
     2013     2012     2013      2012      

Derivatives designated as cash flow hedges

           

Fuel contracts-reclassifications of (gains) losses into earnings (a)

   $ (14   $ 38      $ 4       $ 107      Aircraft fuel

Amortization of pension and post-retirement items

           

Amortization of unrecognized loss and prior service cost (a)

   $ 10      $ 4 (b)    $ 48       $ 13 (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.)

 

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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 operates an average of more than 5,300 flights a day to more than 360 airports across six continents.

Third Quarter Financial Highlights

 

  Third quarter 2013 net income was $590 million, or $1.51 diluted earnings per share, excluding $211 million of special charges. Including special charges, third quarter 2013 net income was $379 million, or $0.98 diluted earnings per share.

 

  Passenger revenue increased 1.6% to $8.9 billion during the third quarter of 2013 as compared to the third quarter of 2012.

 

  Third quarter 2013 aircraft fuel cost decreased 4.2% year-over-year due mainly to a 2.2% decline in fuel prices.

 

  Unrestricted liquidity was $6.7 billion, including $1.0 billion of undrawn commitments.

Third Quarter Operational Highlights

 

  For the quarter ended September 30, 2013, United recorded a U.S. Department of Transportation on-time arrival rate of 79.0% and a system completion factor of 99.2%.

 

  Consolidated traffic and capacity decreased 0.3% and 1.1%, respectively, during the third quarter of 2013 as compared to the third quarter of 2012. The Company’s load factor for the third quarter of 2013 was 85.9%.

 

  The Company took delivery of six new Boeing 737-900ER aircraft and one Boeing 787-8 aircraft during the third quarter of 2013.

 

  The Company accepted an integrated seniority list for its pilots from the Air Line Pilots Association, International. The Company also reached tentative agreements with respect to joint collective bargaining agreements with the International Association of Machinists (“IAM”) for the fleet service, passenger service and storekeeper work groups, subject to ratification by IAM members.

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 nine months of 2013, consolidated capacity decreased 2.6% compared to the first nine months of 2012. The Company expects full-year 2013 consolidated capacity to decrease 1.2% to 1.4% year-over-year, with full-year 2013 domestic capacity to decrease 1.2% to 1.5% and full-year 2013 international capacity to decrease 1.1% to 1.4%. 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 6.0% 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 nine months ended September 30, 2013 as compared to the corresponding periods in 2012.

 

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Table of Contents

Third Quarter 2013 Compared to Third Quarter 2012

The Company recorded net income of $379 million in the third quarter of 2013 as compared to net income of $6 million in the third quarter of 2012. Excluding special items, the Company had net income of $590 million in the third quarter of 2013 as compared to net income of $520 million in the third 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 $508 million for the third quarter of 2013, as compared to $200 million for the third quarter of 2012. Significant components of our operating results for the three months ended September 30 are as follows (in millions, except percentage changes):

 

     2013     2012     Increase
(Decrease)
    % Increase
(Decrease)
 

Operating revenue

   $ 10,228      $ 9,909      $ 319        3.2   

Operating expense

     9,720        9,709        11        0.1   
  

 

 

   

 

 

   

 

 

   

Operating income

     508        200        308        NM   

Nonoperating expense

     (126     (185     (59     (31.9

Income tax expense

     3        9        (6     (66.7
  

 

 

   

 

 

   

 

 

   

Net income

   $ 379      $ 6      $ 373        NM   
  

 

 

   

 

 

   

 

 

   

 

NM—Not meaningful

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

 

     2013     2012     Increase
(Decrease)
    %  Increase
(Decrease)
 

Passengers (thousands) (a)

     36,795        37,588        (793     (2.1

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

     55,863        56,021        (158     (0.3

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

     65,040        65,734        (694     (1.1

Passenger load factor (d)

     85.9     85.2     0.7 pts.        N/A   

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

     13.71        13.35        0.36        2.7   

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

     15.96        15.66        0.30        1.9   

CASM (cents)

     14.94        14.77        0.17        1.2   

Average price per gallon of fuel, including fuel taxes

   $ 3.12      $ 3.19      $ (0.07     (2.2

Fuel gallons consumed (millions)

     1,046        1,069        (23     (2.2

Average full-time equivalent employees

     84,500        85,400        (900     (1.1

 

(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.

 

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Table of Contents

Operating Revenue

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

 

     2013      2012      Increase
(Decrease)
    % Change  

Passenger—Mainline

   $ 7,025       $ 6,993       $ 32        0.5   

Passenger—Regional

     1,893         1,781         112        6.3   
  

 

 

    

 

 

    

 

 

   

Total passenger revenue

     8,918         8,774         144        1.6   

Cargo

     199         246         (47     (19.1

Other operating revenue

     1,111         889         222        25.0   
  

 

 

    

 

 

    

 

 

   
   $ 10,228       $ 9,909       $ 319        3.2   
  

 

 

    

 

 

    

 

 

   

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

 

     Domestic     Pacific     Atlantic     Latin     Total
Mainline
    Regional     Consolidated  

Increase (decrease) from 2012 (a):

              

Passenger revenue (in millions)

   $ 13      $ (160   $ 175      $ 4      $ 32      $ 112      $ 144   

Passenger revenue

     0.4     (11.0 )%      11.0     0.6     0.5     6.3     1.6

Average fare per passenger

     5.8     (7.7 )%      5.7     3.4     4.4     5.0     3.8

Yield

     2.3     (8.4 )%      5.6     1.2     0.8     6.1     1.9

PRASM

     2.9     (9.4 )%      9.0     0.5     1.6     7.1     2.7

Average stage length

     2.8     0.2     0.4     3.4     3.0     (1.3 )%      1.5

Passengers

     (5.1 )%      (3.6 )%      5.0     (2.7 )%      (3.8 )%      1.2     (2.1 )% 

RPMs (traffic)

     (1.8 )%      (2.9 )%      5.2     (0.6 )%      (0.3 )%      0.2     (0.3 )% 

ASMs (capacity)

     (2.4 )%      (1.7 )%      1.9     0.2     (1.1 )%      (0.8 )%      (1.1 )% 

Passenger load factor (points)

     0.5        (1.0     2.7        (0.6     0.6        0.8        0.7   

 

(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 third quarter of 2013 increased 1.6% as compared to the year-ago period due to an increase in consolidated yield of 1.9% year-over-year, offset by a decline of 0.3% in traffic and a reduction in capacity of 1.1% year-over-year. Consolidated passenger revenue in the third quarter was impacted by factors including additional competitive capacity in China, resulting in lower Pacific yields, and a revenue management demand forecast which underestimated the amount of close-in booking demand resulting in a lower-than-expected yield mix.

Cargo revenue decreased $47 million, or 19.1%, in the third quarter of 2013 as compared to the year-ago period due to lower volumes and yield on freight in the Domestic and Atlantic regions offset in part by an increase in mail revenue for the period.

Other operating revenue in the third quarter of 2013 increased $222 million, or 25.0%, as compared to the year-ago period due primarily to the sale of aircraft fuel to a third party as well as an increase in MileagePlus and other ancillary revenue.

 

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Table of Contents

Operating Expenses

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

 

     2013      2012      Increase
(Decrease)
    %
Change
 

Aircraft fuel

   $ 3,262       $ 3,406       $ (144     (4.2

Salaries and related costs

     2,209         2,038         171        8.4   

Regional capacity purchase

     621         628         (7     (1.1

Landing fees and other rent

     540         504         36        7.1   

Aircraft maintenance materials and outside repairs

     472         469         3        0.6   

Depreciation and amortization

     435         379         56        14.8   

Distribution expenses

     377         356         21        5.9   

Aircraft rent

     231         245         (14     (5.7

Special charges

     211         514         (303     NM   

Other operating expenses

     1,362         1,170         192        16.4   
  

 

 

    

 

 

    

 

 

   
   $