SEC Filing - United Airlines Holdings, Inc.

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8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 8, 2012

CONTINENTAL AIRLINES, INC.

(Exact name of registrant as specified in its charter)


Delaware	001-10323	74-2099724
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification Number)

1600 Smith Street, Dept. HQSEO, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

(713) 324-2950

Registrant’s telephone number, including area code

Former name or former address, if changed since last report

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

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

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

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

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

Item 8.01. Other Events.

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

The Company expects in the future that it will merge Continental and United into one legal entity (the “Airlines Merger”). Once the Airlines Merger occurs, the financial statements of United and Continental will be combined for all periods presented from the date of the Merger at their historical cost, and there will no longer be a requirement to separately report the historical financial statements of Continental, and United will be considered the predecessor. As a result of the foregoing, pursuant to SEC Regulation S-X to reflect the Airlines Merger described above, Continental is filing with this Form 8-K the Unaudited Pro Forma Condensed Combined Financial Information and United’s historical consolidated financial statements referred to below.

Exhibit 99.1 to this Current Report on Form 8-K presents the following Unaudited Pro Forma Condensed Combined Financial Information of United, which has been prepared in accordance with Article 11 of Regulation S-X:

•

Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2011;

•

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

•

Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

Exhibit 99.2 to this Current Report on Form 8-K presents the consolidated balance sheets of United as of December 31, 2011 and 2010 and the related statements of consolidated operations, comprehensive income (loss), cash flows and stockholder’s deficit for each of the three years in the period ended December 31, 2011, together with the reports of independent registered public accounting firms thereon. The foregoing financial statements of United were included in United’s Annual Report on Form 10-K for 2011. The notes to these financial statements are combined notes relating to the financial statements of UAL and Continental in addition to the financial statements of United, because this was the presentation used in such Form 10-K. However, for purposes of this Form 8-K, information in the notes to the United financial statements included in Exhibit 99.2 relating to the financial statements of UAL or Continental shall be deemed excluded from such notes.

Exhibits 99.1 and 99.2 hereto are incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits



12.1		Continental Airlines, Inc. Computation of Ratio of Earnings to Fixed Charges

23.1		Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP) for United

23.2		Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United

99.1		Unaudited Pro Forma Condensed Combined Financial Information of United

99.2		Consolidated balance sheets of United as of December 31, 2011 and 2010 and the related statements of consolidated operations, comprehensive income (loss), cash flows and stockholder’s deficit for each of the three years in the period ended December 31, 2011, together with the reports of independent registered public accounting firms thereon.

99.3		Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2011, 2010 and 2009

SIGNATURES

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


CONTINENTAL AIRLINES, INC.

By:		/s/ Chris Kenny
Name:		Chris Kenny
Title:		Vice President and Controller

Date: March 8, 2012

EXHIBIT INDEX


Exhibit No.		Description

12.1		Continental Airlines, Inc. Computation of Ratio of Earnings to Fixed Charges

23.1		Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP) for United

23.2		Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United

99.1		Unaudited Pro Forma Condensed Combined Financial Information of United

99.2		Consolidated balance sheets of United as of December 31, 2011 and 2010 and the related statements of consolidated operations, comprehensive income (loss), cash flows and stockholder’s deficit for each of the three years in the period ended December 31, 2011, together with the reports of independent registered public accounting firms thereon.

99.3		Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2011, 2010 and 2009

EX-12.1

Exhibit 12.1

Continental Airlines Inc.

Computation of Ratio of Earnings to Fixed Charges

(In millions, except ratios)


	Successor						Predecessor
	Year Ended December 31, 2011			Three Months Ended December 31, 2010			Nine Months Ended September 30, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Earnings:

Earnings (loss) before income taxes and minority interest	$	563		$	(99	)	$	442		$	(439	)	$	(695	)	$	556

Less:
Undistributed earnings of equity investees		—			—			—			—			9			18

Plus:
Interest expense		342			86			288			367			376			393
Capitalized interest		(17	)		(4	)		(17	)		(33	)		(33	)		(27	)
Amortization of capitalized interest		—			—			27			36			35			36

Portion of rent expense representative of interest expense (a) at 60%		771			197			684			907			934			917

	$	1,659		$	180		$	1,424		$	838		$	608		$	1,857

Fixed Charges:
Interest expense	$	342		$	86		$	288		$	367		$	376		$	393
Portion of rent expense representative of interest expense		771			197			684			907			934			917

Total fixed charges		1,113			283			972			1,274			1,310			1,310

Coverage adequacy (deficiency)	$	546		$	(103	)	$	452		$	(436	)	$	(702	)	$	547

Coverage ratio (b)		1.49			NA			1.47			NA			NA			1.42

(a)	Interest calculated at 60% of rent payments

(b)

For purposes of calculating this ratio, earnings consist of income before income taxes and cumulative effect of changes in accounting principles adjusted for undistributed income of companies in which Continental has a minority equity interest plus interest expense (net of capitalized interest), the portion of rental expense representative of interest expense and amortization of previously capitalized interest. Fixed charges consist of interest expenses, the portion of rental expense representative of interest expense, the amount amortized for debt discount, premium and issuance expense and interest previously capitalized. For the three months ended December 31, 2010 and the years ended December 31, 2009 and 2008, earnings were inadequate to cover fixed charges and the coverage deficiency was $103 million, $436 million and $702 million, respectively.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-158781 on Form S-3 of Continental Airlines, Inc. of our report dated February 25, 2010, except for Note 2 (Reclassifications) and Note 10, as to which the date is February 22, 2011, relating to the consolidated financial statements and financial statement schedule of United Air Lines, Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph relating to retrospective reclassifications of revenue and expenses in its statements of consolidated operations and an explanatory paragraph relating to a change in reportable segments) appearing in the Current Report on Form 8-K of Continental Airlines, Inc. dated March 8, 2012, and to the reference to us under the heading “Experts” in the Prospectus Supplement, which is part of the Registration Statement.

/s/ Deloitte & Touche LLP

Chicago, Illinois

March 7, 2012

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Experts” and to the incorporation by reference in the Registration Statement (Form S-3 No. 333-158781) of Continental Airlines, Inc. of our report dated February 22, 2012, with respect to the consolidated financial statements and schedule of United Air Lines, Inc., included in the Current Report on Form 8-K of Continental Airlines, Inc. dated March 8, 2012.

/S/ ERNST & YOUNG LLP

Chicago, Illinois

March 7, 2012

EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF UNITED

The Company also expects in the future that it will merge Continental and United into one legal entity (the “Airlines Merger”). Once the Airlines Merger occurs, the financial statements of United and Continental will be combined for all periods presented from the date of the Merger at their historical cost, and there will no longer be a requirement to separately report the historical financial statements of Continental.

The Unaudited Pro Forma Condensed Combined Balance Sheet of United combines the historical consolidated balance sheet of Continental and United as of December 31, 2011. The Unaudited Pro Forma Condensed Combined Statement of Operations of United for the year ended December 31, 2011 combines the historical consolidated statement of operations of Continental and United, for the year ended December 31, 2011.

The Unaudited Pro Forma Condensed Combined Financial Statements of United were prepared by combining the historical financial information of both Continental and United. Pro forma statements that give effect to a business combination to be accounted for as a reorganization of entities under common control combine the historical financial statements of combining entities.

These Unaudited Pro Forma Condensed Combined Financial Statements have been developed from and should be read in conjunction with the consolidated financial statements of Continental and United contained in their respective Annual Reports on Form 10-K for the fiscal year ended December 31, 2011. The Unaudited Pro Forma Condensed Combined Financial Statements of United are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of Continental or United would have been had the Airlines Merger occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF UNITED

December 31, 2011

In millions


	Historical
	Continental			United			Pro Forma Adjustments			Condensed Combined Pro Forma
ASSETS
Current assets:
Cash and cash equivalents	$	2,782		$	3,458					$	6,240
Short-term investments		1,241			275						1,516

Total unrestricted cash, cash equivalents and short-term investments		4,023			3,733			—			7,756
Restricted cash		—			40						40
Receivables, less allowance for doubtful accounts		595			763						1,358
Aircraft fuel, spare parts and supplies, less obsolescence allowance		275			340						615
Deferred income taxes		267			348						615
Receivables from related parties		—			228			(11	)		217
Prepaid expenses and other		165			447			(10	)		602

		5,325			5,899			(21	)		11,203

Property and equipment, net		7,348			9,070						16,418
Other assets:
Goodwill		4,523			—						4,523
Intangibles, less accumulated amortization		2,469			2,283			(2	)		4,750
Restricted cash, cash equivalents and investments		135			393						528
Other, net		364			600						964

		7,491			3,276			(2	)		10,765

	$	20,164		$	18,245		$	(23	)	$	38,386

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Advance ticket sales	$	1,462		$	1,652					$	3,114
Frequent flyer deferred revenue		921			1,484						2,405
Accounts payable		894			1,109						2,003
Accrued salaries and benefits		521			988						1,509
Current maturities of long-term debt		571			615						1,186
Current maturities of capital leases		3			122						125
Payables to related parties		11			104			(11	)		104
Other		279			853			(10	)		1,122

		4,662			6,927			(21	)		11,568


Long-term debt		4,957			5,130						10,087
Long-term obligations under capital leases		193			735						928

Other liabilities and deferred credits:
Frequent flyer deferred revenue		1,235			2,018						3,253
Postretirement benefit liability		292			2,115						2,407
Pension liability		1,770			92						1,862
Advanced purchase of miles		270			1,442						1,712
Deferred income taxes		820			707						1,527
Lease fair value adjustment, net		1,133			—						1,133
Other		507			983						1,490

		6,027			7,357			—			13,384

Stockholder’s equity:
Common stock		—			—						—
Additional capital invested		4,148			3,432						7,580
Retained earnings (deficit)		474			(5,208	)		(2	)		(4,736	)
Accumulated other comprehensive loss		(297	)		(128	)					(425	)

		4,325			(1,904	)		(2	)		2,419

	$	20,164		$	18,245		$	(23	)	$	38,386

The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS OF UNITED

Year ended December 31, 2011

In millions


	Historical
	Continental			United			Pro Forma Adjustments			Condensed Combined Pro Forma
Operating revenue:
Passenger—Mainline	$	11,816		$	14,153		$	6		$	25,975
Passenger—Regional		2,601			3,935						6,536

Total passenger revenue		14,417			18,088			6			32,511
Cargo		448			718						1,166
Special revenue item		19			88						107
Other operating revenue		1,291			2,261			(217	)		3,335

		16,175			21,155			(211	)		37,119

Operating expenses:
Aircraft fuel		5,294			7,080						12,374
Salaries and related costs		3,405			4,172			74			7,651
Regional capacity purchase		830			1,574						2,404
Landing fees and other rent		900			1,028						1,928
Aircraft maintenance materials and outside repairs		595			1,160			(11	)		1,744
Depreciation and amortization		626			921			(1	)		1,546
Distribution expenses		688			748						1,436
Aircraft rent		686			323						1,009
Special charges		159			433						592
Other operating expenses		2,042			2,829			(273	)		4,598

		15,225			20,268			(211	)		35,282

Operating income		950			887			—			1,837
Nonoperating income (expense):
Interest expense		(342	)		(595	)					(937	)
Interest capitalized		17			15						32
Interest income		10			10						20
Miscellaneous, net		(72	)		(33	)					(105	)

		(387	)		(603	)		—			(990	)

Income before income taxes		563			284			—			847
Income tax expense (benefit)		(6	)		3						(3	)

Net income	$	569		$	281		$	—		$	850

The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF UNITED

Note 1. Basis of Presentation

The Unaudited Pro Forma Condensed Combined Balance Sheet of United combines the historical consolidated balance sheet of Continental and United on December 31, 2011. The Unaudited Pro Forma Condensed Combined Statement of Operations of United for the year ended December 31, 2011 combines the historical consolidated statement of operations of Continental and United for the year ended December 31, 2011.

The Unaudited Pro Forma Condensed Combined Financial Statements were prepared by combining the historical financial information of both Continental and United. Pro forma statements that give effect to a business combination to be accounted for as a reorganization of entities under common control generally only combine the historical financial statements of combining entities.

Note 2. Pro Forma Adjustments

The Unaudited Pro Forma Condensed Combined Financial Statements of United primarily reflect the elimination of transactions and account balances between Continental and United.

EX-99.2

Exhibit 99.2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder of

United Air Lines, Inc.

We have audited the accompanying consolidated balance sheets of United Air Lines, Inc. (the “Company”) as of December 31, 2011 and December 31, 2010, and the related statements of consolidated operations, comprehensive income (loss), cash flows, and stockholder’s deficit for each of the two years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Exhibit 99.3 for the years ended December 31, 2011 and 2010. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2011 and December 31, 2010, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company elected to change its method of accounting for frequent flyer award breakage in 2010.

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

/s/ Ernst & Young LLP

Chicago, Illinois

February 22, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

United Air Lines, Inc.

Chicago, Illinois

We have audited the accompanying statements of consolidated operations, consolidated comprehensive income (loss), consolidated stockholder’s deficit, and consolidated cash flows of United Air Lines, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2009. Our audit also included the financial statement schedule for 2009 listed in the Index at Exhibit 99.3. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the operations and the cash flows of United Air Lines, Inc. and subsidiaries for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for 2009, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 (Reclassifications) to the consolidated financial statements, the accompanying 2009 financial statements have been retrospectively adjusted for the reclassifications.

As discussed in Note 10 to the consolidated financial statements, the disclosures in the accompanying 2009 financial statements have been retrospectively adjusted for a change in the composition of reportable segments.

/s/ Deloitte & Touche LLP

Chicago, Illinois

February 25, 2010, except for Note 2 (Reclassifications) and Note 10, as to which the date is February 22, 2011

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS

(In millions)


	Year Ended December 31,
	2011			2010			2009
Operating revenue:
Passenger—Mainline	$	14,153		$	13,412		$	11,313
Passenger—Regional		3,935			3,658			2,884

Total passenger revenue		18,088			17,070			14,197
Cargo		718			714			536
Special revenue item		88			—			—
Other operating revenue		2,261			1,994			1,626

		21,155			19,778			16,359

Operating expense:
Aircraft fuel		7,080			5,700			4,204
Salaries and related costs		4,172			4,212			3,919
Regional capacity purchase		1,574			1,610			1,523
Landing fees and other rent		1,028			1,077			1,011
Aircraft maintenance materials and outside repairs		1,160			980			965
Depreciation and amortization		921			903			917
Distribution expenses		748			756			670
Aircraft rent		323			326			349
Special charges		433			468			374
Other operating expenses		2,829			2,728			2,564

		20,268			18,760			16,496

Operating income (loss)		887			1,018			(137	)

Nonoperating income (expense):
Interest expense		(595	)		(695	)		(577	)
Interest capitalized		15			11			10
Interest income		10			11			19
Miscellaneous, net		(33	)		42			41

		(603	)		(631	)		(507	)

Income (loss) before income taxes		284			387			(644	)
Income tax expense (benefit)		3			(12	)		(16	)

Net income (loss)	$	281		$	399		$	(628	)

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

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)


	Year Ended December 31,
	2011			2010			2009
Net income (loss)	$	281		$	399		$	(628	)

Other comprehensive income (loss), net:
Net change related to employee benefit plans		29			(148	)		(73	)
Net change in gains (losses) on financial instruments		(248	)		204			15

		(219	)		56			(58	)

Total comprehensive income (loss), net	$	62		$	455		$	(686	)

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

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	At December 31,
ASSETS	2011			2010
Current assets:
Cash and cash equivalents	$	3,458		$	4,665
Short-term investments		275			—


Total unrestricted cash, cash equivalents and short-term investments		3,733			4,665
Restricted cash		40			37
Receivables, less allowance for doubtful accounts (2011—$5; 2010—$5)		763			1,004
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011—$73; 2010—$61)		340			321
Deferred income taxes		348			373
Receivables from related parties		228			135
Prepaid expenses and other		447			366

		5,899			6,901

Operating property and equipment:
Owned—
Flight equipment		9,135			8,718
Other property and equipment		2,260			2,086

		11,395			10,804
Less—Accumulated depreciation and amortization		(3,359	)		(2,717	)

		8,036			8,087


Purchase deposits for flight equipment		57			51

Capital leases—
Flight equipment		1,458			1,741
Other property and equipment		67			49

		1,525			1,790
Less—Accumulated amortization		(548	)		(453	)

		977			1,337

		9,070			9,475

Other assets:
Intangibles, less accumulated amortization (2011—$534; 2010—$473)		2,283			2,343
Restricted cash		393			190
Other, net		600			719

		3,276			3,252

	$	18,245		$	19,628

(continued on next page)

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	At December 31,
LIABILITIES AND STOCKHOLDER’S DEFICIT	2011			2010
Current liabilities:
Advance ticket sales	$	1,652		$	1,536
Frequent flyer deferred revenue		1,484			1,703
Accounts payable		1,109			907
Accrued salaries and benefits		988			938
Current maturities of long-term debt		615			1,546
Current maturities of capital leases		122			249
Payables to related parties		104			63
Other		853			950

		6,927			7,892

Long-term debt		5,130			5,480
Long-term obligations under capital lease		735			858

Other liabilities and deferred credits:
Frequent flyer deferred revenue		2,018			2,321
Postretirement benefit liability		2,115			2,091
Pension liability		92			101
Advanced purchase of miles		1,442			1,159
Deferred income taxes		707			731
Other		983			972

		7,357			7,375

Commitments and contingencies

Stockholder’s deficit:
Common stock at par, $5 par value; authorized 1,000 shares; issued 205 shares at December 31, 2011 and 2010		—			—
Additional capital invested		3,432			3,421
Retained deficit		(5,208	)		(5,489	)
Accumulated other comprehensive income (loss)		(128	)		91

		(1,904	)		(1,977	)

	$	18,245		$	19,628

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

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)


	Year Ended December 31,
	2011			2010			2009
Cash Flows from Operating Activities:
Net income (loss)	$	281		$	399		$	(628	)

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities—
Depreciation and amortization		921			903			917
Special charges, non-cash portion		36			166			374
Proceeds from lease amendment		—			—			160
Debt and lease discount amortization		56			93			97
Deferred income taxes		—			(12	)		(16	)
Share-based compensation		9			13			21
Other operating activities		77			83			48

Changes in operating assets and liabilities—
Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles		(235	)		(126	)		123
Increase in accounts payable		241			221			94
Increase (decrease) in other liabilities		200			262			(213	)
Increase (decrease) in advance ticket sales		116			44			(38	)
Increase in other current assets		(129	)		(103	)		(19	)
(Increase) decrease in receivables		(123	)		(160	)		110
(Increase) decrease in fuel hedge collateral		(59	)		10			955
Unrealized (gain) loss on fuel derivatives and change in related pending settlements		27			4			(1,007	)

Net cash provided by operating activities		1,418			1,797			978

Cash Flows from Investing Activities:
Capital expenditures		(464	)		(318	)		(317	)
(Increase) decrease in short-term and other investments, net		(269	)		18			—
(Increase) decrease in restricted cash, net		(210	)		68			(24	)
Proceeds from sale of property and equipment		15			40			77
Aircraft purchase deposits paid, net		(6	)		(42	)		—
Proceeds from asset sale-leasebacks		—			—			175
Other, net		2			7			3

Net cash used in investing activities		(932	)		(227	)		(86	)

Cash Flows from Financing Activities:
Payments of long-term debt		(1,456	)		(1,667	)		(793	)
Principal payments under capital leases		(246	)		(482	)		(190	)
Decrease in aircraft lease deposits		15			236			23
Increase in deferred financing costs		(8	)		(33	)		(49	)
Proceeds from exercise of stock options		2			9			—
Proceeds from issuance of long-term debt		—			1,995			562
Capital contribution from parent		—			—			559
Other, net		—			1			(1	)

Net cash provided by (used in) financing activities		(1,693	)		59			111

Net increase (decrease) in cash and cash equivalents		(1,207	)		1,629			1,003
Cash and cash equivalents at beginning of year		4,665			3,036			2,033

Cash and cash equivalents at end of year	$	3,458		$	4,665		$	3,036

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

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED STOCKHOLDER’S DEFICIT

(In millions)


	Common Stock		Additional Capital Invested		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2008		—	$	2,831	$	(5,260	)	$	93		$	(2,336	)

Net loss		—		—		(628	)		—			(628	)
Other comprehensive loss		—		—		—			(58	)		(58	)
Capital contributions from parent		—		559		—			—			559
Share-based compensation		—		11		—			—			11

Balance at December 31, 2009		—		3,401		(5,888	)		35			(2,452	)

Net income		—		—		399			—			399
Other comprehensive income		—		—		—			56			56
Share-based compensation		—		12		—			—			12
Parent Company contribution related to stock plans		—		8		—			—			8

Balance at December 31, 2010		—		3,421		(5,489	)		91			(1,977	)

Net income		—		—		281			—			281
Other comprehensive loss		—		—		—			(219	)		(219	)
Share-based compensation		—		9		—			—			9
Parent Company contribution related to stock plans		—		2		—			—			2

Balance at December 31, 2011		—	$	3,432	$	(5,208	)	$	(128	)	$	(1,904	)

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

UNITED CONTINENTAL HOLDINGS, INC.,

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

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Continental

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

NOTE 1—MERGER

Merger

Description of Transaction

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

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

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

Expenses Related to the Merger

The Merger-related and integration expenses have been and are expected to be significant. While the Company has assumed that a certain level of expenses would be incurred, there are many factors that could affect the total amount or the timing of these expenses, and many of the expenses that will be incurred are, by their nature, difficult to estimate. These expenses could, particularly in the near term, exceed the financial benefits that the Company expects to achieve from the Merger and could result in the Company taking significant charges against earnings. For the year ended December 31, 2011, UAL, United and Continental incurred integration-related costs of $517 million, $360 million and $157 million, respectively. For the year ended December 31, 2010, UAL and United incurred Merger-related costs of $564 million and $363 million, respectively. Continental Successor and Continental Predecessor incurred Merger-related costs of $201 million and $29 million, respectively, in 2010. These costs are classified within special charges in the consolidated statement of operations. See Note 21 for additional information related to Merger and integration costs.

Pro-forma Impact of the Merger

The UAL unaudited pro-forma results presented below include the effects of the Continental acquisition as if it had been consummated as of January 1, 2009. The pro-forma results include the depreciation and amortization associated with the acquired tangible and intangible assets, lease fair value adjustments, elimination of any deferred gains or losses from other comprehensive income and the impact of income changes on profit sharing expense, among others. However, pro-forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro-forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2009 (in millions, except per share amounts):


	Year Ended December 31,
	2010		2009
Revenue	$	33,946	$	28,677
Net income (loss)		958		(689	)
Basic earnings (loss) per share		3.02		(2.41	)
Diluted earnings (loss) per share		2.62		(2.41	)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

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

(a)

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

(b)

Passenger Revenue Recognition—The value of unused passenger tickets are included in current liabilities as advance ticket sales. The Company records passenger ticket sales and tickets sold by other airlines for use on United or Continental as passenger revenue when the transportation is provided or upon estimated breakage. Tickets sold by other airlines are recorded at the estimated values to be billed to the other airlines. Non-refundable tickets generally expire on the date of the intended flight, unless the date is extended by notification from the customer on or before the intended flight date. Fees charged in association with changes or extensions to non-refundable tickets are recorded as other revenue at the time the fee is incurred. The fare on the changed ticket, including any additional collection, is deferred and recognized in accordance with our transportation revenue recognition policy at the time the transportation is provided. Change fees related to non-refundable tickets are considered a separate transaction from the air transportation because

they represent a charge for the Company’s additional service to modify a previous sale. Therefore, the pricing of the change fee and the initial customer order are separately determined and represent distinct earnings processes. Refundable tickets expire after one year.

The Company records an estimate of breakage revenue on the flight date for tickets that will expire without usage. These estimates are based on the evaluation of actual historical results. The Company recognizes cargo and other revenue as service is provided.

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

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

Accounts receivable primarily consist of amounts due from credit card companies and customers of our aircraft maintenance and cargo transportation services. We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical write-offs and other specific analyses. Bad debt expense and write-offs were not material for the years ended December 31, 2011, 2010 and 2009.

(c)

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

Miles Earned in Conjunction with Flights

In the case of the sale of air services, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale representing the value of the related miles. The adoption of Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”) resulted in the revision of this accounting, effective January 1, 2011.

Under the Company’s prior accounting policy, the Company estimated the weighted average equivalent ticket value by assigning a fair value to the miles that were issued in connection with the sale of air transportation. The equivalent ticket value is a weighted average ticket value of each outstanding mile, based upon projected redemption patterns for available award choices when such miles are consumed. The fair value of the miles was deferred and the residual amount of ticket proceeds was recognized as passenger revenue at the time the air transportation was provided.

The Company began applying the new guidance in 2011 and determines the estimated selling price of the air transportation and miles as if each element is sold on a separate basis. The total consideration from each ticket sale is then allocated to each of these elements individually on a pro rata basis. The estimated selling price of miles is computed using an estimated weighted average equivalent ticket value that is adjusted by a sales discount that considers a number of factors, including ultimate fulfillment expectations associated with miles sold in flight transactions to various customer groups.

Generally, as compared to the historical accounting policy, the new accounting policy decreases the value of miles that the Company records as deferred revenue and increases the passenger revenue recorded at the time air transportation is provided. The application of the new accounting method to passenger ticket transactions resulted in the following estimated increases to revenue (in millions, except per share amounts):


	Year Ended December 31, 2011
	UAL		United		Continental
Operating revenue	$	340	$	215	$	125
Per basic share		1.03		NM		NM
Per diluted share		0.89		NM		NM

Co-branded Credit Card Partner Mileage Sales

United and Continental also each have significant contracts to sell frequent flyer miles to their co-branded credit card partner, Chase Bank USA, N.A. (“Chase”). On June 9, 2011, these contracts were modified and the Company entered into The Consolidated Amended and Restated Co-Branded Card Marketing Services Agreement dated June 9, 2011, (the “Co-Brand Agreement”) with Chase.

The Company historically had two primary revenue elements, marketing and air transportation, in the case of miles sold to non-airline third parties. The Company applied the material modification provisions of ASU 2009-13 to the Co-Brand Agreement in June 2011 when the contract was amended. After the adoption of ASU 2009-13, the Company identified five revenue elements in the Co-Brand Agreement: the air transportation element represented by the value of the mile (generally resulting from its redemption for future air transportation); use of the United brand and access to frequent flyer member lists; advertising; baggage services; and airport lounge usage (together, excluding “the air transportation element”, the “marketing-related deliverables”).

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

The estimated selling price of miles is calculated generally consistent with the methodology as described in Miles Earned in Conjunction with Flights, above.

Under accounting prior to the adoption of ASU 2009-13, the Company used an equivalent ticket value to determine the fair value of miles. The new guidance changed the allocation of arrangement consideration to the number of units of accounting; however, the pattern and timing of revenue recognition for those units did not change. The Company records passenger revenue related to the air transportation element when the transportation is delivered. The other elements are generally recognized as other operating revenue when earned. Pending new or materially modified contracts after January 1, 2011, certain other non-airline partners who participate in the loyalty programs and to which we sell miles remain subject to our historical residual accounting method.

Generally, as compared to the historical accounting policy, the new accounting policy decreases the value of the air transportation deliverable related to the Co-Brand Agreement that the Company records as deferred revenue (and ultimately, passenger revenue when redeemed awards are flown) and increases the value primarily of the marketing-related deliverables recorded in other revenue at the time these marketing-related deliverables are provided. The annual impact of this accounting change on operating revenue will decrease over time. Our ability to project the annual decline for each year is significantly impacted by credit card sales volumes, frequent flyer redemption patterns and other factors. Excluding the effects disclosed in the

“Special Revenue Item” section below, the impact of adoption of ASU 2009-13 resulted in the following estimated increases to revenue (in millions, except per share amounts):


	Year Ended December 31, 2011
	UAL		United		Continental
Operating revenue	$	260	$	180	$	80
Per basic share		0.79		NM		NM
Per diluted share		0.68		NM		NM

Given the impact from the adoption of ASU 2009-13 on total revenue, there was a total impact on the Company’s profit sharing of approximately $90 million.

Special Revenue Item

The transition provisions of ASU 2009-13 require that the Company’s existing deferred revenue balance be adjusted retroactively to reflect the value of any undelivered element remaining at the date of contract modification as if we had been applying ASU 2009-13 since the initiation of the Co-Brand Agreement. We applied this transition provision by revaluing the undelivered air transportation element using its new estimated selling price as determined in connection with the contract modification. This estimated selling price was lower than the rate at which the undelivered element had been deferred under the previous contracts and, as a result, we recorded the following one-time non-cash adjustment to decrease frequent flyer deferred revenue and increase special revenue (in millions, except per share amounts):


	Year Ended December 31, 2011
	UAL		United		Continental
Special revenue item	$	107	$	88	$	19
Per basic share		0.33		NM		NM
Per diluted share		0.28		NM		NM

Expiration of Miles

United accounts for miles sold and awarded that will never be redeemed by program members, which we referred to as “breakage,” using the redemption method. UAL reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns. During the first quarter of 2010, United obtained additional historical data, previously unavailable, which enabled it to refine its estimate of the amount of breakage in its population of miles, increasing the estimate of miles in the population expected to expire. Both the change in estimate and methodology have been applied prospectively effective January 1, 2010. UAL and United estimate these changes increased passenger revenue by approximately $250 million, or $1.21 per UAL basic share ($0.99 per UAL diluted share), in the year ended December 31, 2010.

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

Other Information

The following table summarizes information related to the Company’s frequent flyer deferred revenue (in millions, except rates):


	UAL			United			Continental
Frequent flyer deferred revenue at December 31, 2011	$	5,658		$	3,502		$	2,156
% of miles earned expected to expire or go unredeemed		24	%		24	%		25	%
Impact of 1% change in outstanding miles or estimated selling price on deferred revenue	$	74		$	33		$	41

In 2011, the Company announced that MileagePlus will be the loyalty program for the Company beginning in 2012. Moving to a single loyalty program will be a significant milestone in the integration of the two airlines. Continental’s loyalty program will formally end in the first quarter of 2012 at which point United will automatically enroll OnePass members in MileagePlus and deposit into those MileagePlus accounts award miles equal to their OnePass award miles balance. The Company currently does not expect a material impact in redemptions when moving to a single loyalty program.

Also, effective January 1, 2012, United updated its estimated selling price for miles to the contractual rate at which we sell miles to our Star Alliance partners participating in reciprocal frequent flyer programs, as the estimated selling price for miles. Management believes this change is a change in estimate, and as such, the change will be applied prospectively effective January 1, 2012.

The following table provides additional information related to amounts recorded related to UAL’s frequent flyer programs (in millions):


Year Ended December 31,	Cash Proceeds from Miles Sold		Other Revenue Recognized Upon Award of Miles to Third-Party Customers (b)		Increase in Frequent Flyer Deferred Revenue for Miles Awarded (c)		Net Increase in Advanced Purchase of Miles (d)
2011 United	$	1,823	$	376	$	1,249	$	198
2011 Continental Successor		1,348		190		1,158		—

2011 UAL (a)	$	3,171	$	566	$	2,407	$	198

2010 United	$	1,863	$	300	$	1,477	$	86
2010 Continental Successor		293		31		262		—

2010 UAL (a)	$	2,156	$	331	$	1,739	$	86

2009 UAL / United	$	1,703	$	256	$	1,377	$	70

(a)	Continental’s results are included in UAL’s results from October 1, 2010 to December 31, 2011.

(b)	This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing services component of the sale.

(c)	This amount represents the increase to frequent flyer deferred revenue during the period.

(d)	This amount represents the net increase in the advance purchase of miles obligation due to cash payments for the sale of miles in excess of miles awarded to customers.

See Note 19 for additional information related to the Company’s frequent flyer program. Continental frequent flyer program accounting changed significantly as a result of the Merger. See Continental Predecessor Accounting Policies, below, for the Continental Predecessor policy.

(d)

Cash and Cash Equivalents and Restricted Cash—Cash in excess of operating requirements is invested in short-term, highly liquid investments. Investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents. Investments in debt securities classified as available-for-sale are stated at fair value. The gains or losses from changes in the fair value of available-for-sale securities are included in other comprehensive income.

Restricted cash primarily includes cash collateral associated with workers’ compensation obligations, reserves for institutions that process credit card ticket sales and cash collateral received from fuel hedge counterparties. Restricted cash, cash equivalents and investments are classified as short-term or long-term in the consolidated balance sheet based on the expected timing of return of the assets to the Company. Airline industry practice includes classification of restricted cash flows as either investing cash flows or operating cash flows. Cash flows related to restricted cash activity are classified as investing activities because the Company considers restricted cash arising from these activities similar to an investment. UAL’s cash inflows (outflows) associated with its restricted cash balances for the years ended December 31, 2011, 2010 and 2009 were $(185) million, $68 million and $(19) million, respectively.

(e)

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

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

(g)

Property and Equipment—The Company records additions to owned operating property and equipment at cost when acquired. Property under capital leases and the related obligation for future lease payments are recorded at an amount equal to the initial present value of those lease payments. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized as property and equipment.

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


	Estimated Useful Life (in years)
Aircraft and related rotable parts		27 to 30
Buildings		25 to 45
Other property and equipment		4 to 15
Computer software		5
Building improvements		1 to 40

As of December 31, 2011, UAL, United and Continental had a carrying value of computer software of $361 million, $103 million and $258 million, respectively. For the year ended December 31, 2011, UAL, United and Continental depreciation expense related to computer software was $133 million, $91 million and $42 million, respectively. Aircraft parts were assumed to have residual values with a range of 7% to 11% of original cost, depending on type, and other categories of property and equipment were assumed to have no residual value.

(h)	Maintenance and Repairs—The cost of maintenance and repairs, including the cost of minor replacements, is charged to expense as incurred, except for costs incurred under our power-by-the-hour engine maintenance agreements, which are expensed based upon the number of hours flown.

(i)	Lease Fair Value Adjustments—Lease fair value adjustments are amortized on a straight line basis over the related lease term.

(j)

Regional Capacity Purchase—Payments made to regional carriers under capacity purchase agreements are reported in regional capacity purchase in our consolidated statement of operations. As of December 31, 2011, United has call options on 196 regional jet aircraft currently being operated by certain regional carriers. At December 31, 2011, none of the call options were exercisable because none of the required conditions to make an option exercisable by United were met.

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


	UAL		United		Continental Successor		Continental Predecessor
2011	$	142	$	73	$	69		N/A
2010		90		67		23	$	74
2009		44		44		N/A		102

(l)

Intangibles—The Company has finite-lived and indefinite-lived intangible assets, including goodwill. As of December 31, 2011, goodwill represents the excess purchase price over the fair values of tangible and identifiable intangible assets acquired and liabilities assumed from Continental in the Merger. Finite-lived intangible assets are amortized over their estimated useful lives. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment annually or more frequently if events or circumstances indicate that the asset may be impaired. Goodwill and indefinite-lived assets are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs.

In addition to indefinite-lived intangible assets being recorded at the UAL level, such asset values are allocated to Continental and United for their separate company reporting. In most cases, these indefinite-lived assets are separately associated with and directly assignable to a specific separate company. In cases where the asset is shared between the companies, a prorate allocation was performed based on historical financial and operating measures. This resulted in a fair value allocation of such assets to Continental and United of 44% and 56%, respectively. Any impairment charges resulting from the testing of the fair values of these indefinite-lived intangible assets are also assigned to the applicable company using the same methodology; the impairment charge is recognized at the company to which the asset is assigned. See Notes 4 and 21 for additional information related to intangibles, including impairments recognized in 2011, 2010 and 2009.

(m)

Long-Lived Asset Impairments—The Company evaluates the carrying value of long-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist. For purposes of this testing, the Company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows for purposes of testing aircraft for impairment. An impairment charge is recognized when the asset’s carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset’s carrying value and fair market value. See Note 21 for information related to asset impairments recognized in 2010 and 2009.

(n)

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

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

(p)

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

(q)

Uncertain Income Tax Positions—The Company has recorded reserves for income taxes and associated interest that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the Company,

potentially resulting in additional liabilities for taxes and interest. The Company’s uncertain tax position reserves are reviewed periodically and are adjusted as events occur that affect its estimates, such as the availability of new information, the lapsing of applicable statutes of limitation, the conclusion of tax audits, the measurement of additional estimated liability, the identification of new tax matters, the release of administrative tax guidance affecting its estimates of tax liabilities, or the rendering of relevant court decisions. See Note 8 for further information related to uncertain income tax positions.

(r)

Reclassifications—During 2011, UAL and United corrected the classification of certain expenses associated with non-air redemption of frequent flyer miles for awards which were previously reported on a net basis in revenue in their 2010 consolidated statements of operations to reclassify them from passenger revenue to other operating expenses. In addition, UAL, United and Continental Successor changed their classification of 2010 third party revenue associated with non-air redemptions to reclassify it from passenger revenue to other operating revenue. As a result, these changes decreased passenger revenue and increased either other operating revenue or other operating expenses by a like amount in each period but had no effect on earnings. Amounts originally reported in UAL’s 2010 Annual Report on Form 10-K that have been reclassified are shown below (in millions):


	Year Ended December 31, 2010
	As Reclassified		Historical
Operating revenue:
Passenger—Mainline	$	16,019	$	16,069
Passenger—Regional		4,217		4,229
Other operating revenue		2,257		2,099

	$	22,493	$	22,397

Operating expense:
Other operating expenses	$	3,266	$	3,170

UAL and United did not reclassify its 2009 amounts as they were insignificant. There are no significant differences in the impact of the United reclassifications as compared to the UAL reclassifications above. Continental Successor’s reclassifications related to third party revenue were insignificant and are presented within its 2010 consolidated statements of operations.

UAL and United

In 2010, UAL and United changed their classification of certain revenue and expenses in their statements of consolidated operations. Baggage fees, unaccompanied minor fees and miscellaneous fees moved from mainline and regional passenger revenue to other operating revenue. Purchased services and cost of third party sales moved from separate line items to other operating expenses. Salaries and related costs, aircraft fuel, depreciation and amortization, landing fees and distribution expenses related to regional expenses were reclassified from regional capacity purchase to their separate line items. Amounts originally reported in UAL’s 2009 Annual Report on Form 10-K that have been reclassified are shown below (in millions):


	For the Year Ended December 31, 2009
	As Reclassified		Historical
Operating revenue:
Passenger—Mainline	$	11,313	$	11,910
Passenger—Regional		2,884		3,064
Other operating revenue		1,602		825

	$	15,799	$	15,799


	For the Year Ended December 31, 2009
	As Reclassified		Historical
Operating expense:
Aircraft fuel	$	4,204	$	3,405
Salaries and related costs		3,919		3,773
Regional capacity purchase		1,523		2,939
Landing fees and other rent		1,011		905
Depreciation and amortization		917		902
Distribution expenses		670		534
Other operating expenses		2,567		956
Purchased services		—		1,167
Cost of third party sales		—		230

	$	14,811	$	14,811

There are no significant differences in the impact of the United reclassifications as compared to the UAL reclassifications above.

Continental Predecessor Accounting Policies

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

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

Property and Equipment—Property and equipment was recorded at cost and was depreciated to estimated residual value over its estimated useful life using the straight-line method. Jet aircraft and rotable spare parts were assumed to have residual values of 15% and 10%, respectively, of original cost; other categories of property and equipment were assumed to have no residual value. The estimated useful lives of Continental property and equipment were as follows:


	Estimated Useful Life
Jet aircraft and simulators		25 to 30 years
Rotable spare parts		Average lease term or useful life for related aircraft
Buildings and improvements		10 to 30 years
Vehicles and equipment		5 to 10 years
Computer software		3 to 5 years

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

NOTE 3—RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-09 (“ASU 2011-09”), Disclosures about an Employer’s Participation in a Multiemployer Plan. This update requires additional disclosures, both quantitative and qualitative, about an employer’s participation in a multiemployer pension plan. Some of the required disclosures include the plan names and identifying numbers of the significant multiemployer plans in which an employer participates, the level of an employer’s participation in significant multiemployer plans, the financial health of significant multiemployer plans, and the nature of employer commitments to the plan. ASU 2011-09 is effective for the Company’s annual reporting period ended December 31, 2011 and the required disclosures are disclosed in Note 9.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”), Testing Goodwill for Impairment. This update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Previous guidance requires an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. ASU 2011-08 is effective for the Company for annual and interim periods beginning January 1, 2012. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its results of operations or financial position.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Comprehensive Income. This guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning January 1, 2012 and should be applied retrospectively. As permitted, the Company elected to early adopt ASU 2011-05 during 2011 and the two-statement approach is presented within this report. The adoption of this guidance only relates to the presentation of comprehensive income.

NOTE 4—GOODWILL AND OTHER INTANGIBLE ASSETS

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


		2011				2010
UAL	Asset life (a)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill		$	4,523			$	4,523

Amortized intangible assets
Airport slots and gates		$	100	$	61	$	117	$	49
Hubs			145		44		145		36
Patents and tradenames			108		86		108		73
Frequent flyer database			1,177		381		1,177		279
Contracts			167		64		167		53
Other			109		34		108		14

Total		$	1,806	$	670	$	1,822	$	504

Unamortized intangible assets
Airport slots and gates		$	1,011			$	997
Route authorities			1,606				1,606
Tradenames and logos			593				593
Alliances			404				404

Total		$	3,614			$	3,600


United		2011				2010
Amortized intangible assets
Airport slots and gates	9	$	72	$	52	$	72	$	45
Hubs	20		145		44		145		36
Patents	3		70		70		70		70
Frequent flyer database	21 (b)		521		296		521		261
Contracts	13		140		60		140		52
Other	7		13		12		12		9

Total		$	961	$	534	$	960	$	473

Unamortized intangible assets
Airport slots		$	201			$	201
Route authorities			1,117				1,117
Tradenames			420				420
Alliances			118				118

Total		$	1,856			$	1,856


Continental		2011				2010
Goodwill		$	4,523			$	4,523

Amortized intangible assets
Airport slots	4	$	28	$	9	$	45	$	4
Frequent flyer database	23 (b)		656		85		656		18
Tradenames	3		38		16		38		3
Contracts	10		27		4		27		1
Other	27		96		22		96		5

Total		$	845	$	136	$	862	$	31

Unamortized intangible assets
Airport slots		$	812			$	796
Route authorities			489				489
Alliances			286				286
Tradenames and logos			173				173

Total		$	1,760			$	1,744

(a)	Weighted average life expressed in years. UAL is covered by the weighted average of each of its individual subsidiaries.

(b)

The United and Continental frequent flyer databases are amortized based on an accelerated amortization schedule to reflect utilization of the assets. Estimated cash flows correlating to the expected attrition rate of customers in the frequent flyer databases were considered in the determination of the amortization schedules.

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


Actual Amortization:	UAL		United		Continental Successor		Continental Predecessor
2011	$	169	$	61	$	108
2010		96		65		31	$	11
2009		69		69				14

Projected Amortization:
2012	$	122	$	55	$	67
2013		142		52		90
2014		129		46		83
2015		106		37		69
2016		91		34		57

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

NOTE 5—COMMON STOCKHOLDERS’ EQUITY AND PREFERRED SECURITIES

UAL

At December 31, 2011, approximately 73 million shares of UAL common stock were reserved for future issuance related to the conversion of convertible debt securities and the issuance of equity based awards under UAL’s incentive compensation plans.

As of December 31, 2011, UAL had two shares of junior preferred stock (par value $0.01 per share) outstanding. In addition, UAL is authorized to issue 250 million shares of preferred stock (without par value) under UAL’s amended and restated certificate of incorporation.

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

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

During 2009, UAL issued 7 million shares of its common stock, generating net proceeds of $75 million.

In addition, UAL sold 19 million shares of UAL common stock in an underwritten, public offering for a price of $7.24 per share in October 2009. The Company received approximately $132 million of net proceeds from this issuance. UAL contributed the proceeds from both its equity offering program and its 19 million common stock issuance to United, as further discussed in Note 20.

Continental

In connection with the Merger, on October 1, 2010, all outstanding 141 million shares of Continental common stock were converted into and exchanged for 1.05 fully paid and nonassessable shares of UAL common stock

with any fractional shares paid in cash. The shares of Continental common stock that were acquired by UAL were subsequently canceled and replaced with 1,000 shares of common stock ($0.01 par value), all of which are owned by UAL as of December 31, 2011.

In August 2009, Continental completed a public offering of 14 million shares of its Continental common stock at a price of $11.20 per share, raising net proceeds of $158 million. Proceeds were used for general corporate purposes.

NOTE 6—EARNINGS (LOSS) PER SHARE

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


	2011			2010			2009
Basic earnings (loss) per share:
Net income (loss)	$	840		$	253		$	(651	)
Less: Income allocable to participating securities		(3	)		(1	)		—

Earnings (loss) available to common stockholders	$	837		$	252		$	(651	)

Basic weighted-average shares outstanding		329			207			151

Earnings (loss) per share, basic	$	2.54		$	1.22		$	(4.32	)

Diluted earnings (loss) per share:
Earnings (loss) available to common stockholders	$	837		$	252		$	(651	)
Effect of United 6% senior convertible notes		18			18			—
Effect of Continental 4.5% convertible notes		9			2			—
Effect of Continental 5% convertible notes		—			1			—

Earnings (loss) available to common stockholders including the effect of dilutive securities	$	864		$	273		$	(651	)


Basic weighted-average shares outstanding		329			207			151
Effect of United 6% senior convertible notes		40			40			—
Effect of Continental 4.5% convertible notes		12			3			—
Effect of employee stock options		2			2			—
Effect of Continental 5% convertible notes		—			1			—

Diluted weighted-average shares outstanding		383			253			151

Earnings (loss) per share, diluted	$	2.26		$	1.08		$	(4.32	)

Potentially dilutive shares excluded from diluted per share amounts:
United 4.5% senior limited-subordination convertible notes		11			22			22
Stock options		5			9			7
Continental 6% convertible junior subordinated debentures		4			1			—
Restricted shares		1			—			1
United 5% senior convertible notes		—			3			3
United 6% senior convertible notes		—			—			40

		21			35			73

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

UAL’s 6% Senior Notes due 2031, with a principal amount of $652 million outstanding as of December 31, 2011, can be redeemed, and the $125 million of UAL’s 8% Contingent Senior Unsecured Notes, which UAL issued in January 2012, are redeemable when issued with either cash or shares of UAL common stock, or in the case of mandatory redemption, a combination thereof, at UAL’s option. These notes are not included in the diluted earnings per share calculation because it is UAL’s intent to redeem these notes with cash if UAL were to decide to redeem these notes. See Note 14 for additional information.

During 2011, UAL repurchased at par value approximately $570 million of the $726 million outstanding principal amount of its 4.5% Senior Limited-Subordination Convertible Notes due 2021 with cash after the notes were put to UAL by the noteholders. For the year ended December 31, 2011, the dilutive effect of the 4.5% Senior Limited-Subordination Convertible Notes due 2021 was excluded from the diluted earnings per share calculations from the date that notice was given of the Company’s intent to pay the notes put to it in cash up to the June 30, 2011 repurchase date. However, the dilutive effect of the remaining shares after the repurchase date was included in the Company’s diluted earnings per share calculations.

Continental Predecessor

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


	Nine Months Ended September 30, 2010		Year Ended December 31, 2009


Basic earnings (loss) per share:
Net income (loss)	$	441	$	(282	)

Earnings (loss) available to common stockholders	$	441	$	(282	)

Basic weighted-average shares outstanding		140		129

Earnings (loss) per share, basic	$	3.16	$	(2.18	)

Diluted earnings (loss) per share:
Earnings (loss) available to common stockholders	$	441	$	(282	)
Effect of 5% convertible notes		10		—
Effect of 6% convertible junior subordinated debentures		10		—
Effect of 4.5% convertible notes		7		—

Earnings (loss) available to common stockholders including the effect of dilutive securities	$	468	$	(282	)


Basic weighted-average shares outstanding		140		129
Effect of 4.5% convertible notes		12		—
Effect of 5% convertible notes		9		—
Effect of 6% convertible junior subordinated debentures		4		—
Effect of employee stock options		2		—

Dilutive weighted-average shares outstanding		167		129

Earnings (loss) per share, diluted	$	2.81	$	(2.18	)

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

Approximately 2 million and 8 million weighted average options to purchase shares of Continental common stock for the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively, were excluded from the computation of diluted earnings (loss) per share because the effect of including the options

would have been antidilutive. In addition, approximately 14 million potential shares of Continental common stock related to Continental’s convertible debt securities were excluded from the computation of diluted loss per share for the year ended December 31, 2009 because they were antidilutive.

NOTE 7—SHARE-BASED COMPENSATION PLANS

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

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

In February 2011, 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 that vest pro-rata over three years on the anniversary of the grant date. These awards also include approximately 3.0 million performance-based RSUs consisting of approximately 1.2 million RSUs that vest based on UAL’s return on invested capital for the period beginning January 1, 2011 and ending December 31, 2013, and 1.8 million RSUs that vest based on the achievement of Merger-related goals. Vesting of a portion of the Merger incentive RSUs is based on the achievement of certain Merger-related milestones and vesting of the remainder of the Merger incentive RSUs is based on the achievement of revenue and cost synergies over a three-year performance period ending December 31, 2013. If the specified performance conditions are achieved, cash payments will be made shortly after the end of the performance period or achievement of the specified Merger milestone, as applicable, based on the 20-day average closing price of UAL common stock either immediately prior to the vesting date or, as applicable, on the last day of the month in which the Merger milestone is achieved. The Company accounts for the performance-based RSUs as liability awards.

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


	2011		2010		2009
Compensation cost: (a), (b)
Share-based awards converted to cash awards (c)	$	19	$	84	$	—
Restricted stock units		18		20		10
Restricted stock		12		6		6
Stock options		5		7		5

Total	$	54	$	117	$	21

(a)	All compensation cost is recorded to Salaries and related benefits, with the exception of $17 million and $70 million in 2011 and 2010, respectively, that was recorded in integration and Merger-related costs, respectively.

(b)	United recorded $28 million and $63 million of compensation cost related to UAL’s share-based plans during 2011 and 2010, respectively. These amounts included $7 million and $24 million that were classified as integration and Merger-related expense during

2011 and 2010, respectively. Continental Successor recorded $26 million and $54 million of compensation cost related to UAL’s share-based plans during 2011 and 2010, respectively. These amounts included $10 million and $46 million that were classified as integration and Merger-related expense during 2011 and 2010, respectively. All UAL share-based compensation expense in 2009 was recorded by United.

(c)	As described below, in connection with the Merger, certain awards were converted into fixed cash equivalents.

The table below summarizes UAL’s unearned compensation and weighted-average remaining period to recognize costs for all outstanding share-based awards for the year ended December 31, 2011 (in millions, except as noted):


	Unearned Compensation (a)		Weighted-Average Remaining Period (in years)
Share-based awards converted to cash awards	$	8		1.0
Restricted stock units		24		1.8
Restricted stock		9		1.3
Stock options		2		1.8

Total	$	43

(a)	Compensation cost attributable to future service related to unvested awards remaining to be recognized by United and Continental consists of $25 million and $18 million, respectively.

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

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

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

termination of employment under certain circumstances following the Merger, the participant is entitled to a cash settlement. In the fourth quarter of 2010, UAL paid $19 million in cash for settlement of these awards in connection with Merger-related terminations.

Stock Options. The Company did not grant any stock options during 2011. Historically, stock options were awarded with exercise prices equal to the fair market value of UAL’s common stock on the date of grant. UAL stock options generally vest over a period of either three or four years and have a contractual life of 10 years. The Continental Predecessor stock options generally have an original contractual life of five years (management level employee options) or 10 years (outside directors). Expense related to each portion of an option grant is recognized on a straight-line basis over the specific vesting period for those options.

The table below summarizes UAL stock option activity (shares in thousands):


	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at beginning of year		11,052		$	21.70
Exercised (a)		(2,449	)		10.77
Canceled		(30	)		16.66
Expired		(1,627	)		29.30

Outstanding at end of year		6,946			23.80		3.2

Exercisable at end of period		6,372			24.68		3.0	$	19

(a)	The aggregate intrinsic value of shares exercised in 2011, 2010 and 2009 was $33 million, $42 million and less than $1 million, respectively.

The following table provides additional information for options granted in 2009 and Continental Predecessor options granted in 2010 which were valued at the Merger date:


Weighted-average fair value assumptions:	2010			2009
Risk-free interest rate		0.1 – 1.8	%		1.9 – 3.1	%
Dividend yield		—	%		—	%
Expected market price volatility of UAL common stock		75	%		93	%
Expected life of options (years)		0.1 – 6.3			6.0
Weighted-average fair value	$	11.52		$	3.72

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

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

The expected lives of the options were determined based upon either a simplified assumption that the option will be exercised evenly from vesting to expiration or estimated using historical experience for the assumed options. The terms of certain UAL awards do not provide for the acceleration of vesting upon retirement. In addition,

certain UAL awards and the assumed options awarded to employees that are retirement eligible either at the grant date or within the vesting period is considered vested at the respective retirement eligibility date.

Restricted Stock Awards and Restricted Stock Units. During 2011, the Compensation Committee determined that all outstanding UAL RSUs will be settled in cash. As of December 31, 2011, UAL, United and Continental had recorded a liability of $50 million, $21 million and $29 million, respectively, related to its unvested RSUs.

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


	Restricted Stock Units			Weighted- Average Grant Price		Restricted Stock			Weighted- Average Grant Price
Non-vested at beginning of year		51		$	22.85		671		$	17.20
Granted		3,655			19.89		536			23.87
Vested		(141	)		18.13		(195	)		22.26
Canceled		(199	)		19.90		(27	)		23.95

Non-vested at end of year		3,366			19.98		985			23.33

The fair value of RSUs and restricted shares vested in 2011, 2010 and 2009 was $7 million, $33 million and $21 million, respectively. The fair value of the restricted stock awards was primarily based upon the share price on the date of grant. These awards are accounted for as equity awards. The fair value of the cash-settled RSUs was based upon the Company’s stock price as of the last day preceding the settlement date. These awards were accounted for as liability awards. Restricted stock vesting and the recognition of the expense is similar to the stock option vesting described above.

Continental Predecessor

Share-Based Compensation Expense. Total share-based compensation expense included in salaries and related costs for the nine months ended September 30, 2010 and the year ended December 31, 2009 was $57 million and $(3) million, respectively.

Stock Options. Stock options were awarded with exercise prices equal to the fair market value of Continental’s common stock on the date of grant. Management level employee stock options typically vested over a four year period and generally had five year terms. Expense related to each portion of an option grant was recognized on a straight-line basis over the specific vesting period for those options. Outside director stock options vested in full on the date of grant and had ten year terms. All outstanding options under the Continental 2005 Pilot Supplemental Option Plan, which vested over three years and have terms of six to eight years, and the Continental 2005 Broad Based Employee Stock Option Plan, which vested over three years and have a term of six years, were already fully vested on the Merger closing date. Outstanding stock options granted under the Continental Incentive Plan 2000, the Continental 1998 Stock Incentive Plan, and the Continental 1997 Stock Incentive Plan became exercisable in full upon the closing of the Merger. Outstanding stock options granted under the Continental Incentive Plan 2010 vest on their original vesting schedule or earlier if the holder experiences an involuntary termination within two years of the Merger closing date.

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


	2010			2009
Risk-free interest rate		1.4	%		2.0	%
Dividend yield		—	%		—	%
Expected market price volatility of Continental common stock		88	%		86	%
Expected life of options (years)		3.8			3.9
Weighted average fair value	$	14.55		$	5.75

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

Profit Based RSU Awards. See Merger Impacts-Continental Predecessor Share-Based Awards, above, for a discussion of the impact of the Merger on PBRSU awards. Continental issued PBRSU awards pursuant to its long-term incentive and RSU programs, which provided for cash payments to Continental’s officers upon the achievement of specified profit sharing-based performance targets. The performance targets required that Continental reach target levels of cumulative employee profit sharing during the performance period and that Continental had net income calculated in accordance with U.S. generally accepted accounting principles for the applicable fiscal year in which the cumulative profit sharing target was met. To serve as a retention feature, payments related to the achievement of a performance target generally were made in annual increments over a three-year period to participants who remain continuously employed by Continental through each payment date. Payments also were conditioned on Continental having, at the end of the fiscal year preceding the date any payment was made, a minimum unrestricted cash, cash equivalents and short-term investments balance as set by the Human Resources Committee of Continental’s Board of Directors. If Continental did not achieve the minimum cash balance applicable to a payment date, the payment was deferred until the next payment date (March 1 of the next year), subject to a limit on the number of years payments could be carried forward. Payment amounts were calculated based on the number of PBRSUs subject to the award, the average closing price of Continental common stock during the 20 trading days preceding the payment date and the payment percentage set by the Human Resources Committee of Continental’s Board of Directors for achieving the applicable profit sharing-based performance target.

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

NOTE 8—INCOME TAXES

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


2011	UAL			United			Continental Successor			Continental Predecessor
Current	$	11		$	3		$	—
Deferred		(6	)		—			(6	)

	$	5		$	3		$	(6	)

2010
Current	$	10		$	—		$	2		$	1
Deferred		(10	)		(12	)		(6	)		—

	$	—		$	(12	)	$	(4	)	$	1

2009
Current	$	(1	)	$	—					$	1
Deferred		(16	)		(16	)					(158	)

	$	(17	)	$	(16	)				$	(157	)

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


Year Ended December 31, 2011	UAL			United			Continental Successor			Continental Predecessor
Income tax provision at statutory rate	$	298		$	100		$	199
State income taxes, net of federal income tax benefit		(19	)		(25	)		8
Nondeductible acquisition costs		(17	)		(8	)		(9	)
Nondeductible employee meals		12			7			5
Nondeductible interest expense		13			13			—
Derivative market adjustment		—			—			10
Nondeductible compensation		9			5			5
Valuation allowance		(294	)		(92	)		(223	)
Other, net		3			3			(1	)

	$	5		$	3		$	(6	)

Year Ended December 31, 2010
Income tax provision at statutory rate	$	87		$	135		$	(35	)	$	155
State income taxes, net of federal income tax benefit		24			24			1			8
Nondeductible acquisition costs		45			31			14			—
Nondeductible employee meals		8			7			1			3
Nondeductible interest expense		12			12			—			—
Change in tax law—Medicare Part D Subsidy		119			119			—			—
Nondeductible compensation		13			1			12			—
Goodwill credit		(22	)		(22	)		—			—
Valuation allowance		(290	)		(322	)		9			(166	)
Tax benefit resulting from intraperiod tax allocation		—			—			(6	)		—
Other, net		4			3			—			1

	$	—		$	(12	)	$	(4	)	$	1


Year Ended December 31, 2009	UAL			United			Continental Successor	Continental Predecessor
Income tax provision at statutory rate	$	(234	)	$	(225	)		$	(154	)
State income taxes, net of federal income tax benefit		5			6				(9	)
Nondeductible employee meals		6			6				4
Nondeductible interest expense		12			12				—
Medicare Part D Subsidy		(7	)		(7	)			—
Valuation allowance		190			182				158
Share-based compensation		7			7				—
Tax benefit resulting from intraperiod tax allocation		—			—				(158	)
Other, net		4			3				2

	$	(17	)	$	(16	)		$	(157	)

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

We are required to consider all items of income (including items recorded in other comprehensive income) in determining the amount of tax benefit that should be allocated to a loss from continuing operations. As a result, Continental Successor and Continental Predecessor recorded $6 million and $158 million of non-cash tax benefits on its loss from continuing operations for the three months ended December 31, 2010 and the year ended December 31, 2009, respectively, which were exactly offset by income tax expense in other comprehensive income, a component of stockholder’s equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations, Continental’s net deferred tax positions at December 31, 2010 and 2009 were not impacted by this tax allocation.

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2011 and 2010 were as follows (in millions):


	UAL						United						Continental
	December 31,						December 31,						December 31,
	2011			2010			2011			2010			2011			2010
Deferred income tax asset (liability):
Federal and state net operating loss (“NOL”) carryforwards	$	2,911		$	3,429		$	2,024		$	2,217		$	835		$	1,179
Frequent flyer deferred revenue		2,386			2,358			1,487			1,609			903			752
Employee benefits, including pension, postretirement and medical		1,897			1,741			1,275			1,272			703			551
Lease fair value adjustment		376			504			—			—			376			504
AMT credit carryforwards		268			268			263			263			5			5
Restructuring charges		50			69			50			69			—			—
Other assets		1,201			1,031			510			388			581			495
Less: Valuation allowance		(4,137	)		(4,171	)		(2,614	)		(2,624	)		(1,434	)		(1,384	)

Total deferred tax assets	$	4,952		$	5,229		$	2,995		$	3,194		$	1,969		$	2,102

Depreciation, capitalized interest and other	$	(3,860	)	$	(4,091	)	$	(2,303	)	$	(2,463	)	$	(1,554	)	$	(1,625	)
Intangibles		(1,627	)		(1,699	)		(833	)		(849	)		(795	)		(850	)
Other liabilities		(453	)		(433	)		(218	)		(240	)		(173	)		(186	)

Total deferred tax liabilities	$	(5,940	)	$	(6,223	)	$	(3,354	)	$	(3,552	)	$	(2,522	)	$	(2,661	)

Net deferred tax liability	$	(988	)	$	(994	)	$	(359	)	$	(358	)	$	(553	)	$	(559	)

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

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

In addition to the deferred tax assets listed in the table above, UAL has an $880 million unrecorded tax benefit at December 31, 2011, primarily attributable to the difference between the amount of the financial statement expense and the allowable tax deduction for UAL common stock issued to certain unsecured creditors and employees pursuant to UAL Corporation’s Chapter 11 bankruptcy protection. This unrecorded tax benefit is accounted for by analogy to Accounting Standards Codification Topic 718 which requires recognition of the tax benefit to be deferred until it is realized as a reduction of taxes payable. Although not recognized for financial reporting purposes, this unrecognized tax benefit is available to reduce future income and is incorporated into the disclosed amounts of our federal and state NOL carryforwards, which are discussed below.

The federal and state NOL carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in future years. These tax benefits are mostly attributable to federal pre-tax NOL carryforwards of $10.0 billion for UAL (including the NOLs discussed in the preceding paragraph). If not utilized these federal pre-tax NOLs will expire as follows (in billions): $1.2 in 2022, $1.6 in 2023, $2.4 in 2024, $2.0 in 2025 and $2.8 after 2025. In addition, the majority of state tax benefits of the net operating losses of $205 million for UAL expires over a five to 20-year period.

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

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Prior to 2011, the Company was in a cumulative three-year loss position, which we weighted as a significant source of negative evidence indicating the need for a valuation allowance on our net deferred tax assets. Although the Company was no longer in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of financial losses in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance was still needed on net deferred assets. If UAL achieves significant profitability in 2012, then management will evaluate whether its recent history of profitability constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.

The December 31, 2011 valuation allowances of $4.1 billion, $2.6 billion and $1.4 billion for UAL, United and Continental, respectively, if reversed in future years will reduce income tax expense. The current valuation allowance reflects decreases from December 31, 2010 of $34 million and $10 million for UAL and United, respectively, and an increase from December 31, 2010 of $50 million for Continental.

UAL’s unrecognized tax benefits related to uncertain tax positions were $24 million, $32 million and $16 million at December 31, 2011, 2010 and 2009, respectively. Included in the ending balance at 2011 is $22 million that would affect UAL’s effective tax rate if recognized. The Company does not expect significant increases or decreases in their unrecognized tax benefits within the next twelve months.

There are no significant amounts included in the balance at December 31, 2011 for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

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

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


	2011			2010		2009
Balance at January 1,	$	32		$	16	$	20
Increase due to Continental’s uncertain tax positions at the Merger closing date		—			6		—
Increase in unrecognized tax benefits as a result of tax positions taken during the current period		1			10		1
Decrease in unrecognized tax benefits as a result of tax positions taken during a prior period		(9	)		—		(5	)
Decrease in unrecognized tax benefits relating to settlements with taxing authorities		—			—		—

Balance at December 31,	$	24		$	32	$	16

UAL’s federal income tax returns for tax years after 2002 remain subject to examination by the Internal Revenue Service (“IRS”) and state taxing jurisdictions. The IRS commenced an examination of UAL’s U.S. income tax returns for 2007 through 2009 in the fourth quarter of 2010. As of December 31, 2011, the IRS had not proposed any material adjustments to UAL’s returns. Continental’s federal income tax returns for tax years after 2001 remain subject to examination by the IRS and state taxing jurisdictions.

NOTE 9—PENSION AND OTHER POSTRETIREMENT PLANS

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

Pension Plans

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

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


	Pension Benefits
	Year Ended December 31, 2011									Year Ended December 31, 2010
	UAL			United			Continental			UAL			United			Continental (a)
Accumulated benefit obligation:	$	3,321		$	220		$	3,101		$	2,999		$	214		$	2,785

Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	3,322		$	256		$	3,066		$	228		$	228		$	2,629
Merger impact (b)		—			—			—			3,169			—			439
Service cost		88			7			81			27			6			71
Interest cost		178			10			168			51			9			161
Actuarial (gain) loss		251			(2	)		253			(130	)		17			(147	)
Gross benefits paid		(137	)		(8	)		(129	)		(23	)		(7	)		(75	)
Other		6			(4	)		10			—			3			(12	)

Projected benefit obligation at end of year	$	3,708		$	259		$	3,449		$	3,322		$	256		$	3,066

Change in plan assets:
Fair value of plan assets at beginning of year	$	1,871		$	183		$	1,688		$	156		$	156		$	1,371
Merger impact (b)		—			—			—			1,549			—			83
Actual gain (loss) on plan assets		(47	)