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: October 20, 2005

(Date of earliest event reported)

 

UAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

1-6033

 

36-2675207

(State or other jurisdiction
of incorporation)

 

(Commission
File Number)

 

(I.R.S. Employer
Identification No.)

 

 

 

 

 

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 filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

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.

 

On October 21, 2005, the United States Bankruptcy Court for the Northern District of Illinois (the “Bankruptcy Court”) approved the adequacy of information in the First Amended Disclosure Statement for Reorganizing Debtors’ First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the “First Amended Disclosure Statement”) filed with the Bankruptcy Court on October 20, 2005 by UAL Corporation (“UAL”) and twenty-seven of its U.S.-based direct and indirect subsidiaries, including United Air Lines, Inc. (collectively, the “Debtors”) and authorized UAL to send the First Amended Disclosure Statement, the First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the “First Amended Plan”) and ballots to creditors entitled to vote on the First Amended Plan.  The deadline for voting on the First Amended Plan is December 19, 2005 and the hearing on confirmation of the First Amended Plan is scheduled for January 18, 2006.

 

Copies of the First Amended Disclosure Statement and the First Amended Plan as filed with the Bankruptcy Court are attached hereto as Exhibits 99.1 and 99.2, respectively.  The First Amended Disclosure Statement contains certain projections (the “Projections”) of financial performance for fiscal years 2005 through 2010.  The Debtors do not, as a matter of course, publish their business plans, budgets or strategies, or make external projections or forecasts of their anticipated financial position or results of operations.  UAL has filed the First Amended Disclosure Statement as an exhibit hereto because such First Amended Disclosure Statement has been filed with the Bankruptcy Court in connection with the Debtors’ reorganization proceedings.  UAL refers to the limitations and qualifications included in the First Amended Disclosure Statement, including without limitation those set forth under the captions “Statutory Requirements for Confirmation of the Plan — Best Interests of Creditors Test/Liquidation Analysis and Valuation Analysis,” “— Financial Feasibility” and “Certain Factors to be Considered Prior to Voting — Factors Affecting the Value of the Securities to be Issued Under the Plan” with respect to the Projections.  All information contained in the First Amended Disclosure Statement is subject to change, whether as a result of amendments to the First Amended Plan, actions of third parties or otherwise.

 

This announcement is not intended to be, nor should it be construed as, a solicitation for a vote on the First Amended Plan.  The First Amended Plan will become effective only if it receives the requisite stakeholder approval and is confirmed by the Bankruptcy Court.

 

ITEM 9.01.  Financial Statements and Exhibits

 

Exhibit No.

 

Description

99.1

 

First Amended Disclosure Statement for Reorganizing Debtors’ First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code

 

 

 

99.2

 

Debtors’ First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code

 

2



 

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: October 25, 2005

 

 

UAL CORPORATION

 

 

 

By:

/s/ Frederic F. Brace

 

 

Name: Frederic F. Brace

 

Title: Executive Vice President and Chief Financial Officer

 

3



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

99.1*

 

First Amended Disclosure Statement for Reorganizing Debtors’ First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code

 

 

 

 

99.2*

 

Debtors’ First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code

 


* Filed herewith electronically.

 

4


Exhibit 99.1

 

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

 

In re:

)

Chapter 11

 

)

 

UAL Corporation, et  al.,

)

 

 

)

Case No. 02-B-48191

 

Debtors.(1)

)

(Jointly Administered)

 

)

Honorable Eugene R. Wedoff

 

FIRST AMENDED DISCLOSURE STATEMENT FOR REORGANIZING DEBTORS’ FIRST

AMENDED JOINT PLAN OF REORGANIZATION PURSUANT TO CHAPTER 11 OF THE

UNITED STATES BANKRUPTCY CODE

 

                  Record Date: October 20, 2005

 

                  Voting Deadline: December 19, 2005 at 4:30 p.m. prevailing Pacific time

 

                  Date by which objections to Confirmation of the Plan must be filed and served: December 12, 2005 at 4:00 p.m. prevailing Central time

 

                  Hearing on Confirmation of the Plan: January 18, 2006 at 10:30 a.m. prevailing Central time

 

 

 

James H.M. Sprayregen, P.C.

 

 

Marc Kieselstein, P.C.

 

 

David R. Seligman

 

 

David A. Agay

 

 

Erik W. Chalut

 

 

KIRKLAND & ELLIS LLP

 

 

200 East Randolph Drive

 

 

Chicago, Illinois 60601

 

 

(312) 861-2000

 

 

 

 

 

Counsel for the Debtors and the Debtors in Possession

Dated: October 20, 2005

 

 

 


(1)                                  The Debtors are the following entities: Air Wisconsin, Inc., Air Wis Services, Inc., BizJet Charter, Inc., BizJet Fractional, Inc., BizJet Services, Inc., Ameniti Travel Clubs, Inc., Cybergold, Inc., Domicile Management Services, Inc., Four Star Leasing, Inc., itarget.com, inc., Kion Leasing, Inc., Mileage Plus, Inc., Mileage Plus Holdings, Inc., Mileage Plus Marketing, Inc., MyPoints.com, Inc., MyPoints Offline Services, Inc., Premier Meeting and Travel Services, Inc., UAL Benefits Management, Inc., UAL Company Services, Inc., UAL Corporation, UAL Loyalty Services, LLC, United Air Lines, Inc., United Aviation Fuels Corporation, United BizJet Holdings, Inc., United Cogen, Inc., United GHS, Inc., United Vacations, Inc., and United Worldwide Corporation.

 



 

TABLE OF CONTENTS

 

ARTICLE I. SUMMARY

 

A.

The Purpose of the Plan

 

B.

Debtors’ Principal Assets and Indebtedness

 

C.

Treatment of Claims and Interests

 

D.

Intercompany Claims and Contracts

 

E.

Substantive Consolidation

 

F.

Claims Estimates

 

G.

Reorganized Debtors and the Post-Confirmation Estate

 

H.

Restructuring Transactions Contemplated By the Plan

 

I.

Permanent Injunction

 

J.

Consummation of the Plan

 

K.

Liquidation and Valuation Analyses

 

L.

Certain Factors to Be Considered Prior to Voting

 

M.

Voting and Confirmation

 

N.

Ongoing Negotiations with Committee

 

 

 

 

ARTICLE II. GENERAL INFORMATION

 

A.

Description of UAL’s Business

 

B.

Existing Capital Structure of the Debtors

 

C.

Management of the Debtors

 

 

 

 

ARTICLE III. THE CHAPTER 11 CASES

 

A.

Events Leading to the Chapter 11 Cases and Related Postpetition Events

 

B.

Stabilization of Operations

 

C.

Debtors’ Restructuring Initiatives

 

D.

Appointment of the Creditors’ Committee

 

 

 

 

ARTICLE IV. SUMMARY OF THE PLAN OF REORGANIZATION

 

A.

Overview of Chapter 11

 

B.

Overall Structure of the Plan

 

C.

Severability of Plan Provisions

 

D.

Classification and Treatment of Claims and Interests

 

E.

Implementation of the Plan

 

F.

Treatment Of Executory Contracts And Unexpired Leases

 

G.

Procedures for Treatment of Disputed, Contingent, and Unliquidated Claims Pursuant to the Plan

 

H.

Provisions Governing Distributions

 

I.

Effect of Confirmation of the Plan

 

J.

Allowance And Payment Of Certain Administrative Claims

 

K.

Conditions Precedent To Confirmation And Consummation Of The Plan

 

L.

Modification, Revocation Or Withdrawal Of The Plan

 

M.

Retention Of Jurisdiction

 

N.

Miscellaneous Provisions

 

 

 

 

ARTICLE V. STATUTORY REQUIREMENTS FOR CONFIRMATION OF THE PLAN

 

A.

The Confirmation Hearing

 

 

ii



 

B.

Confirmation Standards

 

C.

Best Interests of Creditors Test/Liquidation Analysis and Valuation Analysis

 

D.

Financial Feasibility

 

E.

Acceptance By Impaired Classes

 

F.

Confirmation Without Acceptance By All Impaired Classes

 

 

 

 

ARTICLE VI. CERTAIN FACTORS TO BE CONSIDERED PRIOR TO VOTING

 

A.

Certain Bankruptcy Considerations

 

B.

Factors Affecting the Value of the Securities to be Issued Under the Plan

 

C.

Risks Related to the Debtors’ Business and Financial Condition

 

 

 

 

ARTICLE VII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES

 

A.

Certain Federal Income Tax Consequences to the Holders of Claims and Interests

 

B.

Certain U.S. Federal Income Tax Consequences to Reorganized Debtors

 

 

 

 

ARTICLE VIII. VOTING PROCEDURES

 

A.

Who Can Vote

 

B.

Classes Impaired Under the Plan

 

C.

Distribution of Solicitation Documents

 

D.

Releases Under the Plan

 

E.

Voting

 

 

 

 

ARTICLE IX. PLAN SUPPLEMENT

 

 

 

ARTICLE X. RECOMMENDATION

 

 

iii



 

THIS DISCLOSURE STATEMENT CONTAINS A SUMMARY OF CERTAIN PROVISIONS OF THE DEBTORS’ PLAN OF REORGANIZATION AND CERTAIN OTHER DOCUMENTS AND FINANCIAL INFORMATION.  THE INFORMATION INCLUDED HEREIN IS FOR PURPOSES OF SOLICITING ACCEPTANCE OF THE PLAN AND SHOULD NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE HOW AND WHETHER TO VOTE ON THE PLAN.  THE DEBTORS BELIEVE THAT THESE SUMMARIES ARE FAIR AND ACCURATE.  THE SUMMARIES OF THE FINANCIAL INFORMATION AND THE DOCUMENTS WHICH ARE ATTACHED HERETO OR INCORPORATED BY REFERENCE HEREIN ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH INFORMATION AND DOCUMENTS.  IN THE EVENT OF ANY INCONSISTENCY OR DISCREPANCY BETWEEN A DESCRIPTION IN THIS DISCLOSURE STATEMENT AND THE TERMS AND PROVISIONS OF THE PLAN, OR THE OTHER DOCUMENTS AND FINANCIAL INFORMATION INCORPORATED HEREIN BY REFERENCE, THE PLAN OR THE OTHER DOCUMENTS AND FINANCIAL INFORMATION, AS THE CASE MAY BE, SHALL GOVERN FOR ALL PURPOSES.

 

THE STATEMENTS AND FINANCIAL INFORMATION CONTAINED HEREIN HAVE BEEN MADE AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFIED.  HOLDERS OF CLAIMS AND INTERESTS REVIEWING THIS DISCLOSURE STATEMENT SHOULD NOT INFER AT THE TIME OF SUCH REVIEW THAT THERE HAVE BEEN NO CHANGES IN THE FACTS SET FORTH HEREIN SINCE THE DATE HEREOF.  EACH HOLDER OF A CLAIM OR INTEREST ENTITLED TO VOTE ON THE PLAN SHOULD CAREFULLY REVIEW THE PLAN, THIS DISCLOSURE STATEMENT, AND THE PLAN SUPPLEMENT IN THEIR ENTIRETY BEFORE CASTING A BALLOT.  THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE LEGAL, BUSINESS, FINANCIAL, OR TAX ADVICE.  ANY PERSONS DESIRING ANY SUCH ADVICE OR OTHER ADVICE SHOULD CONSULT WITH THEIR OWN ADVISORS.

 

NO PARTY IS AUTHORIZED TO GIVE ANY INFORMATION WITH RESPECT TO THE PLAN OTHER THAN THAT WHICH IS CONTAINED IN THIS DISCLOSURE STATEMENT.  NO REPRESENTATIONS CONCERNING THE DEBTORS OR THE VALUE OF THEIR PROPERTY HAVE BEEN AUTHORIZED BY THE DEBTORS OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT. ANY INFORMATION, REPRESENTATIONS OR INDUCEMENTS MADE TO OBTAIN AN ACCEPTANCE OF THE PLAN WHICH ARE OTHER THAN AS, OR INCONSISTENT WITH, THE INFORMATION CONTAINED HEREIN AND IN THE PLAN SHOULD NOT BE RELIED UPON BY ANY HOLDER OF A CLAIM OR INTEREST.

 

WITH RESPECT TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS, AND OTHER PENDING, THREATENED OR POTENTIAL LITIGATION OR ACTIONS, THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AND MAY NOT BE CONSTRUED AS AN ADMISSION OF FACT, LIABILITY, STIPULATION OR WAIVER, BUT RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS.

 

THE SECURITIES DESCRIBED HEREIN WILL BE ISSUED WITHOUT REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY SIMILAR FEDERAL, STATE OR LOCAL LAW, GENERALLY IN RELIANCE ON THE EXEMPTIONS SET FORTH IN SECTION 1145 OF THE BANKRUPTCY CODE.

 

THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.

 

iv



 

ALTHOUGH THE DEBTORS HAVE USED THEIR BEST EFFORTS TO ENSURE THE ACCURACY OF THE FINANCIAL INFORMATION PROVIDED IN THIS DISCLOSURE STATEMENT, THE FINANCIAL INFORMATION CONTAINED IN, OR INCORPORATED BY REFERENCE INTO, THIS DISCLOSURE STATEMENT HAS NOT BEEN AUDITED, EXCEPT FOR THE FINANCIAL STATEMENTS INCLUDED IN THE PLAN SUPPLEMENT WHERE INDICATED.

 

THE PROJECTIONS PROVIDED IN THIS DISCLOSURE STATEMENT HAVE BEEN PREPARED BY THE MANAGEMENT OF THE DEBTORS AND THEIR FINANCIAL ADVISORS. THESE PROJECTIONS, WHILE PRESENTED WITH NUMERICAL SPECIFICITY, ARE NECESSARILY BASED ON A VARIETY OF ESTIMATES AND ASSUMPTIONS WHICH, THOUGH CONSIDERED REASONABLE BY MANAGEMENT, MAY NOT BE REALIZED AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, INDUSTRY, REGULATORY, MARKET AND FINANCIAL UNCERTAINTIES, AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE DEBTORS’ CONTROL. THE DEBTORS CAUTION THAT NO REPRESENTATIONS CAN BE MADE AS TO THE ACCURACY OF THESE PROJECTIONS OR TO THE ABILITY TO ACHIEVE THE PROJECTED RESULTS.  SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE.  FURTHER, EVENTS AND CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE DATE ON WHICH THESE PROJECTIONS WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED OR, ALTERNATIVELY, MAY HAVE BEEN UNANTICIPATED, AND THUS THE OCCURRENCE OF THESE EVENTS MAY AFFECT FINANCIAL RESULTS IN A MATERIALLY ADVERSE OR MATERIALLY BENEFICIAL MANNER. THE PROJECTIONS, THEREFORE, MAY NOT BE RELIED UPON AS A GUARANTY OR OTHER ASSURANCE OF THE ACTUAL RESULTS THAT WILL OCCUR.

 

SEE ARTICLE VI OF THIS DISCLOSURE STATEMENT, ENTITLED “CERTAIN FACTORS TO BE CONSIDERED PRIOR TO VOTING,” FOR A DISCUSSION OF CERTAIN CONSIDERATIONS IN CONNECTION WITH A DECISION BY A HOLDER OF AN IMPAIRED CLAIM OR IMPAIRED INTEREST TO ACCEPT THE PLAN.

 

THE BANKRUPTCY COURT HAS SCHEDULED THE CONFIRMATION HEARING TO COMMENCE ON JANUARY 18, 2006 AT 10:30 A.M. BEFORE THE HONORABLE EUGENE R. WEDOFF, UNITED STATES BANKRUPTCY JUDGE, IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, LOCATED AT THE EVERETT MCKINLEY DIRKSEN BUILDING, 219 S. DEARBORN, CHICAGO, ILLINOIS 60604.  THE CONFIRMATION HEARING MAY BE ADJOURNED FROM TIME TO TIME BY THE BANKRUPTCY COURT WITHOUT FURTHER NOTICE EXCEPT FOR AN ANNOUNCEMENT OF THE ADJOURNED DATE MADE AT THE CONFIRMATION HEARING OR ANY ADJOURNMENT THEREOF.

 

OBJECTIONS TO CONFIRMATION OF THE PLAN MUST BE FILED AND SERVED ON OR BEFORE DECEMBER 12, 2005, IN ACCORDANCE WITH THE SOLICITATION NOTICE FILED AND SERVED ON CREDITORS, EQUITY INTEREST HOLDERS, AND OTHER PARTIES IN INTEREST. UNLESS OBJECTIONS TO CONFIRMATION ARE TIMELY SERVED AND FILED IN COMPLIANCE WITH THE SOLICITATION NOTICE, THEY MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.

 

v



 

ARTICLE I.
SUMMARY

 

The following summary is qualified in its entirety by the more detailed information contained in the Plan and elsewhere in this Disclosure Statement.  Capitalized terms used but not otherwise defined herein have the meaning given to such terms in the Plan.

 

UAL Corporation (“UAL”) is a holding company whose principal, wholly-owned subsidiary is United Air Lines, Inc. (“United”).  United’s operations, which consist primarily of the transportation of persons, property, and mail throughout the U.S. and abroad, accounted for most of UAL’s revenues and expenses in 2004.  United is one of the largest scheduled passenger airlines in the world with over 1,500 daily departures to more than 120 destinations in 26 countries and two U.S. territories.  Through United’s global route network, United serves virtually every major market around the world, either directly or through the Star Alliance, which is the world’s largest airline network.  In addition to the Star Alliance, United provides regional service into United’s domestic hubs through marketing relationships with “United Express®” carriers.  In 2004, United added a new low-fare brand, called Ted, designed to serve select leisure markets and to more effectively compete with low-fare carriers.

 

As discussed more fully below, on December 9, 2002 (the “Petition Date”), UAL, United, and 26 other direct and indirect wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). The foregoing entities are sometimes referred to collectively as the “Debtors” and each individually as a “Debtor” and, on or after the Effective Date, collectively as the “Reorganized Debtors” and each individually as a “Reorganized Debtor.”

 

This Disclosure Statement is being furnished by the Debtors as proponents of the Debtors’ Joint Plan of Reorganization pursuant to Chapter 11 of the United States Bankruptcy Code (as may be amended from time to time, the “Plan,” a copy of which is attached hereto as Appendix A), pursuant to Section 1125 of the Bankruptcy Code and in connection with the solicitation of votes for the acceptance or rejection of the Plan, as it may be amended or supplemented from time to time in accordance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).

 

This Disclosure Statement describes certain aspects of the Plan, including the treatment of Holders of Claims against, and Interests in, the Debtors, and also describes certain aspects of the Debtors’ operations, projections and other related matters.

 

A.                                   The Purpose of the Plan

 

The Debtors have concluded, after careful review of their current business operations, their prospects as ongoing business enterprises, and the estimated recoveries of Creditors in various liquidation scenarios, that the recovery of Holders of Allowed Claims will be maximized by the Debtors’ continued operation as a going concern.  The Debtors believe that their businesses and assets have significant value that would not be realized in a liquidation scenario, either in whole or in substantial part.  According to the liquidation analysis described herein (the “Liquidation Analysis”) and the other analyses prepared by the Debtors and their advisors, the value of the Debtors’ Estates is considerably greater as a going concern than if they were liquidated.

 

The New UAL Common Stock will be distributed to the Debtors’ employee and creditor constituents through the distribution provisions in the Plan and settlements with certain of these

 

1



 

constituents implemented through the Plan, as described in greater detail below, after accounting for stock set aside for the Management Equity Incentive Plan and Director Equity Incentive Plan.

 

The Debtors believe that the Plan provides the best recoveries possible for the Holders of Allowed Claims and strongly recommend that, if you are entitled to vote, you vote to accept the Plan.  The Debtors believe that any alternative to Confirmation of the Plan, such as liquidation or attempts by another party in interest to file a plan of reorganization, could result in significant delays, litigation, and additional costs.  For more information, see ARTICLE V hereof and the Liquidation Analysis set forth as Appendix B hereto and in the Plan Supplement to the Debtors’ Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the “Plan Supplement”), as Exhibit 27.(2)

 

B.                                     Debtors’ Principal Assets and Indebtedness

 

UAL’s principal asset is the stock of United and the other Debtor-subsidiaries.  UAL’s principal indebtedness is: (i) its guarantee of the indebtedness under the DIP Facility; (ii) guarantees of certain aircraft-related indebtedness of Air Wisconsin; (iii) guarantees of two municipal bond issuances (the Regional Airports Improvement Corporation (“RAIC”) Adjustable-Rate Facilities Lease Refunding Revenue Bonds, Issue of 1984, United Air Lines, Inc. (Los Angeles International Airport) and RAIC Facilities Lease Refunding Revenue Bonds, Issue of 1992, United Air Lines, Inc. (Los Angeles International Airport)); and (iv) its indebtedness with respect to the TOPrS.

 

For the 12 months ended December 2004, United accounted for approximately 95.1% of the Debtors’ operating revenues on a consolidated basis.  United’s principal assets are its airline business and the stock of its subsidiaries.  United’s principal indebtedness is: (i) its indebtedness under the DIP Facility; (ii) its aircraft-related indebtedness; (iii) its indebtedness under the Unsecured Debentures; and (iv) its indebtedness in connection with issuances of municipal bonds.

 

C.                                     Treatment of Claims and Interests

 

The Plan divides all Claims and Interests against each Debtor into various Classes.  As the Plan contemplates substantive consolidation of the United Debtors (i.e., all Debtors other than UAL), the United Debtor Classes will be consolidated as set forth in ARTICLE I.E below.  Except as such Classes may be consolidated under the Plan, each Class of Claims and Interests will be treated separately in the Plan.  Certain Classes may receive distributions under the Plan, and substantive consolidation will not affect the treatment and distributions received by the various Classes.  The following tables summarize the Classes of Claims and Interests under the Plan, the treatment of such Classes and the projected recovery under the Plan, if any, for such Classes.  The projected recoveries are based upon certain assumptions contained in the valuation analysis set forth as Appendix C hereto and in the Plan Supplement, as Exhibit 29 (the “Valuation Analysis”), including an assumed reorganization value of the New UAL Common Stock equal to approximately $15 per share.  As more fully described herein, the assumed reorganization values of the New UAL Common Stock were derived from commonly accepted valuation techniques and are not estimates of trading values for such securities.  The range listed below of a 4-8 percent recovery for the Holders of most Classes of Unsecured Claims is based on various assumptions, including, but not limited to (i) final Unsecured Claims ranging between $20-35 billion and (ii) an equity value of the Debtors of $1.9 billion.

 


(2)                                  Several documents that are included in the Plan Supplement are described herein, but these summaries are not a substitute for a complete understanding of the underlying documents.  You are urged to review the full text of all such documents in the Plan Supplement.

 

2



 

Claims against all of the Debtors:

 

Claim

 

Plan Treatment

 

Projected Recovery
Under the Plan

Administrative Claims

 

Paid in full

 

100.0%

Priority Tax Claims

 

Paid in full in cash; paid in cash on a deferred quarterly basis over a period not exceeding six years after the date of assessment of such Priority Tax Claim; or paid on such other amount and terms as agreed by the Debtor and the Holder

 

100.0%

 

UAL Corporation:  Summary of Classification and Treatment of Claims and Interests

 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan(3)

 

Status

 

Voting
Rights

1A

 

DIP Facility Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

1B-1

 

Secured Aircraft Claims

 

Reinstated; such treatment as to which UAL or Reorganized UAL and the Secured Aircraft Creditor shall have agreed in writing; return of collateral; or treatment otherwise rendering such Secured Aircraft Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

1B-2

 

Other Secured Claims

 

Reinstated; paid in full in Cash; return of collateral; or treatment otherwise rendering such Other Secured Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

1C

 

Other Priority Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

1D

 

Unsecured Convenience Class Claims

 

Cash equal to the gross proceeds from the sale of such Holder’s pro rata share of the Unsecured Distribution less the amount of any discount, commission, or fee paid or incurred on such sale and any taxes withheld or paid on account of such sale

 

4-8%

 

Impaired

 

Entitled to Vote

 


(3)                                  Failure by the Bankruptcy Court to order substantive consolidation of the United Debtors does not affect the projected recoveries under the Plan.

 

3



 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan(3)

 

Status

 

Voting
Rights

1E-1

 

Unsecured Retained Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

1E-2

 

Unsecured Rejected Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

1E-3

 

Other Unsecured Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

1F

 

TOPrS Claims

 

Not entitled to receive any distribution or retain any property under the Plan

 

0%

 

Impaired

 

Deemed to Reject

 

 

 

 

 

 

 

 

 

 

 

1G

 

Preferred Stock Interests

 

Not entitled to receive any distribution or retain any property under the Plan

 

0%

 

Impaired

 

Deemed to Reject

 

 

 

 

 

 

 

 

 

 

 

1H

 

Common Stock Interests

 

Not entitled to receive any distribution or retain any property under the Plan

 

0%

 

Impaired

 

Deemed to Reject

 

 

 

 

 

 

 

 

 

 

 

1I

 

Subordinated Securities Claims

 

Not entitled to receive any distribution or retain any property under the Plan

 

0%

 

Impaired

 

Deemed to Reject

 

 

 

 

 

 

 

 

 

 

 

 

United Air Lines, Inc.: Summary of Classification and Treatment of Claims and Interests

 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan

 

Status

 

Voting
Rights

2A

 

DIP Facility Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

2B-1

 

Secured Aircraft Claims

 

Reinstated; such treatment as to which United or Reorganized United and the Secured Aircraft Creditor shall have agreed in writing; return of collateral; or treatment otherwise rendering such Secured Aircraft Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

2B-2

 

Other Secured Claims

 

Reinstated; paid in full in Cash; return of collateral; or treatment otherwise rendering such Other Secured Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

2C

 

Other Priority Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

4



 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan

 

Status

 

Voting
Rights

2D-1

 

Unsecured Convenience Class Claims

 

Cash equal to the gross proceeds from the sale of such Holder’s pro rata share of the Unsecured Distribution less the amount of any discount, commission, or fee paid or incurred on such sale and any taxes withheld or paid on account of such sale

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2D-2

 

Unsecured Retiree Convenience Class Claims

 

Cash equal to the gross proceeds from the sale of such Holder’s pro rata share of the Unsecured Distribution less the amount of any discount, commission, or fee paid or incurred on such sale and any taxes withheld or paid on account of such sale

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2E-1

 

Unsecured Retained Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2E-2

 

Unsecured Rejected Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2E-3

 

Unsecured PBGC Claims

 

New UAL PBGC Securities and pro rata share of the Unsecured Distribution

 

Value of securities plus 4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2E-4

 

Unsecured Chicago Municipal Bond Claims

 

New UAL ORD Settlement Bonds and pro rata share of the Unsecured Distribution

 

Value under Chicago Municipal Bond Settlement Agreement

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2E-5

 

Unsecured Public Debt Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2E-6

 

Other Unsecured Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

2H

 

Common Stock Interests

 

Not entitled to receive any distribution under the Plan; provided, however, that Debtors reserve the right to reinstate at any time

 

0%

 

Impaired

 

Deemed to Reject

 

5



 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan

 

Status

 

Voting
Rights

2I

 

Subordinated Securities Claims

 

Not entitled to receive any distribution or retain any property under the Plan

 

0%

 

Impaired

 

Deemed to Reject

 

Air Wisconsin, Inc.: Summary of Classification and Treatment of Claims and Interests

 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan

 

Status

 

Voting
Rights

3A

 

DIP Facility Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

3B-1

 

Secured Aircraft Claims

 

Reinstated; such treatment as to which United or Reorganized United and the Secured Aircraft Creditor shall have agreed in writing; return of collateral; or treatment otherwise rendering such Secured Aircraft Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

3B-2

 

Other Secured Claims

 

Reinstated; paid in full in Cash; return of collateral; or treatment otherwise rendering such Other Secured Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

3C

 

Other Priority Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

3D

 

Unsecured Convenience Class Claims

 

Cash equal to the gross proceeds from the sale of such Holder’s pro rata share of the Unsecured Distribution less the amount of any discount, commission, or fee paid or incurred on such sale and any taxes withheld or paid on account of such sale

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

3E-1

 

Unsecured Retained Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

3E-2

 

Unsecured Rejected Aircraft Claims

 

Pro rata share of the Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

3E-3

 

Other Unsecured Claims

 

Pro rata share of Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

6



 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan

 

Status

 

Voting
Rights

3H

 

Common Stock Interests

 

Not entitled to receive any distribution under the Plan; provided, however, that Debtors reserve the right to reinstate at any time

 

0%

 

Impaired

 

Deemed to Reject

 

7



 

Air Wis (Classes 4A, 4B, 4C, 4D, 4E, and 4H), Ameniti Travel Clubs, Inc. (Classes 5A, 5B, 5C, 5D, 5E, and 5H), BizJet Charter (Classes 6A, 6B, 6C, 6D, 6E, and 6H), BizJet Fractional (Classes 7A, 7B, 7C, 7D, 7E, and 7H), BizJet Services (Classes 8A, 8B, 8C, 8D, 8E, and 8H), Cybergold (Classes 9A, 9B, 9C, 9D, 9E, and 9H), DMS (Classes 10A, 10B, 10C, 10D, 10E, and 10H), Four Star (Classes 11A, 11B, 11C, 11D, 11E, and 11H), itarget (Classes 12A, 12B, 12C, 12D, 12E, and 12H), Kion Leasing (Classes 13A, 13B, 13C, 13D, 13E, and 13H), Mileage Plus Holdings (Classes 14A, 14B, 14C, 14D, 14E, and 14H), Mileage Plus, Inc. (Classes 15A, 15B, 15C, 15D, 15E, and 15H), Mileage Plus Marketing (Classes 16A, 16B, 16C, 16D, 16E, and 16H), MyPoints.com (Classes 17A, 17B, 17C, 17D, 17E, and 17H), MyPoints Offline (Classes 18A, 18B, 18C, 18D, 18E, and 18H), Premier Marketing (Classes 19A, 19B, 19C, 19D, 19E, and 19H), UAFC (Classes 20A, 20B, 20C, 20D, 20E, and 20H), UAL BMI (Classes 21A, 21B, 21C, 21D, 21E, and 21H), UAL Company Services (Classes 22A, 22B, 22C, 22D, 22E, and 22H), ULS (Classes 23A, 23B, 23C, 23D, 23E, and 23H), United BizJet (Classes 24A, 24B, 24C, 24D, 24E, and 24H), United Cogen (Classes 25A, 25B, 25C, 25D, 25E, and 25H), United GHS (Classes 26A, 26B, 26C, 26D, 26E, and 26H), United Vacations (Classes 27A, 27B, 27C, 27D, 27E, and 27H), and United Worldwide (Classes 28A, 28B, 28C, 28D, 28E, and 28H)

 

Class

 

Claim

 

Plan Treatment of Class

 

Projected
Recovery
Under the
Plan

 

Status

 

Voting
Rights

4A through 28A

 

DIP Facility Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

4B through 28B

 

Other Secured Claims

 

Reinstated; paid in full in Cash; return of collateral; or treatment otherwise rendering such Other Secured Claim Unimpaired

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

4C through 28C

 

Other Priority Claims

 

Paid in full

 

100.0%

 

Unimpaired

 

Deemed to Accept

 

 

 

 

 

 

 

 

 

 

 

4D through 28D

 

Unsecured Convenience Class Claims

 

Cash equal to the gross proceeds from the sale of such Holder’s pro rata Distribution less the amount of any discount, commission, or fee paid or incurred on such sale and any taxes withheld or paid on account of such sale

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

4E through 28E

 

Unsecured Claims

 

Pro rata share of Unsecured Distribution

 

4-8%

 

Impaired

 

Entitled to Vote

 

 

 

 

 

 

 

 

 

 

 

4H through 28H

 

Common Stock Interests

 

Not entitled to receive any distribution under the Plan; provided, however, that Debtors reserve the right to reinstate at any time

 

0%

 

Impaired

 

Deemed to Reject

 

8



 

D.                                    Intercompany Claims and Contracts

 

Except as otherwise set forth in the Plan, there shall be no distributions on account of Intercompany Claims.  Pursuant to Sections 1126(f) and 1126(g) of the Bankruptcy Code, Holders of Intercompany Claims are not entitled to vote to accept or reject the Plan.  Notwithstanding the foregoing, the Reorganized Debtors reserve the right to Reinstate, extinguish, or cancel, as applicable, all Intercompany Claims, including, without limitation, all relevant agreements, instruments, and documents underlying such Intercompany Claims as of the Effective Date or such other date as is appropriate.

 

Except as set forth in the Plan, however, each Intercompany Contract to which any Debtor is a party shall be deemed automatically assumed in accordance with the provisions and requirements of Sections 365 and 1123 of the Bankruptcy Code as of the Effective Date to the extent such contracts and leases are executory.

 

E.                                      Substantive Consolidation

 

The Plan contemplates substantive consolidation of the Estates of the United Debtors into the United Estate. The foregoing non-UAL Classes shall be consolidated as follows.

 

Classes

 

Claims and Interests

DIP Facility Claims

 

2A, 3A, 4A, 5A, 6A, 7A, 8A, 9A, 10A, 11A, 12A, 13A, 14A, 15A, 16A, 17A, 18A, 19A, 20A, 21A, 22A, 23A, 24A, 25A, 26A, 27A, and 28A

 

 

 

Secured Aircraft Claims

 

2B-1 and 3B-1

 

 

 

Other Secured Claims

 

2B-2, 3B-2, 3B, 5B, 6B, 7B, 8B, 9B, 10B, 11B, 12B, 13B, 14B, 15B, 16B, 17B, 18B, 19B, 20B, 21B, 22B, 23B, 24B, 25B, 26B, 27B, and 28B

 

 

 

Other Priority Claims

 

2C, 3C, 4C, 5C, 6C, 7C, 8C, 9C, 10C, 11C, 12C, 13C, 14C, 15C, 16C, 17C, 18C, 19C, 20C, 21C, 22C, 23C, 24C, 25C, 26C, 27C, and 28C

 

 

 

Unsecured Convenience Class Claims

 

2D-1, 3D, 4D, 5D, 6D, 7D, 8D, 9D, 10D, 11D, 12D, 13D, 14D, 15D, 16D, 17D, 18D, 19D, 20D, 21D, 22D, 23D, 24D, 25D, 26D, 27D, and 28D

 

 

 

Unsecured Retiree Convenience Class Claims

 

2D-2

 

 

 

Unsecured Retained Aircraft Claims

 

2E-1 and 3E-1

 

 

 

Unsecured Rejected Aircraft Claims

 

2E-2 and 3E-2

 

 

 

Unsecured PBGC Claim

 

2E-3

 

 

 

Unsecured Chicago Municipal Bond Claim

 

2E-4

 

 

 

Unsecured Public Debt Aircraft Claims

 

2E-5

 

 

 

Other Unsecured Claims

 

2E-6, 3E-3, 4E, 5E, 6E, 7E, 8E, 9E, 10E, 11E, 12E, 13E, 14E, 15E, 16E, 17E, 18E, 19E, 20E, 21E, 22E, 23E, 24E, 25E, 26E, 27E, and 28E

 

 

 

Common Stock Interests

 

2H, 3H, 4H, 5H, 6H, 7H, 8H, 9H, 10H, 11H, 12H, 13H, 14H, 15H, 16H, 17H, 18H, 19H, 20H, 21H, 22H, 23H, 24H, 25H, 26H, 27H, and 28H

 

 

 

Subordinated Securities Claims

 

2I

 

9



 

F.                                      Claims Estimates

 

As of September 1, 2005, the Debtors’ Claims Agent had received approximately 44,716 Proofs of Claim.  As of September 1, 2005, the total amounts of remaining Claims filed against one or more of the Debtors were as follows:  319 Secured Claims in the total amount of $13,545,350,698.99; 95 Administrative Claims in the total amount of $319,766,767.14; 256 Claims asserting Priority Claims in the total amount of $10,470,875,378.18; and 6,208 Unsecured Claims in the total amount of $20,422,648,792.51.  The Debtors believe that many of the filed Proofs of Claim are invalid, untimely, duplicative, overstated, and therefore are in the process of objecting to such Claims.  Through such objections, the Bankruptcy Court has to date disallowed a total of approximately $3.618 trillion in Claims (including reduced retroactive pay claims of $3.375 trillion (the “Retroactive Pay Claims”)).(4)

 

The Debtors estimate that at the conclusion of the Claims objection, reconciliation and resolution process, the aggregate amount of estimated Allowed Secured Claims against the Debtors will aggregate approximately $8 billion, estimated Allowed Priority Tax Claims against the Debtors will aggregate approximately $60 million, and estimated Allowed Unsecured Claims against the Debtors will aggregate approximately $28 billion.(5)  These estimates are based upon a number of assumptions made by the Debtors.  There is no guarantee that the ultimate amount of each of such categories of Claims will conform to the estimates stated herein, and most of the Claims underlying such estimates are subject to challenge, including, but not limited to, an objection by the Creditors’ Committee to the Unsecured PBGC Claim and a potential objection to the SAM Distribution and the SAM Notes, as defined in Article III.C.4.b.ii.b below.(6)  The Creditors’ Committee’s position is that it can object to the SAM Notes and the Sam Distribution outside of the context of the Plan Confirmation process.  The Debtors disagree with the Creditors’ Committee’s position.

 

The Debtors estimate that at the conclusion of the Claims objection, reconciliation and resolution process, the aggregate amount of estimated Allowed Administrative Claims against the Debtors will aggregate approximately $81 million.  The estimate of Allowed Administrative Claims includes, inter alia, Claims associated with the cure of assumed executory contracts and unexpired leases,  Claims related to aircraft subject to Section 1110(a) elections and/or Section 1110(b) stipulations (but not any Claims asserted by parties seeking allowance of administrative claims under Sections 503(b) and 365(d)(10) of the Bankruptcy Code for aircraft), Claims arising from a right of reclamation, and certain Administrative Claim requests reflected on the Claims Register and docket for which the Debtors reasonably expect there to be a recovery.  The estimate of Allowed Administrative Claims does not include ordinary course obligations incurred post-petition such as trade payables, the Debtors’ key employee retention plans, or Professional fees.


(4)                                  Certain of the Debtors’ IAM and AMFA-represented employees were entitled to an effective wage increase, retroactive from July 12, 2000, to mid-March 2002 (herein, the “Retroactive Pay”).  Retroactive Pay, which was secured by the Debtors’ corporate headquarters and certain aircraft simulators, was payable in eight quarterly installments at 6% interest, compounded annually.  United made the first installment payment on December 13, 2002, and the final payment on October 15, 2004.

 

(5)                                  The estimate of Allowed Unsecured Claims includes, among other things, proposed distributions to the Debtors’ employee groups as discussed in Article III.C.4 herein.

 

(6)                                  The total estimated amount of the Allowed Unsecured Claims includes estimated Allowed Unsecured Claims for damages based on the rejection of executory contracts and unexpired leases under Section 365 of the Bankruptcy Code.  Therefore, the amount of such estimated Allowed Unsecured Claims likely will increase if the Debtors decide to reject additional executory contracts and unexpired leases, including leases of various airport facilities that the Debtors currently intend to assume.

 

10



 

G.                                     Reorganized Debtors and the Post-Confirmation Estate

 

Except as otherwise provided in the Plan, each Debtor shall continue to exist as a Reorganized Debtor after the Effective Date as a separate entity with all the powers of a corporation or a limited liability company under the laws of the respective state of incorporation or formation and without prejudice to any right to alter or terminate such existence (whether by merger, dissolution, or otherwise) under such applicable state law.  Except as otherwise provided in the Plan, on or after the Effective Date, all property in each Estate and any property acquired by each of the Debtors under the Plan shall vest in each respective Reorganized Debtor, free and clear of all Liens, Claims, charges, or other encumbrances.  On and after the Effective Date, each Reorganized Debtor may operate its business and may use, acquire or dispose of property, and compromise or settle any Claims or Interests without supervision or approval of the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan and the Confirmation Order.

 

H.                                    Restructuring Transactions Contemplated By the Plan

 

The Plan provides that on or prior to the Effective Date, or as soon as reasonably practicable thereafter, the Debtors or Reorganized Debtors, as applicable, may undertake all actions as may be necessary or appropriate to affect any transaction described in, approved by, contemplated by, or necessary to effectuate the Plan, including without limitation, the Roll-Up Transactions.  The Roll-Up Transactions include: a dissolution or winding up of the corporate existence of a Reorganized Debtor under applicable state law; or the consolidation, merger, contribution of assets, or other transaction in which a Reorganized Debtor merges with or transfers substantially all of its assets and liabilities to another Reorganized Debtor or one or more of their Affiliates, on or after the Effective Date as defined below.  The Debtors do not anticipate that such transactions would have any impact on the recoveries of Creditors under the Plan.

 

I.                                         Permanent Injunction

 

From and after the Effective Date, all Persons and Entities are permanently enjoined from commencing or continuing in any manner, any suit, action, or other proceeding, on account of or respecting any Claim, obligation, debt, right, Cause of Action, remedy, or liability discharged, exculpated, released, or to be released pursuant to Article X of the Plan.

 

J.                                        Consummation of the Plan

 

Following Confirmation of the Plan, the Plan will be consummated on the date (the “Effective Date”) selected by the Debtors after consulting with the Plan Oversight Committee, which is a Business Day after the Confirmation Date on which (a) no stay of the Confirmation Order is in effect, and (b) all conditions to Consummation of the Plan have been satisfied or waived.  Distributions to be made under the Plan will be made on or as soon as reasonably practicable after the Effective Date.

 

K.                                    Liquidation and Valuation Analyses

 

The Debtors believe that the Plan will produce a greater recovery for Holders of Allowed Claims than would be achieved in a Chapter 7 liquidation because, among other things, of the administrative and postpetition claims generated by a conversion to a Chapter 7 case, plus the administrative costs of liquidation and associated delays in connection with a Chapter 7 liquidation that likely would diminish the assets available for distribution to such Holders.  Also, the value of the equity in the Reorganized Debtors upon the Debtors’ exit from bankruptcy as a reorganized going concern, as reflected in the Plan, is projected to be greater than the recovery realized from a liquidation of the Debtors’ assets.  In fact, the

 

11



 

projected hypothetical liquidation of the Debtors results in a recovery for Holders of Unsecured Claims far less than that proposed under the Plan, if any at all.  Rothschild, Inc., the Debtors’ financial advisors (“Rothschild”), and Huron Consulting Group (“Huron”), the Debtors’ restructuring consultants, have prepared, respectively, a Valuation Analysis and a Liquidation Analysis on behalf of the Debtors to assist Holders of Claims in determining whether to accept or reject the Plan.  These Liquidation and Valuation Analyses together compare the proceeds to be realized if the Debtors were to be liquidated in a case under Chapter 7 of the Bankruptcy Code with their recovery under the Plan as currently proposed.  The analyses are based upon the value of the Debtors’ assets and liabilities as of a date certain, and incorporate estimates and assumptions developed by the Debtors, including a hypothetical conversion to a Chapter 7 liquidation as of a date certain, that are subject to potentially material changes with respect to economic and business conditions and legal rulings.  Therefore, the actual liquidation value of the Debtors could vary materially from the estimates provided therein.

 

L.                                      Certain Factors to Be Considered Prior to Voting

 

There are a variety of factors that all Holders of Claims entitled to vote on the Plan should consider prior to accepting or rejecting the Plan.  Some of these factors, which are described in more detail in ARTICLE VI hereof, are as follows and may impact recoveries under the Plan:

 

1.     The financial information contained in this Disclosure Statement has not been audited (except for the financial statements included in the Plan Supplement that indicate as such) and is based on an analysis of data available at the time of the preparation of the Plan and Disclosure Statement.

 

2.     ARTICLE VII hereof describes certain significant federal tax consequences of the transactions contemplated by the Plan that affect the Debtors and others.  Such consequences may include: (i) the realization of cancellation of indebtedness income; (ii) the reduction of net operating loss carryforwards and unrealized built-in losses; and (iii) the recognition of taxable income by the Holders of Claims and Interests. The Valuation Analysis set forth as Appendix C hereto and in the Plan Supplement as Exhibit 29 concludes that a material portion of the Debtors’ valuation is derived from the Debtors’ net operating losses.  ARTICLE VII discusses the limitations that may apply to the Debtors’ usage of those net operating losses.  ARTICLE VII also discusses certain restrictions under the Plan and the UAL restated certificate of incorporation on transfer of New UAL Common Stock to preserve the Debtors’ net operating losses.  Holders of Claims and Interests are urged to consult with their own tax advisors regarding the federal, state, local, and foreign tax consequences of the Plan.

 

3.     Although the Debtors believe that the Plan complies with all applicable provisions of the Bankruptcy Code, the Debtors cannot assure such compliance or that the Bankruptcy Court will confirm the Plan.

 

4.     The Debtors may be required to request Confirmation of the Plan without the acceptance of all Impaired Classes entitled to vote, in accordance with Section 1129(b) of the Bankruptcy Code.

 

5.     Any delays of either Confirmation or the Effective Date of the Plan could result in, among other things, increased Claims of Professionals.

 

6.     The Plan contemplates substantive consolidation of all Debtors other than UAL into United.  The Debtors can provide no assurance, however, that the Bankruptcy Court will order substantive consolidation of any or all of the United Debtors.  The Debtors reserve the right, however, to request Confirmation and Consummation of the Plan, even if the Court rejects substantive consolidation of the United Debtors, or approves substantive consolidation of less than all of the United Debtors. Failure to substantively consolidate the United Debtors into one entity will not affect the distribution of property

 

12



 

currently proposed in the Plan.  In the event that one or more of the United Debtors are not substantively consolidated, such failure will not affect the validity of the vote taken by Impaired Classes to accept or reject the Plan or require any sort of re-vote or re-solicitation of the Impaired Classes.

 

The occurrence or non-occurrence of any or all such contingencies, which could affect distributions available to Holders of Allowed Claims under the Plan, will not necessarily affect the validity of the vote taken by the Impaired Classes to accept or reject the Plan or necessarily require a re-vote by the Impaired Classes.

 

M.                                 Voting and Confirmation

 

Each Holder of a Claim in the following Classes is entitled to vote either to accept or reject the Plan.

 

Unsecured Convenience Class Claims

 

1D, 2D-1, 3D, 4D, 5D, 6D, 7D, 8D, 9D, 10D, 11D, 12D, 13D, 14D, 15D, 16D, 17D, 18D, 19D, 20D, 21D, 22D, 23D, 24D, 25D, 26D, 27D, and 28D

 

 

 

Unsecured Retiree Convenience Class Claims

 

2D-2

 

 

 

Unsecured Retained Aircraft Claims

 

1E-1, 2E-1 and 3E-1

 

 

 

Unsecured Rejected Aircraft Claims

 

1E-2, 2E-2 and 3E-2

 

 

 

Unsecured PBGC Claim

 

2E-3

 

 

 

Unsecured Chicago Municipal Bond Claim

 

2E-4

 

 

 

Unsecured Public Debt Aircraft Claims

 

2E-5

 

 

 

Other Unsecured Claims

 

1E-3, 2E-6, 3E-3, 4E, 5E, 6E, 7E, 8E, 9E, 10E, 11E, 12E, 13E, 14E, 15E, 16E, 17E, 18E, 19E, 20E, 21E, 22E, 23E, 24E, 25E, 26E, 27E, and 28E

 

The Classes entitled to vote shall have accepted the Plan if (i) the Holders of at least two-thirds in dollar amount of the Allowed Claims actually voting in each such Class, as applicable, have voted to accept the Plan and (ii) the Holders of more than one-half in number of the Allowed Claims actually voting in each such Class, as applicable, have voted to accept the Plan.  Assuming the requisite acceptances are obtained, the Debtors intend to seek Confirmation of the Plan at the Confirmation Hearing scheduled to commence on January 18, 2006 at 10:30 a.m. prevailing central time, before the Bankruptcy Court. Section 1129(a)(10) of the Bankruptcy Code shall be satisfied for purposes of Confirmation by acceptance of the Plan by at least one Class of Claims that is Impaired under the Plan.  Notwithstanding the foregoing, the Debtors will seek Confirmation of the Plan under Section 1129(b) of the Bankruptcy Code with respect to any Impaired Classes presumed to reject the Plan, and reserve the right to do so with respect to any other rejecting Class or to modify the Plan.

 

The Bankruptcy Court has established October 20, 2005 (the “Record Date”) as the date for determining which Holders of Claims and Interests are eligible to vote on the Plan.  Ballots, along with a CD-Rom containing the Disclosure Statement, the Plan, and the Solicitation Procedures Order, will be mailed to all registered Holders of Claims or Interests as of the Record Date that are entitled to vote to accept or reject the Plan.  An appropriate return envelope will be included with your Ballot, if necessary.  Beneficial Holders of Claims or Interests who receive a return envelope addressed to their bank, brokerage firm, or other nominee (or its agent) (each, a “Nominee”) should allow sufficient time for their

 

13



 

votes to be received by the Nominee and processed on a Master Ballot before the Voting Deadline, as defined below.

 

The Debtors have engaged Poorman-Douglas Corporation as their Solicitation Agent to assist in the voting process.  The Solicitation Agent will answer questions regarding the procedures and requirements for voting to accept or reject the Plan and for objecting to the Plan, provide additional copies of all materials, and oversee the voting tabulation.  The Solicitation Agent will also process and tabulate ballots for each Class entitled to vote to accept or reject the Plan.  The Solicitation Agent is located at the following addresses:

 

If by U.S. Mail:

Poorman-Douglas Corporation
UAL Balloting
P.O. Box 4349
Portland, Oregon 97208-4349

 

If by courier/hand delivery:

Poorman-Douglas Corporation
UAL Balloting
10300 SW Allen Boulevard
Beaverton, Oregon 97005

 

If you have any questions on voting procedures, please call the Solicitation Agent at the following toll free number: (877) 752-5527.

 

TO BE COUNTED, YOUR BALLOT (OR MASTER BALLOT OF YOUR NOMINEE HOLDER, IF APPLICABLE) INDICATING ACCEPTANCE OR REJECTION OF THE PLAN MUST BE RECEIVED BY THE SOLICITATION AGENT NO LATER THAN 4:30 P.M., PREVAILING PACIFIC TIME, ON DECEMBER 19, 2005 (THE “VOTING DEADLINE”). ANY BALLOT RECEIVED AFTER THE VOTING DEADLINE SHALL NOT BE COUNTED.

 

THE DEBTORS BELIEVE THAT THE PLAN IS IN THE BEST INTEREST OF ALL OF THEIR CREDITORS.  THE DEBTORS RECOMMEND THAT ALL HOLDERS OF CLAIMS AGAINST, AND INTERESTS IN, THE DEBTORS WHOSE VOTES ARE BEING SOLICITED SUBMIT BALLOTS TO ACCEPT THE PLAN.

 

N.                                    Ongoing Negotiations with Committee

 

In their ongoing efforts to reach a consensual Plan, the Debtors and the Creditors’ Committee continue to discuss certain terms of such Plan and related documents.  The areas under discussion include:

 

                  The Debtors’ proposed charter, bylaws and other corporate documents, regarding shareholder protections, board governance, additional equity issuances and other matters.

 

                  The composition of the Reorganized UAL Board and its committees, including the terms and identity of directors, and other related matters.

 

                  The trigger, grant, vesting and certain other terms of the Management Equity Incentive Program and the Director Equity Incentive Program, including the overall percentages of equity to be allocated under such Plans.

 

                  The Creditors’ Committee has requested that certain additional recoveries be assigned to the Other Unsecured Claim Classes (Classes 1E-3, 2E-6, 3E-3, and 4E through 28E), including, without limitation, (i) the remaining unassigned portion of the 45% of the PBGC Claim, (ii) the SAM Distribution and SAM Notes, and (iii) repurchased Unsecured Debentures currently held by United.

 

14



 

                  Mechanisms for the sale of UAL Common Stock and distributions of net Cash proceeds to Holders of Unsecured Convenience Class Claims and Unsecured Retiree Convenience Class Claims, as well as mechanisms for satisfying the Debtors’ withholding tax obligations.

 

                  Scope and duration of the Plan Oversight Committee.

 

                  Trading restrictions on the New UAL Plan Securities.

 

Certain of the Plan Supplement documents may be modified prior to Confirmation as a result of these discussions, and certain additional documents may be prepared to reflect any potential resolutions.  If these and other Confirmation issues are not resolved to the Creditors’ Committee’s satisfaction, all parties reserve their rights, including the right to address them at the Confirmation Hearing.

 

ARTICLE II.
GENERAL INFORMATION

 

UAL Corporation, UAL Loyalty Services, LLC, Ameniti Travel Clubs, Inc., Mileage Plus Holdings, Inc., Mileage Plus Marketing, Inc., MyPoints.com, Inc., Cybergold, Inc., itarget.com, inc., MyPoints Offline Services, Inc., UAL Company Services, Inc., Four Star Leasing, Inc., Air Wis Services, Inc., Air Wisconsin, Inc., Domicile Management Services, Inc., UAL Benefits Management, Inc., United BizJet Holdings, Inc., BizJet Charter, Inc., BizJet Fractional, Inc., BizJet Services, Inc., United Air Lines, Inc., Kion Leasing, Inc., Premier Meeting and Travel Services, Inc., United Aviation Fuels Corporation, United Cogen, Inc., Mileage Plus, Inc., United GHS, Inc., United Worldwide Corporation and United Vacations, Inc. (collectively, the “Debtors”) submit this Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code, for use in the solicitation of votes on the Plan dated October 20, 2005 which is attached as Appendix A hereto.

 

This Disclosure Statement sets forth certain information regarding the Debtors’ prepetition history, significant events that have occurred during the Chapter 11 Cases, and the anticipated reorganization and post-reorganization operations and financing of the Reorganized Debtors.  This Disclosure Statement also describes the terms and provisions of the Plan, including certain alternatives to the Plan, certain effects of Confirmation of the Plan, certain risk factors associated with securities to be issued under the Plan, and the manner in which distributions will be made under the Plan.  In addition, this Disclosure Statement discusses the Confirmation process and the Voting Procedures that Holders of Claims must follow for their votes to be counted.

 

FOR A DESCRIPTION OF THE PLAN AND VARIOUS FACTORS TO BE CONSIDERED PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST, AND INTERESTS IN, THE DEBTORS, PLEASE SEE ARTICLE IV AND ARTICLE VI.

 

THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE PLAN, CERTAIN STATUTORY PROVISIONS, CERTAIN DOCUMENTS RELATED TO THE PLAN, CERTAIN EVENTS IN THE DEBTORS’ CHAPTER 11 CASES, AND CERTAIN FINANCIAL INFORMATION.  ALTHOUGH THE DEBTORS BELIEVE THAT SUCH SUMMARIES ARE FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS.  FACTUAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN PROVIDED BY THE DEBTORS’ MANAGEMENT EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED.  THE DEBTORS DO NOT WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN, INCLUDING THE FINANCIAL INFORMATION, IS WITHOUT ANY MATERIAL INACCURACY OR OMISSION.

 

15



 

A.                                   Description of UAL’s Business

 

1.     Corporate Structure

 

As mentioned above in ARTICLE I, the Debtors consist of UAL, a Delaware corporation, United, a Delaware corporation, and the 26 other direct and indirect wholly-owned subsidiaries named above.  Five other direct and indirect wholly-owned subsidiaries were not included in the Debtors’ Chapter 11 Cases: United Air Lines Ventures, Inc.; Four Star Insurance Co. Ltd.; ULS Ventures, Inc.; Kion de Mexico, S.A. de C.V.; and Covia LLC.  Each of these non-filing entities is continuing normal business operations.  The Debtors also have minority equity interests in a number of non-wholly owned subsidiaries, none of which are included in the Debtors’ Chapter 11 petitions for relief.  Included in the Plan Supplement as Exhibit 30 are three organizational charts of UAL and its subsidiaries.  The first chart shows the Debtors’ corporate structure as of the Petition Date.  The second chart shows the Debtors’ corporate structure as of the date that this Disclosure Statement is filed.  The third chart shows the Debtors’ proposed post-Effective Date corporate structure.

 

2.     The Debtors’ Business

 

a.     Introduction

 

United is one of the largest scheduled passenger airlines in the world.  In 2004, United flew approximately 115 billion mainline revenue passenger miles and carried approximately 71 million passengers on more than 1,500 daily departures to more than 120 destinations in 26 countries and two U.S. territories.  Operating revenues attributed to the North American segment were $10.5 billion in 2004, $10.0 billion in 2003 and $10.4 billion in 2002.  Operating revenues attributed to international segments were $5.1 billion in 2004, $4.2 billion in 2003, and $4.7 billion in 2002.  Through the first six months of 2005, operating revenues were $8.3 billion.  Operating revenues for the first six months of 2005 attributable to the North American segment were $5.1 billion.  $2.8 billion is attributable to international segments.(7)  In 2004, United added a new low-fare brand, called Ted, designed to serve select leisure markets to more effectively compete with low-fare carriers.

 

The Debtors have entered into a number of bilateral and multilateral alliances with other airlines to provide their customers more choices and to participate in markets worldwide that the Debtors do not serve directly.  These collaborative marketing arrangements typically include one or more of the following features: joint frequent flyer participation; code sharing of flight operations (whereby one carrier’s flights can be marketed under the two-letter airline designator code of another carrier); coordination of reservations, baggage handling, and flight schedules; and other resource-sharing activities.

 

The most significant of the Debtors’ alliances is Star Alliance.  Star Alliance was co-founded in 1997 by the Debtors as the first truly global airline alliance to offer customers global reach and a smooth travel experience. The members are Air Canada, Air New Zealand, ANA, Asiana Airlines, Austrian, bmi, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Singapore Airlines, Spanair, TAP Portugal, Thai Airways International, United, US Airways and VARIG Brazilian Airlines. As of September 1, 2005, the member carriers offer more than 15,000 daily flights to 795 destinations in 139 countries.

 

Recently, Star Alliance was named the world’s best airline alliance by independent research conducted by SkyTrax. This comes as part of the 2005 World Airline Awards and is also the second time

 


(7)           The remaining $0.4 billion is attributable to the UAL Loyalty Services segment, as described below.

 

16



 

in three years that the alliance has been given this honor.   Winning this award strengthens Star Alliance’s commitment in further improving the travel experience for customers.  Future growth for Star Alliance includes the expansion of the network to approximately 846 destinations in 151 countries, through the future integration of South African Airways and SWISS in 2006.   Lastly, the Star Alliance continues to extend its product and customer advantages through initiatives such as interline electronic ticketing links between all member carriers and co-location projects at key airports such as the new Bangkok airport, London – Heathrow, Paris – Charles De Gaulle, and Tokyo – Narita.

 

Within North America, United also offers a network of connecting flights through its contractual arrangements with regional U.S. carriers operating under the brand name “United Express.”  United Express offers one-stop check-in, advance seat assignments, and miles flown on United Express receive full credit in the “Mileage Plus” frequent flyer program.  United Express has approximately 2,000 scheduled daily departures to over 150 destinations.  Together, United and United Express serve more than 200 worldwide destinations and offer more than 3,400 daily departures.  In 2004, United added two additional United Express partners, Chautauqua Airlines and Shuttle America, to United’s regional carrier network which includes Skywest Airlines, Air Wisconsin Airlines Corporation (“AWAC”), Trans States Airlines (“Trans State”) and Mesa Airlines (“Mesa”).  In August 2004, United terminated its partnership with Atlantic Coast Airlines (“ACA”), and in 2005 United will be adding aircraft provided by GoJet, a sister company to Trans States.  In 2006 United will terminate its flying partnership with AWAC.  In addition, United recently announced an agreement with Colgan Air to start providing United Express service.

 

In February 2004, United launched the first phase of Ted in Denver to eight destinations.  Today, Ted provides service from all of United’s hubs to 16 destinations in the U.S. and 2 in Mexico.  Ted operates over 200 daily departures with a fleet of 47 Airbus A320 aircraft.  On March 3, 2005, United announced that it plans to expand its Ted fleet of aircraft from 47 to 56 aircraft by converting nine mainline Airbus A320 aircraft to the Ted configuration.  The additional Ted aircraft will bring Ted service to new destinations of West Palm Beach, Florida and Cancun, Mexico and will provide additional departures out of Ted’s hubs in Denver, Washington Dulles, and Chicago to markets in Florida, Mexico, and the Caribbean.

 

UAL reports its results through five reporting segments:  North America, the Pacific, the Atlantic, Latin America, and UAL Loyalty Services.  United’s network provides comprehensive transportation service within its North American segment and to international destinations within its Pacific, Atlantic, and Latin American segments.  Each of these reporting segments is described in further detail below.

 

North America. Today, United serves approximately 86 destinations throughout North America and operates hubs in Chicago, Denver, Los Angeles, San Francisco, and Washington, D.C.  United’s North American operations, including United Express, accounted for 64% of the Debtors’ operating revenues in 2004.

 

Pacific.  Today, United serves the Pacific from its U.S. gateway cities of Chicago, Honolulu, Los Angeles, New York, San Francisco, and Seattle.  United provides nonstop service to Beijing, Hong Kong,  Nagoya (new service started March 26th), Osaka, Shanghai, Sydney, and Tokyo.  United also provides direct service to Bangkok, Ho Chi Minh City, Melbourne (Australia), Seoul (resumes as nonstop service in April 2006), Singapore, and Taipei. In 2004, United’s Pacific operations accounted for 16% of the Debtors’ operating revenues.

 

Atlantic.  Washington, D.C. is United’s primary gateway to Europe, serving Amsterdam, Brussels, Frankfurt, London, Munich, Zurich, and Paris.  Today, Chicago is United’s secondary gateway to Europe, with nonstop service to and from Amsterdam (seasonal), Frankfurt, London, Munich (new

 

17



 

service started June 7th), and Paris.  United also provides nonstop service between San Francisco and each of Paris (until October 29, 2005), London, and Frankfurt, and between London and each of Los Angeles and New York.  In addition, United provides seasonal service between Chicago and Bermuda.  In 2004, United’s Atlantic operations accounted for 12% of the Debtors’ operating revenues.

 

Latin America.  United serves Latin America from its five hubs and provides nonstop service to Aruba, Buenos Aires, Cancun, Cozumel, Guatemala City, Mexico City, Montego Bay, Puerto Vallarta, Punta Cana, , San Jose Del Cabo, San Juan (Puerto Rico), San Salvador, Sao Paulo, St. Maarten, St. Thomas (U.S. Virgin Islands), and Zihuatanejo/Ixtapa.  United also provides direct service to San Jose (Costa Rica) via Guatemala City – through December 14, 2005), Rio de Janeiro (via Sao Paulo) and Montevideo (via Buenos Aires).  Beginning in December 2006, United will start service to Liberia (Costa Rica) and Nassau (Bahamas) and on February 5, 2006 to St. Lucia.  In 2004, United’s Latin American operations accounted for almost 3% of the Debtors’ operating revenues.

 

UAL Loyalty Services.  For financial reporting purposes, the “UAL Loyalty Services” segment relates to the Debtors’ non-core marketing businesses (and relates to operations provided by UAL Loyalty Services, LLC, MyPoints.com, Inc., and Ameniti Travel Clubs, Inc.).  This segment operates substantially all United-branded travel distribution and customer loyalty e-commerce activities, such as united.com.  In addition, this segment includes certain aspects of the Mileage Plus frequent flyer program, including sales of miles, member relationships, communications, and account management.  This segment also includes certain other United-branded customer programs as well as the MyPoints.com online loyalty program, under which registered consumers earn points for goods and services purchased from participating vendors.

 

b.     Operations

 

The air travel business is subject to seasonal fluctuations.  The Debtors’ operations can be adversely impacted by severe weather.  In addition, the Debtors’ first- and fourth-quarter results normally reflect reduced travel demand.  Historically, operating results are better in the second and third quarters.  From 2001 to 2003, however, the typical seasonal relationships were distorted by the events of September 11, 2001, the fear of terrorism, the Iraq war, the outbreak of Severe Acute Respiratory Syndrome, fluctuations in fuel prices, and general economic conditions.  The Debtors experienced a more typical seasonal pattern of financial results in 2004 and to date in 2005.

 

In addition to the Debtors’ global passenger services, there are several other important components of the Debtors’ operations.

 

United Express.  The Debtors’ “hub and spoke” business model calls for the transportation of large numbers of passengers on generally long-haul flights using larger-capacity aircraft, but it is not profitable for the Debtors’ mainline fleet to fly everywhere.  As a result, the Debtors’ mainline flights are supplemented by flights transporting small numbers of passengers on generally short-haul flights using small aircraft.  Generally, these “feeder” flights are outsourced to regional air carriers.  These regional carriers fly regional jet and turbo-prop aircraft owned by the regional carrier but operating under United’s reservation code and under the brand name “United Express.”  Passengers flying in United Express aircraft make reservations and purchase tickets through United (with all revenue accruing to United), and United subsequently pays the regional carrier a fee.  The fee has two components: reimbursement of the carrier’s costs per flight between specified city pairs; and a variable portion based on the carriers’ monthly operating performance against certain objective standards.

 

United Cargo.  United Cargo offers both domestic and international shipping through a variety of services including Small Package Delivery, T.D. Guaranteed®, First Freight, International Freight, and

 

18



 

Global SP.  Freight accounts for approximately 77% of United Cargo’s shipments, with mail accounting for the remaining 23%.  During 2004, United Cargo accounted for 4% of the Debtors’ revenues by generating over $704 million in freight and mail revenue, a 12% increase versus 2003.  Since United Cargo is not a separate reporting segment, cargo revenues are allocated to the North America, Pacific, Atlantic and Latin America reporting segments of the Debtors.  The majority of United Cargo revenues are earned in the international segments of the Debtors’ operations.

 

Fuel.  Fuel is United’s second largest cost behind labor.  United’s fuel costs and consumption for the years 2004, 2003, and 2002 were as follows:

 

 

 

2004

 

2003

 

2002

 

Gallons consumed (in millions)

 

2,349

 

2,202

 

2,458

 

Average price per gallon, including tax and hedge impact

 

$

1.25

 

$

0.94

 

$

0.78

 

Cost (in millions)

 

$

2,943

 

$

2,072

 

$

1,921

 

 

The price and availability of jet fuel significantly affects the Debtors’ operations.  In addition to being at high levels, oil prices continue to see large swings in both intra-day trading and over time.  This phenomenon is well-illustrated by the fact that oil prices rose to historic highs in mid-October 2004, fell by several dollars during December 2004, and then steadily built up again to hit new record highs in August 2005.  The prices of crude oil and jet fuel recently reached all-time highs.  As of August 31, 2005, for example, the prices were $68.94 per barrel of crude oil and $2.323 per gallon of jet fuel.  Moreover, every $1.00 increase in the price of a barrel of oil increases the Debtors’ annual fuel expenses by approximately $60 million.  The lack of useable excess supply to meet demand, coupled with speculation by investors in the commodities futures markets, have been key components of this volatility.

 

A significant rise in crude oil prices was the primary reason that the Debtors’ fuel expense increased $871 million in 2004 over the Debtors’ 2003 fuel costs and that operating expenses attributable to aircraft fuel costs were 36 percent higher in the first half of 2005 than in the first half of 2004.  Due to the highly competitive nature of the airline industry, the Debtors’ ability to pass on increased fuel costs to their customers in the form of higher ticket prices has been limited.

 

To ensure adequate supplies of fuel and to provide a measure of control over fuel costs, the Debtors arrange to have fuel shipped on major pipelines and store fuel close to their major hub locations.  Although the Debtors do not currently anticipate a significant reduction in the availability of jet fuel, a number of factors make predicting fuel prices and fuel availability difficult, including increased world demand due to the improving global economy, geopolitical uncertainties in oil-producing nations, threats of terrorism directed at oil supply infrastructure, and changes in relative demand for other petroleum products that may impact the quantity and price of jet fuel produced from period to period.

 

On September 19, 2003, the Bankruptcy Court approved a Jet Fuel Supply Agreement (the “Fuel Supply Agreement”) with Morgan Stanley Capital Group Inc. (“Morgan Stanley”).  Under the Fuel Supply Agreement, Morgan Stanley will supply jet fuel to the Debtors and maintain minimum levels of fuel inventory for the Debtors at various airports for a term of three years, with a two-year renewal period.  In connection with this arrangement, Morgan Stanley has subleased certain of the Debtors’ terminaling and throughput agreements for storage of jet fuel at the airports.  The Debtors have also assigned to Morgan Stanley certain third-party sale agreements, bulk supply agreements, and local supply agreements.  In addition, the Debtors transferred their historic capacity on common carrier pipelines to Morgan Stanley pursuant to an agency agreement.  This arrangement allows the Debtors to meet their jet fuel needs, while lowering their working capital requirements for fuel.

 

19



 

During the second quarter of 2004, the Debtors began to implement a strategy to hedge a portion of their price risk related to projected jet fuel requirements, primarily using collar options which involved the purchase of fuel call options with the simultaneous sale of fuel put options with identical expiration dates.  As of June 30, 2005, the Debtors had hedged approximately 8% of their remaining 2005 projected fuel requirements at an average price of $1.24 per gallon, excluding taxes.  The Debtors currently have hedges in place through December 31, 2005.  The fair market value of the Debtors’ designated hedge position was approximately $21 million as of June 30, 2005 and is included in other comprehensive income.  The Debtors expect that this entire amount, to the extent it remains effective, will be recognized into earnings within the next six months as a reduction to fuel expense.  The Debtors plan to continue to hedge future fuel purchases as circumstances and market conditions allow.

 

Insurance.  United carries hull and liability insurance of a type customary in the air transportation industry, in amounts deemed adequate, covering passenger liability, public liability, and damage to aircraft and other physical property.  Since the September 11, 2001 terrorist attacks, United’s premiums have increased significantly. Additionally, after September 11, 2001, commercial insurers cancelled United’s liability insurance for losses resulting from war and associated perils (terrorism, sabotage, hijacking, and other similar events), but United obtained replacement coverage through the federal government.

 

The Homeland Security Act, which became effective in February 2003, mandated the Federal Aviation Administration (“FAA”) to provide third-party, passenger and hull war-risk insurance to commercial air carriers through August 31, 2003, and permitted such coverage to be extended to December 31, 2004.  The Consolidated Appropriations Act 2005, signed into law on December 8, 2004, extended this war risk insurance to commercial air carriers through August 31, 2005, which was subsequently extended until December 31, 2005.  Should the government discontinue this coverage, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all.

 

United also maintains other types of insurance such as property, directors and officers, cargo, automobile, and the like, with limits and deductibles that are standard within the industry.  These premiums also have risen substantially since September 11, 2001.

 

c.     Competition

 

The domestic airline industry is highly competitive and volatile.  In domestic markets, new and existing carriers deemed fit by the Department of Transportation (the “DOT”) are free to initiate service between any two points in the U.S.  United’s domestic competitors are primarily the other U.S. airlines, a number of which are low-fare carriers, commonly known as LCCs, which have significantly lower cost structures than United’s, and, to a lesser extent, other forms of transportation.

 

United faces significantly more domestic competition now than it did in the past.  This increase is largely attributable to the growth of LCCs, whose share of domestic passengers is now over 30 percent.  Accordingly, in excess of 75 percent of United’s domestic revenue is now exposed to LCCs, which is approximately double the percentage from a decade ago.  United anticipates that competition from LCCs and other U.S. airlines will continue to intensify in the future.

 

Domestic pricing decisions are largely affected by the need to meet competition from other U.S. airlines.  Fare discounting by competitors historically has had a negative effect on United’s financial results because United generally finds it necessary to match competitors’ fares to maintain passenger traffic.  Periodic attempts by United and other network airlines to raise fares have often failed due to lack of competitive matching by LCCs.  Because of vastly different cost structures, low-ticket prices that

 

20



 

generate a profit for an LCC usually have a negative effect on United’s financial results.  The introduction of Ted by United in early 2004 is designed to provide United with a lower-cost operation in selected leisure markets, under which United can be more economically competitive with its LCC rivals.

 

In its international networks, United competes not only with U.S. airlines but also with foreign carriers.  United’s competition on specified international routes is subject to varying degrees of governmental regulations (see “Industry Regulation” below).  As the U.S. is the largest market for air travel worldwide, United’s ability to generate U.S. originating traffic from its integrated domestic route systems provides United with an advantage over non-U.S. carriers.  Foreign carriers are prohibited by U.S. law from carrying local passengers between two points in the U.S., and United experiences comparable restrictions in foreign countries.  In addition, U.S. carriers are often constrained from carrying passengers to points beyond designated international gateway cities due to limitations in air service agreements or restrictions imposed unilaterally by foreign governments.  To compensate for these structural limitations, U.S. and foreign carriers have entered into alliances and marketing arrangements that allow the carriers to feed traffic to each other’s flights.

 

d.     Industry Regulation

 

Domestic Regulation.  All carriers engaged in air transportation in the U.S. are subject to regulation by the DOT.  Among its responsibilities, the DOT has authority to issue certificates of public convenience and necessity for domestic air transportation (and no air carrier, unless exempted, may provide air transportation without a DOT certificate of public convenience and necessity), grant international route authorities, approve international code share agreements, regulate methods of competition, and enforce certain consumer protection regulations, such as those dealing with advertising, denied boarding compensation and baggage liability.  United operates under a certificate of public convenience and necessity issued by the DOT.  This certificate may be altered, amended, modified, or suspended by the DOT if public convenience and necessity so require, or may be revoked for intentional failure to comply with the terms and conditions of the certificate.

 

Airlines are also regulated by the FAA, a division of the DOT, primarily in the areas of flight operations, maintenance, and other safety and technical matters.  The FAA has authority to issue air carrier operating certificates and aircraft airworthiness certificates, prescribe maintenance procedures, and regulate pilot and other employee training, among other responsibilities.  From time to time, the FAA issues rules that require air carriers to take certain actions, such as the inspection or modification of aircraft and other equipment, that may cause United to incur substantial, unplanned expenses.  United is also subject to inquiries by these and other U.S. and international regulatory bodies.

 

The airline industry is also subject to various other federal, state, and local laws and regulations.  The Department of Homeland Security has jurisdiction over virtually all aspects of civil aviation security.  See “Recent Domestic Legislation” below.  The Department of Justice has jurisdiction over certain airline competition matters.  The U.S. Postal Service has authority over certain aspects of the transportation of mail.  Labor relations in the airline industry are generally governed by the Railway Labor Act.

 

In addition, access to landing and take-off rights, or “slots,” at three major U.S. airports and certain foreign airports served by United are subject to government regulation.  The FAA has designated John F. Kennedy International Airport (“JFK”) and LaGuardia Airport (“La Guardia”) in New York, and Ronald Reagan Washington National Airport in Washington, D.C., as “high density traffic airports” and has limited the number of departure and arrival slots at those airports.  Slot restrictions at O’Hare International Airport in Chicago (“O’Hare”) were eliminated in July 2002 and are slated to be eliminated at JFK and LaGuardia by 2007.  From time to time, the elimination of slot restrictions has impacted United’s operational performance and reliability.  To address congestion concerns and delays at O’Hare,

 

21



 

United and American Airlines reached an agreement with the FAA in January 2004 to reduce each of their flight schedules at O’Hare.  Furthermore, United reduced its schedule at O’Hare beginning February 2004 between the peak hours of 1:00 p.m. and 8:00 p.m.  In addition, effective March 2004, United again depeaked its flight schedule by 5%.  Subsequently, United, American Airlines, and certain other carriers complied with the FAA’s request to further depeak afternoon operations at O’Hare resulting in a slight reduction in operations overall beginning in November 2004.  On July 18, 2005 the FAA issued an order to show cause why the current operating restrictions at O’Hare should not remain in place through April, 2006.  The FAA has initiated a formal rulemaking process to address O’Hare congestion after April, 2006.

 

Recent Domestic Legislation.  Since September 11, 2001, aviation security has been and continues to be a subject of frequent legislative action, requiring changes to United’s security processes and increasing the economic cost of security procedures at United.  The Aviation and Transportation Security Act (the “Aviation Security Act”), enacted in November 2001, has had wide-ranging effects on United’s operations.  The Aviation Security Act makes the federal government responsible for virtually all aspects of civil aviation security, creating a new Transportation Security Administration (“TSA”), which is a part of the Department of Homeland Security pursuant to the Homeland Security Act of 2002.  Under the Aviation Security Act, substantially all security screeners at airports are now federal employees and significant other aspects of airline and airport security are now overseen by the TSA.  Pursuant to the Aviation Security Act, funding for airline and airport security is provided in part by a passenger security fee of $2.50 per flight segment (capped at $10.00 per round trip), which is collected by the air carriers and remitted to the government.  In addition, air carriers are required to submit to the government an additional security fee equal to the amount the air carrier paid for screening passengers and property in 2000.

 

On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act was signed into law.  The legislation included approximately $3 billion of direct compensation for U.S. airlines.  Of the total, $2.4 billion compensates air carriers for lost revenues and costs related to aviation security.  Additionally, passenger and air carrier security fees were suspended from June 1 through September 30, 2003, and government-provided war risk insurance was extended for one year to August 2004.  The Consolidated Appropriations Act 2005, signed into law on December 8, 2004, extended this war risk insurance to commercial air carriers through August 31, 2005, which was subsequently extended until December 31, 2005.  It is expected that aviation security laws and processes will continue to be under review and subject to change by the federal government in the future.

 

International Regulation.  International air transportation is subject to extensive government regulation.  In connection with United’s international services, it is regulated by both the U.S. government and the governments of the foreign countries it serves.  In addition, the availability of international routes to U.S. carriers is regulated by treaties and related aviation agreements between the U.S. and foreign governments, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments.

 

Historically, access to foreign markets has been tightly controlled through bilateral agreements between the U.S. and the relevant foreign country.  These agreements regulate the number of markets served, the number of carriers allowed to serve the market, and the frequency of their flights.  Since the early 1990s, the U.S. has pursued a policy of “Open Skies” (meaning all carriers have access to the destination), under which the U.S. government has negotiated a number of bilateral agreements allowing unrestricted access to foreign markets.

 

Further, United’s ability to serve some countries and expand into certain others is limited by the absence altogether of aviation agreements between the U.S. and the relevant governments.  Shifts in U.S.

 

22



 

or foreign government aviation policies can lead to the alteration or termination of air service agreements between the U.S. and other countries.  Depending on the nature of the change, the value of United’s route authorities may be enhanced or diminished.

 

The U.S. and the European Commission are continuing their attempts to negotiate a single air services agreement to replace the existing bilateral agreements between the U.S. and the European Union (“EU”) member states.  The European Commission has called upon the EU member states to renounce the air services agreements with the U.S. because they allegedly do not comply with EU law.  To date, no EU member state has indicated a willingness to renounce its air services agreement with the U.S.  If EU member states do renounce such agreements, the status of United’s existing antitrust immunity with its European partners would be in doubt because the immunity is based upon an open skies agreement between the U.S. and the applicable EU member states.

 

In late 2004, the European Commission commenced a consultation process that seeks stakeholder input on the introduction of market-based mechanisms for slot allocation at EU airports.  The Commission proposes to introduce a highly regulated form of secondary slot trading.  The availability of such slots is not assured and the inability of United to obtain or retain needed slots could inhibit its efforts to compete in certain international markets.

 

Environmental Regulations. The airline industry is subject to increasingly stringent federal, state, local, and foreign environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils, and waste materials. The airline industry is also subject to other environmental laws and regulations, including those that require the Debtors to remediate soil or groundwater to meet certain objectives. It is the Debtors’ policy to comply with all environmental laws and regulations, which often require expenditures. Under the federal Comprehensive Environmental Response, Compensation and Liability Act (sometimes commonly known as “Superfund”) and similar environmental cleanup laws, waste generators, and owners or facility operators, including the Debtors, can be subject to liability for investigation and remediation costs at facilities that have been identified as requiring response actions. The Debtors also conduct voluntary remediation actions. Such cleanup obligations arise from, among other circumstances, the operation of fueling facilities and primarily involve airport sites.

 

Two other regulatory programs that will require an expenditure of capital costs in the next few years are: (1) petroleum storage upgrades required to comply with recent changes to the Spill Prevention Countermeasures and Control law; and (2) new California regulations and/or an industry-wide voluntary agreement, reducing air emissions from ground support equipment utilized in California.

 

The Debtors are subject to known and potential environmental cleanup Claims and obligations at current and former operating locations. Such Claims and obligations arose from, among other circumstances, past discharges from fueling facilities. Among known Claims, there is litigation among United, American Airlines, and other companies concerning the responsibility for payment of certain cleanup costs for groundwater and soil contamination at JFK. The litigation is currently stayed because of the Chapter 11 Cases, and may be addressed through adjudication by the Bankruptcy Court.  In addition, in accordance with a June 1999 order issued by the California Regional Water Quality Control Board (“CRWQCB”), United, along with most of the other tenants of the San Francisco International Airport, has been investigating potential environmental contamination at the airport and conducting certain remediation. Among these projects is investigation and remediation at United’s San Francisco Maintenance Center. This project is being conducted in accordance with CRWQCB approvals. In addition to the matters discussed above, from time to time the Debtors become aware of potential non-compliance with environmental regulations that have been identified either by the Debtors (through their internal environmental compliance auditing program) or by a governmental entity. In some instances, these

 

23



 

matters could potentially become the subject of an administrative or judicial proceeding and could potentially involve material monetary penalties of $100,000 or more.

 

e.     Employees

 

As of June 30, 2005, the Debtors had approximately 58,000 active employees, of which approximately 80% are represented by various labor organizations.

 

The employee groups, number of employees, labor organization, and current contract status for each of United’s collective bargaining groups, as of June 30, 2005, were as follows:

 

Employee Group

 

Number of
Employees

 

Union

 

Contract Open for
Amendment

Pilots

 

6,420

 

ALPA

 

January 1, 2010

Flight Attendants

 

14,868

 

AFA

 

January 8, 2010

Mechanics and Related

 

6,138

 

AMFA

 

January 1, 2010

Public Contact Employees/Ramp & Stores/Food Service Employees/Security Officers/Maintenance Instructors/Fleet Technical Instructors

 

18,350

 

IAM

 

January 1, 2010

Dispatchers

 

160

 

PAFCA

 

January 1, 2010

Meteorologists

 

19

 

TWU

 

January 1, 2010

Engineers

 

292

 

IFPTE

 

Negotiating Initial Contract

 

Collective bargaining agreements (“CBAs”) are negotiated under the Railway Labor Act, which governs labor relations in the transportation industry, and typically do not contain an expiration date.  Instead, they specify an amendable date, upon which the CBA is considered “open for amendment.”  Prior to the amendable date, neither party is required to agree to modifications to the CBA.  Nevertheless, nothing prevents the parties from agreeing to start negotiations or to modify the CBA in advance of the amendable date.  Contracts remain in effect while new CBAs are negotiated.  During the negotiating period, both the Debtors and the negotiating union are required to maintain the status quo.

 

For additional information about the Debtors’ business operations, please refer to UAL’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and UAL’s Quarterly Reports on Form 10-Q for the first quarter ending March 31, 2005 and the second quarter ending June 30, 2005 and any other recent UAL Annual and Quarterly Report.  These filings are available by visiting the Securities and Exchange Commission’s website at http://www.sec.gov or the Debtors’ website at http://www.ual.com.

 

24



 

B.                                     Existing Capital Structure of the Debtors

 

1.     UAL

 

a.     Aircraft-Related Guarantees

 

In connection with United’s financing of 22 Boeing 757s and one Boeing 737 through U.S. leveraged leases (“USLLs”), UAL guaranteed United’s obligations.  Also, in connection with UAL’s acquisition of Air Wisconsin in 1992, UAL guaranteed Air Wisconsin’s obligations for nine regional aircraft.  As of September 1, 2005, the aggregate amount of asserted Claims based on such guarantees is approximately $828 million.  The Debtors, however, anticipate that the aggregate amount of such Claims that will be allowed will be less and the Debtors reserve all rights with respect to such Claims.

 

b.     Serial Preferred Stock

 

As of December 31, 2004, UAL had outstanding 3,203,177 depositary shares, each representing 1/1000 of one share of Series B 121/4% preferred stock (the “Old Series B Preferred Stock” or an “Old Series B Preferred Share”), with a liquidation preference of $25 per depositary share ($25,000 per Old Series B Preferred Share) and a stated capital of $0.01 per Old Series B Preferred Share. Under its terms, any portion of the Old Series B Preferred Stock or the depositary shares is redeemable for cash after July 11, 2004, at UAL’s option, at the equivalent of $25 per depositary share, plus accrued dividends.  The Old Series B Preferred Stock is not convertible into any other securities, has no stated maturity and is not subject to mandatory redemption.

 

The Old Series B Preferred Stock ranks senior to all other preferred and common stock outstanding, except the TOPrS Preferred Securities, as to receipt of dividends and amounts distributed upon liquidation. The Old Series B Preferred Stock has voting rights only to the extent required by law and with respect to charter amendments that adversely affect the preferred stock or the creation or issuance of any security-ranking senior to the preferred stock.

 

On September 30, 2002, UAL announced that it was suspending the payment of dividends on the Old Series B Preferred Stock. As a result of the Chapter 11 filing, UAL is no longer accruing dividends on the Old Series B Preferred Stock.  The amount of dividends in arrears is approximately $27 million as of June 30, 2005.

 

c.     ESOP and Employee/Independent Director Preferred Stock

 

In July 1994, the stockholders of UAL approved a plan of recapitalization that provided an approximately 55% equity and voting interest in UAL to certain employees of United, in exchange for wage concessions and work-rule changes.  As part of the recapitalization, UAL’s stockholders also approved an elaborate governance structure, which was set forth principally in UAL’s prior restated certificate of incorporation (the “Old UAL Charter”) and the employee stock ownership plans (the “ESOPs”).  Among other matters, the revised governance structure provided that UAL’s board of directors (the “Old UAL Board”) was to consist of five public directors, four independent directors, and three employee directors.

 

Under the ESOPs, an aggregate of 17,675,345 shares of Old Class 1 and Class 2 Preferred Stock were allocated to individual employee accounts from 1994 to 2000.   The Old Class 1 and Class 2 Preferred Stock represented the employees’ equity interest in UAL.  Each share of Old Class 1 and Class 2 Preferred Stock was convertible into four shares of Old UAL Common Stock.  Because the shares of Old Class 1 and Class 2 Preferred Stock were convertible into shares of freely tradable Old UAL

 

25



 

Common Stock, Old Class P, M, and S Preferred Stocks (the “Voting Preferred Stock”) were established to provide a fixed level of voting power to the ALPA, IAM, and SAM employee groups participating in the ESOPs.  In the aggregate, 17,675,345 shares of Voting Preferred Stock were issued from 1994 to 2000.  The Voting Preferred Stock had a par value and liquidation preference of $0.01 per share.  The stock was not entitled to receive any dividends and was convertible into .0004 shares of Old UAL Common Stock.

 

To effectuate the election of independent and employee directors to the Old UAL Board, the Old Class Pilot, Old Class IAM, Old Class SAM, and Old Class I Junior Preferred Stocks (collectively the “Director Preferred Stocks”) were established.  One share each of Old Class Pilot and Old Class IAM Preferred Stock was authorized and issued, respectively, to the United Airlines master executive councils of ALPA and IAM 141.  Three shares of Old Class SAM Preferred Stock and four shares of Old Class I Junior Preferred Stock were issued on December 31, 2002 to the persons designated by the SAMs pursuant to the terms of a stockholders agreement and to UAL’s independent directors respectively.  Each of the Director Preferred Stocks has a par value and liquidation preference of $0.01 per share. The Holders of the Old Class Pilot Preferred Stock, the Old Class IAM Preferred Stock, and the Old Class SAM Preferred Stock are each entitled to vote as a separate class to elect one director to the Old UAL Board.  The Director Preferred Stocks are not entitled to receive any dividends and are non-transferable.

 

The Voting Preferred Stock represented approximately 55% of the aggregate voting power until “Sunset,” even though the Old UAL Common Stock issuable upon conversion from time to time represented more or less than 55% of the fully diluted Old UAL Common Stock.  Sunset occurred when the Old UAL Common Stock issuable upon conversion of Old Class 1 and Class 2 Preferred Stock, plus (i) all other Old UAL Common Stock held by all other Debtor-sponsored employee benefit plans and (ii) all available unissued Old Class 1 and Class 2 Preferred Stock held in the ESOPs, in the aggregate, fell to below 20% of the aggregate number of shares of common equity and all available unissued Old Class 1 and Class 2 Preferred Stock of UAL.  As a result of certain sales of Old UAL Common Stock by State Street Bank & Trust (“State Street”), an independent fiduciary for the ESOPs, employee ownership was reduced to less than 20% on March 7, 2003, thus triggering Sunset.

 

Upon the occurrence of Sunset, the 55% voting power of the ESOPs represented by the Voting Preferred Stock was reduced to the actual percentage represented by the outstanding Old Class 1 and Class 2 Preferred Stock held by the ESOPs on an as-converted basis.  In addition, the provisions in the Old UAL Charter with respect to the following matters became inoperative: (i) the qualification, nomination, and vacancy of public and independent directors; (ii) the special super-majority voting provisions relating to, among others, charter amendments, change of control, sales of assets, dissolution, and labor-related business transactions; and (iii) the memberships, functions, and powers of various committees.  Concurrently with Sunset, all shares of the Old Class I Preferred Stock were redeemed automatically.  As a result of the foregoing changes, the Old UAL Board was comprised of:  (a) nine Directors to be elected by the Holders of the outstanding Old UAL Common Stock, (b) one director to be elected by ALPA, (c) one director to be elected by IAM, and (d) one Director to be elected by the SAMs.

 

On June 26, 2003, the ESOP was terminated following the publication of a regulation by the Internal Revenue Service (the “IRS”) that would permit the distribution of the remaining ESOP shares to plan participants without jeopardizing UAL’s ability to utilize its net operating losses.  On June 28, 2004, all remaining ESOP shares were converted to Old UAL Common Stock and either distributed to participants at their request or “rolled over” to an account in their name.

 

d.     UAL Common Stock

 

As of June 30, 2005, UAL had 116,220,959 shares of Old UAL Common Stock outstanding.

 

26



 

e.               TOPrS

 

In December 1996, UAL Corporation Capital Trust I (the “TOPrS Trust”) completed a voluntary exchange offer to exchange its 131/4% Trust Originated Preferred Securities (the “TOPrS Preferred Securities”) for any and all outstanding depositary shares, each representing 1/1000 of one share of Series B 121/4% preferred stock.  After the expiration of the exchange offer, the TOPrS Trust issued $75 million of TOPrS Preferred Securities in exchange for the 2,999,304 depository shares that were tendered in the exchange.  Along with the issuance of the TOPrS Preferred Securities and the related purchase by UAL of the TOPrS Trust’s common securities, UAL issued to the TOPrS Trust $77 million aggregate principal amount of its 131/4% Junior Subordinated Debentures (the “TOPrS Debentures”) due 2026.  The TOPrS Debentures are the sole assets of the TOPrS Trust.  The interest and other payment dates on the TOPrS Debentures correspond to the distribution and other payment dates on the TOPrS Preferred Securities.  Pursuant to the operative agreements of the TOPrS Trust, upon maturity or redemption of the TOPrS Debentures, the TOPrS Preferred Securities are to be redeemed on a mandatory basis.  The TOPrS Debentures were redeemable at UAL’s option, in whole or in part, on or after July 12, 2004, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. Upon the repayment of the TOPrS Debentures, the proceeds thereof are to be applied to redeem the TOPrS Preferred Securities.  The payment of the principal and interest on the TOPrS Debentures is subordinate and junior to all indebtedness of UAL (unless such indebtedness by its terms is subordinate in right of payment to or pari passu with the TOPrS Debentures), but is senior to all capital stock.

 

Pursuant to the operative agreements of the TOPrS Trust, UAL has the right to defer payments of interest on the TOPrS Debentures by extending the interest payment period, at any time, for up to 20 consecutive quarters.  If interest payments on the TOPrS Debentures are so deferred, distributions on the TOPrS Preferred Securities also will be deferred.  During any deferral, distributions will continue to accrue with interest thereon.  In addition, during any such deferral, UAL may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock.  The payment of distributions out of moneys held by the TOPrS Trust is guaranteed by UAL on a subordinated basis to the extent not paid by the TOPrS Trust but only to the extent that UAL has made a payment to the trustee of principal and interest on the TOPrS Debentures deposited in the TOPrS Trust as trust assets.  UAL’s guaranty of the TOPrS Trust’s obligations under the TOPrS Preferred Securities constitutes an unsecured obligation of UAL that is subordinate and junior in right of payment to all other liabilities of UAL (except obligations made pari passu or subordinate by their terms) but is senior to all capital stock issued by UAL.

 

As a result of the Chapter 11 filing, UAL is no longer making interest payments on the TOPrS Debentures. As a result, the TOPrS Trust no longer has the funds available to pay distributions on the TOPrS Preferred Securities and stopped accruing and paying such dividends in October 2002.

 

2.               United

 

a.               Secured Aircraft Financing

 

As of the Petition Date, United operated a fleet of 567 aircraft, approximately 95 of which had been unencumbered and thus became pledged to the Debtors’ debtor-in-possession financing lenders (the “DIP Lenders”) to secure its debtor-in-possession credit facilities.(8)  463 aircraft and related engines in

 


(8)                                  The 567 aircraft operated by United as of the Petition Date do not include certain regional and other aircraft leased by United to Air Wisconsin and Federal Express and certain aircraft parked as of the Petition Date.

 

27



 

United’s fleet (the “Section 1110 Fleet”) were leased or financed and eligible for Section 1110 protection and consist of the following array of model types:(9)

 

Aircraft Type

 

Number

 

Boeing 737-500

 

29

 

Boeing 737-300

 

91

 

Boeing 757-200

 

69

 

Boeing 767-300

 

30

 

Boeing 777-200A

 

21

 

Boeing 777-200B

 

37

 

Boeing 747-400

 

36

 

Airbus 319

 

54

 

Airbus 320

 

96

 

Total:

 

463

 

 

The Section 1110 Fleet was owned or leased by United pursuant to a broad variety of financing, including, without limitation, mortgages, operating leases, capital leases, single investor leases, leveraged leases, Japanese leveraged leases (“JLLs”), German leveraged leases (“GLLs”), and French leveraged leases (“FLLs”).  Out of the Section 1110 Fleet, 158 aircraft served as collateral for issues of public debt, including certain pass-through certificates (“PTCs”), equipment trust certificates (“ETCs”), and enhanced equipment trust certificates (“EETCs”).  The balance of the aircraft in the Section 1110 Fleet were financed or leased pursuant to private transactions.  Of these private transactions, 58 aircraft were financed through JLL, GLL, or FLL cross-border financing arrangements, approximately 97 were financed by manufacturers such as Boeing, Airbus, General Electric, and Intlaero Leasing, and the remainder of the private transactions were financed through U.S. leveraged leases or other leasing and secured debt techniques.  As discussed more fully below, the Debtors have downsized their Section 1110 Fleet and substantially reduced their financing costs for their remaining aircraft through refinancing.

 

As of the Petition Date, an aggregate of approximately $7.0 billion in aircraft-related debt was outstanding.  Of that amount, the Debtors had approximately $3.1 billion of various aircraft-backed mortgages outstanding (the “Aircraft Mortgage Notes”).  There was an aggregate of approximately $32 million of unpaid interest on the aircraft-backed mortgages as of the Petition Date.  In December 1997, July 2000, December 2000, and August 2001, the Debtors issued $674 million, $801 million, $1.51 billion, and $1.47 billion, respectively, of EETCs to refinance certain owned aircraft and aircraft under operating leases which are also included in the aircraft-related debt.  There was an aggregate of approximately $70 million of unpaid interest on the EETCs as of the Petition Date.

 


(9)                                  The remaining nine aircraft in United’s fleet are not subject to Section 1110 of the Bankruptcy Code, as more fully described herein, and thus not subject to the same restructuring process as the other aircraft in the fleet.

 

28



 

b.              Senior Notes

 

United issued six series of unsecured notes due between 2003 and 2021 (the “Unsecured Debentures”) pursuant to an indenture dated as of July 1, 1991, between United and The Bank of New York, as trustee:

 

Series

 

Original Principal
Amount

 

 

 

($ in millions)

 

101/4 % Debentures due July 15, 2021

 

$

300.0

 

93/4 % Debentures due August 15, 2021

 

$

250.0

 

9% Notes due December 15, 2003

 

$

150.0

 

91/8 % Debentures due January 15, 2012

 

$

200.0

 

10.67% Series A Debentures due May 1, 2004

 

$

370.2

 

11.21% Series B Debentures due May 1, 2014

 

$

371.0

 

Total:

 

$

1,641.2

 

 

Each of the series of Unsecured Debentures is an unsecured and unsubordinated obligation of United, which ranks pari passu with all existing senior unsecured indebtedness of United and senior to subordinated indebtedness.  As of the Petition Date, there was in aggregate $17.6 million of accrued and unpaid interest on the Unsecured Debentures.

 

As a result of repurchases of Unsecured Debentures by United, there is currently approximately $646 million principal amount outstanding of Unsecured Debentures not held by United.  The Creditors’ Committee have informed the Debtors that they would like the repurchased Unsecured Debentures assigned to the Holders of Allowed Other Unsecured Claims on a pro rata basis.

 

c.               Municipal Bonds

 

Eighteen series of special facilities revenue bonds due through 2035 have been issued to finance the acquisition and construction of certain facilities in Los Angeles, San Francisco, Miami, Chicago, and certain other locations (the “Municipal Bonds”):

 

Series

 

Issue Date

 

Maturity

 

Original
Principal
Amount

 

 

 

 

 

 

 

($ in millions)

 

California Statewide Communities Development Authority Special Facility Revenue Bonds, Series 1997 (United Air Lines, Inc. – Los Angeles International Airport Projects)

 

November 1, 1997

 

October 1, 2034

 

$

190.2

 

 

 

 

 

 

 

 

 

California Statewide Communities Development Authority Special Facility Revenue Bonds, Series 2001 (United Air Lines, Inc. – Los Angeles International Airport Cargo Project)

 

April 1, 2001

 

October 1, 2035

 

$

34.6

 

 

 

 

 

 

 

 

 

California Statewide Communities Development Authority Special Facilities Lease Revenue Bonds, 1997 Series A (United Air Lines, Inc. – San Francisco International Airport Projects)

 

August 1, 1997

 

October 1, 2033

 

$

154.8

 

 

29



 

Series

 

Issue Date

 

Maturity

 

Original
Principal
Amount

 

 

 

 

 

 

 

($ in millions)

 

California Statewide Communities Development Authority Special Facilities Lease Revenue Bonds, 2000 Series A (United Air Lines, Inc. – San Francisco International Airport Terminal Projects)

 

November 1, 2000

 

October 1, 2034

 

$

33.2

 

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Refunding Bonds (United Air Lines, Inc. Project) Series 1999A

 

February 1, 1999

 

September 1, 2016

 

$

121.4

 

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Refunding Bonds (United Air Lines, Inc. Project) Series 1999B

 

February 1, 1999

 

April 1, 2011

 

$

40.3

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Refunding Bonds (United Air Lines, Inc. Project) Series 2000A

 

June 1, 2000

 

November 1, 2011

 

$

38.4

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Bonds (United Air Lines, Inc. Project) Series 2001A-1

 

February 1, 2001

 

November 1, 2035

 

$

102.6

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Bonds (United Air Lines, Inc. Project) Series 2001A-2

 

February 1, 2001

 

November 1, 2035

 

$

100.0

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Refunding Bonds (United Air Lines, Inc. Project) Series 2001B

 

February 1, 2001

 

November 1, 2035

 

$

49.3

 

 

 

 

 

 

 

 

 

City of Chicago, Chicago O’Hare International Airport, Special Facilities Revenue Refunding Bonds (United Air Lines, Inc. Project) Series 2001C

 

February 1, 2001

 

May 1, 2016

 

$

149.4

 

 

 

 

 

 

 

 

 

City and County of Denver, Colorado, Special Facility Airport Revenue Bonds (United Air Lines, Inc. Project) Series 1992A

 

October 1, 1992

 

October 1, 2032

 

$

261.4

 

 

 

 

 

 

 

 

 

Indianapolis Airport Authority 6.50% Special Facility Revenue Bonds, Series 1995A (United Air Lines, Inc., Indianapolis Maintenance Center Project)

 

June 1, 1995

 

November 15, 2031

 

$

220.7

 

 

 

 

 

 

 

 

 

Massachusetts Port Authority Special Facility Bonds (United Air Lines, Inc. Project) Series 1999A

 

December 1, 1999

 

October 1, 2029

 

$

80.5

 

 

30



 

Series

 

Issue Date

 

Maturity

 

Original
Principal
Amount

 

 

 

 

 

 

 

($ in millions)

 

Miami-Dade County Industrial Development Authority Special Facilities Revenue Bond (United Air Lines, Inc. Project) Series 2000

 

March 1, 2000

 

March 1, 2035

 

$

32.4

 

 

 

 

 

 

 

 

 

New York City Industrial Development Agency Special Facility Revenue Bonds, Series 1997 (1997 United Air Lines, Inc. Project)

 

July 1, 1997

 

July 1, 2032

 

$

34.2

 

 

 

 

 

 

 

 

 

Regional Airports Improvement Corporation Adjustable-Rate Facilities Lease Refunding Revenue Bonds, Issue of 1984, United Air Lines, Inc. (Los Angeles International Airport)

 

October 1, 1984

 

November 15, 2021

 

$

25.0

 

 

 

 

 

 

 

 

 

RAIC Facilities Lease Refunding Revenue Bonds, Issue of 1992, United Air Lines, Inc. (Los Angeles International Airport)

 

October 1, 1992

 

November 15, 2012

 

$

34.4

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

1,702.8

 

 

As of December 31, 2004, there were approximately $1.7 billion principal amount of Municipal Bonds outstanding and, as of the Petition Date, there was an aggregate of $16.0 million of accrued and unpaid interest on the Municipal Bonds. UAL guaranteed United’s obligations under the (i) RAIC Adjustable-Rate Facilities Lease Refunding Revenue Bonds, Issue of 1984, United Air Lines, Inc. (Los Angeles International Airport); and (ii) RAIC Facilities Lease Refunding Revenue Bonds, Issue of 1992, United Air Lines, Inc. (Los Angeles International Airport).

 

C.                                     Management of the Debtors

 

The management team of UAL is comprised of highly capable professionals with substantial airline and other applicable industry experience. Information regarding the executive officers of the Debtors is as follows:

 

Name

 

Position

Glenn F. Tilton

 

Chairman, President and Chief Executive Officer

Frederic F. Brace

 

Executive Vice President and Chief Financial Officer

Sara A. Fields

 

Senior Vice President – People

Douglas A. Hacker

 

Executive Vice President

Paul R. Lovejoy

 

Senior Vice President, General Counsel and Secretary

Peter D. McDonald

 

Executive Vice President and Chief Operating Officer

Rosemary Moore

 

Senior Vice President – Corporate and Government Affairs

Richard J. Poulton

 

Senior Vice President – Business Development

John P. Tague

 

Executive Vice President – Marketing, Sales and Revenue

 

Glenn F. Tilton.  Age 57.  Director of UAL since 2002.  Mr. Tilton has been Chairman, President, and Chief Executive Officer of UAL and United since September 2002.  From October 2001 to August

 

31



 

2002, he served as Vice Chairman of ChevronTexaco Corporation (global energy).  In addition, from May 2002 to September 2002 he served as Non-Executive Chairman of Dynegy, Inc.  From February to October 2001 he served as Chairman and Chief Executive Officer of Texaco, Inc. (global energy).  He previously served as President of Texaco’s Global Business Unit.  He serves as a director of Lincoln National Corporation and TXU Corporation.

 

Frederic F. Brace.  Age 47.  Mr. Brace has been Executive Vice President and Chief Financial Officer of UAL and United since August 2002.  From September 2001 to August 2002, Mr. Brace served as UAL’s and United’s Senior Vice President and Chief Financial Officer.  From July 1999 to September 2001, Mr. Brace had served as United’s Senior Vice President - Finance and Treasurer.  From February 1998 through July 1999, he served as Vice President - Finance of United.

 

Sara A. Fields.  Age 62.  Ms. Fields has been Senior Vice President – People of United since December 2002.  From January to December 2002, Ms. Fields served as United’s Senior Vice President - People Services and Engagement.  Ms. Fields previously served as Senior Vice President – Onboard Service of United.

 

Douglas A. Hacker.  Age 50.  Mr. Hacker is Executive Vice President of UAL and United and he has been in this position since December 2002.  From September 2001 to December 2002, Mr. Hacker served as United’s Executive Vice President and President of ULS.  From July 1999 to September 2001, Mr. Hacker had served as UAL’s Executive Vice President and Chief Financial Officer and as United’s Executive Vice President Finance & Planning and Chief Financial Officer.  From July 1994 to July 1999, he served as Senior Vice President and Chief Financial Officer of United.

 

Paul R. Lovejoy.  Age 50.  Mr. Lovejoy has been Senior Vice President, General Counsel, and Secretary of UAL and United since June 2003.  From September 1999 to June 2003, he was a partner with Weil, Gotshal & Manges, LLP.  He previously served as Assistant General Counsel of Texaco, Inc.

 

Peter D. McDonald.  Age 54.  Mr. McDonald has been Executive Vice President and Chief Operating Officer of United since May 2004.  From October 2002 to April 2004, Mr. McDonald served as Executive Vice President – Operations.  From January to September 2002, Mr. McDonald served as United’s Senior Vice President – Airport Operations.  From May 2001 to January 2002, he served as United’s Senior Vice President – Airport Services.  From July 1999 to May 2001, he served as Vice President - Operational Services.  From July 1995 to July 1999, he served as Managing Director - Los Angeles Metro Area for United.

 

Rosemary Moore.  Age 54.  Ms. Moore has been the Senior Vice President – Corporate and Government Affairs of United since December 2002.  From November to December 2002, Ms. Moore had been the Senior Vice President – Corporate Affairs of United.  From October 2001 to October 2002, she was the Vice President – Public and Government Affairs of ChevronTexaco Corporation.  From June 2000 to October 2001, she was Vice President – Corporate Communications and Government Affairs of Texaco, Inc.  From September 1996 to June 2000, she was an independent consultant.

 

Richard J. Poulton. Age 40.  Mr. Poulton is Senior Vice President – Business Development of United Airlines since June 2005.  From March 2003 to June 2005, Mr. Poulton served as Senior Vice President – Strategic Sourcing and Chief Procurement Officer of United.  From December 2002 to March 2003 he served as President, UAL Loyalty Services (at the time a wholly owned subsidiary of UAL Corporation and formerly known as United New Ventures, Inc.) and Vice President of United.  Prior to that, he served as Chief Financial Officer and Treasurer of United New Ventures, Inc.

 

32



 

John P. Tague.  Age 43.  Mr. Tague has been Executive Vice President – Marketing, Sales, and Revenues of UAL and United since May 2004.  From May 2003 to April 2004, Mr. Tague served as Executive Vice President – Customer of UAL and United.  From 1997 to August 2002, Mr. Tague was the President and Chief Executive Officer of ATA Holdings Corp.

 

ARTICLE III.
THE CHAPTER 11 CASES

 

On December 9, 2002, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The Debtors continue to conduct their businesses and manage their properties as Debtors in Possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. The following is a general summary of the Chapter 11 Cases including, without limitation, the events preceding the Chapter 11 filings, the stabilization of the Debtors’ operations following the Chapter 11 filings, the Debtors’ business plan, and the Debtors’ restructuring initiatives since the Chapter 11 filings.

 

A.                                   Events Leading to the Chapter 11 Cases and Related Postpetition Events

 

The airline industry is highly competitive and labor intensive.  United’s business is highly sensitive to fuel costs, fare levels, and demand for travel.  Passenger demand and fare levels are influenced by, among other things, the state of the global economy, domestic and international events, airline capacity, and pricing actions taken by carriers.  Beginning in 2000, the slowing economy and decrease in high-yield business travel, among other things, caused a significant decline in United’s revenues.  These declines were exacerbated by the continued increase of internet-based ticket sales, price transparency, and the resultant downward pricing pressure, as well as the increasing impact of LCCs such as Southwest Airlines Co. and JetBlue Airways.  At the same time, during this period, labor costs steadily increased, reaching $7.0 billion in 2001, or 38.3% of operating expenses, largely due to the CBA with the Debtors’ pilots, amended in 2000, market-based pay increases for non-represented employees, and the expected wage increases associated with the then open CBAs with machinists, ramp workers, public contact, and other employees.  In 2002, the Debtors entered into new CBAs with these employee groups that contained wage increases retroactive to mid-2000.  Consequently, United’s labor costs became the highest in the industry.  In addition, the terrorist attacks of September 11, 2001, had a significant, negative impact on passenger and cargo demand for air travel.  Although these factors caused a sharp and sustained decline in revenues throughout the airline industry, the Debtors, who historically have enjoyed a leading position among full-fare business customers, were hit the hardest.

 

As a result, the Debtors’ passenger revenues plunged from $16.9 billion in 2000 to $11.9 billion for 2002.  In response to these dramatically falling revenues, the Debtors mounted an aggressive cost-cutting campaign, during which the Debtors reduced their daily flight schedule, retired their oldest aircraft, reduced planned new aircraft deliveries, significantly reduced planned non-aircraft capital spending, closed several unprofitable international stations, converted six stations to United Express, cancelled or suspended a number of major airport construction plans, closed five reservations centers, eliminated certain travel agency based commissions, negotiated trade concessions, and significantly downsized their workforce.

 

In addition, the Debtors sought savings from their unionized workforce in an amount and of a duration sufficient to ward off bankruptcy.  Yet, despite these measures, the Debtors were unable to obtain any meaningful out-of-court financing in the public or private capital markets.  Consequently, United depleted its cash reserves at an unprecedented rate.  United’s operating “cash burn” (i.e., the amount by which operating cash disbursements exceeds receipts) averaged more than $10 million per day over the fourth quarter of 2001.  The Debtors’ massive cost-cutting efforts reduced this amount to $7 million per day by March 2002 and to less than $1 million per day during the second quarter of 2002.

 

33



 

However, a stalled recovery in July 2002 resulted in approximately $7 million of operating cash burn per day during the third quarter of 2002, decreasing slightly to over $5 million a day by November 2002.

 

In June 2002, United approached the Air Transportation Stabilization Board (the “ATSB”) for a $1.8 billion federal loan guarantee with a business plan contemplating capacity cuts, revenue increases, and lower labor costs.  On December 4, 2002, the ATSB decided not to approve United’s proposal for a federal loan guarantee.  Subsequent to the ATSB’s decision and facing approximately $875 million in debt maturities, on December 9, 2002, the Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code—the best available means to facilitate the implementation of necessary changes to their businesses and bring costs and operations in line with the current business environment.

 

B.                                     Stabilization of Operations

 

As of the Petition Date, all actions and proceedings against the Debtors and all acts to obtain property from the Debtors were automatically stayed under Section 362 of the Bankruptcy Code.  To minimize disruption of the Debtors’ operations during the Chapter 11 Cases, the Debtors filed with the Bankruptcy Court on the Petition Date a number of “first day” motions requesting authority to make certain payments, honor certain obligations, and assume certain contracts.  Much of this relief was granted by the Bankruptcy Court and has facilitated the administration of the Chapter 11 Cases.  Several of these motions and orders are described below, but these summaries are not a substitute for a complete understanding of the underlying motions or the resulting orders.  You are urged to review the full text of all such motions and orders, which are available for your review by visiting the Debtors’ private website at http://www.pd-ual.com.

 

1.               Motion to Pay Employee Wages and Associated Benefits

 

The Debtors believe that their employees are their most valuable asset and that any delay in paying prepetition or postpetition compensation or benefits to their employees would have destroyed their relationship with employees and irreparably harmed employee morale at a time when dedication, confidence, and cooperation of their employees was most critical.  Therefore, the Debtors requested, and the Bankruptcy Court approved, authority to pay certain compensation and benefits owed to employees.  The authority allowed the Debtors to compensate their employees for certain obligations payable as of the Petition Date, as well as certain obligations that came due after the Petition Date.

 

2.               Motion to Continue Using Existing Cash Management System, Bank Accounts, Business Forms, and Investment Guidelines

 

The Bankruptcy Court authorized the Debtors to continue using their domestic and international cash management systems and their respective bank accounts, business forms, and investment guidelines.

 

3.               Motion to Continue Customer Programs

 

The Debtors believe that their existing customer programs, including the Mileage Plus Program, vacation package program, barter arrangements program, Red Carpet Club program, corporate incentive programs, cargo programs, and MyPoints.com programs, are vital to their efforts to maintain their current customers through this difficult period and to position themselves to attract new customers.  The Bankruptcy Court granted the Debtors’ request for authority to perform their prepetition obligations relating to their customer programs and to continue, renew, replace, or terminate such customer programs during the Chapter 11 Cases.

 

34



 

4.               Motion for Authority to Prohibit Utilities from Terminating Service

 

On December 11, 2002, the Bankruptcy Court entered an order enjoining utility companies from terminating service or requiring deposits in connection with any unpaid utility charges.  Although a group of utilities objected to the order, the Bankruptcy Court on March 27, 2003, entered an order satisfying both the Debtors and the utilities by providing procedural safeguards to the utilities, such as access to certain financial information of the Debtors and an expedited dispute resolution process.

 

It should be noted that only a minority of the objecting utilities who were beneficiaries of the March 27, 2003 order took advantage of receiving the Debtors’ financial information, and some who originally did request it subsequently asked to no longer receive it.  Also, no utility has had occasion to invoke the expedited dispute resolution process since the date the order was entered.  Finally, the Debtors have continued to pay their utility invoices on time and, since the utility activity described above, there have been no further motions filed by utilities seeking payment.

 

5.               Motion for Authority to Pay Sales and Use Taxes, Transportation Taxes, Fees, Passenger Facility Charges, and Other Similar Government and Airport Charges

 

In connection with the normal operation of their businesses, the Debtors collect and pay various taxes, fees, and charges.  Specifically, the Debtors: (a) collect fuel taxes, value added taxes, sales taxes, excise taxes, customs fees, immigration fees, security fees, inspection fees, and passenger facility charges from their customers on behalf of various taxing authorities; (b) incur use, liquor, gross receipts, and fuel taxes which must be paid to various taxing authorities; and (c) are charged fees, including, without limitation, the Aviation Security Infrastructure Fee, overflight fees and landing and other access fees, licenses, airport performance bond-related obligations (excluding municipal bonds), and other similar charges and assessments by various taxing and licensing authorities.  These taxes, fees, and charges are paid to the various taxing, licensing, and airport authorities (collectively, the “Authorities”) on a periodic basis.

 

As of October 31, 2002, the Debtors owed over $268 million to the Authorities.  If the Debtors did not pay the various taxes and fees to the applicable Authorities in a timely manner, the Authorities might have suspended the Debtors’ business operations, filed Liens, sought to lift the automatic stay, or pursued other remedies that would harm the Debtors’ Estates.  As a result, the Debtors moved for, and the Bankruptcy Court granted, the Debtors’ request for authority to pay certain taxes, fees, and charges owed to the Authorities.

 

In addition, prior to the Petition Date, the Debtors established an escrow account to provide greater assurance for the remittance of these fees and taxes.  The escrow account was created pursuant to an escrow agreement, dated November 29, 2002, by and between UAL and LaSalle Bank National Association, as escrow agent.  On December 5, 2002, UAL deposited $200 million into the escrow account.  Based on the importance of continuing to satisfy the obligations of the Debtors to the various authorities described above, the Bankruptcy Court granted the Debtors’ request to assume the escrow agreement under Section 365 of the Bankruptcy Code.  As of September 7, 2005 there remains $200 million in the escrow account.

 

6.               Motion for Authority to Pay in the Ordinary Course of Business Prepetition Claims of Essential Trade Creditors

 

The Debtors purchase goods and services from certain domestic vendors who are not affiliated with the Debtors.  The Debtors’ obligations to these trade Creditors include, among others, obligations owed to:  (a) parts suppliers; (b) maintenance service providers; (c) essential amenity providers; (d) flight

 

35



 

training suppliers; (e) information service providers; (f) essential goods providers; and (g) insurance providers.  The future revenues and profits of the Debtors would suffer if the Debtors’ relationships with these vendors were terminated.  Many of these trade Creditors are sole source suppliers without whom the Debtors could not operate.  The Debtors believed it was essential that they be allowed to pay selected trade Creditors in the ordinary course of business to continue the Debtors’ operations and to honor their contractual commitments to their customers.  Upon the Debtors’ motion, the Bankruptcy Court granted the Debtors the authority to provisionally pay in the ordinary course of business Claims of essential trade Creditors, up to an aggregate amount of $35 million.  As of August 30, 2005, the Debtors have paid approximately $528,000 in prepetition Claims of essential trade Creditors.

 

7.               Motion for Authority to Pay Foreign Vendors, Service Providers, and Governments

 

The Debtors’ foreign routes are extremely valuable assets of their Estates.  The Debtors believed that if outstanding prepetition obligations owing to certain foreign vendors, service providers, regulatory agencies, and governments (collectively, the “Foreign Entities”) were not paid, the Foreign Entities would take actions that could severely disrupt the Debtors’ foreign operations.  On December 11, 2002, the Bankruptcy Court authorized the Debtors to pay or honor their prepetition obligations to the Foreign Entities.

 

8.               Motion for Authority to Assume Certain Clearinghouse and Similar Agreements in the Ordinary Course of Business

 

The airline business is an interdependent industry based upon a network of agreements that govern virtually all aspects of air travel and airline operations.  Among other things, these agreements facilitate cooperation among airlines with respect to such critical activities as making reservations and transferring passengers, packages, baggage, and mail between airlines.  Certain services under these agreements, such as the clearinghouse functions and nationwide reservations services, are the equivalent of industry-wide “utility” services for which there is no readily available alternative.

 

To preserve their essential relationships with their various tour operators, cargo agents, travel agents, clearinghouses, other airlines with whom they have various interline agreements, commercial and/or code sharing relationships, and certain other business entities, the Debtors moved for and the Bankruptcy Court granted the Debtors authority to assume their interline agreements, clearinghouse agreements, billing and settlement plan agreements, cargo agreements, the Universal Air Travel Plan agreement, and their agreements with respect to the Star Alliance (collectively, the “Clearinghouse Contracts”). The Debtors also requested authority to continue honoring, performing, and exercising their respective rights and obligations (whether prepetition or postpetition) in the ordinary course of business and in accordance with, among others, the Debtors’ code share agreements, express carrier agreements, global distribution systems agreements, network agreements, travel agency agreements, booking and online fulfillment agreements, cargo agency agreements, and Mileage Plus agreements (collectively, the “Clearinghouse Obligations”).  Because certain of the Clearinghouse Contracts and the Clearinghouse Obligations provide for an ongoing mutual billing and settlement and adjustment process that necessarily entails continuing submission of billings to the Debtors and continuing setoffs of obligations owed to and obligations owed by the Debtors, the Debtors also requested that the Bankruptcy Court lift the automatic stay to the extent necessary to enable the parties to participate in routine billings and settlements in accordance with certain of the Clearinghouse Contracts.

 

9.               Motion for Authority to (A) Apply Prepetition Payments to Postpetition Fuel Supply Contracts and Pipeline and Storage Agreements, (B) Honor Other Fuel Supply, Pipeline, Storage, Into-Plane Fuel Contracts and Other Fuel Service Arrangements, and (C) Continue Participation in Fuel Consortia

 

36



 

As of the Petition Date, the Debtors purchased approximately 4.6 million barrels of jet fuel per month to operate their aircraft.  A ready fuel supply for the Debtors’ fleet of aircraft and, consequently, an ability to perform under any of their fuel purchase, delivery, storage and other service arrangements customary in the airline industry, is of critical importance to their continued operations and successful reorganization.

 

Accordingly, the Debtors moved for and the Bankruptcy Court granted an order: (i) authorizing certain of the Debtors’ fuel suppliers and pipeline and storage providers to credit postpetition fuel lifting and pipeline and storage facility usage with any prepayment or other credits existing prior to the Petition Date; (ii) authorizing the Debtors to honor, perform, and exercise their rights and obligations (whether prepetition or postpetition) pursuant to certain of their fuel supply contracts, pipeline and storage agreements, into-plane service contracts, and fuel consortia arrangements; and (iii) authorizing the Debtors to continue participating in their fuel consortia arrangements in the ordinary course of business.

 

10.         Motion for Authority to Assume Credit Card Agreements

 

Credit card sales represent a substantial majority of the Debtors’ total gross sales receipts.  The Debtors have various agreements with credit card processors to collect and process credit card receivables.  Pursuant to these various agreements, the parties specify a discount rate that reduces the amount of credit card receivables that are paid by processors to the Debtors.  In addition, the agreements may specify the amount of the reserve that the processors can maintain.

 

As the largest component of the Debtors’ revenues, credit card sales are an essential component of the Debtors’ businesses.  Accordingly, the Debtors moved for an order authorizing the Debtors to assume, as modified, contracts with certain of their credit card processors.  Initially, the Bankruptcy Court authorized the Debtors to assume credit card processing agreements with: (i) American Express Travel Related Services Company, Inc.; (ii) Novus Services, Inc.; (iii) Citibank International plc; and (iv) Universal Air Travel Plan.

 

On December 30, 2002, National Processing Company LLP and National City Bank of Kentucky (collectively, “National City”) objected to the assumption of their credit card contract with the Debtors, claiming that the contract was a financial accommodation, and therefore not assumable under the Bankruptcy Code; or, in the alternative, that the contract could not be assumed unless the Debtors agreed to provide National City with adequate assurance of future performance.  After conducting a full hearing on the issues, the Bankruptcy Court disagreed with National City’s arguments and held that the contract was assumable and that the Debtors could assume the contract without providing any additional security.  National City subsequently appealed the Bankruptcy Court’s decision to the United States District Court for the Northern District of Illinois (except as otherwise noted, the “District Court”).  Both the District Court and the United States Court of Appeals for the Seventh Circuit (the “Seventh Circuit”) subsequently affirmed the Bankruptcy Court’s decision.

 

11.         Motions for Authority to Obtain Postpetition Financing

 

To maintain business relationships with vendors, suppliers, and customers, to address liquidity concerns, and to satisfy other working capital needs prior to the commencement of the Chapter 11 Cases, the Debtors negotiated term sheets and commitment letters for two Debtor-in-Possession credit agreements for up to $1.5 billion in postpetition financing.  On December 30, 2002, pursuant to two orders, the Bankruptcy Court gave its final approval of the DIP Facilities.

 

One of the two orders authorized the Debtors’ entry into a stand-alone $300 million amortizing term loan from Bank One, NA secured by, among other things, the revenue from the Co-Branded Credit

 

37



 

Card Program Mileage Plus Agreement between Bank One, United, and ULS (as amended, restated, waived, supplemented or otherwise modified from time to time, the “Bank One DIP Facility”). United made its final payment under the Bank One DIP Facility on July 1, 2004.  Thus, the Bank One DIP Facility terminated on that date.(10)

 

The other order authorized the Debtors’ entry into a separate debtor-in-possession credit facility in the form of revolving and term loans up to an aggregate principal amount of $1.2 billion from JPMorgan Chase Bank, Citicorp USA, Inc., Bank One, The CIT Group/Business Credit, Inc. and a syndicate of lenders party to the Club DIP Facility (collectively, the “Club DIP Lenders”) on a pro rata basis (as amended, restated, waived, supplemented or otherwise modified from time to time, the “Club DIP Facility,” and collectively with the Bank One DIP Facility, the “DIP Facilities”).  The commitments under the Club DIP Facility were to be provided in two stages.  In Stage I, the Club DIP Lenders made a commitment to provide a $100 million Tranche A revolving credit and letter of credit facility, and a $400 million Tranche B term loan.  The Debtors immediately drew on the entire $500 million available under the Stage I facilities.  In Stage II, which would become available only upon the occurrence of certain specified conditions, the Debtors could access an additional $700 million under Tranche A.  A first priority perfected Lien on substantially all of the Debtors’ assets secures the Club DIP Facility.

 

The DIP Facilities have allowed the Debtors to pay certain permitted prepetition Claims, fulfill working capital needs, obtain letters of credit, and pay for other general corporate matters.  Moreover, the funds available to the Debtors under the DIP Facilities have provided the necessary security to the Debtors’ vendors so that they would continue to do business with the Debtors, helping to minimize the disruptions to the Debtors’ operations as the Debtors pursued their reorganization efforts.

 

Both DIP Facilities have been amended several times during the Chapter 11 Cases, in some cases to address issues unique to each facility and in other cases to address issues common to both facilities.

 

a.               Summary of Amendments Specific to the Club DIP Facility

 

Specifically with respect to the Club DIP Facility, certain waivers and amendments made during the Chapter 11 Cases, among other things, served to: (a) establish the borrowing base criteria; (b) waive United’s compliance requirements with certain EBITDAR covenants; (c) permit an “overadvance” on the borrowing base under the Club DIP Facility; (d) increase the amount of debt that can be secured by Liens or letters of credit in connection with fuel hedging or similar agreements; (e) increase the total collateral available to the DIP Lenders; (f) assign a portion of the initial lender’s commitments to new members of the bank syndicate; and (g) reduce the interest rate on the Club DIP Facility financing.  Another amendment that was necessary with respect to the Club DIP Facility occurred during the third quarter 2004 when Cendant and Orbitz announced their merger and United agreed to sell the remainder of its equity investment in Orbitz, Inc. pursuant to a tender offer by Cendant Corporation.  The Bankruptcy Court approved United’s participation in the transaction on October 15, 2004.  This transaction generated approximately $185 million in proceeds (of which 25% would, under the then current terms, be used to pay down the Club DIP Facility) and a one-time gain of approximately $158 million.  Pursuant to the ninth amendment to the Club DIP Facility, United retained 100% of these proceeds.

 


(10)                            As a condition to obtaining DIP financing from Bank One at the inception of these Chapter 11 Cases, the Debtors assumed a co-branded credit card agreement (the “Co-Branded Card Agreement”) with Bank One.  The Co-Branded Card Agreement contains a liquidated damages clause that would result in a $700 million postpetition claim against United, ULS, and UAL in the event of a breach before the end of 2005.  This liquidated damages clause reduces to $600 million for breaches that occur on or after January 1, 2006.

 

38



 

Of particular note, the Club DIP Facility has been amended several times to reflect changes in the commitment under such facility.  The second amendment to the Club DIP Facility, executed on February 10, 2003, among other things, reduced the commitment under Tranche A of the Club DIP Facility by $200 million (thereby reducing the total commitment under the Club DIP Facility to $1 billion).  The seventh amendment to the Club DIP Facility, executed on May 7, 2004, among other things, entirely eliminated Stage II of that facility, which the Debtors had never accessed, thus reducing the total commitment under the Club DIP Facility to approximately $500 million, consisting of a $300 million term loan and a $200 million revolver (which included a $100 million liquidation reserve).  As a result of the ATSB denial of a loan guarantee, discussed in ARTICLE III.C.4 herein, the Debtors determined that they needed to secure additional DIP financing to satisfy the added liquidity needs of an extended stay in bankruptcy.  The Debtors quickly began intensive, arm’s-length negotiations with their Club DIP Lenders, ultimately reaching agreement on the eighth amendment to the Club DIP Facility which provided for an additional $500 million in DIP financing.  On July 21, 2004, after the final payment on the Bank One DIP Facility, the Debtors received commitments for the $500 million increase, thus increasing the amount they had available in total DIP financing to $1.0 billion.  Pursuant to the Twelfth Amendment to the Club DIP Facility, approved by the Bankruptcy Court on July 15, 2005, the Club DIP Lenders agreed to increase their commitment under the Club DIP Facility by approximately $310 million to approximately $1.3 billion.  The Club DIP Lenders also agreed, among other things, to extend the Club DIP Facility’s maturity date, which had already been extended several times during the Chapter 11 Cases through December 30, 2005 (with an option to by the Debtors to further extend the maturity date to March 31, 2006, subject to no event of default under the Club DIP Facility existing on December 30), to decrease the interest rate under the Club DIP Facility by 25 basis points and to amend certain covenants to give the Debtors more flexibility to optimize operations, and to make additional amendments to the Club DIP Facility, the SGR Security Agreement and Aircraft Mortgage.

 

Pursuant to the recent Thirteenth Amendment to the Club DIP Facility, approved by the Bankruptcy Court on August 18, 2005, the Club DIP Lenders agreed to a Tranche C term loan which would be structured as a senior secured superpriority debtor-in-possession term loan facility up to the aggregate principal amount of $350 million, at a market rate of interest.  The specific purpose of the Tranche C loan is to refinance certain aircraft under the 1997-1 EETC financing transaction.  Pursuant to the Thirteenth Amendment, JPMorgan intends to syndicate all or part of the Tranche C loan.  As of the date of this Disclosure Statement, the conditions for funding the Tranche C loan have not yet been satisfied.  If such conditions are met, the total amount of the Club DIP Facility will be in an amount up to $1.65 billion. On August 26, 2005 Wells Fargo Bank Northwest, N.A., the trustee under the 1997-1 EETC aircraft financing, filed a notice of appeal of the Bankruptcy Court’s order approving the Thirteenth Amendment to the Club DIP Facility.  The District Court conducted a status hearing on the appeal on October 11, 2005 and set a briefing schedule.

 

b.              Summary of Amendments Specific to the Bank One DIP Facility

 

Specifically with respect to the Bank One DIP Facility, certain waivers and amendments served to: (a) waive UAL’s and the other Debtors’ noncompliance with reporting requirements; and (b) clarify the events which trigger prepayment of the Bank One DIP Facility.

 

c.               Summary of Amendments Common to the DIP Facilities

 

The waivers and amendments common to the Bank One and Club DIP Facilities served to: (a) increase both the applicable interest rates on the loans and the minimum cash covenants; (b) allow United, pursuant to a tax stipulation, to enter into an arrangement with the U.S. government to receive a tax refund as well as impose a Lien, in favor of the government, on a portion of such refund; (c) waive events of default relating to: (i) United’s failure to make certain payments in connection with the Section

 

39



 

1110 Fleet; (ii) the increase in United’s indebtedness as a result of deferring payments with respect to the Section 1110 Fleet, provided certain other conditions were satisfied; (iii) United’s failure to provide proper notice with respect to its modification or suspension of service on certain routes; (iv) the incurrence of additional Liens on United’s fuel inventory; (v) the financing of certain insurance premiums; (vi) United’s failure to provide proper notice regarding its discontinuation of service on the San Francisco/Taipei route; and (vii) cross-defaults under either facility; and (d) permit United to:  (i) elect not to pay an obligation arising under a Section 1110-related agreements unless compelled by the Bankruptcy Court; (ii) incur additional Liens on cash collateral and fuel inventory; (iii) incur a Lien on United’s right to receive a refund of unearned insurance premium financed by United; (iv) increase its indebtedness as a result of deferring payments with respect to the Section 1110 Fleet, provided certain other conditions were satisfied; (v) permanently transfer certain slots it maintained at the London Heathrow Airport; (vi) enter into the Fuel Supply Agreement with Morgan Stanley, as well as incur a Lien on the deposit securing United’s and UAFC’s obligations under the Fuel Supply Agreement; (vii) restructure indebtedness secured by a Lien on five (5) certain flight simulators; and (viii) dispose of both its interest in Hotwire, Inc. and a portion of its interest in Orbitz, Inc. and Orbitz, LLC through a public offering (such net cash proceeds were used to prepay the Club DIP Facility in accordance with its terms).

 

12.         Applications for Retention of Debtors’ Professionals

 

On December 30, 2002, and February 1, 2003, the Bankruptcy Court approved the retention of certain Professionals to represent and assist the Debtors in connection with the Chapter 11 Cases.  Certain of these Professionals have been intimately involved with the negotiation and development of the Plan.  These Professionals include, among others: (a) Kirkland & Ellis LLP as counsel for the Debtors; (b) Rothschild as investment banker and financial adviser for the Debtors; (c) Huron as restructuring consultants to the Debtors; and (d) Poorman-Douglas as notice agent and Claims Agent for the Debtors.  The Bankruptcy Court also approved the Debtors’ requests to retain other Professionals to assist the Debtors in other ongoing matters.  These Professionals include, but are not limited to: (i) Vedder, Price, Kaufman & Kammholz, P.C. as special aircraft financing counsel and conflicts counsel to the Debtors; (ii) Paul, Hastings, Janofsky & Walker LLP as special labor counsel and special litigation counsel to the Debtors; (iii) Babcock & Brown LP as restructuring advisor to the Debtors with respect to secured aircraft debt and lease obligations; (iv) Deloitte & Touche LLP as independent auditors, accountants and tax service providers to the Debtors; (v) Wilmer, Cutler, Pickering, Hale and Dorr LLP as special regulatory counsel to the Debtors; and (vi) Piper Rudnick LLP as special labor counsel to the Debtors.  The Bankruptcy Court also authorized the establishment of procedures for interim compensation and reimbursement of the Debtors’ Professionals.

 

Subsequently, the Debtors sought Bankruptcy Court approval to employ additional Professionals.  On February 27, 2003, the Bankruptcy Court approved the retention of McKinsey & Company as management consultant to the Debtors.  The Bankruptcy Court similarly approved the retention of Bain & Company as strategic consultants and negotiating agents for the Debtors on April 16, 2003.  It approved the retention of Mercer Management Consulting as executory contract consultants on May 23, 2003.  Also on May 23, 2003, the Bankruptcy Court approved the retention of Transportation Planning, Inc. as appraisers to the Debtors.  On February 25, 2004, the Bankruptcy Court approved the retention of Mayer Brown Rowe & Maw LLP as special litigation counsel.  On November 1, 2004, the Bankruptcy Court approved the retention of Bridge Associates, LLC to provide financial and operational review and consulting services to United.  Finally, in October of 2004, United obtained Bankruptcy Court approval for the retention of Novare, Inc. and Account Resolution Corporation as preference consultants.

 

40



 

C.                                     Debtors’ Restructuring Initiatives

 

Following the filing of the Debtors’ Chapter 11 petitions and the initial stabilization of their operations, the Debtors focused on pursuing a number of restructuring initiatives to prepare for their successful emergence from Chapter 11.  Several of these initiatives are described in further detail below.

 

1.               Automatic Stay

 

The filing of the bankruptcy petition on the Petition Date triggered the immediate imposition of the automatic stay under Section 362 of the Bankruptcy Code, which, with limited exceptions, enjoined the commencement or continuation of all collection efforts and actions by Creditors and claimants, the enforcement of Liens against property of the Debtors, and continuation of litigation against the Debtors.  The automatic stay remains in effect until the Debtors’ emergence from Chapter 11.

 

September 11 Litigation.  While most litigation against the Debtors remains stayed, the Debtors have filed a number of stipulations with the Bankruptcy Court modifying the automatic stay to allow certain plaintiffs to proceed for the limited purpose of establishing liability and/or recovering from available insurance proceeds.  One of the most significant cases to proceed arises out of the September 11, 2001 terrorist attacks, which involved two United aircraft (Flights 175 and 93).  Hundreds of lawsuits have been filed as a result of the events of September 11 in the United States District Court for the Southern District of New York, which has exclusive jurisdiction over all claims arising out of the terrorist attacks.  In addition, various parties filed approximately 370 Proofs of Claim against the Debtors’ Estates on account of this litigation.  These suits assert a variety of theories, including wrongful death, personal injury, and property damage, based on the allegation that United, among others, breached its duty of care to its passengers and certain ground victims.  Pursuant to legislation passed by Congress (the Air Transportation and Safety and System Stabilization Act of 2001, codified at 49 U.S.C. § 40101 and amended by the Aviation and Transportation and Security Act, Pub. L. 107-71, 115 Stat. 597 (2001)), the recovery by such plaintiffs is limited to the amount of applicable insurance coverage.  As a result, on May 29, 2003, the Debtors reached an agreement with the September 11 plaintiffs whereby they would proceed against liability insurance proceeds.  Since that time, a number of plaintiffs pursuing litigation in the Southern District of New York have opted into the September 11 Victims’ Compensation Fund, which allowed individual victims of the September 11 terrorist attacks to receive compensation from the federal government in lieu of pursuing a civil action, as a result of which their lawsuits against the Debtors have been dismissed.  As a result of such dismissals, only 121 lawsuits are still active.  Of these, 33 plaintiffs continue to seek recovery against the Debtors’ applicable insurance for damages caused to passengers or ground victims by the two United flights.  An additional 30 property damage lawsuits are still pending.  In addition, only 15 Proofs of Claim related to the September 11 terrorist attacks remain on the Debtors’ Claims register.  On October 7, 2005, the Debtors and Creditors’ Committee each filed an objection to all 15 of such Proofs of Claims.  A pre-trial hearing is scheduled with respect to such objections for November 18, 2005. The Debtors reserve all rights, claims, and defenses with respect to this litigation and any Proofs of Claim filed by such plaintiffs.

 

Summers Litigation.  On February 28, 2003, certain participants in the Debtors’ ESOP (the “ESOP Plaintiffs”) brought a purported class action in the District Court against UAL’s ESOPs, the “ESOP Committee,” and certain of the ESOP Committee members (the “ESOP Defendants”) alleging the ESOP Defendants breached their fiduciary duties by not selling UAL stock held by the ESOP (the “Summers Litigation”).  The complaint cites numerous events and disclosures that allegedly should have alerted the ESOP Defendants of the need to sell the shares.  The Debtors have $10 million in fiduciary insurance for any liability and are obligated to indemnify the ESOP Committee members for any liability beyond that coverage.

 

41



 

On May 9, 2003, the ESOP Committee and certain of its members filed indemnification Claims against the Debtors in the Chapter 11 Cases relating to the Summers Litigation.  On July 3, 2003, the ESOP Plaintiffs filed a purported class action Claim in the Chapter 11 Cases making similar Claims that the Debtors breached their fiduciary duties to monitor the ESOP Committee members.  The parties subsequently entered into a stipulation under which the ESOP Plaintiffs agreed to proceed only against the insurance proceeds.  On February 17, 2005, the District Court certified the matter to proceed as a class action on behalf of all participants in the ESOP.  All parties (the ESOP Plaintiffs, State Street, and the ESOP Committee) have filed motions for summary judgment, all of which are fully briefed and currently pending.  The Seventh Circuit subsequently authorized the ESOP Defendants to file an interlocutory appeal from the class certification decision.  The appeal has now been fully briefed.  On August 17, 2005 the ESOP Plaintiffs and the ESOP Committee Defendants filed a proposed settlement with the District Court.  The District Court preliminarily approved the settlement.  The ESOP Plaintiffs notified class members of the settlement and the court approved the fairness of the settlement is scheduled on October 12, 2005.   State Street did not settle with the ESOP Plaintiffs and the parties went to trial in the District Court in October 2005.  Recently, the District Court ruled in State Street’s favor with respect to this litigation.  The Debtors reserve all rights, claims, and defenses with respect to this litigation.

 

Hall d.b.a. Travel Specialists v. United.  A North Carolina travel agent filed an antitrust class action suit against United (and other carriers) initially in state court and then in federal court (in North Carolina), following the reduction by United (and other carriers) in November 1999 of commission rates payable to travel agents.  The plaintiffs alleged that United and the other carrier-defendants conspired to fix travel agent commissions in violation of the Sherman Act and sought treble damages and injunctive relief.  Subsequent to this initial filing, the case was expanded by the addition of new carrier defendants and the certification of a plaintiff class consisting of all U.S. travel agencies.  The plaintiffs also have added Claims relating to the carriers’ commission reduction actions in 1997, 1998, 2001, and 2002.  The plaintiffs have claimed lost commissions in the amount of $13 billion, although United’s alleged share of this amount was not specified.  Upon the Debtors’ Chapter 11 filing, this case was stayed as against United.  Since that date, all remaining defendants have moved for summary judgment.  Subsequently, the United States District Court for the Eastern District of North Carolina granted summary judgment in favor of the defendants.  The plaintiffs appealed the summary judgment decision to the Fourth Circuit Court of Appeals, and on December 9, 2004, the Fourth Circuit affirmed the trial court’s ruling dismissing all claims.  On January 4, 2005, the Fourth Circuit denied plaintiffs’ request for a rehearing en banc and the time for further appeal has now expired.  The Debtors reserve all rights, claims, and defenses with respect to this litigation.

 

Always Travel Litigation and Canadian CCAA Filing.   On May 13, 2002, Always Travel Inc. (“Always Travel”), Highbourne Enterprises Inc. (“Highbourne”), and Canadian Standard Travel Agent Registry (“CSTAR” and together with Always Travel and Highbourne, the “Canadian Plaintiffs”) commenced an action in the Federal Court of Canada (the “Federal Court”) against United, Air Canada, American Airlines Inc., Delta Airlines Inc., Continental Airlines Inc., Northwest Airlines Inc., and the International Air Transport Association.  Always Travel and Highbourne are both travel agencies located in Canada, specifically in Montreal, Québec, and Toronto, Ontario.  CSTAR is a not-for-profit corporation purporting to represent travel agencies throughout Canada.  The Canadian Plaintiffs had claimed damages on their own behalf and as representatives of a class of travel agents in Canada for, among other things, damages as a result of an alleged conspiracy and breach of the Canadian Competition Act.  In August 2004, a Canadian insolvency judge upheld the separate decisions of a claims monitor and a claims officer disallowing the Canadian Plaintiffs’ Claims in their entirety.  Subsequently, pursuant to an objection filed by the Debtors, the Bankruptcy Court disallowed the Canadian Plaintiffs’ Proofs of Claim filed in the Chapter 11 Cases.  The underlying litigation against all the airline defendants, including United, has now been dismissed with prejudice bringing this dispute to a final conclusion.

 

42



 

In addition, on May 16, 2003, United and its related entities sought and obtained an order (the “Foreign Recognition Order”) from the Ontario Superior Court of Justice (the “Superior Court”) under the Companies’ Creditors Arrangement Act (“CCAA”) that, among other things: (i) recognized United’s Chapter 11 bankruptcy proceedings in Canada; (ii) stayed all Claims against United in Canada; and (iii) directed all Canadian Creditors and claimants to file any Claims that they may have against the Debtors in their Chapter 11 Cases by no later than June 23, 2003 (the “Canadian Bar Date”).  The Superior Court has periodically extended the Foreign Recognition Order, which still remains in effect.  Most recently, on September 15, 2005, the Superior Court extended the Foreign Recognition Order through January 13, 2006.  Upon Confirmation of the Plan, the Debtors will file a motion for a final order with the Superior Court which would seek: (i) recognition and enforcement of the Confirmation Order by all courts within Canada’s Jurisdiction; and (ii) termination of the CCAA proceedings in the Superior Court.  The Debtors reserve all rights, claims, and defense with respect to this litigation.

 

2.               Claims

 

On February 24, 2003, the Debtors filed their schedules of assets and liabilities and statement of financial affairs (the “Schedules”) with the Bankruptcy Court.  On June 24, 2005, the Debtors filed amended Schedules with the Bankruptcy Court (the “Amended Schedules”).  Interested parties may review the Schedules and/or Amended Schedules at the office of the Clerk of the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Everett McKinley Dirksen Building, 219 S. Dearborn, Chicago, Illinois 60604.

 

On February 27, 2003, the Bankruptcy Court entered an order setting claims bar dates (the “Bar Date Order”) approving the form and manner of the bar date notice (the “Bar Date Notice”).  Pursuant to the Bar Date Order and the Bar Date Notice, the general Bar Date for filing Proofs of Claim in these Chapter 11 Cases was May 12, 2003 for all persons and non-governmental entities, and June 9, 2003 for all governmental entities.  The Debtors served copies of the Bar Date Notice on all scheduled Creditors, employees, and other potential Creditors and published the Bar Date Notice in USA Today, The Wall Street Journal, The New York Times, Chicago Tribune, The Australian, the London Times, the South China Morning Post, Asahi Shinbun, La Nacion, Folha de Sao Paulo (Retail Rate), USA Today - Global Edition, and the International Herald Tribune.  In addition, as discussed above, pursuant to the Foreign Recognition Order, the Debtors published notice of the Canadian Bar Date in the Globe and Mail (National Edition) on May 28, 2003.

 

Claims Estimates..  As of September 1, 2005, the Debtors’ Claims Agent had received approximately 44,716 Proofs of Claim.  As of September 1, 2005, the total amounts of remaining Claims filed against one or more of the Debtors were as follows:  319 Secured Claims in the total amount of $13,545,350,698.99; 95 Administrative Claims in the total amount of $319,766,767.14; 256 Claims asserting Priority Claims in the total amount of $10,470,875,378.18; and 6,208 Unsecured Claims in the total amount of $20,422,648,792.51.  The Debtors believe that many of the filed Proofs of Claim are invalid, untimely, duplicative, overstated, and therefore are in the process of objecting to such Claims.  Through such objections, the Bankruptcy Court has to date disallowed a total of approximately $3.618 trillion in Claims (including reduced Retroactive Pay Claims of $3.375 trillion).

 

The Debtors estimate that at the conclusion of the Claims objection, reconciliation and resolution process, the aggregate amount of estimated Allowed Secured Claims against the Debtors will aggregate approximately $8 billion, estimated Allowed Priority Tax Claims against the Debtors will aggregate approximately $60 million, and estimated Allowed Unsecured Claims against the Debtors will aggregate

 

43



 

approximately $28 billion.(11)  These estimates are based upon a number of assumptions made by the Debtors.  Moreover, there is no guarantee that the ultimate amount of each of such categories of Claims will conform to the estimates stated herein, and most of the Claims underlying such estimates are subject to challenge, including, but not limited to, an objection by the Creditors’ Committee to the Unsecured PBGC Claim and a potential objection to the SAM Distribution and SAM Notes, as defined in Article III.C.4.b.ii.b below.  The Creditors’ Committee’s position is that it can object to the SAM Notes and the SAM Distribution outside of the context of the Plan Confirmation process.  The Debtors’ disagree with the Creditors’ Committee’s position.

 

The Debtors estimate that at the conclusion of the Claims objection, reconciliation and resolution process, the aggregate amount of estimated Allowed Administrative Claims against the Debtors will aggregate approximately $81 million.  The estimate of Allowed Administrative Claims includes, inter alia, Claims associated with the cure of assumed executory contracts and unexpired leases,  Claims related to aircraft subject to Section 1110(a) elections and/or Section 1110(b) stipulations (but not any Claims asserted by parties seeking allowance of administrative claims under Sections 503(b) and 365(d)(10) of the Bankruptcy Code for aircraft), Claims arising from a right of reclamation, and certain Administrative Claim requests reflected on the Claims Register and docket for which the Debtors reasonably expect there to be a recovery.  The estimate of Allowed Administrative Claims does not include ordinary course trade payables, the Debtors’ key employee retention plans, or Professional fees.

 

Also, to resolve an adversary proceeding against the United States government seeking turnover of certain tax refunds, overpayments, and other tax-related items owed to the Debtors, and in return for the release to the Debtors of approximately $363 million administratively frozen by the U.S., the Debtors and the U.S. entered into a stipulation and agreed order (approved by the Bankruptcy Court on March 27, 2003).  The stipulation established a $25 million fund from which valid Claims of the U.S. government could be set off.  As of September 1, 2005, the U.S. government exercised approximately $5.5 million in set offs, reducing the $25 million fund to $19.5 million.  Any valid Claims of the federal government in excess of the fund would be treated as Administrative Claims by the Debtors, with a maximum cap of approximately $363 million for such Claims.  The Debtors’ current estimated aggregate liability to the U.S. government (excluding amounts owed the PBGC) is approximately $19.7 million.  The adversary proceeding was dismissed without prejudice, and the Debtors may, if necessary, institute an action for turnover of any remaining administratively frozen funds.  Under the stipulation the Debtors retain the right to object to, and have the Bankruptcy Court adjudicate, any Claim of the U.S. government.

 

In addition, various alleged Creditors asserted numerous Claims in unliquidated amounts.  The Debtors believe that certain Claims that have been asserted are without merit and intend to object to all such Claims.  There can be no assurance that the Debtors will be able to achieve the significant reductions in Claims set forth above.  Moreover, additional Claims may be filed or identified during the Claims resolution process that may materially affect the foregoing Claims estimates.

 

Recently, the IRS filed a Proof of Claim against each of the 28 Debtors on a joint and several basis for approximately $114 million in excise taxes allegedly arising from the Debtors’ failure to make minimum funding contributions to their Pension Plans (as discussed below in Article III.C.4.b.i).  The Debtors dispute the merits of these Claims but have not yet filed an objection thereto.

 

Four parties, Jimella Harris, David Lawson, Barnita P. Vann, and Timothy Hafer filed objections to this Disclosure Statement requesting that the Debtors allow their Claims.  The Debtors’ position,

 


(11)                            The estimate of Allowed Unsecured Claims includes, among other things, proposed distributions to the Debtors’ employee groups as discussed in Article III.C.4 herein.

 

44



 

however, is that such Claims will be resolved in the course of the Claims reconciliation process described herein rather than through the Plan.  In addition, Jeffrey A. Talon, whose Claims were expunged by order of the Bankruptcy Court after a contested hearing, objects to the expungement of his Claims under the Plan.  The Debtors disagree with these individuals’ positions and reserve their rights accordingly.

 

The “Covia Parties” and the “Osband Parties” objected to the Disclosure Statement asserting that the Debtors do not describe the treatment of their claims for purported rights of boarding priority.  The Claims of both groups have not been resolved at this time in the Claims objection and reconciliation process.  The Covia Parties and the Osband Parties allege that their purported rights are equitable in nature and cannot be discharged as Claims under the Plan.  The Debtors believe that the boarding rights asserted by the Covia Parties and Osband Parties can be liquidated as prepetition Claims.  In any event, these matters will be resolved in connection with the Claims objection and reconciliation process discussed herein, and all parties reserve their rights with respect to any objection to these Covia and Osband parties’ Claims.

 

3.               Protection of Net Operating Losses

 

As of the Petition Date, the Debtors’ federal net operating losses (“NOLs”) were estimated to be approximately $4 billion.  Since the Petition Date, the Debtors have incurred an additional several billion dollars of NOLs.  Under the Internal Revenue Code, NOLs that accumulate prior to emergence from bankruptcy may be used to offset post-emergence taxable income.  However, under the applicable federal tax laws, the Debtors would have lost the ability to utilize a significant portion of their NOLs if an “ownership change” were to occur prior to completion of the Chapter 11 Cases.  Consequently, trading in the stock of the Debtors could have jeopardized the Debtors’ ability to use those NOLs.  In addition, the Debtors’ ability to use their NOLs could have been significantly limited as a result of trading of Claims against the Debtors.

 

In light of the vital importance of maintaining this significant source of future savings, the Debtors sought, and the Bankruptcy Court entered, an interim order on December 10, 2002, to prohibit any trading in:  (i) Claims against the Debtors; or (ii) equity securities of the Debtors.  The Debtors were particularly concerned about sales of equity securities by State Street, the independent fiduciary for the ESOPs, because the ESOPs previously had held more than 50% of UAL’s stock.  Sales by State Street alone could have triggered an ownership change.  The Bankruptcy Court’s December 10 interim order applied to any Holder holding at least:  (i) 2,500,000 shares of Old UAL Common Stock; or (ii) Claims in excess of $65 million.  Following a hearing on December 30, 2002, the Bankruptcy Court entered an additional interim order to assist the Debtors in monitoring and preserving their NOLs by imposing certain notice and hearing procedures on trading in Claims against, or Interests in, the Debtors.  With respect to transfers of Claims, the December 30 interim order also increased the minimum level of applicable Claims from $65 million to $200 million and, with respect to Holders of shares, increased the minimum number of shares of Old UAL Common Stock to 4,800,000 shares.  On January 15, 2003, the Bankruptcy Court entered another interim order clarifying such procedures and further limiting the application of the restrictions.

 

In January 2003, the Bankruptcy Court’s ruling that State Street could sell only those shares that would not jeopardize the Debtors’ NOLs permitted State Street to convert an additional 3.2 million shares of Old Class 1 and Class 2 Preferred Stock to an equivalent 12.8 million shares of Old UAL Common Stock and sell them on the open market.  On February 24, 2003, the Bankruptcy Court entered a preliminary injunction limiting transfers of Interests of and Claims against the Debtors and approving related notice procedures consistent with the prior interim orders.  On March 4, 2003, the Debtors announced they had received a private letter ruling from the IRS, effectively permitting State Street to sell approximately 3.9 million additional UAL shares, but confirming that sales of any additional shares

 

45



 

would in fact cause an “ownership change” that would cause United to lose its NOLs.  State Street promptly sold those 3.9 million shares on the open market.  Please refer to Article III.C.1. regarding the Summers Litigation brought against the ESOP Committee in connection with State Street’s sale of such shares.

 

In May 2003, the Old UAL Board passed a resolution that if the IRS amended its regulations, the ESOPs would terminate and all shares held by the ESOPs would be distributed to the individual ESOP participants.  On June 27, 2003, the Treasury Department and the IRS released a new set of tax regulations regarding qualified plans (such as the ESOPs) and the manner in which sales and distributions of stock by ESOPs affect corporate NOLs.  As a result of these regulations, which generally permitted an ESOP to distribute shares to its participants with no adverse effect on a corporation’s NOLs, UAL and the Creditors’ Committee authorized termination of the ESOP and State Street was permitted to distribute the remaining 15.9 million shares of Old UAL Common Stock held by the ESOP to the ESOPs’ individual participants (after accounting for the conversion of the Old Class 1 and Class 2 Preferred Stock into Old UAL Common Stock).

 

4.               Labor, Pension, and Retirement Cost Restructuring

 

Prior to the Petition Date, the Debtors struggled under the costs and restrictions of CBAs covering approximately 85% of their domestic work force.  The Debtors’ CBAs set high wage scales and established work rules that hampered productivity in comparison to the Debtors’ competitors.  As a result, during 2002, the Debtors had the highest labor costs of any major U.S. airline.  Moreover, the CBAs hindered the Debtors’ flexibility to make critical business decisions, such as entering into code-sharing agreements with other airlines, allowing its United Express partners to use smaller and less costly regional jets on routes with less demand, and outsourcing work to companies who could provide services at much lower costs than the Debtors’ employees.  Because labor costs constituted the Debtors’ largest expense and consequently are a critical differentiator of total costs among airlines, negotiating modifications to their CBAs ranked among the Debtors’ highest priorities from the outset of the Chapter 11 Cases.

 

The Debtors also faced significant pension obligations.  As of the Petition Date, the Debtors sponsored four underfunded defined benefit pension plans: the United Airlines Pilot Defined Benefit Pension Plan (the “Pilot Plan”), the United Airlines Flight Attendant Defined Benefit Pension Plan (the “Flight Attendant Plan”), the United Air Lines Ground Retirement Income Plan (the “Ground Plan”), and the Management, Administrative, and Public Contact Workers Defined Benefit Pension Plan (the “MAPC Plan”) (collectively, the “Pension Plans”).(12)  The combination of the lowest interest rates in 45 years and volatile stock market returns caused many U.S. defined benefit pension plans, including those of the Debtors, to become underfunded.  Government funding requirements obligated the Debtors to pay a special funding surcharge called a “deficit reduction contribution” (“DRC”) that would have required the Debtors to make significant accelerated contributions to the Debtors’ Pension Plans over the next few years.  The Debtors estimated that they would have had to make over $5.5 billion in pension contributions (including pilot and management non-qualified benefits) from 2004 through 2008.

 

a.               2003 Labor, Pension, and Retirement Cost Restructuring

 

For the first 18 months of their Chapter 11 Cases, and with the support of all of their stakeholders, including the Creditors’ Committee, the Debtors focused on obtaining exit financing guaranteed by the

 


(12)                            In addition, the Debtors sponsor the United Air Lines, Inc. Employees’ Variable Benefit Retirement Income Plan which is a small frozen defined benefit pension plan.  No contributions are currently due with respect to this Plan.

 

46



 

ATSB on terms that would have allowed the Debtors to exit bankruptcy with their Pension Plans intact.  By statute, a precondition of an ATSB guarantee would have been that non-ATSB-guaranteed financing of the Debtors’ business plan submitted to the ATSB was not available on commercially reasonable terms.  Thus, no parallel exit financing process could have been undertaken in earnest during the ATSB process.  During this time, the Debtors made tremendous strides (which the ATSB expressly acknowledged) in reducing their overall cost structure and making their businesses more competitive, including a tripartite restructuring of their labor, pension, and other retirement costs.

 

(i)                                     The Debtors’ 2003 Labor Cost Restructuring Activities
 

Negotiations to modify the Debtors’ CBAs commenced three days after the Petition Date, when the Debtors presented each of their Unions with proposed modifications to their CBAs, initiating the Section 1113 process under the Bankruptcy Code.  While the Debtors committed to reaching consensual settlements, they informed their Unions that to satisfy covenants under the DIP Facility they would be forced to seek rejection of their CBAs if negotiations proved unsuccessful.  Simultaneously, the Debtors took immediate steps to reduce the pay, benefits and staffing levels of their non-represented SAM employees.

 

The DIP Facility covenants originally required that the Debtors lower their labor costs by mid-February 2003, which would have necessitated a filing to reject the Debtors’ CBAs by December 26, 2002.  To allow the Debtors enough headroom under the DIP Facility covenants, thereby delaying their Section 1113(c) rejection motion, and allowing the parties more time to reach consensual agreements, the Debtors, ALPA, AFA, PAFCA, and TWU agreed to interim wage reductions, which were ratified by their memberships in early January 2003.  The Debtors subsequently moved under Section 1113(e) for interim wage relief against IAM 141 and IAM 141M, which the Bankruptcy Court granted on January 10, 2003.

 

After attaining interim wage relief, the Debtors and their Unions continued negotiations to achieve long-term wage and benefit cost-saving agreements.  By mid-March, the Debtors had reached agreement only with TWU, the smallest of the Debtors’ Unions (the “TWU 2003 Restructuring Agreement”).  Thus, even while continuing to negotiate, the Debtors were forced to file their Section 1113(c) motion on March 17, 2003, to reject all of their other CBAs.

 

Ultimately, the negotiations succeeded.  On March 27, 2003, the Debtors and ALPA reached tentative agreement on long-term modifications to the ALPA CBA (the “ALPA 2003 Restructuring Agreement”), while the Debtors reached tentative agreements with AFA (the “AFA 2003 Restructuring Agreement”), PAFCA (the “PAFCA 2003 Restructuring Agreement”), IAM 141 (the “IAM 141 2003 Restructuring Agreement”), and IAM 141M(13) (the “IAM 141M Restructuring Agreement,” and collectively, the “2003 Restructuring Agreements”) in early April 2003.Each of the Unions’ memberships subsequently ratified their respective 2003 Restructuring Agreements.

 

Significantly, the 2003 Restructuring Agreements provided for:  enhanced flexibility with respect to regional jets, outsourcing, and code share arrangements; a low-cost product offering; and a success-sharing program.  The Debtors, ALPA, and IAM also entered into letters of agreement providing that ALPA and IAM would have a seat on Reorganized UAL’s board of directors.  Pursuant to the 2003

 


(13)                            In July 2003, the National Mediation Board announced that the Debtors’ mechanics and related employees, previously represented by the IAM, voted to change their union representation to AMFA. This change in representation from IAM to AMFA had no effect on the terms or duration of the modified CBAs ratified in April 2003.

 

47



 

Restructuring Agreements, the Debtors achieved average annual savings of approximately $1.1 billion from ALPA; approximately $500,000 from TWU; approximately $4 million from PAFCA; approximately $300 million from AFA; approximately $350 million from IAM 141M; and approximately $450 million from IAM 141. The Debtors also achieved average annual savings of approximately $332 million from their SAM employees.  In all, these changes were projected to result in average annual savings of approximately $2.5 billion over the 2003 to 2008 time period.  Additionally, concessions included in the 2003 Restructuring Agreements reduced the Debtors’ projected pension funding contributions by approximately $1.2 billion between 2004 and 2008.

 

The Debtors determined that all of their employee groups would share proportionately in the distribution under the Debtors’ plan to the Unsecured Creditor body.  Specifically, the Debtors agreed to propose a plan of reorganization that provided for distributions to each of the their Union-represented and SAM employee groups based on their pro rata share of the Unsecured Distribution as though such employee groups had Unsecured Claims, calculated as follows: (a) the dollar value of 30 months of average cost reductions obtained in the Debtors’ 2003 labor savings initiatives with respect to each employee group as reasonably measured by the Debtors’ labor model, divided by (b) the sum of each respective distribution amount and the total amount of all other allowed prepetition general Unsecured Claims against the Debtors.  Collectively, the average labor cost savings over 30 months based on the Debtors’ 2003 labor savings initiatives total approximately $6.4 billion.

 

On April 30, 2003, the Debtors filed a motion to approve the 2003 Restructuring Agreements, and the Bankruptcy Court considered the motion the same day.  (Although the Debtors’ labor model contemplated a pro rata distribution of the Unsecured Distribution to SAM employees, the Debtors’ motion did not include a request for Bankruptcy Court approval of such distributions to SAM employees).  Certain parties objected to the distributions under the 2003 Restructuring Agreements. The Debtors addressed the objectors’ concerns by including a reservation of rights in the order approving the motion as follows:

 

[V]arious parties state that the claims set forth in the Distribution Agreements contained in the [2003] Restructuring Agreements may be challenged at a later date; the Debtors and the unions state that the Restructuring Agreements speak for themselves in that regard.

 

Order Approving 2003 Restructuring Agreements, ¶ 4.  When one of the objectors asked for clarification of this provision in the order, the Bankruptcy Court stated as follows:

 

I don’t know, and can’t possibly have given sufficient consideration to know, the appropriateness of a claim to be asserted by the unions in connection with these restructurings.  I have every reason to believe that it was the subject of considerable negotiation between United and the unions.  If there’s also no question that the agreement of the unions to accept reductions in the compensation of their members as this case moves forward would be essential to the continued operation of the airline, it’s continued ability to generate income and, hence, the potential for your clients recovering anything on their general unsecured claims — with those observations, I would suggest that it is highly likely that the claims that are set forth in this agreement would ultimately be approved by the Court if there were a challenge made to the claims. However, I have to believe that the provisions of Section 502 of the Bankruptcy Code which would allow other parties to challenge claims asserted by any creditors of the estate, could not be undone by a bilateral agreement between the debtor and a particular creditor. So those — those would be my observations.  If that’s troubling to either party in such a way as to

 

48



 

cause them not to want me to sign this order, I will hear from them.  But that’s the way I would view the situation at the present time.

 

See 4/30/2003 Transcript, pp. 7-8.

 

While the savings achieved through the Debtors’ 2003 labor restructuring initiatives were significant, the Debtors still faced $2.5 billion in pension plan contributions coming due in 2004 and 2005.  For this reason, among others, the Debtors expressly reserved their rights with respect to Section 1113, Section 1114, and pension issues as warranted by future developments.

 

(ii)                                  The Debtors’ Request for Pension Funding Relief
 

On October 10, 2003, the Debtors filed with the IRS multiple applications for pension funding waivers for all four of the Debtors’ Pension Plans.  In addition, the Debtors worked closely with other airlines, airline unions, and the AFL-CIO in support of a pension reform proposal that would allow companies affected by the DRC requirements to defer certain accelerated pension funding contributions and smooth out minimum funding requirements over a longer period of time than provided by the current law.

 

Despite resistance from low fare carriers, Congress enacted the Pension Funding Equity Act (“PFEA”) on April 10, 2004.  The PFEA benefited the Debtors in two ways.  First, the PFEA adjusted the benchmark that the Debtors were to use during the following two years to calculate their contributions from the 30-year Treasury Bond rate to a rate comprised of a mix of corporate bonds (which lowered the Debtors’ required pension funding obligations in 2004 and 2005).  Second, the PFEA provided DRC relief to the airline and steel industries (by deferring certain payments to future years).

 

(iii)                               The Debtors’ Section 1114 Negotiations: Obtaining Modifications to Retiree Benefits
 

Because of the need to meet certain financial metrics, the Debtors next reluctantly turned to restructuring their costs to provide medical benefits to retirees.  On January 14, 2004, the Debtors announced that they would seek modifications to their retirees’ medical benefits pursuant to Section 1114 of the Bankruptcy Code.  All of the Unions who represented employees of the Debtors, except for ALPA, agreed to serve as “authorized representatives” for their respective retiree groups.  On January 23, 2004, the Debtors filed a motion with the Bankruptcy Court seeking appointment of a committee of retired persons to represent retired salaried and management employees and retired pilots.(14)  On February 20, 2004, the Bankruptcy Court appointed two retiree committees, one committee representing retired pilots and one committee representing retired SAM employees (collectively, the “Retiree Committees”).  Thereafter, the Debtors began the negotiation process under Section 1114 by distributing the proposed

 


(14)                            On February 2, 2004, in connection with the Section 1114 process, the AFA filed a motion for appointment of an examiner under Section 1104(c) of the Bankruptcy Code.  The AFA argued that an examiner was warranted to determine whether the Debtors intentionally enticed flight attendants into retiring early while at the same time not disclosing that they had already decided to seek modification to their retiree benefits under Section 1114 of the Bankruptcy Code.  IAM and AMFA joined this request.  The Debtors opposed the request.  On February 20, 2004, the Bankruptcy Court ordered the appointment of Ross O. Silverman as examiner (the “Examiner”) for the limited purpose of determining whether the Debtors decided to seek Section 1114 relief prior to July 1, 2003.  On March 19, 2004, the Examiner submitted his report to the Bankruptcy Court.  The report concluded that the Debtors’ decision to seek relief under Section 1114 was not made before December 15, 2003.

 

49



 

modifications and relevant information to the Retiree Committees and the other authorized representatives.

 

The Debtors engaged in negotiations with the authorized representatives throughout April and May 2004.  On May 21, 2004, the Debtors were forced to file a motion to modify their retiree medical benefits under Section 1114 because they had only reached consensual agreement on the modification of retiree medical benefits with one of their authorized representatives.  Thus, a trial was scheduled for June 11, 2004.  On the eve of trial, however, the Debtors reached agreements with each of the authorized representatives.  These agreements were subsequently memorialized in an agreed order that the Bankruptcy Court entered on June 14, 2004.  The Debtors estimated that the modifications to retiree benefits netted more than $300 million in total cash savings through 2010 (although the total amount of savings to the Debtors arising from the modifications to retiree benefits will be larger because the Debtors will obtain savings well past 2010).

 

(iv)                              Debtors’ Termination of Their SERP
 

In March 2003, the Debtors ceased payment of Supplemental Executive Retirement Plan (“SERP”) benefits (i.e., non-qualified benefits earned under the terms of the MAPC Plan) to SAM retirees who were not employed by the Debtors on the Petition Date.  Subsequently, in February 2005, the Debtors terminated the SERP entirely, thereby eliminating such benefits for all remaining active and retired SAM employees.

 

b.              Post-ATSB Labor, Pension, and Retirement Cost Restructuring: Obtaining Non-Guaranteed Exit Financing

 

In June 2004, the ATSB denied the Debtors’ federal loan guarantee application, resulting in a need to secure exit financing not backed by ATSB loan guarantees.  To obtain exit financing not largely backed by the full faith and credit of the United States, and in the midst of record-high fuel prices and a highly competitive revenue environment, United embarked on significant additional restructuring initiatives, including additional cost-cutting and efficiency improvements.  As part of this process, United re-examined every aspect of its cost structure as part of the process of formulating a revised business plan that the capital markets would be willing to finance.  Among other things, it became necessary for the Debtors to revisit their labor costs, including their pension obligations, which remained the Debtors’ single largest expense.

 

(i)                                     The Debtors’ Decision To Suspend Minimum Funding Contributions
 

In July 2004, minimum funding contributions of $72 million, $404 million, and $91 million were coming due on July 15, September 15, and October 15, 2004 respectively, in connection with the Pension Plans.  The Debtors announced that they would not make the July 15 contribution .  They also announced that they would suspend further contributions until a final decision was reached on whether termination and replacement of the Pension Plans was necessary.  By suspending contributions, the Debtors averted a precipitous decision with respect to the Pension Plans, allowing for a full and thoughtful exploration with their stakeholders of every possible alternative to termination and replacement.  Suspending the contributions also avoided a liquidity crisis which would have been triggered had the Debtors paid the $567 million in pension contributions due in July, September, and October 2004.  However, as discussed below, the Debtors’ decision to defer future pension contributions caused several parties, including PBGC, IAM, AFA, and the United States Department of Labor (the “DOL”), to pursue legal challenges both in and out of the Bankruptcy Court.

 

50



 

In August 2004, AFA filed a master executive council grievance under the AFA CBA seeking to compel the Debtors to immediately make their minimum funding contributions with respect to the Flight Attendant Plan.  The Debtors and AFA agreed to an expedited decision process to resolve AFA’s grievance.  A neutral arbitrator was selected to sit on the AFA System Board of Adjustment, who would have the power, under the AFA CBA, to render a binding decision on AFA’s grievance.  Ultimately, the AFA System Board of Adjustment ruled in the Debtors’ favor and found that the Debtors had been adequately funding the plan from an actuarial perspective and had not violated the AFA CBA.

 

Outside of bankruptcy, under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code, a lien arises in favor of PBGC when unpaid minimum funding contributions exceed $1 million.  In this case, however, the automatic stay prevented PBGC from perfecting its alleged liens against the Debtors.  Notwithstanding the automatic stay, on August 30, 2004, PBGC purported to perfect certain liens against three non-debtor UAL subsidiaries: ULS Ventures, Inc., United Air Lines Ventures, Inc., and Covia LLC.

 

Following the Debtors’ deferral of any decision regarding making additional minimum funding contributions, the Debtors and the DOL engaged in discussions regarding the ongoing administration of the Pension Plans.  As a result of these discussions, the Debtors proposed, and the DOL agreed, that the Debtors would retain an independent fiduciary for the Pension Plans.  With the DOL’s approval, the Debtors engaged Independent Fiduciary Services, Inc. (“IFS”) to fill that role.

 

On November 30, 2004, IFS filed a motion to allow minimum funding contribution claims of the Pension Plans as administrative expenses.  Specifically, the motion requested the allowance of an Administrative Claim against the Debtors in the amount of the unpaid minimum funding contributions to the Flight Attendant, Ground, and MAPC Plans (no contributions to the Pilot Plan had been owed during this time period).  On March 18, 2005, the Bankruptcy Court ruled in the Debtors’ favor that, as a matter of law, only that portion of the Debtors’ minimum funding obligations attributable to benefits earned post-petition was entitled to administrative priority under the Bankruptcy Code.  Specifically, the Bankruptcy Court held that Section 1113(f), on its own, did not afford super-priority to the Debtors’ obligations under their CBAs.  Furthermore, the Bankruptcy Court held that PBGC’s Claim for unpaid minimum funding obligations was not entitled to tax priority in bankruptcy where, as in this case, the automatic stay prevented the imposition of a lien against the Debtors. IFS has appealed the Bankruptcy Court’s ruling to the District Court.  On May 27, 2005, the Debtors issued a notice to terminate IFS as independent fiduciary of the Pension Plans, effective on the later of July 27, 2005 or the termination date of each of the Pension Plans, respectively.  Because the Ground, Flight Attendant, and MAPC Plans (the Pension Plans that were the subject of IFS’s motion) were terminated, before July 27, 2005 IFS ceased being the independent fiduciary of those Pension Plans as of that date.

 

Separately, the Debtors’ Canadian Auto Workers-represented (“CAW”) and IAM-represented employees located in Canada brought a motion before the Ontario Superior Court of Justice (the “Ontario Superior Court”) to compel minimum funding contributions to the pension plans maintained for the Debtors’ Canadian employees (the “Canadian Pension Plans”).  In early February 2005, the Ontario Superior Court granted IAM and CAW’s motion to compel the Debtors to continue making minimum funding contributions to the Canadian Pension Plans.  As a result, on or about March 31, 2005, the Debtors made the missed minimum funding contributions with respect to the Canadian Pension Plans which totaled approximately $710,000 (USD).

 

In related matters, on July 30, 2004, IAM and various IAM-represented employees filed two separate lawsuits alleging breaches of fiduciary duty arising out of the Debtors’ decision to cease making minimum funding contributions.  One action was filed in the District Court against the Pension and Welfare Plans Administration Committee of United Airlines, Inc. (“PAWPAC”) and certain executives of

 

51



 

UAL, including Glenn F. Tilton, Frederic F. Brace, and Peter D. McDonald (IAM, et al. v. PAWPAC, et al., Case No. 04-C-496).  The second action was filed in the United States District Court for the District of New Jersey against the same three executives (Donnelly, et al. v. Tilton et al., Case No. 04-03653).  On August 2, 2004, the Debtors brought adversary proceedings against the various plaintiffs, requesting that the Bankruptcy Court enjoin the actions.  On August 23, 2004, the Bankruptcy Court entered an order enjoining both actions.  Both actions were later dismissed without prejudice.  Accordingly, on May 20, 2005, the Debtors agreed to dismiss their adversary proceeding in the Bankruptcy Court without prejudice.

 

Similarly, on August 11, 2004, IAM and AFA each filed a motion seeking appointment of a Chapter 11 trustee.  They argued that the Debtors’ management had failed to perform its legal obligations with respect to its nonpayment of minimum funding contributions and was jeopardizing the Debtors’ chances of achieving a successful reorganization.  In late October 2004, to resolve IAM’s and AFA’s motions, and address concerns expressed by IAM and AFA regarding the Debtors’ reformulated business plan, the Debtors agreed to retain Bridge Associates, LLC to review the Debtors’ revised business plan.  IAM and AFA subsequently withdrew their motions for the appointment of a Chapter 11 trustee.  On December 16, 2004, the Debtors advised the Bankruptcy Court that Bridge Associates, LLC had completed its review of the Debtors’ business plan and issued a final report concluding that the business plan was “feasible,” subject to certain operational and cash flow assumptions.(15)

 

(ii)                                  Revisiting the Section 1113 Process and Termination and Replacement           of the Pension Plans.
 

In the process of revising their business plan and after reviewing alternative approaches, the Debtors concluded that the airline industry’s continuing harsh operating and financial environment would likely require termination and replacement of the Debtors’ Pension Plans in order to obtain exit financing without a loan guarantee from the ATSB.  The Debtors also determined and announced that, in addition to the savings realized from termination and replacement of the Debtors’ Pension Plans, the Debtors’ business plan required approximately $725 million in further average annual labor cost savings from the Debtors’ Union and SAM employees to meet exit financing requirements.

 

To that end, the Debtors officially re-commenced Section 1113 discussions with their Unions on November 4, 2004 by distributing term sheets and a revised business model to them.  The term sheets contained specific proposals, including suggested modifications to wages, benefits, and work rules that would provide each group’s portion of the approximately $725 million in labor cost reductions that the Debtors needed to start implementing by January 2005, plus a proposal to eliminate any requirement in their CBAs to maintain the Pension Plans.  The Debtors also provided additional alternative cost savings options for the Unions to consider, and underscored their willingness to consider all workable options and alternatives proposed by the Unions that would still provide the long-term savings necessary to exit Chapter 11 successfully.  On November 24, 2004, the Debtors filed their Section 1113(c) motion to reject their CBAs.  The Bankruptcy Court scheduled a Section 1113(c) trial to commence on January 7, 2005.  On a parallel track, the Debtors worked with their Unions to reach consensual agreements that would achieve the cost reductions the Debtors needed and that would avoid the need to commence the Section 1113(c) trial.

 


(15)                            The term “feasible” as used in Bridge’s report was defined as “the quality of being doable.”

 

52



 

(a)                                  The Debtors’ December 2004 Agreements with ALPA, PAFCA and TWU
 

In December 2004, the Debtors and ALPA reached an agreement on modifications to the ALPA CBA.  Pursuant to the December 2004 ALPA agreement, the Debtors and ALPA agreed, among other things, that pilot base pay rates would be reduced by 14.7 percent, effective January 1, 2005, not to increase again until 2006.  The agreement also provided that if the Debtors should seek judicial approval to terminate the Pilot Plan and such termination were to occur no earlier than May 2005, ALPA would waive any claim it may have that the termination of the Pilot Plan would violate the terms and conditions of the ALPA CBA.  For their part, the Debtors agreed to, among other things, (a) propose a plan of reorganization that provides pilots with (i) $550 million of New UAL Convertible Employee Notes, (ii) an additional pro rata distribution of the overall distributions to Unsecured Creditors under a plan, and (iii) assumption of the ALPA CBA; (b) an allowed administrative expense Claim equal to twice the estimated cost savings to the Debtors, (i.e., approximately $167 million), if under certain conditions, the agreement were to be terminated; and (c) provide incremental, annual 6 percent defined contribution plan contributions for the pilots.

 

As outlined in the agreement, the New UAL Employee Convertible Notes would be convertible into shares of New UAL Common Stock at a conversion price equal to the product of (x) 125% and (y) the average closing price of New UAL Common Stock for the sixty consecutive trading days following the Effective Date and will bear interest and be payable all as set forth in the ALPA 2005 Restructuring Agreement.  The New UAL Employee Convertible Notes also will include other terms and conditions that are customarily found in public traded convertible securities of this type.(16)

 

Later in December 2004, the Debtors reached similar agreements with PAFCA and TWU.  The PAFCA agreement provided that dispatcher base pay rates would be reduced by 5.2 percent, effective January 1, 2005, that monthly rates would be temporarily reduced by an additional 1.6 percent for the period January 1, 2005 through June 30, 2005, and that following the expiration of the temporary reduction, dispatcher wage rates would not increase again until 2006.  The TWU agreement provided, among other things, that meteorologist base pay rates would be reduced by 9.8 percent, effective January 1, 2005.  Both agreements, like the December 2004 ALPA agreement, provided that if the Debtors should seek judicial approval to terminate their respective Pension Plans the Unions would waive any claim they may have that the termination of such Pension Plans violated the terms and conditions of their CBAs.  In return, the Debtors agreed to propose a plan of reorganization with: (a) New UAL Convertible Employee Notes (similar to the Notes provided to ALPA-represented employees) of $24,000 for TWU-represented employees and $400,000 for PAFCA-represented employees; (b) an additional pro rata distribution of the overall distributions to Unsecured Creditors under a plan; (c) an administrative claim equal to the estimated cost savings to the Debtors, under certain conditions, which would be extinguished only if the agreement was ultimately terminated; and (d) annual contributions to defined contribution plans of 5.5 percent for employees represented by TWU and 5 percent for employees represented by PAFCA.

 


(16)                            United Retired Pilots Benefit Protection Association (“URPBPA”) argues that the Debtors’ disclosure regarding the New UAL Convertible Employee Notes is inadequate.  Specifically, URPBPA indicates that the Debtors should disclose how the New UAL Convertible Employee Notes provided to pilots will be allocated between the active pilots and the retired pilots.  The 2005 ALPA Restructuring Agreement provides that “[d]istribution mechanics, eligibility and allocation among such pilots [will] be reasonably determined by [ALPA].”  At present, ALPA has not informed the Debtors how it will allocate the consideration received under the 2005 ALPA Restructuring Agreement.

 

53



 

On December 16, 2004, the Debtors filed a motion to approve the December 2004 ALPA agreement and on January 5, 2005, the Debtors filed a motion to approve the December 2004 PAFCA and TWU agreements.  The motion to approve the ALPA agreement was opposed by the Creditors’ Committee, IAM, AFA, PBGC and trustees for various bond holders.  On January 7, 2005, the Bankruptcy Court denied the motion to approve the agreement with ALPA, finding that certain incentive provisions unduly limited the rights of other parties.  Specifically, the Bankruptcy Court found objectionable ALPA’s right to terminate the agreement and receive an administrative claim equal to twice the estimated cost savings if (1) the Debtors’ other Pension Plans were not terminated; (2) exclusivity was terminated and (3) a trustee was appointed or the case was converted to Chapter 7.  When the Bankruptcy Court declined to approve the December 2004 ALPA agreement, the Debtors withdrew their motion to approve their agreements with PAFCA and TWU.

 

(b)                                 The Debtors’ Reconstituted Agreements with ALPA, TWU, and PAFCA and PBGC’s Commencement of Involuntary Termination Actions Regarding the Pilot Plan
 

After the Bankruptcy Court denied the Debtors’ motion to approve the December 2004 ALPA agreement, the Debtors and ALPA immediately recommenced negotiations to modify the ALPA CBA in a way that would resolve the Bankruptcy Court’s concerns.  The Debtors and ALPA ultimately reached a tentative agreement reconstituting the deal (the “ALPA 2005 Restructuring Agreement”).  Pursuant to the ALPA 2005 Restructuring Agreement, among other things, the pilot base pay rates would be reduced by 11.8 percent, effective January 1, 2005, not to increase again until 2006, and an additional monthly contribution of 6 percent would be made to the pilots’ defined contribution plan.  The ALPA 2005 Restructuring Agreement reduced the Administrative Claim to an amount equal to the estimated cost savings (rather than twice the estimated cost savings) payable in the event of termination of the agreement and eliminated the other provisions the Bankruptcy Court found objectionable.

 

The Debtors also reconstituted their agreements with PAFCA and TWU (respectively, the “PAFCA 2005 Restructuring Agreement” and “TWU 2005 Restructuring Agreement”).  Among other things, the PAFCA 2005 Restructuring Agreement provided for dispatcher base pay rates to be reduced by 5.2 percent, effective January 1, 2005, with no increase until 2006, and annual contributions to a defined contribution plan of 6% of pay. The TWU 2005 Restructuring Agreement provided for meteorologist base pay rates to be reduced by 7.2 percent, effective January 1, 2005.  As with their December 2004 agreement with TWU, the Debtors agreed to provide annual contributions to defined contribution plans averaging 5.5 percent of pay.

 

As with their December 2004 tentative agreements, each of the ALPA, PAFCA and TWU 2005 Restructuring Agreements provided that after April 11, 2005, if the Debtors should seek judicial approval to terminate their respective Pension Plans, then on or after May 11, 2005, under certain circumstances, the Unions would waive any claims that termination would violate the terms and conditions of their CBAs.  In addition, the 2005 Restructuring Agreements continued to provide that the Debtors would propose a plan of reorganization that contained New UAL Convertible Employee Notes (totaling $550 million, $400,000 and $24,000 for ALPA, PAFCA and TWU represented employees respectively) as well as the additional pro rata distribution of the overall distribution to Unsecured Creditors and assumption of the CBAs, among other things.

 

During this same time period, the Debtors also announced that they were asking their SAM employees to take further reductions in salary and benefits.  Consequently, pay rates were reduced by 4% to 11% on January 1, 2005, and changes to benefits were implemented in the first quarter.  Additional reductions to headcount were also made, and initiatives to achieve even further gains in productivity are ongoing.  In consideration, and to account for the termination of the MAPC Plan, the Debtors have

 

54



 

provided in their business plan to distribute New UAL Convertible Employee Notes to SAM employees calculated using a methodology consistent with that used to calculate the New UAL Convertible Employee Notes for ALPA, PAFCA, and TWU, totaling approximately $56 million (the “SAM Notes”).  In addition, SAM employees will be eligible for a 100% match on their own contributions to the SAM defined contribution plan (up to 4 percent), and will be eligible for an additional, direct company contribution of up to 4 percent (depending on the participant’s age and years of service).

 

Moreover, as they previously had agreed in their 2003 Restructuring Agreements, the Debtors also agreed to provide in their plan of reorganization that their ALPA, PAFCA and TWU-represented and SAM employee groups would share in the distributions to the Debtors’ unsecured creditors on account of labor and pension-related savings achieved during the 2005 labor savings initiative.  Specifically, the Debtors agreed to propose a plan of reorganization providing for distributions to each of these employee groups as though such groups had Unsecured Claims, calculated as follows: (a) (i) the dollar value of 30 months of average cost reductions obtained in the Debtors’ 2003 labor savings initiatives with respect to each respective employee group as reasonably measured by the Debtors’ labor model, plus (ii) the dollar value of 20 months of average cost reductions obtained in the Debtors’ 2005 labor savings initiatives with respect to each respective employee group as reasonably measured by the Debtors’ labor model, divided by (b) the sum of each respective distribution and the total amount of all other allowed prepetition general Unsecured Claims against the Debtors.

 

Each of the ALPA, TWU, and PAFCA 2005 Restructuring Agreements also provided that they could be terminated at the option of the respective Union if, for example, a plan of reorganization is filed or confirmed which contains any material term that is materially inconsistent with the terms of the respective 2005 Restructuring Agreement or if the Debtors failed to achieve a specifically defined aggregate level of cost saving from all of its other employee groups, including SAM.  Each of the ALPA, TWU, and PAFCA 2005 Restructuring Agreements was ratified by their respective Union membership and approved by the Bankruptcy Court.(17)  The orders approving the ALPA, PAFCA, and TWU 2005 Restructuring Agreements provided that, except for the allowed Administrative Claim, judicial approval of such agreements would have the same meaning and effect as judicial approval of the 2003 Restructuring Agreements.

 

Again, although the Debtors’ labor model also contemplated a pro rata distribution of the Unsecured Distribution to SAM employees based on such employees’ additional concessions in the second 1113 process, the Bankruptcy Court did not specifically approve such additional distributions.  Moreover, although the Debtors’ business plan contemplated the distribution of SAM Notes to SAM employees, the Bankruptcy Court did not specifically approve such distributions.  The Plan does in fact provide for the distribution of the SAM Notes and for the SAM Distribution.

 

The Debtors estimate that with respect to wage and related relief, they will achieve approximately $181 million of average annual wage and related savings pursuant to the ALPA 2005 Restructuring Agreement; approximately $230,000 of average annual wage and related savings pursuant to the TWU 2005 Restructuring Agreement; approximately $2.8 million of average annual wage and related savings pursuant to the PAFCA 2005 Restructuring Agreement; and approximately $112 million of average

 


(17)                            Two parties, URPBPA and PBGC, appealed the Bankruptcy Court’s approval of the ALPA 2005 Restructuring Agreement.  The Debtors filed motions to dismiss both appeals.  On June 24, 2005, the District Court dismissed the URPBPA appeal.  On July 19, 2005, URPBPA appealed the District Court’s ruling to the Seventh Circuit Court of Appeals.  The Seventh Circuit has set a deadline for URPBPA to file its opening brief of September 16, 2005.  On July 22, 2005, the District Court entered an order approving PBGC’s motion to voluntarily dismiss its appeal.

 

55



 

annual wage and related savings with respect to SAM employees.  Copies of the ALPA, PAFCA, and TWU 2005 Restructuring Agreements are in the Plan Supplement, as Exhibits 19, 24, and 26, respectively.

 

(c)                                  PBGC’s Involuntary Termination Action With Respect to Pilot Plan
 

On December 30, 2004, PBGC initiated an involuntary termination action with respect to the Pilot Plan in the District Court.  The Debtors immediately requested that the District Court refer the matter to the Bankruptcy Court pursuant to the Internal Operating Procedures for the Northern District of Illinois.  The District Court entered an order referring the case to the Bankruptcy Court over PBGC’s objections.  PBGC’s motion to reconsider the referral order is still under advisement with the District Court.  In the interim, PBGC has filed a motion for summary judgment in the Bankruptcy Court.  United and several other parties filed responses, and PBGC filed a reply on August 5, 2005.  On August 26, 2005, the Bankruptcy Court denied PBGC’s summary judgment motion in part.  The Court held that summary judgment was inappropriate to determine whether the Pilot Plan should be terminated under Section 1342(a) of ERISA.  However, the Court granted the agency’s motion to set the termination effective date as December 30, 2004.  On September 27, 2005, the Bankruptcy Court announced that it determined that PBGC had met its burden with respect to termination of the Pilot Plan, and that the Bankruptcy Court subsequently would enter an order terminating the Pilot Plan with an accompanying memorandum opinion.  In addition, the Debtors filed objections to all individual claims based on the termination of qualified pension benefits, and a group of retired pilots challenged the Debtors’ objection.  The Debtors’ objection, as it relates to retired pilots, has been scheduled for hearing on October 21, 2005.

 

(d)                                 Debtors’ 2005 Agreement with AFA, Original 2005 Tentative Agreement with AMFA, 1113(e) Relief Obtained as to IAM
 

Just as the Section 1113(c) trial was set to begin in early January 2005, the Debtors reached tentative agreements with AFA (the “AFA 2005 Restructuring Agreement”) and AMFA on long-term wage and related savings, though not with respect to pension relief.  Among other things, the AFA 2005 Restructuring Agreement provided that flight attendant pay rates would be reduced by 9.5 percent, effective January 7, 2005, with no increase until 2007, and that AFA or the Debtors could seek to terminate the AFA 2005 Restructuring Agreement if the Debtors failed to achieve a specifically defined aggregate level of cost saving from all of its other employee groups, including SAM employees.  Under the AFA 2005 Restructuring Agreement, the Debtors agreed that AFA-represented employees would share in the Unsecured Distribution of New UAL Common Stock with the Debtors’ Unsecured Creditors.  Specifically, the Debtors agreed to propose a plan of reorganization providing for distributions to their AFA-represented employees, as though they had Unsecured Claims, calculated as follows: (a) (i) the dollar value of 30 months of average cost reductions obtained in the AFA 2003 Restructuring Agreement, as reasonably measured by the Debtors’ labor model, plus (ii) the dollar value of 20 months of average cost reductions obtained in the AFA 2005 Restructuring Agreement as reasonably measured by the Debtors’ labor model, divided by (b) the sum of the distribution and the total amount of all other allowed prepetition general Unsecured Claims against the Debtors.  A copy of the AFA 2005 Restructuring Agreement is in the Plan Supplement, as Exhibit 17.

 

The AFA Restructuring Agreement was ratified by AFA’s membership and approved by the Bankruptcy Court.  The order provided that judicial approval of the agreement would have the same meaning and effect as judicial approval of the AFA 2003 Restructuring Agreement.  The Debtors estimate that with respect to wage and related relief, they will achieve approximately $130 million of average annual wage and related savings pursuant to the AFA 2005 Restructuring Agreement.

 

56



 

Among other items, the tentative agreement reached with AMFA provided that the base pay of non-utility classifications would be reduced by 5.0 percent and the base pay of utility classifications would be reduced by 10.0 percent, effective January 9, 2005, with no increase until 2006.  AMFA’s membership, however, did not approve this tentative agreement.  As a result, the Debtors were forced to file a motion under Section 1113(e) of the Bankruptcy Code to obtain interim wage concessions from AMFA, which was granted by the Bankruptcy Court on January 31, 2005.  The Bankruptcy Court’s order, effective through May 31, 2005, required a temporary pay rate reduction for AMFA-represented employees of 9.8 percent and a 25 percent reduction in sick pay for the first 15 days of any occurrence.

 

The Debtors also were unable to reach an agreement with IAM.  However, IAM did not object to the Debtors’ Section 1113(e) motion for interim wage concessions.  On January 6, 2005, the Bankruptcy Court granted the IAM Section 1113(e) order, effective through April 11, 2005 (which was subsequently extended through July 22, 2005), requiring a temporary reduction in the base pay for IAM-represented employees of 11.5% and a 30% reduction in sick pay.

 

As the Debtors were unable to reach ratified agreements in January 2005 with IAM, AMFA, andAFA (regarding pension relief), the parties agreed to continue the Section 1113(c) trial to May 11, 2005, thus providing time for further negotiations designed to achieve consensual resolutions.  The parties agreed that if by April 11, 2005 there were no ratified agreements on long-term cost-savings with AMFA and IAM and on pension issues with all three groups, the Debtors would re-file their Section 1113(c) motion with respect to these issues and file a motion for voluntary distress termination of each of the Pension Plans applicable to the employees represented by these Unions.

 

(e)                                  PBGC’s Commencement of Involuntary Termination Actions Regarding the Ground Plan and AFA’s Notice to Terminate AFA 2005 Restructuring Agreement
 

On March 11, 2005, PBGC filed an involuntary termination complaint to terminate the Ground Plan (which covers all AMFA-represented employees and some IAM-represented employees) in the United States District Court for the Eastern District of Virginia.  The Debtors filed a motion on March 25, 2005 to transfer venue of PBGC’s action to the District Court for the Northern District of Illinois for reference to the Bankruptcy Court.

 

Additionally, on April 8, 2005, AFA served notice to the Debtors of its intention to exercise the termination provision in the 2005 AFA Restructuring Agreement.  Although the Debtors believe that AFA has no cause to terminate the 2005 AFA Restructuring Agreement, the parties agreed to and are in the process of resolving the matter through expedited arbitration.

 

(f)                                    The Debtor’s Global Settlement with PBGC and Termination of the Flight Attendant and MAPC Pension Plans
 

Although the Debtors continued to negotiate in good faith with AFA, IAM, and AMFA, the parties were unable to reach a consensual resolution.  Thus, on April 11, 2005, the Debtors re-filed their motion under Section 1113(c) of the Bankruptcy Code (with respect to the AFA only on pension issues) and filed a motion for voluntary distress termination of the MAPC and Flight Attendant Plans.

 

After intensive, good faith, arm’s-length negotiations, the Debtors and PBGC reached a global settlement regarding the Debtors’ Pension Plans on April 22, 2005 (the “PBGC Settlement Agreement”).  Among other things, the PBGC Settlement Agreement contemplates termination of all four underfunded Pension Plans pursuant to Title IV of ERISA, should PBGC determine that the statutory requirements for involuntary termination have been met as to each plan.  Following any termination, the Debtors would

 

57



 

enter into trusteeship agreements with PBGC.  Such terminations would save the Debtors $4.4 billion of minimum required cash contributions over the next six years and $1.3 billion for 2005 alone.  The Debtors and PBGC reserved the right in this agreement to continue to explore alternatives to pension termination and to terminate the PBGC Settlement Agreement if they decided to pursue any such alternatives.  Additionally, under the PBGC Settlement Agreement, the Debtors will be released from over $990 million in alleged administrative minimum funding contribution Claims, and almost $800 million in other alleged “real dollar” (i.e., secured, administrative, priority and claims against non-Debtor entities) Claims against United and certain of its non-debtor affiliates.

 

In the PBGC Settlement Agreement, United agreed that it would propose in its plan of reorganization that PBGC would receive the following consideration: $500 million in 6% New UAL Senior Subordinated Notes; $500 million in 8% New UAL Contingent Senior Subordinated Notes; and $500 million in shares of 2% New UAL Convertible Preferred Stock (collectively, the “PBGC Securities”).  PBGC also will be allowed a single prepetition, general, unsecured unfunded liability Claim, for an amount determined under PBGC regulations and taking into account, among other things, the joint and several nature of PBGC’s Claims, the value provided to PBGC under the PBGC Settlement Agreement, and PBGC’s waiver of certain of its Claims under the PBGC Settlement Agreement, against the United Estate (and not separate, joint and several Claims against each United entity) arising from the termination of the Pension Plans.  The Debtors estimate that PBGC’s unfunded liability Claim could total approximately $9.9 billion, if allowed, as calculated under PBGC’s regulations.  The Creditors’ Committee has reserved its rights to object to PBGC’s unfunded liability Claim, including, without limitation, that it should be calculated by the “prudent investor” standard.

 

The PBGC Settlement Agreement also included other terms.  The Debtors and PBGC agreed that at the Debtors’ option, PBGC shall assign 45% of the distribution that it receives on account of its Claim as directed by the Debtors.  However, separate and apart from the PBGC Settlement Agreement, the Debtors agreed to consult with the Creditors’ Committee prior to directing any assignment, give 10 days business notice before directing any assignment, gain Bankruptcy Court approval under “the best interest of creditors’ test” pursuant to a de novo review, and, if the Debtors do not exercise such discretion, then the Debtors shall direct such distribution to the unsecured Creditor body.  The parties also agreed that the Debtors would not implement any new defined benefit pension plans for a five-year period beginning on the Effective Date.  Finally, the parties agreed that if the Bankruptcy Court confirms a plan of reorganization that does not provide for the terms of the PBGC Settlement Agreement, or if a plan of reorganization containing such terms does not become effective, then the terms of the PBGC Settlement Agreement are null and void as they relate to: (i) PBGC’s waiver and release of various Claims for minimum funding contributions, unfunded benefits, and insurance premiums (other than the settlement and release of fiduciary duty Claims, if such settlement and release already has occurred); (ii) PBGC’s agreement to release any and all Liens against any United entities; (iii) PBGC’s agreement not to set off any of its Claims; (iv) PBGC’s agreement to assign 45% of the distribution it receives on account of its unfunded liability Claim at United’s direction; and (v) United’s agreement to pay PBGC’s professional fees related to the Chapter 11 Cases.

 

At present, the Debtors have no information about, and no control over, how PBGC will allocate the consideration received under the PBGC Settlement Agreement among the Debtors’ Pension Plans and the beneficiaries under those Plans.  Any party seeking information regarding PBGC’s disposition of such consideration should contact PBGC.

 

The PBGC Settlement Agreement was a landmark achievement in the Debtors’ restructuring that provided significant momentum for the Debtors’ emergence from Chapter 11 and their continuing efforts to become a competitive, sustainable enterprise.  On April 26, 2005, the Debtors filed an emergency motion to approve the PBGC Settlement Agreement.  Various stakeholders, including AFA, IAM,

 

58



 

AMFA, IFPTE, URPBPA, IFS, and certain indenture trustees, objected to the PBGC Settlement Agreement on various grounds.  The Creditors’ Committee did not object but reached agreement with the Debtors to revise the settlement agreement to include, among other things, the limitations on the assignment of 45% of the PBGC’s distribution discussed above. On May 10, 2005, the Bankruptcy Court overruled the objections and approved the PBGC Settlement Agreement, as amended, provided that judicial approval of such agreement would have the same meaning and effect as judicial approval of the 2003 Restructuring Agreements.  Thereafter the Debtors voluntarily withdrew their motion to reject the AFA CBA, as such ruling narrowed the scope of the impending trial solely to wage and work rule issues under the AMFA and IAM CBAs.

 

IAM and AFA filed notices of appeal from the Bankruptcy Court’s order approving United’s settlement with PBGC (the “PBGC Settlement Order”).(18)  IAM filed a motion to dismiss its appeal on August 11.  On September 6, 2005, the District Court granted IAM’s motion.

 

On May 20, AFA filed a motion in the Bankruptcy Court seeking a stay pending appeal of the PBGC Settlement Order.  On May 26, the Bankruptcy Court denied AFA’s request for a stay.  AFA next filed its motion in the District Court for a stay pending appeal in the District Court and also sought expedited briefing of the appeal.  On June 16, the District Court denied AFA’s motion without prejudice on procedural grounds.  On June 20, AFA re-filed its motion. On July 21, the District Court affirmed the Bankruptcy Court’s decision.  On July 25, AFA appealed the District Court’s ruling to the Seventh Circuit.  AFA filed its initial brief on August 5.  PBGC and United filed their responsive briefs on August 23 and 24 respectively, and AFA filed its reply on September 2.  The Seventh Circuit heard oral arguments on this matter on September 13, 2005 but has not yet entered an order.

 

The impact of any potential reversal by the Seventh Circuit of the PBGC Settlement Order is unclear because the impact would depend on the nature of that reversal.  There is a potential that, depending on the nature of the reversal by the Seventh Circuit, PBGC’s joint and several claims against the Debtors will no longer be deemed waived; however, in such circumstances, PBGC’s recovery on account of such joint and several claims should be the same because the Plan provides for the substantive consolidation of all United Debtors.  And if the Bankruptcy Court does not order substantive consolidation, the Debtors believe that PBGC’s recovery under the Plan on account of such joint and several claims will not materially change because PBGC’s recovery from non-United estates likely will be de minimis.  If PBGC’s joint and several claims are no longer waived, PBGC believes that substantive consolidation of all the Debtors would not be appropriate and that PBGC’s recovery on its joint and several claims would be materially greater.

 

Separately, on May 20, 2005, AFA filed a declaratory action against PBGC in the United States District Court for the District of Columbia to enjoin PBGC’s termination of the Flight Attendant Plan under ERISA § 4003.  On June 3, 2005, the District Court for the District of Columbia heard extensive argument on AFA’s motion for a preliminary injunction.  On June 8, the District Court for the District of Columbia denied AFA’s preliminary injunction motion.  The District Court for the District of Columbia ruled that there was not a strong likelihood of success on the merits of AFA’s argument, there was no irreparable harm absent a stay, the balance of the harms did not warrant a preliminary injunction, and a preliminary injunction was not in the public’s best interest.

 


(18)                            In addition, AMFA filed a notice of appeal concerning the PBGC Settlement Order for the limited purpose of challenging the March 11 termination date for the Ground Plan.  This appeal, however, was subsequently dismissed by agreement of the parties.

 

59


 


 

On June 23, 2005, PBGC issued notices of determination that the MAPC and Flight Attendant Plans should be terminated, with termination dates of June 30, 2005.  The Debtors and PBGC subsequently entered into trusteeship agreements whereby PBGC become the statutory trustee of the Pension Plans (such an agreement had been executed for the Ground Plan on May 23, 2005), and the Debtors have no further duties or rights with respect to those Pension Plans.

 

Following PBGC’s termination of the Flight Attendant Plan on June 30, AFA amended its complaint to allege that PBGC had arbitrarily and capriciously terminated the Flight Attendant Plan; it also seeks to restore the Flight Attendant Plan.  PBGC filed its motion for summary judgment on October 3; AFA has until October 23 to file its opposition and cross-motion; PBGC will have until November 4 to file its reply and opposition to AFA’s cross-motion; and AFA will have until November 18 to file its cross-motion reply.

 

In addition, a number of individuals have asserted that they do not believe that the PBGC Settlement Agreement should be implemented in connection with Confirmation of the Plan.  More generally, these individuals disagree with the Debtors’ restructuring of their pension liabilities in the Chapter 11 Cases.  These parties include: Marc Cloutier; Richard D. Faytinger and Lorainne V. Faytinger; William A. Mullen; William A. Mullen; Carl A. Hankwitz; Michael Cuddy; Wesley C. Bartlett; Allan L. Holmes; James A. Sorensen; Diana L. Raymond; George G. Raymond; Lawrence C. Becker; Jerry R. Summers; Bruce R. Munroe; Nicholas Hyland; Mary Ellen Ricardo; and Bruce G. Wilkins.  The Debtors disagree with the positions asserted by these individuals.

 

(g)                                 The Debtors’ AMFA Agreement
 

On May 11, 2005, a trial commenced before the Bankruptcy Court on the Debtors’ Section 1113(c) motion with IAM and AMFA.  Throughout the duration of the trial, the parties continued to negotiate towards a consensual resolution.  Ultimately, United reached a tentative agreement with AMFA on May 16, 2005 (the “AMFA 2005 Restructuring Agreement”).

 

Pursuant to the AMFA 2005 Restructuring Agreement, which was ratified by AMFA’s membership on May 31, among other things, the pay of all AMFA-represented employees will be reduced by 3.9 percent and will not be increased until 2006.  The AMFA 2005 Restructuring Agreement also provides that AMFA will waive any Claim it may have that the termination of the Ground Plan does or would violate the terms and conditions of the AMFA CBA or any other agreements or status quo between the parties, and that AMFA shall not otherwise oppose United’s efforts to terminate the Ground Plan.

 

The Debtors agreed in the AMFA 2005 Restructuring Agreement to propose a plan of reorganization with:  (a) $40 million of New UAL Convertible Employee Notes for AMFA-represented employees; and (b) provide a defined contribution plan (averaging 5.0 percent of pay) for AMFA-represented employees.   Moreover, the Debtors also agreed to propose a plan of reorganization providing for distributions to their AMFA-represented employees, as though they had Unsecured Claims, calculated as follows: (a) (i) the dollar value of 30 months of average cost reductions obtained in the Debtors’ 2003 labor savings initiatives with respect to AMFA-represented employees as reasonably measured by the Debtors’ labor model, plus (ii) the dollar value of 20 months of average cost reductions obtained in the AMFA 2005 Restructuring Agreement as reasonably measured by the Debtors’ labor model, divided by (b) the sum of the distribution and the total amount of all other allowed prepetition general Unsecured Claims against the Debtors.

 

In addition, the order approving the AMFA 2005 Restructuring Agreement provided that judicial approval of such agreement would have the same effect as judicial approval of the 2003 Restructuring Agreements.  Finally, the AMFA 2005 Restructuring Agreement provides that such agreement may be

 

60



 

terminated at the option of the Union if a plan of reorganization is confirmed which contains any material term that is materially inconsistent with the terms of the agreement.  On May 31, the Bankruptcy Court entered an order approving the AMFA 2005 Restructuring Agreement.  The Debtors estimate that with respect to wage and related relief, it will achieve approximately $96 million of average annual wage and related savings pursuant to the AMFA 2005 Restructuring Agreement.  A copy of the AMFA 2005 Restructuring Agreement is in the Plan Supplement, as Exhibit 20.

 

On June 10, following ratification and Bankruptcy Court approval of the AMFA 2005 Restructuring Agreement, the Debtors agreed with AMFA and PBGC to litigate the propriety of the March 11 termination date in the context of PBGC’s involuntary termination action pending in the Eastern District of Virginia.  The parties also presented the court with an agreed briefing schedule regarding the various discovery-related issues in that action.  In accordance with the parties’ agreement, the Debtors and PBGC withdrew their joint motion to dismiss and the Debtors withdrew without prejudice their motion to transfer venue.  A pre-trial conference is scheduled with respect to this matter on September 15.  On June 13, AMFA and United filed a joint stipulation to dismiss AMFA’s appeal of the PBGC Settlement Order.

 

(h)                                 The Debtors’ IAM Agreement
 

 The Debtors also reached an agreement in principle with IAM on May 31, 2005 (the “IAM 2005 Restructuring Agreement”).  Pursuant to the IAM 2005 Restructuring Agreement, which was ratified by IAM’s membership on July 21, among other things, the pay of most IAM-represented employees will be reduced by 5.5 percent, effective July 1, 2005, with such pay not to begin increasing again until 2007.  Debtors agreed to provide contributions to the IAM national pension plan (or to a defined contribution plan) of 4% of pay beginning March 2006, increasing annually until March 2009, when the contribution reaches 6.5%. The IAM 2005 Restructuring Agreement also provides that IAM will withdraw with prejudice any and all opposition to termination of the two United defined benefit pension plans in which IAM members participate:  the Ground Plan and the MAPC Plan.  The Debtors agreed in the IAM 2005 Restructuring Agreement to propose a plan of reorganization with $60 million of New UAL Convertible Employee Notes for IAM-represented employees.  Moreover, the Debtors also agreed to propose a plan of reorganization providing for distributions to their IAM-represented employees, as though they had Unsecured Claims, calculated as follows: (a) (i) the dollar value of 30 months of average cost reductions in the in the Debtors’ 2003 labor savings initiatives with respect to IAM-represented employees as reasonably measured by the Debtors’ labor model, plus (ii) the dollar value of 20 months of average cost reductions in the IAM 2005 Restructuring Agreement as reasonably measured by the Debtors’ labor model, divided by (b) the sum of the distribution and the total amount of all other allowed prepetition general Unsecured Claims against the Debtors.

 

In addition, the order approving the IAM 2005 Restructuring Agreement provided that judicial approval of such agreement would have the same meaning and effect as judicial approval of the 2003 Restructuring Agreements.  On July 22, the Bankruptcy Court entered an order approving the IAM 2005 Restructuring Agreement.  United estimates that with respect to wage and related relief, it will achieve approximately $163 million of average annual wage and related savings pursuant to the IAM 2005 Restructuring Agreement.(19)  A copy of the IAM 2005 Restructuring Agreement is in the Plan Supplement, as Exhibit 22.

 


(19)                            All of the 2005 Restructuring Agreements also reduced represented employees’ participation in the Debtors Success Sharing Program.  At targeted levels of performance, these changes reduce the Debtors’ costs by approximately $100 million annually.

 

61



 

Collectively, the average labor and wage cost savings over 20 months based on the Debtors’ 2005 labor savings initiatives total approximately $1.1 billion.

 

5.               Section 1110 and Fleet Restructuring

 

United has undertaken a comprehensive rationalization and refinancing process to contract its fleet to match capacity with demand and reduce a substantial portion of its fleet financing obligations to current market rates.  This process has involved complying with United’s obligations under the Bankruptcy Code and intensive negotiations with United’s aircraft financiers.

 

a.               Section 1110 and the Automatic Stay.

 

In general, upon the filing of a Chapter 11 bankruptcy petition, the automatic stay under Section 362 of the Bankruptcy Code enjoins the enforcement of rights and remedies by a debtor’s creditors.  Section 1110 of the Bankruptcy Code operates as an exception to the automatic stay for certain types of financed aircraft and aircraft equipment.

 

As discussed in ARTICLE II.B.2.a above, the 463 aircraft in the Debtors’ fleet subject to Section 1110 of the Bankruptcy Code were financed or leased (the “Section 1110 Fleet”).  Pursuant to Section 1110 of the Bankruptcy Code, by February 7, 2003 (60 days after the Petition Date), the Debtors either had to: (i) take certain statutorily prescribed actions to elect to perform their obligations under the prepetition financing arrangements (“1110(a) Elections”); or (ii) enter into agreements with the respective aircraft financiers that would allow the Debtors to continue to use the aircraft without making such election to perform (“1110(b) Stipulations”), to continue the automatic stay in effect for aircraft in the Section 1110 Fleet.  On February 7, 2003, the Debtors made 1110(a) Elections with respect to approximately 214 aircraft in the Section 1110 Fleet (“1110(a) Aircraft”).  The Debtors also entered into, or had agreements in principle to enter into, 1110(b) Stipulations with respect to approximately 173 aircraft in the Section 1110 Fleet.  As to the remainder of the Section 1110 Fleet, the automatic stay terminated on February 7, 2003 and the related financiers were able to exercise their remedies and take enforcement actions.

 

b.              Aircraft Rejections and Abandonment.

 

Also, under the Bankruptcy Code, airline debtors may reject burdensome aircraft leases and/or financing arrangements or abandon property of their Estates.  Based on a variety of factors, including financing costs and anticipated revenues, the Debtors decided during their Chapter 11 Cases to decrease the size of their fleet.  To effectuate that downsizing, the Debtors have to date rejected, abandoned, sold, retired, or returned over 100 aircraft.  The Debtors believe that, by the Effective Date, they will operate a fleet of approximately 455 aircraft.(20)

 

c.               Auction Pool, Manufacturer, and Cross-Border Restructurings.

 

As discussed in ARTICLE II.B.2.a above, as of the Petition Date, the 463 financed aircraft in the Section 1110 Fleet were owned or leased by the Debtors pursuant to a broad variety of financings, including, without limitation, mortgages, capital leases, single investor leases, leveraged leases, Japanese leveraged leases (JLLs), German leveraged leases (GLLs) and French leveraged leases (FLLs).  To realize

 


(20)                            Nothing in this Disclosure Statement constitutes a commitment by United as to the number of rejections or abandonments that will occur prior to substantial consummation of the Plan or a commitment as to the projected size of its aircraft fleet as of the effective date of the Plan or for any period thereafter.

 

62



 

further cost savings, the Debtors have worked intensively during their Chapter 11 Cases to identify opportunities to reduce their fleet operating costs, quantify those opportunities, negotiate with all necessary parties to restructure existing financing and leasing arrangements, seek court approvals and finalize such aircraft restructurings.

 

To better manage the restructuring (and carry out their program of “marking-to-market” their aircraft financing costs), the Debtors divided their Section 1110 Fleet into four general categories: so-called “Auction Pool Aircraft,” “Cross-Border Transactions,” “Manufacturer Transactions,” and “Public Debt Aircraft.” The Auction Pool Aircraft consisted of approximately 150 older Boeing aircraft financed primarily through U.S. leveraged leases, mortgages, or single investor leases.  The Cross-Border Transactions consisted of 58 newer Boeing and Airbus aircraft financed through JLLs, GLLs and FLLs by investors in Japan, Germany, and France.  The Manufacturer Transactions consisted of approximately 97 aircraft financed by Boeing, Airbus, General Electric, and International Aero Engines.  Finally, the Public Debt Aircraft consist of a mix of approximately 158 older and newer Boeing and Airbus aircraft financed by holders of public debt through pass-through certificates (PTCs), equipment trust certificates (ETCs), and enhanced equipment trust certificates (EETCs).(21)

 

As indicated, the Debtors’ central goal in restructuring the Auction Pool Aircraft, Cross-Border Transactions, Manufacturer Transactions, and Public Debt Aircraft has been to reduce their rent and other payment obligations.  Towards that end, for certain of the Auction Pool Aircraft (Boeing 737s and 767s), the Debtors engaged in a so-called “reverse Dutch auction.”  The Debtors offered different pricing terms for limited quotas of specific types of aircraft and the Debtors accepted bids for the financing terms until the Debtors exhausted their quota for each aircraft type.  The Debtors did not utilize the auction format for the remainder of the Auction Pool Aircraft (Boeing 757s and 747s), the Cross-Border, Manufacturer, and Public Debt deals.  For the entire Section 1110 Fleet, however, the aircraft financiers were offered the opportunity to enter into long-term restructured financing arrangements at reduced rates that the Debtors believe reflect current market rates.

 

The restructurings for the Auction Pool Aircraft, Cross-Border Transactions, Manufacturer Transactions, and Public Debt Aircraft were effectuated either by terminating the existing arrangement and entering into new financings or amending the prepetition financing structures (the “Postpetition Aircraft Agreements”).  In general, as part of the Postpetition Aircraft Agreements, other than with respect to the Public Debt Aircraft, the Debtors have reserved their right to terminate and reject the restructured financing arrangements during the Chapter 11 Cases (up until substantial Consummation of the Plan) as the Debtors’ fleet plan evolved.  For those Postpetition Aircraft Agreements that the Debtors do not terminate, the Debtors may be obligated under the operative documents to “honor” or “assume” such Postpetition Aircraft Agreements under the Plan.  The Plan specifically provides in Article VII.G that the Debtors shall honor non-terminated Postpetition Aircraft Agreements according to their terms or, to the extent required, terminated Postpetition Aircraft Agreements shall be deemed assumed as of Consummation of the Plan; provided that nothing in the Plan shall restrict the Debtors’ termination rights.  Also, as part of the Postpetition Aircraft Agreements, the Debtors sought to settle the Administrative and prepetition Unsecured Claims of the aircraft financiers.  For the Manufacturer Transactions, the aircraft financiers waived their prepetition Claims in whole or in part so long as the Debtors did not terminate or reject the restructured agreements.

 

Auction Pool Restructurings.  Generally, the Postpetition Aircraft Agreements for the Auction Pool Aircraft contemplate converting the former financing arrangements into operating leases at rates the

 


(21)                            Approximately 17 aircraft from the Auction Pool Aircraft that were financed through private transactions ultimately migrated to the Public Debt Aircraft, largely because of cross-holdings between various transactions.

 

63



 

Debtors believe reflect current market rates.  These leases generally have 2 to 9-year terms with certain renewal options.

 

Cross Border Restructurings.  The Cross-Border Transactions were structured to permit the investors to take advantage of certain favorable tax laws in their home jurisdictions.  From United’s standpoint, each transaction was tantamount to a mortgage financing.  During the course of the Chapter 11 Cases, the majority of these Cross-Border Transactions were amended to provide debt relief (in the form of principal reductions and/or deferrals) and/or interest rate reductions.  These Postpetition Aircraft Agreements have maturities of 9 to 11 years after the Effective Date.  No aircraft secures more than one note.  Generally, the notes provide for semi-annual payments of principal and interest.

 

Manufacturer Restructurings.  The Manufacturer Transactions were structured in a variety of ways.  Certain of the Manufacturer Transactions were restructured entirely into a combination of leasing and mortgage transactions bearing rates that the Debtors believe reflect current market rates.  Other manufacturer restructurings involved amendment of existing lease facilities, which effectively reduced the rentals to current market rates.  These mortgage and lease transactions have maturities ranging from 2 to 17 years after the Effective Date.

 

Of the 305 aircraft included in the Auction Pool Aircraft, the Cross Border Transactions, and the Manufacturer Transactions, 266 will be subject to postpetition restructuring transactions.

 

d.              Public Debt Aircraft

 

While United successfully negotiated Postpetition Aircraft Agreements with individual financiers for the Auction Pool Aircraft, the Cross-Border Transactions, and the Manufacturer Transactions, the financiers and other individuals and entities representing the Public Debt Aircraft refused to negotiate with United individually and, instead, formed a group — the “Public Debt Group” (“PDG”) — that elected to conduct coordinated negotiations.

 

During the first six months of these cases, United negotiated so-called “Adequate Protection Stipulations” with the PDG (in connection with this effort, certain of the Auction Pool Aircraft were included with the Public Debt Aircraft due to common holdings by the applicable financiers).  Pursuant to these stipulations, United generally agreed to pay for the use of the Public Debt Aircraft during the Chapter 11 Cases until the rejection or abandonment of such aircraft and/or termination of the applicable Adequate Protection Stipulation.  Portions of such payments were deferred until fall 2003 or spring 2004, at which time United caught-up on these deferred payments through six equal monthly installments.  The Adequate Protection Stipulations also provided that in settlement of certain Claims asserted under Section 1110(a) of the Bankruptcy Code, the Debtors had to make certain payments (with administrative priority) starting in March 2004, to be paid in 6 equal monthly installments.

 

After Bankruptcy Court approval of the Adequate Protection Stipulations, United entered into negotiations with the PDG on a long-term resolution.  Negotiations with the PDG initially culminated in a draft global restructuring agreement in principle dated February 13, 2004.  This first agreement with the PDG, however, contemplated securing a loan guaranty from the ATSB for the Debtors’ exit financing.  The ATSB’s denial of the Debtors’ loan guaranty application on June 17, 2004, discussed above in ARTICLE III.C.4, and other adverse economic developments eventually led United to elect not to proceed with the February 13, 2004 agreement.

 

Although a settlement with the PDG has recently been approved by the Bankruptcy Court, the 14 aircraft covered by the 1997-1 EETC financing were not included in that settlement.  Wells Fargo Bank Northwest, N.A. (“Wells Fargo”), Pass Through Trustee in the 1997-1 EETC transaction (the

 

64



 

“Transaction”), believes that the preceding description does not adequately present its point of view regarding the content of the adequate protection stipulation covering the 14 aircraft covered by the Transaction.  Therefore, United has agreed to include the following language suggested by Wells Fargo, with the explicit caveat that the following language does not represent United’s point of view, and United believes that Wells Fargo has no legal right to recover any additional amounts, under Section 365(d)(10) or any other section of the Bankruptcy Code for United’s use of the subject aircraft:

 

The Trustee for the 1997-1 EETC disputes whether the payments under its adequate protection stipulation constituted payments in full of any obligation to pay adequate protection or obligations under other sections of the Bankruptcy Code.  In the adequate protection stipulation, the Trustee reserved its right to seek additional payments pursuant to section 365(d)(10) or other provisions of the Bankruptcy Code.

 

(i)                                     Antitrust Litigation
 

The ATSB’s denial, as well as greatly increased fuel costs and fare reductions, forced United to develop a new business plan and led to a several-month hiatus in negotiations with the PDG.  By November 2004, the Debtors had completed this process, and United advised the PDG that it would be forwarding new proposals.  Nonetheless, on November 23 and 24, 2004, the PDG sent formal demands for immediate repossession of fourteen aircraft pursuant to Section 1110(c) of the Bankruptcy Code.  On November 26, 2004, United filed a verified complaint for injunctive relief and moved for a temporary restraining order (“TRO”) on antitrust grounds to enjoin the PDG’s repossessions and collusive behavior.  On that same day, the Bankruptcy Court, after an evidentiary hearing, entered a TRO, finding that United’s showing of irreparable harm was undisputed and that United had shown a likelihood of success on its antitrust Claims.  The Bankruptcy Court set a preliminary injunction hearing for December 15, 2004.  The Creditors’ Committee intervened in the action with the Bankruptcy Court’s approval.

 

In connection with the parties’ preparation for the preliminary injunction hearing, the PDG representatives advised United that they were withholding on grounds of attorney-client privilege all communications among members of the PDG.  On December 8, 2004, the Bankruptcy Court granted United’s motion to compel production of such documents and ordered immediate production for in camera review of documents withheld on privilege grounds.  In response, PDG representatives advised the Bankruptcy Court that they would not comply and requested that the court hold them in contempt to facilitate an immediate appeal.  The Bankruptcy Court accommodated this request by entering a contempt order.  The Bankruptcy Court also entered an agreed order continuing the TRO and the preliminary injunction hearing while the PDG appealed the contempt ruling.  Thereafter, the PDG contemporaneously moved to withdraw the reference to the District Court.  In addition, the PDG also appealed both the contempt order and the November 26, 2004 TRO to the District Court.  On December 9, 2004, the District Court denied the PDG’s motion to withdraw the reference.  In addition, in opinions dated March 18, 2005, the District Court dismissed both appeals on the ground that they involved a non-appealable, interlocutory order.  The District Court also declined to accept the appeals on a discretionary basis.  Thereafter, the PDG petitioned the Seventh Circuit for a writ of mandamus.

 

On May 6, 2005, the Seventh Circuit granted the PDG’s writ of mandamus on the TRO (and denied the writ as to the contempt order).  The Seventh Circuit reversed the Bankruptcy Court and the District Court and ordered the District Court to dissolve the TRO injunction.  After the Seventh Circuit’s Order issued, the Debtors moved to dismiss the antitrust complaint.  The Creditors’ Committee opposed the motion, arguing that dismissal would amount to abandonment of a valuable asset of the Estates, and contemporaneously sought leave to prosecute the action.  On May 20, 2005, the Bankruptcy Court denied the dismissal motion on the grounds that the Claims stated in the complaint had value.  The PDG thereafter filed a motion with the Seventh Circuit to enforce its May 6 opinion.  On May 27, 2005, the

 

65



 

Seventh Circuit issued an order granting the PDG’s enforcement motion and providing that the injunction should be dissolved immediately and the antitrust action dismissed.  On June 1, 2005, the Bankruptcy Court dismissed the antitrust action with prejudice and denied the Creditors’ Committee’s motion for leave to prosecute.  The Creditors’ Committee appealed both of those rulings to the District Court.  Also, the Seventh Circuit denied the Creditor’s Committee’s motion for rehearing en banc of the decision to grant the writ of mandamus.  The Creditors’ Committee subsequently filed a petition for certiorari in the United States Supreme Court (the “Supreme Court”) seeking review of the mandamus decision.  In addition, although United’s antitrust complaint has been dismissed, the PDG filed a series of counterclaims against United for damages.  United subsequently moved to dismiss those counterclaims.  On July 15, 2005, the Bankruptcy Court dismissed these counterclaims with prejudice.  The PDG filed a notice of appeal with respect to this order on July 27, 2005.  Ultimately, all matters were resolved and settled as part of the global settlement with the PDG, as discussed below. This includes, without limitation, the agreement to withdraw the following appeals: the Creditors’ Committee’s petition for certiorari with respect to the antitrust litigation; the Creditors’ Committee’s appeal of the order dismissing the antitrust litigation; the Creditors’ Committee’s appeal of the order denying its motion for leave to prosecute its antitrust action; and the PDG’s appeal of the dismissal of its counterclaims.

 

By the time of the Seventh Circuit’s ruling, United already had rejected six of the fourteen aircraft subject to the TRO, leaving eight B767 aircraft unresolved.  Ultimately, United could not reach agreement with the PDG to retain the “1993A PTC” and “1993C PTC” aircraft (four B767s), which United was required to return in compliance with the demands of the PDG.  With respect to the remaining four “Jets 95A” aircraft, United successfully negotiated to purchase and retain those aircraft in its fleet and, ultimately, entered into an arrangement to finance the purchase.

 

(ii)                                  Section 365(d)(10) Litigation
 

In addition to the antitrust litigation, United and the PDG litigated the amount and extent of United’s postpetition obligations for use of the Public Debt Aircraft.  On December 5, 2003, the PDG filed a motion seeking administrative expense payments under Sections 365(d)(10), 503(b)(1)(A) and 1110 of the Bankruptcy Code for fifteen leased aircraft that the Debtors rejected (in addition to the payments under the Adequate Protection Stipulations) (the “365(d)(10) Motion”).  The PDG argued that the foregoing Bankruptcy Code provisions require the Debtors to compensate them for the difference between the prepetition lease rates for the 15 rejected aircraft and the adequate protection payments that the Debtors agreed to pay the aircraft financiers for their postpetition use of the aircraft.  The PDG also sought administrative expense payments pursuant to Sections 365(d)(10) and 1110(a) on account of the Debtors’ alleged failure to comply with the maintenance and return conditions specified in the prepetition leases.

 

The Debtors opposed the aircraft financiers’ motion by arguing, among other things, that the Bankruptcy Code does not require the Debtors to compensate the aircraft financiers at rates out of line with present economic reality, particularly when the parties entered into arm’s-length Adequate Protection Stipulations to compensate the aircraft financiers for the Debtors’ postpetition use of the aircraft.  The Creditors’ Committee joined in opposition to the motion.  Moreover, the Debtors have asserted that Section 365(d)(10) is inapplicable in the Section 1110 context, in the absence of a Section 1110(a) election, and that even if it were applicable, the “equities” of the case under Section 365(d)(10) clearly dictate that the aircraft financiers should not be awarded contract rate payments for the rejected aircraft.  In this regard, the Debtors have argued, among other things, that such an award would amount to a windfall for the aircraft financiers, who, unlike the personal property lessors Section 365(d)(10) was designed to protect, were not restricted by the automatic stay and had an unbridled right to take back their equipment after 60 days had passed in the bankruptcy case.  The 365(d)(10) Motion was continued from

 

66



 

time to time as United and the PDG attempted to settle the 365(d)(10) Motion as part of a global restructuring.

 

On November 5, 2004, and again on June 3, 2005, the PDG amended their 365(d)(10) Motion to include additional aircraft rejected by United and new Claims.  In opposing the PDG’s original 365(d)(10) Motion and the amended motion filed on November 5, 2004, the Debtors filed a motion to dismiss certain of the PDG’s Claims.  In particular, the Debtors sought to dismiss as a matter of law the PDG’s Claims for United’s alleged failure to return the rejected aircraft in compliance with certain obligations under the prepetition leases and for additional adequate protection based on “maintenance burn.”  On December 20, 2004, the Bankruptcy Court granted the Debtors’ motion, in part.  The Bankruptcy Court treated the motion to dismiss as a motion in limine with respect to the trial scheduled on the 365(d)(10) Motion.  (At that time, the trial was scheduled for March 1, 2005, but it has been continued from time-to-time to allow for negotiations.)  The Bankruptcy Court ordered that the PDG could not present evidence at the trial relating to: any lack of adequate protection after termination of the automatic stay; or any breach of return obligations involving failure of United to maintain the aircraft according to obligations in existence during the period prior to rejection of the leases.  The PDG’s amended motion filed on June 3, 2005 reasserted the same arguments (for additional aircraft) as to which the Bankruptcy Court ruled that the PDG could not present evidence in connection with the November 5 amended motion.  As a result, the Debtors opposed the June 3, 2005 amended motion arguing, in part, that the PDG was barred by the law of the case from making such adequate protection and maintenance arguments.

 

On July 7, 2005, the parties filed their preliminary pretrial statement on the 365(d)(10) Motion.  The pretrial statement contained the PDG’s, the Debtors’, and the Creditors’ Committee’s statements of their respective positions and the evidence they intended to introduce at trial.  Subsequently, at the July 11, 2005 pretrial hearing on the 365(d)(10) Motion, the Bankruptcy Court requested briefing on the threshold legal question of whether Section 365(d)(10) is applicable to leased aircraft for which United had not made elections under Section 1110(a) of the Bankruptcy Code.  After briefing by the parties, the Bankruptcy Court opined, on July 26, 2005, that failure to elect to perform under Section 1110(a) likely results in a de facto rejection and, that, Section 365(d)(10) ceases to apply to non-Section 1110(a) aircraft after the 60th day of the bankruptcy case.  The Bankruptcy Court indicated that it would follow with a written opinion on the issue.  In connection with the global settlement with the PDG, the Debtors and the PDG ultimately settled the Section 365(d)(10) motion as discussed below.

 

On October 7, 2005, U.S. Bank, National Association, as trustee for certificateholders with respect to two aircraft, filed a new motion pursuant to Section 365(d)(10) seeking allowance of administrative expenses in excess of $11 million.  On October 14, the Debtors and the Creditors’ Committee filed objections to this motion.  The motion is scheduled for hearing on October 21 before the Bankruptcy Court.

 

(iii)                               Global Settlement with PDG
 

In June, July, and August 2005, the pace of negotiations with the PDG accelerated.  Several factors contributed to the urgency of reaching a settlement.  Among other things, the Seventh Circuit’s ruling dissolving the Bankruptcy Court’s injunction and ordering the Debtors’ antitrust complaint dismissed left the Debtors with no ability whatsoever to forestall repossessions or impair the PDG’s rights.  Together with the improving market for aircraft and United’s limited ability to tolerate additional repossessions, there was a considerable alteration of the balance of leverage subsequent to the Seventh Circuit’s orders.  Unless United quickly could come to terms with the PDG, the very real threat existed of repossession of some or all of the remaining “at risk” Public Debt Aircraft, resulting in substantial operational disruption and passenger disservice and increased likelihood of liquidation, as the Debtors would be unable to timely and effectively replace the lost aircraft capacity.  Manifesting these

 

67



 

unfavorable developments, in July 2005, the Debtors received § 1110(c) demands for 15 aircraft (eight B747s and seven B767s), with the PDG expressing a clear willingness to follow through on those repossession threats.

 

On August 5, 2005, after over two years of negotiation, the Debtors entered into a long-term global settlement as to all of the Public Debt Aircraft, other than those securing the 1997-1 EETCs (discussed below) (the “PDG Settlement”).  The Debtors estimate that the settlement will save the Estates over $2.9 billion (present value as of the Petition Date) over the life of the PDG Settlement.  During the 2003-2008 period, the Debtors have or will realize approximately $300 million in annual savings from the Public Debt Aircraft.  During that same period, when coupled with the Debtors’ other aircraft restructurings (from the Auction Pool, Manufacturer, and Cross-Border groups), the Debtors will reduce their fleet costs by approximately $850 million in average annual savings from 2003-2008.

 

With respect to the 19 pre-1997 Public Debt Aircraft remaining in the fleet, the PDG Settlement contemplates restructuring the financings by converting the structures to operating lease transactions having terms ranging from 9.4 to 11.3 years.  With respect to the 86 post-1997 EETC Public Debt Aircraft, the Debtors will issue a new note for each aircraft with the original contractual coupon rate and maturities ranging from 6.25 to 7.2 years.  Finally, certain of the restructured financings will incorporate, inter alia, cross-collateralization and cross-default provisions.  All of the restructured PDG transactions will include representations and warranties and default, loss, return, insurance, inspection, maintenance, filing, and indemnification provisions.  Unlike the other Postpetition Aircraft Agreements, United cannot unilaterally terminate the arrangement and return the aircraft.  The PDG Settlement further contemplates the following additional terms:

 

                  revised payment schedules for each transaction;

 

                  deferral of remedies by the PDG and suspension of any pending § 1110(c) demands;

 

                  restructuring of the prepetition transactional agreements;

 

                  the Debtors’ agreement not to reject leases of or abandon any additional Public Debt Aircraft (45 already have been rejected or abandoned and 7 repossessed);

 

                  settlement and release of all PDG Administrative Claims (whether under Code § § 362, 363, 365, 503, 506, 507, or 1110 or otherwise), including all Claims asserted in the 365(d)(10) Motion and the antitrust litigation, in consideration for:

 

                  the rates paid by the Debtors under the PDG Settlement;

 

                  an aggregate additional payment of $65 million to be shared solely among the pre-1997 Public Debt Aircraft transactions (as determined by the PDG);(22)

 

                  additional principal and interest payments made in the post-1997 EETCs; and

 


(22)                            The Debtors and the trustees for pre-1997 non-restructured transactions in the PDG (those with no remaining aircraft operated by the Debtors) have entered into a letter agreement dated as of August 5, 2005, whereby parties to such transactions have agreed to resolve the issue of the allocation described in the letter agreement among themselves and without any involvement by the Debtors.

 

68



 

                  subject to and in accordance with the PBGC Settlement Order, the Debtors directing PBGC to assign for the benefit of (and allocated among) the pre-1997 PDG transactions (as determined by the controlling holders of those transactions) $0.50 of each dollar of value derived from 45% of PBGC’s unfunded benefit liability claim in an aggregate amount up to, but in no event to exceed, $100 million (the “PBGC Claim Proceeds”), with no guarantee by the Debtors of the proceeds actually obtained from PBGC’s claim and no obligation to top-off the actual PBGC Claim Proceeds realized under the settlement if less than $100 million;(23)

 

                  settlement of the PDG’s general Unsecured Claims in the aggregate amount of approximately $3.1 billion, other than the PDG’s Unsecured Claims under the 1997-EETC transaction;

 

                  payment by the Debtors of all reasonable costs, fees, and expenses of the PDG, including those of their counsel and technical, financial and other professional advisors;

 

                  performance of certain maintenance obligations (per a detailed schedule) by the Debtors and the posting of security by the Debtors if they default on such maintenance obligations (along with the granting of a super-priority Administrative Claim in the amount of the cost of such unperformed obligations);

 

                  conforming the rates paid on 1110(a) aircraft with the rates under the PDG Settlement;

 

                  amending the Adequate Protection Stipulations to conform with the terms of the PDG Settlement in certain respects;

 

                  the purchase of six of the Public Debt Aircraft; and

 

                  a permanent release (and injunction) by United and any other entity or person of all claims or causes of action against the PDG and its agents, counsel, and advisors relating to the Public Debt Aircraft transactions and the settlements and compromises under the PDG Settlement, or the implementation thereof, including without limitation any cause of action or claims arising out of claims of inequitable conduct or antitrust violations (the “Permanent Release”).

 

Other than with respect to the 1997-1 EETC transaction, the PDG Settlement fully and finally resolves and disposes of all litigation between the Debtors and the PDG.  The PDG Settlement provides that the transactions contemplated therein will be incorporated into the Plan and shall be final and binding postpetition obligations of the Debtors and the Reorganized Debtors, subject to certain “Unwind Events”.  In the event of such Unwind Events, including conversion to chapter 7 or failure by the Debtors to obtain confirmation of the Plan by June 30, 2006, the agreements and transactions contemplated by the PDG Settlement, other than the Permanent Release, shall be unwound and rescinded and the parties’ respective rights, claims, obligations, and defenses would be restored.  Notwithstanding the Permanent Release, if an Unwind Event occurs, any defenses or offsets of the Debtors existing prior to the Unwind Event (but for the releases and waivers under the PDG Settlement) are preserved, so long as United does not seek any affirmative recovery against the PDG.

 


(23)                            The Creditors’ Committee has informed the Debtors that it would like the balance of the 45% assignment from the PBGC to be distributed on a pro rata basis to the Holders of Allowed Other Unsecured Claims.

 

69



 

On August 30, 2005, the Debtors and the PDG filed a joint motion to approve the PDG Settlement.  The Bankruptcy Court approved the motion on September 27, 2005 (the “Public Debt Settlement Order”).  The Plan provides that the Debtors will honor the Public Debt Aircraft Settlement Agreement, which shall become an obligation of the Reorganized Debtors under the Plan.  In the event of any inconsistency between the Disclosure Statement and the Public Debt Aircraft Settlement Agreement or Public Debt Settlement Order, the terms of the Public Debt Aircraft Settlement Agreement or Public Debt Settlement Order shall govern.

 

(iv)                              1997-1 EETCs
 

The 1997-1 EETCs are backed by equipment notes which are in turn secured by mortgages and leases on 14 Public Debt Aircraft.  Three tranches of 1997-1 EETCs were publicly owned: the senior, “A” tranche and the subordinated “B” and “C” tranches.  Unlike in other PDG transactions, the A tranche holders did not have any cross-holdings in the B and C tranches, and the B and C tranche EETCs were owned by one holder.  Although the B and C tranche holdings gained significantly in value during the Chapter 11 Cases, due to the substantial paydown of the par value of the A tranche debt through Adequate Protection Stipulation payments and the 1997-1 EETC aircraft retaining their value, the Debtors were able to negotiate a buyout of the B and C tranches for less than face value.  Upon purchasing the B and C tranche EETCs, the Debtors could exercise the contractual right afforded junior lien holders to buy out the senior tranche holders at par.  The Debtors’ purchase of the A tranche EETCs would allow the Debtors to become the controlling party in the transaction, avoid the possibility of repossession of aircraft, and refinance the 1997-1 EETC transaction.

 

The Debtors’ strategy was aided by United obtaining the Tranche C term loan pursuant to the Thirteenth Amendment to the Club DIP Facility (approved by the Bankruptcy Court on August 18, 2005 and discussed above).  The expiration date for this loan commitment is currently October 31, 2005.  United will use its unrestricted cash to make purchase of the Class A Certificates.  Once the purchase of the Class A Certificates is approved and consummated, the Debtors expect to refinance the Tranche C loan, such that the cash flows required to service the restructured 1997-1 debt would be substantially more attractive than that which would be required should the B and C Tranches be acquired by a likely unfriendly third party (either affiliated or unaffiliated with the PDG).  If, on the other hand, the Debtors could not have purchased the B and C tranches, and ownership of the A, B, and C tranches became common, it is likely that the holders of the B and C Tranches would have demanded a recovery equal to or greater than the current fair market value of the aircraft, and potentially seek closer to a 100% recovery.

 

On July 27, 2005, the Bankruptcy Court approved the Debtors’ direct purchase of the B and C tranches.  On August 4, 2005, the Debtors filed a motion for approval of the purchase the A tranche at par under the transaction documents for $292,787,446.  On August 8, 2005, the Court granted the Debtors’ motion.  As required under the transaction documents, the Debtors issued a buyout notice to the trustee for the 1997-1 EETC transaction.  However, the trustee declined to allow the Debtors to consummate the purchase the A tranche EETCs, contending that the Debtors had to pay a New York statutory judgment rate of 9% rather than the stated interest rate on the Class A EETCs of LIBOR plus 22 basis.  The trustee’s calculation increased the purchase price by $65 million.  Subsequently, purporting to exercise its remedies under the Adequate Protection Stipulation, the trustee notified the Debtors of a purported sale of the underlying equipment notes in the 1997-1 EETC transaction to a special purpose vehicle for a price that reflected the judgment rate asserted by the trustee.  If allowed, such a sale would, in the Debtors’ view, circumvent the Debtors’ rights as holders of the lower tranche 1997-1 EETCs to buy out the A tranche at par and undermine the savings the Debtors hoped to achieve by purchasing the B and C tranche EETCs.

 

70