UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report: April 14, 2005

(Date of earliest event reported)

UAL CORPORATION

(Exact name of registrant as specified in its charter)

1200 East Algonquin Road, Elk Grove Township, Illinois 60007

(Address of principal executive offices)

(847) 700-4000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

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

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

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

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

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

Item 8.01.              Other Events.

In connection with its voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code in Case Nos. 02-48191 through 02-48218, UAL Corporation filed on April 11, 2005 with the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, a Supplemental Memorandum In Support of Debtors’ Motion to Reject Their Collective Bargaining Agreement Pursuant to 11 U.S.C. § 1113(c) and for Voluntary Distress Termination of their Defined Benefit Pension Plans Pursuant to 29 U.S.C. § 1341(c).  A copy of the Supplemental Memorandum is provided hereunder as Exhibit 99.1.

Item 9.01.              Financial Statements and Exhibits.

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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.

Dated:  April 14, 2005

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Exhibit 99.1

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

SUPPLEMENTAL MEMORANDUM IN SUPPORT OF
DEBTORS’ MOTION TO REJECT THEIR COLLECTIVE
BARGAINING AGREEMENT PURSUANT TO 11 U.S.C. § 1113(c)
AND FOR VOLUNTARY DISTRESS TERMINATION OF THEIR
DEFINED BENEFIT PENSION PLANS PURSUANT TO 29 U.S.C. §  1341(c)

TABLE OF CONTENTS

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TABLE OF AUTHORITIES

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TABLE OF EXHIBITS

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I.              INTRODUCTION AND OVERVIEW.

Contrary to the hopes of United and its employees, but consistent with the business plan upon which the Company predicated its second round of Section 1113 proposals, the industry environment has not improved over the last three-and-a-half months, and the structural long-term changes that have roiled the industry have not reversed.  Fuel prices have soared to record levels, refuting the principal contention of the PBGC and AFA that United’s forecast was unjustifiably pessimistic.  United continues to face unrelenting revenue and market challenges from both LCCs and legacy carriers.  And other airlines have taken steps to reduce their own labor costs and pension liabilities.  United has done all it can to offset these pressures (through the limited fare increases that the market will bear and other profit initiatives), but significant, long-term labor cost reductions from all of the Company’s employee groups and the termination and replacement of the Company’s pension plans remain critical to the completion of a successful reorganization.

Despite these obstacles, the Company has a clear and defined path to exiting Chapter 11 successfully.  United has received preliminary proposals for exit financing from four leading financial institutions.  These proposals reaffirm the capital markets’ faith in United’s management and validate the restructuring initiatives taken throughout this bankruptcy case.  Each financier, however, has conditioned its proposal on United being able to substantially meet its business plan and, in particular, reduce costs within the Company’s control, as reflected in the Gershwin 5F financial model.  The Company’s business plan, and thus Gershwin 5F, incorporates necessary labor savings from the Company’s employees and the termination and replacement of United’s four defined benefit pension plans.

United’s motions today represent the resumption of the most difficult but necessary step towards the Company’s effort to leave Chapter 11 behind forever.  United’s

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Section 1113 motion no longer involves ALPA, PAFCA or TWU.  The Court approved agreements with those three unions on all issues, including their agreement not to oppose termination of their members’ pension plans.  United does not have any agreements with either the IAM or AMFA, whose memberships have been working under Court-ordered reductions to wages and sick pay.  United’s current Section 1113(c) proposals to the IAM and AMFA, therefore, seek both long-term labor savings consistent with the targets achieved by ALPA, PAFCA and TWU, and the removal of any CBA impediments to pension termination.

As to the AFA, up until this past Friday, April 8, United had intended to limit its proposal to the removal of any contractual requirement to maintain the existing Flight Attendant Pension Plan and to put in place a replacement defined contribution plan.  On April 8, however, the AFA gave United notice of its intent to “terminate” the parties’ Court-approved agreement on wages, benefits and work rule changes based on the AFA’s unfounded charge that United’s SAM employees are not meeting their savings target.  The AFA kept secret its “termination notice” from United even though, as the second and third pages of its notice make clear, the AFA had started drafting it at least eleven days earlier and, in the interim, had premised a pension proposal to United (and the PBGC) in part on the concessions given in the very agreement it intended to terminate.  In view of the AFA’s election to abandon the progress represented by the January 2005 agreement (which had been ratified by its members), United proposes to proceed directly with an 1113(c) proceeding on the entirety of the AFA’s CBA based on the proposal it submitted to the Court in January 2005.(1)

(1)           Moreover, United expects to file a motion for interim relief under Section 1113(e) in advance of the AFA’s proposed “termination” date (April 28) to last until May 31, the same as the interim relief applying to the IAM and AMFA.

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United’s voluntary distress termination motion asks this Court to approve the termination of all of the Company’s four pension plans.  The PBGC has initiated actions for the involuntary termination of the Pilot Plan and the Ground Plan (covering all AMFA employees and some IAM employees), but those termination actions remain pending.  Subject to the resolution of those proceedings, this motion seeks approval to voluntarily terminate those plans along with the Flight Attendant and MAPC (management, administrative and public contact employees) Plans.  In this respect, on March 30, 2005, the District Court for the District of Delaware flatly rejected the contention also made by the PBGC (and seized upon by the AFA) in this case that “ERISA requires each of the Debtors’ pension plans to be looked at individually to determine whether the sponsor meets the statutory test for reorganization in bankruptcy.…”  In re Kaiser Aluminum Corp., No. Civ.A. 04-145-JJF, 2005 WL 735551 (Mar. 30, 2005).  Instead, the Delaware District Court affirmed the bankruptcy court’s rejection of an interpretation of ERISA that would “require the Debtors to pick and choose those groups of employees and retirees whose pension benefits would continue and those whose benefits would terminate.…”  Id., at *2.  This rejection of the plan-by-plan analysis of the sort insisted upon by the PBGC and AFA in this case removes any doubt that all of United’s pension plans must be terminated so that the Company’s reorganization can succeed.

The necessity of proceeding with distress terminations at this juncture of United’s reorganization has also been laid bare by the many months that United has now devoted to working to no avail with its unions, the PBGC, and its other constituencies to devise alternatives to termination that would still provide the required savings.  The bottom line is that there simply are no such alternatives to be found.  Thus, termination and replacement of all of the Company’s pension plans is the only way to prevent all the hard restructuring work over the last two-and-a-

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half years from going to waste and to enable United to emerge from bankruptcy as a vibrant and competitive enterprise.

*              *              *

This brief is an update to, and intended to be read in conjunction with, United’s December 14, 2004 Memorandum in Support of its Section 1113 Motion (the “Memorandum”).  Part II describes the continuing and intensifying revenue and fuel price challenges facing United and the industry.  Part III explains the steps other legacy carriers are taking to reduce their costs, the continuing expansion of LCCs, and how corporations in the broader economy are addressing pension costs.  Part IV updates United’s search for exit financing.  Part V details United’s efforts to find an alternative to termination and replacement of its pension plans and why none of those alternatives are feasible.  Part VI summarizes United’s agreements with ALPA, PAFCA and TWU, its proposals to the IAM, AMFA and the AFA, and cost savings provided by SAM employees.  Part VII affirms that United continues to satisfy the legal standards of Section 1113 to reject its CBAs with the AFA, IAM, and AMFA.  Part VIII demonstrates that United meets the test under ERISA for terminating each of its defined benefit pension plans.

II.            THE FINANCIAL CHALLENGES HAVE NOT ABATED.

A.            Higher–Than–Expected Fuel Costs Continue to Hurt United’s Profitability.

High jet fuel prices continue to plague airlines, especially given the limited ability to pass those higher costs to passengers.  Current fuel prices are approximately 20 percent higher than Gershwin 5F projections.  And there seems to be little relief in sight, as most analysts and market participants believe that prices for oil, the key component of jet fuel, could remain above $50 a barrel for years to come.

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1.             Current Fuel Prices Are Higher Than Predicted.

Contrary to the projections advanced by the PBGC and the AFA in the 1113 proceedings four months ago,(2) fuel prices have continued to rise and show no sign of materially subsiding any time soon.  The increase in jet fuel prices corresponds to record high prices for crude oil.  United’s Gershwin 5F financial model projected fuel costs based on a mid-October forecast.  Although oil prices during mid-October were at $55 a barrel, the Gershwin 5F forecast assumed that those prices would return to the still high, yet more manageable price of $45 a barrel by April 2005.(3)

Unfortunately, current oil prices significantly exceed the levels in Gershwin 5F.(4)  To be sure, oil prices in late December and January fell below Gershwin 5F projections, leading the AFA and PBGC to claim that United had “overestimated” its forecasts.  Since then, however, oil prices have sharply increased to well above Gershwin 5F levels.  In mid-March, oil prices soared to record highs, hitting $57.60 a barrel on March 17.(5) Two weeks later, on April 4, prices hit $58.28, and the closing futures prices were the highest since trading began in 1983.(6)  As of April 8, oil prices were $53.32 per barrel, $8.32 higher than Gershwin 5F projections.

(2)           AFA Objection to Debtors’ Section 1113(c) Motion (“AFA Objection”), 1/4/05, at 44 [No Docket No.] (asserting that United’s Section 1113 proposal was “based on grossly inflated projected fuel costs over the term of the business plan”); PBGC Objection to Debtors’ Section 1113(c) Motion (“PBGC Objection”), 1/4/05, at 25 [Docket No. 9585] (claiming that United’s ability to retain its plans would increase if the Company took “into consideration the lower fuel price trend”).

(3)           Declaration and Expert Report of Robert M. Sturtz (“Sturtz Decl.”) (Ex. 105) ¶ 28.

(4)           Supplemental Declaration and Expert Report of Robert M. Sturtz (“Sturtz Supp. Decl.”) (Ex. 134) ¶ 4.

(5)           Oil Up, Saudi Says More Oil at Any Time, Reuters, Mar. 21, 2005.

(6)           Shares Rise in Volatile Trading as Oil Briefly Tops $58, Associated Press, Apr. 5, 2005; Jad Mouawad, 3.4% Surge Pushes Oil Above $57, N.Y. Times, Apr. 2, 2005, at C1.

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Consequently, whereas Gershwin 5F projected jet fuel prices of $1.26 a gallon for March 2005,(7) actual prices in spot markets were approximately $1.61 a gallon:(8)

Exhibit 1.               AVERAGE MONTHLY JET FUEL PRICES.

2.             Projected Oil Prices Are Significantly Higher Than United’s Gershwin 5F Forecast.

Although United arguably might have been able to withstand temporarily high fuel prices, analysts and market participants now believe that $50-plus crude oil is anything but temporary.  Indeed, in sharp contrast to the position it took just four months ago, the AFA now acknowledges that crude oil prices are up 26 percent from predictions for 2005, with analysts “pushing back airline profit forecasts to 2007.”(9)  On March 8, 2005, the AFA informed its members that the Boyd Aviation Group “has warned … that oil may stay at or above $50 per

(7)           RS00115 (United October 14, 2004 Jet Fuel Price Forecast).

(8)           Supplemental Declaration and Expert Report of Daniel M. Kasper (“Kasper Supp. Decl.”) (Ex. 129) ¶ 33.

(9)           AFA, Dear AFA (Mar. 8, 2005) (Ex. 168).

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barrel ‘on a near-permanent basis,’ and referred to it as an industry crisis.”(10)  Similarly, Goldman Sachs raised its 2005 forecast to $50 a barrel and its 2006 forecast to $55 a barrel, while warning that oil prices could be in the earlier stages of a prolonged spike of up to $105 a barrel.(11)  Lehman Brothers’ airline analyst recently upped his oil projections to $51 a barrel for 2006 and $47 a barrel thereafter.(12)  The Air Transport Association, an industry-wide trade group, estimates 2005 crude oil prices at $52 a barrel.(13)  Finally, the head of the International Monetary Fund concurs that “probably oil prices will stay high, although probably not at these levels, in the next two years at least because of demand pressures and because of certain supply constraints.”(14)

Like most other airlines, these price predictions are significantly higher than United’s forecasts.  Gershwin 5F projected that 2005 crude oil prices would average $44.31 a barrel, with jet fuel prices at $1.36 a gallon.(15)  Projections for 2005 now would put crude oil at $54.74 per barrel and jet fuel could be $1.66 per gallon.  For the first quarter of the year, fuel

(10)        Id.

(11)         Arjun N. Murti, Goldman Sachs, Super Spike Period May Be Upon Us: Sector Attractive at 1 (Mar. 30, 2005); Goldman Sachs Says Oil Could Spike to $105, Reuters, Mar. 31, 2005.

(12)         Gary Chase, Lehman Brothers, Airlines Industry Update: Estimate Revisions on Revenue, Fuel at 4 (Mar. 15, 2005).

(13)         Air Transport Association of America, Inc., State of the U.S. Airline Industry: Commercial Trends at 9 (Apr. 1, 2005) (Ex. 169).

(14)         Ashok Sharma, IMF Chief: High Oil Prices to Continue, Associated Press, Mar. 20, 2005.  During the IMF head’s speech, oil was at $57 a barrel.  See also Mouawad, 3.4% Surge Pushes Oil Above $57, at C1 (quoting Jan Stuart, an oil analyst at Fimat USA: “Until something derails the current trends in supply and demand, prices have no way to go down significantly, let alone stay down significantly.”).

(15)         Sturtz Decl. ¶ 24; Sturtz Supp. Decl. ¶ 4.  All jet fuel prices stated in this Supplemental Memorandum include taxes.

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costs were essentially right on plan.(16)  In the second quarter, however, fuel costs could run about $200 million over plan.(17)  At current levels, fuel costs could exceed Gershwin 5F forecasts by roughly $500 million in the second half of 2005.(18)  Thus, for 2005, United could face roughly $700 million in higher fuel costs, even taking into account the Company’s hedging efforts, if prices do not abate.(19)  American Airlines likewise has stated that fuel prices could be as high as $1.65 a gallon for 2005, adding $1.4 billion to that carrier’s fuel cost compared to 2004.(20)

The longer-term effects beyond 2005 may be severe as well.  For example, Gershwin 5F assumed crude oil prices averaging $44.03 per barrel for 2006 with jet fuel prices at $1.32 per gallon.(21)  Under the forward curve of futures prices as of April 8, the Company’s fuel costs could be more than 20 percent higher at $53.91 a barrel and $1.60 a gallon.(22)  This would translate to an over $700 million increase in fuel costs in 2006 alone.(23)

The recent fuel hikes make painfully clear that United must achieve a cost structure that can withstand higher fuel prices, rather than simply hoping that lower prices might

(16)         Supplemental Declaration of Michael F. Dingboom (“Dingboom Supp. Decl.”) (Ex. 135) ¶ 6.

(17)         Id.

(18)         Id.

(19)         Id.  United responsibly hedged in December and early January when fuel prices were lower.  Declaration of Kathryn Mikells (“Mikells Decl.”) (Ex. 145) ¶¶ 9-10.  As of April 8, this hedging would reduce 2005 costs by $75 million.  Dingboom Supp. Decl. ¶ 6.  Thus, without its hedging initiatives, fuel costs may be nearly $800 million higher for 2005.

(20)         Armbrust Aviation Group, Jet Fuel Report at 3 (Apr. 1, 2005).

(21)         Sturtz Decl. ¶ 24; Sturtz Supp. Decl. ¶ 6.

(22)         Sturtz Supp. Decl. ¶ 6.

(23)         Dingboom Supp. Decl. ¶ 6.

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materialize.(24)  Artificially low forecasts serve no one’s interest, as illustrated by Delta’s recent revelations that because the “forward curve for crude oil currently implies substantially higher jet fuel prices for 2005” than assumed in its business plan, the airline needs oil prices to “decline significantly” to maintain liquidity.(25)  The only rational and responsible way to account for the possibility of a drop-off in oil prices, as United stressed in its Memorandum, is to create a fair and equitable profit sharing plan.(26)

B.            The Revenue Environment Has Remained Challenging.

The last few months have also cemented the permanent shift in the industry revenue environment.  LCCs have continued to expand the scale and scope of their operations, and now control roughly 30 percent of the market.(27)  More importantly for United, LCCs now fly on more than 80 percent of its domestic routes:

(24)         Kasper Supp. Decl. ¶ 34.

(25)         Delta Air Lines, Inc. 2004 10-K at 11.

(26)         Kasper Supp. Decl. ¶ 34.

(27)         Id. ¶ 21.

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Exhibit 2.               PROPORTION OF UNITED’S DOMESTIC PASSENGERS WITH ACCESS TO LCC SERVICE.

It is not surprising, then, that LCCs continue to weigh down legacy carriers’ profitability.(28)  While some LCCs struggled in 2004, Southwest, jetBlue and AirTran all posted operating profits, a striking contrast to the $3 billion in losses suffered last year by legacy carriers.(29)  And their long-term outlook remains promising.  LCC market capitalizations, which reflect analyst and investor expectations of LCC profitability, still far exceed those of legacy carriers. (30)

As a result, all legacy carriers now agree that the days of widespread, cost-insensitive business travel and booming revenues are a thing of the past.  American Airlines, for

(28)   Kasper Supp. Decl. ¶ 21.

(29)   Id. ¶ 22.

(30)   Id. ¶ 24.  For example, Southwest’s market capitalization exceeds those of all legacy carriers combined; jetBlue’s is higher than American’s (the world’s largest carrier); and AirTran’s exceeds those of Continental, Delta and Northwest.  Id.

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example, blamed its depressed revenues over the last two years on “reduced pricing power, resulting mainly from greater cost sensitivity on the part of travelers (especially business travelers), increasing competition from LCCs and the continuing increase in pricing transparency resulting from the use of the Internet.”(31)  American “believes that its reduced pricing power … will persist indefinitely and possibly permanently.”(32)  Similarly, Northwest agreed that “permanent structural differences in the industry revenue environment have also taken place that have contributed to the decline.”(33)  Delta likewise explained that “[a]lthough global economic conditions have improved … the airline industry has continued to experience a reduction in high-yield business travel and increased price sensitivity in customers’ purchasing behavior” and “expect[s] all of these conditions will continue.”(34)  Finally, Continental concurred that in “recent years, the market share held by low cost carriers has increased significantly and is expected to continue to increase, which is dramatically changing the airline industry.”(35)

These sustained competitive pressures have continued to drive down yields from their already depressed levels:

(31)         American Airlines, Inc. 2004 10-K at 18; see also id. at 28.

(32)        Id. at 18.

(33)         Northwest Airlines Corporation 2004 10-K at 26.  In Northwest’s view, these include the “rapid growth of low cost airlines,” the “increased price consciousness of both business and leisure travelers,” and “Internet travel Web sites” that have “allowed consumers to become more efficient at finding lower fare alternatives.”  Id.

(34)         Delta Air Lines, Inc. 2004 10-K at 16.

(35)         Continental Airlines, Inc. 2004 10-K, Risk Factors Relating to Airline Industry (adding that “[f]or the last three years, large network carriers have generally lost a significant amount of pricing power in domestic markets”).

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Exhibit 3.               LEGACY CARRIER YEAR-OVER-YEAR CHANGE IN DOMESTIC YIELD.

Overall, domestic yields over the last several months are approximately 25 percent below 2000 levels.(36)  Put simply, no legacy carrier has been immune from the current industry challenges.

While most pricing pressure stems from LCC competition, additional downward pressure came from a recent action by one of the legacy carriers.  On January 5, 2005, Delta implemented its SimpliFares™ program across its route network.(37)  SimpliFares™ capped ticket prices at $499 for a one-way economy ticket and $599 for a one-way first class fare.  The program also eliminated the Saturday night stay requirement for less expensive fares, a historically effective way of segmenting business travelers from leisure passengers.  American

(36)   Air Transport Association, State of the U.S. Airline Industry at 23.

(37)   Delta Air Lines, Press Release, Delta Slashes Everyday Fares Up To 50 Percent As Airline Introduces SimpliFares™ Nationwide (Jan. 5, 2005).

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matched many of these changes, forcing United, Continental and other airlines to reduce their fares as well.(38)

SimpliFares™ has negatively impacted legacy carriers.(39)  According to one estimate, SimpliFares™ drove down one-way business class fares by an average of 25 percent, while leisure fares fell by 7 percent.(40)  Analysts concur that over the short term, Delta’s move will drive down legacy carriers’ revenue.(41)  Predicting the longer-term effect is more difficult as the loss of revenue from lower ticket prices must be balanced against the potential of such prices to stimulate demand and shift market share away from LCCs to legacy carriers.(42)  For its part, United projects that SimpliFares™ will decrease revenues by roughly $6 to $14 million each month, or $72 to $168 million annually.(43)

(38)        E.g., Marilyn Adams, ‘Simplified’ Ticketing Is Not So Simple For All Fliers, USA Today, Feb. 7, 2005, at 1B; Rivals Follow Delta’s Lead, Cincinnati Post, Jan. 6, 2005, at A1.

(39)         For example, Continental estimates that Delta’s program will cost it $200 million annually.  Continental Airlines, Inc. 8-K (Mar. 9, 2005).  And even Delta acknowledges that SimpliFares™ will negatively impact its own revenues “for some period” of time.  Delta Air Lines, Inc. 2004 10-K at 4.

(40)         Adams, ‘Simplified’ Ticketing at 1B (citing study by Harrell Associates).

(41)         See Jamie Baker, JP Morgan, The Case Against LCCs; AWA Downgraded to UW at 2 (Jan. 11, 2005).

(42)         Kasper Supp. Decl. ¶ 30.  Airlines themselves differ over the projected effects, with Delta believing SimpliFares™ will be positive over the long-term, Northwest and Continental concluding it will be revenue negative, and American being ambivalent.  Delta Air Lines, Inc. 2004 10-K at 4; Northwest Airlines Corporation 2004 10-K at 10; Continental Airlines, Inc. 8-K (Mar. 9, 2005); American Airlines, Inc. 2004 10-K at 4.

(43)         Declaration of Dennis P. Corrigan (“Corrigan Decl.”) (Ex. 146) ¶ 4.  Specifically, United estimates revenue loss of $10 million per month from passengers “buying-down” to the new, lower walk-up fares, and a loss of $11 million per month from elimination of the Saturday night stay requirement.  Id.  These effects will be offset, however, by United’s recapture of market share from LCCs (worth $5 to $7 million per month) and revisions to United’s corporate discount contracts (worth $2 to $8 million per month).  Id.

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C.            Recent Fare Increases Have Only Partially Offset The Impact Of Fuel Prices And Revenue Pressures.

Although United has been raising fares and matching competitor increases wherever possible, the bad news is that these positive developments (which, if they remain in place, would net $285 million annually in increased revenues)(44) offset only a fraction of the combined impact of fuel prices and SimpliFares™.  Fuel costs could be over $700 million higher in 2005 than projected in Gershwin 5F and the midpoint of the projected decreased revenues for Delta’s fare restructuring subtracts another $120 million.(45)  Thus, United’s need for labor and pension savings is more critical than ever.

D.            As The PBGC Has Recognized, The Cost of Maintaining Defined Benefit Plans Has Not Improved.

Meanwhile, United and other defined benefit sponsors are still contending with what PBGC Executive Director Bradley Belt continues to call the “one-two punch” of weak asset returns and record-low interest rates.(46)  Despite analyst predictions to the contrary, long-term interest rates have not risen since December.(47)  Persistently low rates have kept United’s pension liabilities high, requiring the Company to contribute almost $4.4 billion to its plans over the next

(44)         Corrigan Decl. ¶ 7.

(45)         Dingboom Supp. Decl. ¶ 6.

(46)         Bradley D. Belt, PBGC Executive Director, Presentation to the 6th Annual Conference of the Retirement Research Consortium at 5 (Aug. 13, 2004); see also Bradley D. Belt, PBGC Executive Director, Testimony Before the Committee on Education and the Workforce, United States House of Representatives at 7-8 (Mar. 2, 2005).

(47)         James F. Moore, Pension Update: Treading Water Against Currents of Change at 1 (Feb. 2005) (Falling interest rates are “[d]efying the prognostication ability of 24 of 25 economists surveyed by the Wall Street Journal at the year’s beginning.  Since the end of 1999, falling rates have added some $300 billion in liabilities to the plans of S&P 500 members”).

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four years.(48)  Similarly, poor economy-wide equity returns in 2000 through 2002 broadened the gap between fund assets and plan liabilities – a gap that, absent plan terminations, United will have to bridge with cash contributions.(49)

These stubborn economic realities only reaffirm that United’s pension problems are not cyclical and will not disappear when equity returns and interest rates improve.  Indeed, as Bradley Belt recently testified before Congress:

It is not reasonable public policy to base pension funding on the expectation that the unprecedented stock market gains of the 1990s will repeat themselves.  Similarly, it is not reasonable public policy to base pension funding on the expectation that interest rates will increase dramatically.  The consensus forecast predicted that long-term interest rates would have risen sharply by now, yet they remain near 40-year lows.(50)

Just as the PBGC acknowledges that it is not “reasonable public policy” to assume market conditions will make a rapid turn-around, United cannot base its business plan on such unfounded optimism.  Furthermore, in light of the $4.4 billion United must pour into its plans over the next four years, even significant improvement in interest rates or stock market performance would leave the Company with massive contribution requirements.

(48)         Supplemental Declaration of Timothy J. Marnell (“Marnell Supp. Decl.”) (Ex. 136) ¶ 20.  Lower interest rates increase the present value of pension liabilities because a lower discount rate means that a larger amount of money must be put aside today to cover future payments.

(49)         See Belt, Testimony Before the Committee on Education and the Workforce at 7.

(50)         See id. at 10-11 (emphasis added).

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III.           TRANSFORMATIONS IN THE AIRLINE INDUSTRY AND THE BROADER ECONOMY CONFIRM UNITED’S NEED TO RESTRUCTURE ITS LABOR COSTS.

A.            Recent Legacy Carrier Efforts to Cut Labor Costs.

Other legacy carriers have not sat idle while United has pursued its restructuring.  They too have persisted in their efforts to reduce labor costs:

Northwest Airlines:  Northwest’s pilots recently agreed to $265 million in wage cuts, a 15 percent reduction.  The carrier also announced that it is furloughing as many as 930 maintenance employees, and declared that it needed to increase its annual labor savings to $1.1 billion annually (from a previously-announced $950 million target) to offset losses driven by the fuel and revenue environment.(51)

Continental Airlines:  Continental cut 2,400 jobs last year in an effort to control its labor costs.  Its employees, apart from its IAM–represented flight attendants, recently ratified agreements that will provide $418 million of the carrier’s targeted $500 million in annual wage and benefit savings.  Continental is continuing negotiations with its flight attendants over the remaining savings but has indicated that it will require additional concessions in light of the industry’s current fuel and revenue environment.(52)

American Airlines:  American cut more jobs (2,900) than any other airline last year.  To generate additional savings, American now plans to eliminate 1,000 more mechanic and engineering jobs and 8 percent of its management workforce in 2005.(53)

(51)         Joel J. Smith, Northwest May Cut Flights; The Money-Losing Carrier Also Considers More Concessions From Its Work Force, The Detroit News, Feb. 18, 2005, at 1B; Northwest Airlines Corporation, 2004 10-K at 12; Martin J. Moylan, NWA To Trim Mechanics Jobs, Detroit Free Press, Mar. 17, 2005; Michelle Maynard, Northwest Airlines Wants More Worker Concessions, N.Y. Times, Mar. 30, 2005, at C2.

(52)         Trebor Banstetter, Fuel Costs, Competition Cited for American Cuts, Ft. Worth Star Telegram, Mar. 10, 2005, at 3C; Continental Airlines, Inc., 2004 10-K at 12-13; Kristen Hays, Analysts, Investors Unaffected by Union OK on Concessions, Associated Press, Mar. 31, 2005; Continental Airlines, Press Release, Continental Airlines Announces Unions Representing Pilots, Mechanics, Dispatchers and Simulator Engineers Agree to Implement Ratified Agreements (Mar. 31, 2005).

(53)         Banstetter, Fuel Costs, Competition Cited for American Cuts, at 3C; Adrienne Nettles, American Aims to Gain $850 Million, Ft. Worth Star Telegram, Jan. 4, 2005, at 1C.

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Delta Airlines:  Delta is implementing a “transformation plan” to cut annual labor costs by $2.7 billion annually by 2006.  The carrier’s CFO also warned that the airline may need to cut costs even further in light of recent fuel prices.(54)

US Airways:  Shortly after filing for bankruptcy again in September 2004, US Airways reached agreements with its pilots, dispatchers, flight crew training instructors and flight simulator engineers on over $300 million in long-term annual labor cost savings.  Agreements with its flight attendants and reservation and customer service employees followed.  After the bankruptcy court granted US Airways’ 1113 motion, the company’s IAM-represented employees ratified labor agreement changes providing long-term labor cost reductions.  Through the Section 1114 process, US Airways also reached agreement to virtually eliminate health care benefits for current retirees.  In total, US Airways has secured $1.1 billion in annual savings from all of its labor groups, and has targeted $225 million in annual non-labor savings.(55)

In short, all legacy carriers continue to reduce their labor costs, and United must do the same if it is to compete effectively in the marketplace.(56)

B.            Airlines and Other Employers Continue to Recognize the Need to Control Pension Costs.

United’s competitors have recently taken steps to reduce their pension costs as well.  Most notably, after terminating its pilots’ defined benefit plan during its first bankruptcy, US Airways terminated all of its remaining defined benefit plans.(57)  The court order approving

(54)         Delta Air Lines, Inc., 2004 10-K at 10; Delta CEO: More Cost Cuts Are Needed, Associated Press, Mar. 23, 2005.

(55)         US Airways’ Memorandum in Support of 1113 and 1114 motions, filed in In re US Airways, Case No. 04-13819 (Bankr. E.D. Va. Nov. 12, 2004); US Airways’ Motion to Approve Agreement with AFA-CWA, AFL-CIO, filed in In re US Airways, Case No. 04-13819 (Bankr. E.D. Va. Jan. 6, 2005); US Airways’ Motion to Approve Agreement with CWA, filed in In re US Airways, Case No. 04-13819 (Bankr. E.D. Va. Dec. 27, 2004); US Airways’ Motion to Approve Agreement with IAM, filed in In re US Airways, Case No. 04-13819 (Bankr. E.D. Va. Jan. 21, 2005); US Airways, Press Release, US Airways’ Three IAM Units Ratify Agreements on More Than $353 Million in Annual Cost Savings (Jan. 21, 2005).

(56)         Kasper Supp. Decl. ¶ 14.

(57)         U.S. Running Pension Plans Of US Airways, N.Y. Times, Feb. 3, 2005, at C3.

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the termination described the US Airways plans as a “financial albatross.”(58)  Just last month, Northwest announced a proposal to freeze its defined benefit plans and replace them with defined contribution plans, such as 401(k) plans.(59)  Likewise, Continental’s recently concluded agreement with its pilots froze their defined benefit plan.(60)  Although Continental has not released the details of this agreement, the airline projects that the changes will reduce its required pension contributions by $50 million this year alone.(61)  Additionally, Delta, Northwest and American are pursuing legislative relief that would extend the time in which companies must fund pension obligations.(62)  In fact, Delta and Northwest have cautioned that, without Congressional action (which, at this juncture, observers say seems unlikely),(63) they too may have to terminate their plans.(64)

(58)         In re US Airways, Inc., No. 04-13819, 1/6/05 Hr’g Tr. at 35 (Bankr. E.D. Va.) (Ex. 171).

(59)         Liz Fedor, NWA’s Pension Quagmire; CEO Seeks to Freeze Current Plans, Move Toward 401(k)s, Minneapolis Star Tribune, Mar. 2, 2005, at 1D; Maynard, Northwest Airlines Wants More Worker Concessions, at C2.

(60)         Flight Attendants Reject Concessions at Continental, N.Y. Times, Mar. 31, 2005, at C18.  A tentative agreement that would have frozen Continental’s flight attendant defined benefit plan did not ratify.  See id.; Tentative Agreement between Continental and the IAM at 24-1 to 24-4, available at http://www.iamdl142.org/PDF/COTA/CO_IAM_tentative_Agreement.pdf, last visited Apr. 11, 2005.

(61)         Continental Airlines, Inc. 2004 10-K, Employees, Risk Factors Relating to the Company.

(62)         Mary Jane Credeur, Delta Asks Congress For Reprieve On Pension Obligations, Atlanta Business Chronicle, Mar. 17, 2005; Liz Fedor, NWA Seeks Help In Pension Crisis, Minneapolis Star Tribune, Mar. 19, 2005, at 1A; American Airlines Joins With Unions On Pension, Associated Press, Mar. 16, 2005.

(63)         See Russell Grantham, Delta Seeks Pension Relief, Atlanta Journal-Constitution, Mar. 18, 2005, at Fl; see Section V.C.

(64)         Credeur, Delta Asks Congress; Fedor, NWA Seeks Help, at 1A.

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Airlines are not the only employers seeking to reduce pension obligations.(65)  From 1986 to 2004, employers economy-wide terminated about 2,000 underfunded defined benefit plans.(66)  Many companies stopping short of termination are freezing plans or moving to alternative benefit structures, such as cash balance or pension equity plans.(67)  Just last month, the PBGC estimated that these “hybrid” plans now cover about 25 percent of all pension participants.(68)

These trends have become evident in the public sector as well.  For example, earlier this year, Governor Arnold Schwarzenegger declared that California can no longer afford its defined benefit plan.(69)  The Governor has referred to the state’s plan as a “government program out of control” and voiced support for an initiative to move to a defined contribution plan if the Legislature does not address the problem this year.(70)  Similarly, Illinois Governor Rod Blagojevich has offered a pension reform proposal that would reduce the state’s pension costs by $55 billion over the next 40 years, a move he says is “necessary to avert a looming crisis.”(71)

(65)         Supplemental Declaration and Expert Report of Thomas J. Kuhlman (“Kuhlman Supp. Decl.”) (Ex. 131) ¶ 31.

(66)         Bradley D. Belt, PBGC Executive Director, Testimony Before the Subcommittee on Select Revenue Measures, Committee on Ways and Means, U.S. House of Representatives at 3 (Mar. 8, 2005).

(67)         Id. at 4.  A cash balance plan is a defined benefit plan that defines the promised benefit in terms of a specified account balance.  Similar to a cash balance plan, a pension equity plan provides benefits based on a percentage of earnings at retirement.  The percentage of earnings to which a participant is entitled depends on the participant’s age and service.  Kuhlman Supp. Decl. ¶ 32.

(68)         Belt, Testimony Before the Subcommittee on Select Revenue Measures at 4.

(69)         Office of the Governor, Press Release, Governor Schwarzenegger Calls For Landmark Reform (Jan. 5, 2005).

(70)         Greg Pierce, Inside Politics, The Washington Times, April 8, 2005, at A10.

(71)         Office of the Governor, Press Release, Governor Blagojevich Proposes Major Reforms To Ensure Fiscal Solvency In Fiscal Year 2006 and Beyond (Feb. 16, 2005).

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IV.           FINANCIERS HAVE EXPRESSED INTEREST IN FUNDING UNITED’S EXIT SO LONG AS UNITED WILL BE ABLE TO MEET ITS BUSINESS PLAN.

United is positioned to obtain exit financing once it can secure the relief sought by today’s motions.  In December, the Company sent requests for exit financing proposals to various financial institutions believed to be capable of providing the $2.0 billion or more that United needs to exit bankruptcy.  United provided those financiers with the Gershwin 5F financial model and an accompanying data book for their use in evaluating United’s business plan and ability to repay.  Four different institutions responded with preliminary proposals for exit financing in the range of $2.0 to $2.5 billion.  United’s management met separately with each of these potential financiers in January.  In early February, each institution met with the exit financing subcommittee of the OCUC Working Group to present and discuss their proposals.  Further discussions have been put on hold pending the resolution of United’s Section 1113 and distress termination motions.

The reason for this pause is that each financier conditioned its proposal on United being able to meet the cost reductions contemplated by its business plan.  As explained in United’s Memorandum, the Company’s business plan incorporates both the termination and replacement of each of United’s defined benefit pension plans and $725 million of average annual non-pension savings from labor.  These savings are critical to United’s financial flexibility and ability to achieve anticipated exit financing requirements.  Thus, United and the potential exit financiers must await the outcome of today’s motions before they can sensibly move forward to formal proposals and negotiations.

To be sure, the recent increase in current and projected crude prices make satisfying anticipated capital market requirements all the more difficult.  As painful as it is to say, these new events only underscore the necessity of long-term savings from AMFA, the IAM

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and the AFA as well as the termination and replacement of all of the Company’s defined benefit plans.  Without these savings, United likely cannot obtain the exit financing necessary to leave bankruptcy behind forever.

V.            UNITED HAS CONTINUED TO SEARCH FOR MEANS TO AVOID PENSION PLAN TERMINATION.

Since these proceedings were suspended in early January 2005, United has continued to research and implement all feasible means of minimizing the burden on its labor force.  United continues to pursue non-labor cost savings and exhaustively has explored countless alternatives to termination and replacement.  Unfortunately, these efforts have not revealed any way for United to successfully reorganize without terminating and replacing each of its defined benefit pension plans and every labor group contributing its fair share of non-pension savings.

A.            United’s Profit Improvement Initiatives Remain on Track.

The Company has continued to reduce all elements of its cost structure and increase profitability by all means reasonably possible.  Most prominently, as described in Section II.C., the Company has pushed through several fare increases, after many unsuccessful tries, that are expected to generate $285 million annually.  Moreover, all of the Company’s previously announced cost-saving initiatives are progressing apace.  The Company continues to negotiate with the Aircraft Providers Group (“APG”) to maximize savings from its aircraft financings.  The Company’s Business Improvement Initiatives are being implemented to yield hundreds of millions in additional savings across the Company’s operations.  In addition, the

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Company is appealing all adverse municipal bond decisions to the Seventh Circuit in an effort to maintain, or if possible increase, the assumed savings in its financial model.(72)

United also has considered suggestions from its unions on areas for additional profit improvement, many of which are unfeasible or contrary to the best interests of the estate.  In particular, the AFA has publicly argued that United should abandon the expansion of O’Hare airport and instead earmark the saved money for pensions.(73)  United’s financial obligations for the O’Hare expansion will not start until June 2008, and will only increase by $7 million annually in 2008, and by $49 million annually from 2010 to 2012 as the expansion is completed.(74)  The AFA’s proposal ignores how this modest investment in United’s future will more than pay for itself by virtue of the substantial financial and operational improvements that United will realize from an O’Hare expansion, to the benefit of all of the Company’s stakeholders.(75)  The AFA has also urged United to improve cargo profitability through freighters.  This suggestion, which United has already explored fully, would require modifications to the ALPA and IAM CBAs to which those unions have refused to agree.(76)  Thus, while United will

(72)         Additional information on United’s profit improvement and cost saving initiatives can be found in the Memorandum at 99-110; Mikells Decl. ¶ 7; Declaration of Jeffrey T. Kawalsky (“Kawalsky Decl.”) (Ex. 110) ¶¶ 3-20; Declaration of Richard Poulton (“Poulton Decl.”) (Ex. 111) ¶¶ 4-12; Declaration of Gregory P. Kaldahl (“Kaldahl Decl.”) (Ex. 112) ¶¶ 4-9; Debtors’ December, 2004 Report on Status of Reorganization at 3-5, 7 [Docket No. 9329]; Debtors’ January, 2005 Report on Status of Reorganization at 5-10 [Docket No. 9818]; Debtors’ February, 2005 Report on Status of Reorganization at 4-6 [Docket No. 10160]; Debtors’ March 2005 Report on Status of Reorganization at 4-9 [Docket No. 10504].

(73)         AFA, Press Release, Flight Attendants Fight for ‘Pensions over Pavement’ for O’Hare Expansion (Feb. 18, 2005).

(74)         Declaration of Janice V. Scott (“Scott Decl.”) (Ex. 147) ¶ 15.

(75)         Id.

(76)         Supplemental Declaration of Scott Dolan (“Dolan Supp. Decl.”) (Ex. 137) ¶ 15.

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continue to explore any profit improvement suggestions from its unions, none to date has changed the need for the savings and relief United now seeks.

B.            Alternatives to Terminating and Replacing United’s Pension Plans Would Provide Only Limited and Insufficient Relief.

Aside from the inherent problems associated with United’s retention of only one or two pension plans (see Section VIII.D.), anything short of a termination and replacement of all four plans would provide far too little of United’s required relief.

1.             Updated Projections of United’s Minimum Required Pension Contributions and Long-Term Pension Liabilities.

As explained in United’s earlier Memorandum, the Company’s short-term minimum required pension contributions and long-term liabilities are both daunting.(77)  Since that filing, United has updated its funding forecasts to reflect 2005 assumptions and valuations, including the impact of all labor pay reductions achieved by the Company in these proceedings.(78)  But United’s near-term minimum required cash contributions remain essentially unchanged at $4.4 billion over the next six years and $1.3 billion for 2005 alone:(79)

(77)         Memorandum at 68-71.

(78)         Specifically, United’s updated forecasts use January 1, 2005, employee population and pay scale data and December 31, 2004, pension plan asset valuations.  United also revised its projections to include the most-up-to-date interest rate forecasts.  All actuarial data set forth in this Section reflects these updates.  Marnell Supp. Decl. ¶¶ 10-11, 13.  The assumptions also reflect all wage and headcount reductions United has achieved or seeks to achieve through the Section 1113 process, including the agreement that the AFA now seeks to terminate.

(79)         Marnell Supp. Decl. ¶ 20.

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Exhibit 4.               UNITED’S PROJECTED MINIMUM FUNDING REQUIREMENTS ($ MILLIONS).

United’s long-term pension liability – or Present Value of Projected Benefits (“PVPB”)(81) – remains equally overwhelming at $10.7 billion if calculated using United’s assumed asset return rate of 9.25 percent or $16 billion using the 6.10 percent discount rate that ERISA and the IRC prescribe for DRC purposes:(82)

Exhibit 5.               UNITED’S PRESENT VALUE OF PROJECTED BENEFITS ($ BILLIONS).

(80)         United’s projected minimum contributions are less than $100 million in 2009 and zero in 2010 because the application of the Additional Funding Charge (“AFC”) means that United must eliminate essentially all pension underfunding by 2008.  See Memorandum at 79.

(81)         PVPB values all future obligations in today’s dollars.  See Memorandum at 69-71.

(82)         Marnell Supp. Decl. ¶ 17.  When United filed its earlier Memorandum, the DRC-mandated discount rate was 6.55 percent.  For a full explanation of the DRC, see Memorandum at 36-37.

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Because the value of United’s current pension assets is approximately $7.1 billion,(83) United’s underfunded PVPB is at least $3.6 billion or, using the DRC-mandated discount rate, $8.9 billion.

2.             No “Pension Alternative” Would Provide the Permanent and Necessary Savings United Requires to Achieve a Financeable Business Plan.

Termination and replacement of each of United’s defined benefit plans would save United $3.9 billion in total or an average of $645 million per year from 2005 through 2010, even with United contributing between four and six percent of salary to each employee’s replacement plan following termination.(84)

No alternatives to terminating all of United’s plans would net savings anywhere near these numbers.  In fact, anything short of termination and replacement would leave United facing billions of dollars in minimum funding obligations over the next several years and, in any scenario involving plan freezes, still require the Company to establish defined contribution replacement plans likely to cost more than $700 million through 2010.

a.             Freezes Provide Insufficient Savings.

As explained in United’s earlier Memorandum, freezing United’s plans would only stop future benefit accruals, leaving United fully responsible for paying all benefits earned prior to the freeze.(85)  Based on current projections, freezing United’s pensions effective July 1,

(83)         Current as of December 31, 2004.  See Marnell Supp. Decl. ¶ 17.

(84)         In general terms, this figure is derived by calculating the average annual savings due to the elimination of all of United’s minimum required contributions ($743 million annually) less the average annual cost of United’s replacement plans for all groups ($119 million).  See Marnell Supp. Decl. ¶¶ 22-24.  This figure reflects updates since December 2004 to United’s projected headcounts and wage levels.  See Memorandum at 78 n.186.

(85)         This is because of ERISA’s “anti-cutback rule.”  See Memorandum at 38-39.

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2005, would save United only $765 million over the next six years and leave United responsible for nearly $3.7 billion in total minimum cash contributions over the same period, with more than $1.4 billion in contributions coming due for the MAPC and Flight Attendant plans alone:(86)

Exhibit 6.               TERMINATION ALTERNATIVES: FREEZES ($ MILLIONS).

And even the modest $765 million in projected savings attributable to a freeze of all plans would be almost completely devoured by United’s projection of approximately $714 million in defined contribution replacement plan costs over those same six years.(87)  Freezes will therefore do little to alleviate either United’s short-term or long-term pension obligations.

b.             Freezes and Single-Year IRS Waivers Would Not Significantly Reduce United’s Pension Costs.

Given the size of United’s current pension liabilities, plan funding waivers from the IRS would provide only modest and temporary relief, even if United also freezes all of its

(86)         Marnell Supp. Decl. ¶ 72.

(87)         Id. ¶ 73; Supplemental Declaration of Mark Nelsen (“Nelsen Supp. Decl.”) (Ex. 138) ¶ 4.

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plans.  In fact, United would still have to contribute almost $3.6 billion to its pension plans from 2005 through 2010, including more than $1.3 billion for just the MAPC and the Flight Attendant plans:(88)

Exhibit 7.               TERMINATION ALTERNATIVES: FREEZES AND 2005 WAIVER ($ MILLIONS).

Waivers provide little assistance to a plan sponsor over the long haul because they only delay – and do not reduce – minimum cash contributions.  In fact, because the IRS charges employers substantial interest on any amounts waived, funding waivers can actually increase an employer’s total required contributions over time.  Further mitigating the benefit of waivers, the Internal Revenue Code also generally requires that employers pay back all sums waived on a tight five-year amortization schedule.(89)  Perhaps even more significantly, the IRS has never granted a waiver in the amount United would need.  Even if United could obtain the sizable single-year waiver while freezing all its plans, the cost of United’s replacement plans – an

(88)         Marnell Supp. Decl. ¶ 75.

(89)         26 U.S.C. § 412(b)(2)(C).

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estimated $714 million through 2010 – would largely consume the $865 million the Company would save over the same period by freezing and securing waivers for its plans.(90)

c.             Freezes With Three-Year IRS Waivers Are Also Not the Answer to United’s Pension Problems.

Even if United could secure waivers from the IRS for three consecutive years while also freezing all of its plans, the Company would still face staggering required pension contributions over the next five years.  Under such an unlikely waiver scenario,(91) United would have to pay more than $3.4 billion to its pension plans from 2005 through 2010, including more than $1.2 billion for the MAPC and the Flight Attendant plans:(92)

Exhibit 8.               TERMINATION ALTERNATIVES: FREEZES AND 2005-07 WAIVERS ($ MILLIONS).

(90)         Marnell Supp. Decl. ¶ 76; Nelsen Supp. Decl. ¶ 9.

(91)         United’s inability to provide the IRS any meaningful security interest, the unprecedented dollar amount that would be involved in securing such waivers, and the legal standard governing the IRS’s decision that the Company needs to be suffering a “temporary business hardship” all make waivers impracticable.  Furthermore, the IRS never has granted a waiver for more than one year at a time.  See Memorandum at 113-114; see also Section V.B.2.b. infra.

(92)         Marnell Supp. Decl. ¶ 78.

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As with the savings from single-year waivers, the figures in the chart above understate United’s cash costs under an all-plan freeze and three-year waiver scenario because they do not account for the estimated $714 million in defined contribution replacement plan costs that United would be required to make through 2010.(93)  United’s apparent cash savings of nearly $1 billion through 2010 by maximizing the benefits of freezes and waivers is, therefore, roughly only $300 million.(94)

d.             “Restoration Funding” Would Not Substantially Reduce United’s Required Contributions Over the Long-Term.

Nor is restoration funding the long-term solution to United’s pension situation.  To begin with, the PBGC has been unreceptive to terminating a plan solely for the purpose of restoring it on a more forgiving funding schedule.(95)  Even assuming the PBGC would change its position and allow United to spread its required contributions over the maximum allowed 30 years, the Company still would have to pay about $2 billion to its plans through 2010 and would continue to bear about $500 million a year in required contributions for decades to come.  In fact, through 2030, United’s contributions would total more than $12 billion:(96)

(93)         Id. ¶ 79; Nelsen Supp. Decl. ¶ 9.

(94)         Marnell Supp. Decl. ¶ 79.

(95)         See Memorandum at 115-16.

(96)         Marnell Supp. Decl. ¶ 81.  United also has considered contributing non-cash assets to its pension plans in lieu of cash.  Unfortunately, the Company does not have any non-cash assets that it could contribute to its pension plans.  United already has sold a number of its assets during the course of its bankruptcy to maintain liquidity, and assets that remain are critical to the Company’s operations and/or will be necessary to use as collateral for its exit financing.  Moreover, ERISA prohibits the contribution of non-cash assets to pension plans, 29 U.S.C. § 1106(a)(1), and so the Company would need an exemption from the Department of Labor (“DOL”) even if it had assets that could be contributed.  29 U.S.C. § 1108(a); see also 29 CFR § 2570.30, et seq.

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Exhibit 9.               UNITED’S MINIMUM CONTRIBUTION REQUIREMENTS WITH RESTORATION FUNDING ($ MILLIONS).

C.            The PFEA Is Set to Expire This Year, and There Is No Legislative Relief on the Horizon for Pension Plan Sponsors.

The Pension Funding Equity Act (“PFEA”) is set to expire at the end of this year and the leading legislative proposal to take its place would likely only increase United’s pension costs.(97)  Congress enacted the PFEA in April 2004 to provide temporary relief from ERISA’s funding requirements.  The PFEA afforded two main short-term benefits.  First, the PFEA decreased required 2004 and 2005 contributions by temporarily increasing the interest rate used to calculate pension liabilities.  Second, it permitted certain employers, such as the airlines and

(97)         Kuhlman Supp. Decl. ¶ 40.

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steel companies, to defer 80 percent of the 2004 and 2005 plan year “additional funding charges” to 2006 and beyond.(98)

Despite the modest relief that the PFEA will afford through 2005, United still faces staggering required contributions of over $1.2 billion for its pension plans this year, and those costs will get even worse after the PFEA expires at year’s end.(99)  Without further legislative action, interest rates will revert to the lower 30-year Treasury rate, the 2006 additional funding charge will be due in full, and the sizable additional funding charge deferrals from the last two years must be paid over the next three to five years.(100)

No meaningful replacement for the PFEA is under discussion on Capitol Hill.  To the contrary, the proposal receiving the most attention – President Bush’s 2005 pension reform plan – would likely increase United’s pension costs.(101)  Although certain provisions of the President’s proposal may provide marginal relief to some employers, the initiative would likely make it even more difficult for financially troubled plan sponsors like United to continue funding

(98)         For a more thorough discussion of the PFEA, see Memorandum at 63-65, 112-13.

(99)         Kuhlman Supp. Decl. ¶ 37; Marnell Supp. Decl. ¶ 20.

(100)       Kuhlman Supp. Decl. ¶ 39.

(101)       Id. ¶ 40. See The Administration’s Single Employer Defined Benefit Pension Reform Proposal, Feb. 7, 2005, available at http://www.dol.gov/ebsa/pdf/SEPproposal2.pdf, last visited Mar. 30, 2005.  The key components of the President’s proposal are:  (1) higher PBGC premiums (from $19 to $30 per participant), plus additional risk-based premiums for underfunded plans; (2) a seven-year period to make additional funding charge payments (up from the current three to five years); (3) requiring “financially weak” companies to use more conservative funding measures; (4) use of “duration-matching” interest rates to calculate pension liabilities based on when participants’ benefits will be paid in the future (higher rates would be used to discount benefits expected to be paid further in the future, while lower rates would apply to benefits to be paid to participants in the near term); and (5) eliminating credit balances.  See Bear Stearns, Airlines: Fear and Loathing on the Pension Front; Competitive and Legislative Uncertainties Abound at 17 (Mar. 2005).

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their pension plans.(102)  While the proposal would increase to seven years the time for employers to make up underfunding, other provisions would more than offset that limited benefit.(103)  For example, President Bush’s plan requires “financially weak” employers – which United presently would be considered – to use more conservative assumptions to calculate their funding targets, raising required pension payments.(104)  Additionally, “duration matching” interest rates would hit sponsors with large near-term benefit payments (such as United) particularly hard by requiring them to use a much lower discount rate, increasing liabilities.(105)  Finally, in addition to raising the flat-dollar PBGC premiums all employers must pay from $19 to $30 per participant, the Bush proposal would charge “financially weak” sponsors an additional risk-based premium for every dollar of underfunding in their plans.(106)

In short, President Bush’s proposals would likely put even more financial pressure on employers (like United) already overwhelmed by immediate multi-billion dollar funding

(102)       Kuhlman Supp. Decl. ¶ 41.  According to Bear Stearns, while “the full potential effect of enacting the Administration’s proposals is uncertain at this time, our initial take is that the airlines would see little benefit, and could suffer perhaps even more financial pressure under the Bush plan.”  Bear Stearns, Airlines: Fear and Loathing at 17.

(103)       Kuhlman Supp. Decl. ¶ 41.

(104)       Id. ¶ 42.  “Financially weak” sponsors include any entity that has any senior unsecured debt rated below investment grade.  The Administration’s Single Employer Defined Benefit Pension Reform Proposal at 14-15.  Financially weak sponsors would have to use the following funding assumptions under the President’s proposal: (1) retirement rates would be accelerated to the earliest available retirement date; (2) benefits would be distributed in whatever form results in the largest liability for the plan; and (3) a “loading factor” ($700 per participant plus four percent of the plan’s liability) would be charged to reflect the additional administrative cost of purchasing a group annuity if the plan were to terminate.  Id. at 16.

(105)       Kuhlman Supp. Decl. ¶ 42.

(106)       Id. ¶ 40; The Administration’s Single Employer Defined Benefit Pension Reform Proposal at 31-32.

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liabilities when those employers need relief the most.(107)  As ALPA has observed, “taken as a whole, [President Bush’s proposal] would make it much more costly for United to maintain its current pension plans.”(108)  Other airline executives have expressed similar concern over the President’s proposal.  Northwest’s Vice President for Government Affairs called the plan “a death sentence for the airlines’ pension plans.”(109)  And Delta’s Senior Vice President of Government Affairs explained that the “Administration’s proposal would not help us.  The primary reason is not the seven years but the interest rate assumption, which would not give us the kind of relief we are looking for in terms of funding obligations we have got in the near term.”(110)  United cannot count on a legislative solution to its pension problems any time soon.

VI.           UNITED’S SECTION 1113(c) AGREEMENTS AND PROPOSALS.

Through difficult but successful negotiations, United and many of its unions made significant progress in obtaining the cost savings United needs for a successful restructuring.  In mid-December, United reached agreement on CBA reductions as well as a pension solution with ALPA, followed by agreements with PAFCA and TWU later that month.  Although the Court did not approve the original agreements, United and these three unions reached new agreements in mid-January that were ratified again by their respective memberships and then approved by the Court.

On the eve of the Section 1113 trial, United also agreed on modified wages, benefits, and work rules with the AFA, and modified wages, benefits, work rules and outsourcing

(107)       Kuhlman Supp. Decl. ¶ 41.

(108)       Bear Stearns, Airlines: Fear and Loathing at 18.

(109)       Evan Perez, Airlines Lobby for Pension Relief, Wall St. J., Mar. 17, 2005, B2.

(110)       Bear Stearns, Airlines: Fear and Loathing at 18.

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with AMFA.  Neither of these tentative agreements, however, provided for pension relief; instead, the agreements deferred that issue for 90 days to provide the parties more time to evaluate any viable alternatives.  The AFA’s membership ratified the tentative agreement on January 31, and the Court approved it that same day, though the AFA’s leadership has since decided to back out of the parties’ agreement.  The AMFA agreement was not ratified, thereby prompting United to file – and this Court to grant – temporary wage and sick pay reductions under Section 1113(e).

Finally, United and the IAM were unable to reach a tentative agreement, so the Company filed a Section 1113(e) motion for interim wage and sick pay reductions.  The IAM did not oppose the motion, which the Court granted on January 6.  Interim relief against the IAM was originally set to end on April 11, but has been extended through May 31.

A.            The Company’s Agreements with ALPA, PAFCA and TWU.

In January, United reached agreements to provide labor savings with ALPA, PAFCA and TWU that each group’s membership ratified and the Court approved.  As part of those negotiations, the parties agreed that the new CBAs would run from 2005 through 2009, instead of 2010 as originally proposed by the Company.(111)  Each of the new agreements came within one percent of United’s targeted average annual savings from 2005 through 2009:

(111)       Supplemental Declaration of Peter B. Kain (“Kain Supp. Decl.”) (Ex. 139) ¶ 3.

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Exhibit 10.             SAVINGS FROM AGREEMENTS COMPARED TO ALLOCATION TARGETS.(112)

Among other changes, all three unions agreed to substantial wage reductions:  11.8 percent for ALPA, 5.2 percent for PAFCA, and 7.2 percent for TWU.(113)  Each union also agreed to a combination of changes to pay factors, work rules, and benefits to meet their target.(114)  And although not part of United’s initial proposals, United and the parties agreed to reduce potential success sharing payouts in exchange for lesser wage reductions.(115)

The ALPA, PAFCA and TWU agreements each resolve the contentious issue of pension plan termination insofar as it concerns the Company’s CBAs.  These three agreements provide that, after May 11, 2005, the unions will waive any claim that termination of their defined benefit plans violates their respective CBA and will not oppose pension termination.(116)  If the defined benefit plans are terminated, United will implement a 6 percent defined

(112)       Id.

(113)       Letter of Agreement between United and ALPA (“ALPA Agreement”) (Ex. 159) ¶ 2; Agreement between United and the AFA (“AFA Agreement”) (Ex. 160) at p. 1; Letter of Agreement between United and PAFCA (“PAFCA Agreement”) (Ex. 161) ¶ 2; Letter of Agreement between United and TWU (“TWU Agreement”) (Ex. 162) ¶ 2.  TWU’s wages will be increased by approximately 1.5 percent on July 1, 2005.  TWU Agreement ¶ 2.

(114)       ALPA Agreement ¶ 3, Ex. B-1, B-2, B-3; AFA Agreement at pp. 2-3; PAFCA Agreement ¶ 3, Ex. B; TWU Agreement ¶ 3, Ex. B-1, B-2.