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

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 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

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 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, and United will be considered the predecessor.

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         

 

1


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

 

2


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.

 

3


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.

 

4


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)

 

5


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.

 

6


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.

 

7


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.

 

8


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.

 

9


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

 

10


  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.

 

11


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

 

12


“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   

 

13


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.

 

14


(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   

 

15


(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,

 

16


  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   
  

 

 

    

 

 

 

 

17


     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.

 

18


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.

 

19


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      
     

 

 

       

 

 

    

 

20


 

(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

 

21


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.

 

22


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

 

23


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

 

24


  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

 

25


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,

 

26


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.

 

27


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.

 

28


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   
  

 

 

   

 

 

   

 

 

       

 

 

 

 

29


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

 

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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.

 

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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.

Other Postretirement Plans

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

 

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The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in these financial statements for the defined benefit and other postretirement plans (in millions):

 

     Pension Benefits  
     Year Ended
December 31, 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     5        (52     131        16        115   

Employer contributions

     194        24        170        58        18        202   

Benefits paid

     (137     (8     (129     (23     (7     (75

Other

     (13     (9     (4     —          —        $ (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status—Net amount recognized

   $ (1,840   $ (64   $ (1,776   $ (1,451   $ (73   $ (1,378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Continental, in 2010, represents combined Predecessor and Successor. Other than remeasurement described in (b), all other activity occurred on a consistent basis throughout 2010.
(b) UAL, in 2010, represents plan assets and liabilities assumed in Merger. Continental, in 2010, represents remeasurement of the projected benefit obligation as of the Merger closing date.

 

     Pension Benefits  
     December 31, 2011     December 31, 2010  
     UAL     United     Continental     UAL     United     Continental (a)  

Amounts recognized in the consolidated balance sheets consist of:

            

Noncurrent asset

   $ 31      $ 31      $ —        $ 32      $ 32    &