FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                    to

 

        

	Commission File Number	Exact Name of Registrant as Specified in its Charter, Principal Office Address and Telephone Number	State of Incorporation	I.R.S. Employer Identification No
	001-06033	UAL Corporation	Delaware	36-2675207
	001-11355	United Air Lines, Inc. 77 W. Wacker Drive Chicago, Illinois 60601 (312) 997-8000	Delaware	36-2675206

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

UAL Corporation                                                          Yes x No o

United Air Lines, Inc.                                                   Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

UAL Corporation                                                Large accelerated filer x        Accelerated filer o         Non-accelerated filer o

United Air Lines, Inc.                                         Large accelerated filer ¨         Accelerated filer o         Non-accelerated filer x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

UAL Corporation                                                          Yes ¨ No x

United Air Lines, Inc.                                                   Yes ¨ No x

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

UAL Corporation                                                          Yes x No o

United Air Lines, Inc.                                                   Yes x No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 26, 2007.

 

UAL Corporation                                             116,278,809 shares of common stock ($0.01 par value)

United Air Lines, Inc.

205 (100% owned by UAL Corporation)

There is no market for United Air Lines, Inc. common stock.

 

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UAL Corporation and Subsidiary Companies and

United Air Lines, Inc. and Subsidiary Companies

	PART I. FINANCIAL INFORMATION		Page
Item 1.	Financial Statements
	UAL Corporation:
	Condensed Statements of Consolidated Operations (Unaudited)			3
	Condensed Statements of Consolidated Financial Position (Unaudited)			5
	Condensed Statements of Consolidated Cash Flows (Unaudited)			7
	United Air Lines, Inc.:
	Condensed Statements of Consolidated Operations (Unaudited)			8
	Condensed Statements of Consolidated Financial Position (Unaudited)			10
	Condensed Statements of Consolidated Cash Flows (Unaudited)			12
	Combined Notes to Condensed Consolidated Financial Statements (Unaudited) (UAL Corporation and United Air Lines, Inc.)			13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			44
Item 4.	Controls and Procedures			44
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings			45
Item1A.	Risk Factors			46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 6.	Exhibits			47
Signatures
Exhibit Index

 

2

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ITEM 1. FINANCIAL STATEMENTS

 

UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Operations (Unaudited)
(In millions, except per share amounts)
		Three Months Ended September 30,
		2007				2006
Operating revenues:
Passenger - United Airlines		$	4,225			$	3,916
Passenger - Regional Affiliates			819				773
Cargo			198				183
Special operating items (Note 2)			45				-
Other operating revenues			240				304
			5,527				5,176
Operating expenses:
Aircraft fuel			1,324				1,368
Salaries and related costs			1,062				1,060
Regional affiliates			751				713
Purchased services			344				302
Aircraft maintenance materials and outside repairs			295				252
Depreciation and amortization			245				226
Distribution expenses (Note 1)			211				215
Landing fees and other rent			201				199
Aircraft rent			102				104
Cost of third party sales			68				153
Special operating items (Note 2)			(22	)			(30	)
Other operating expenses			290				279
			4,871				4,841
Earnings from operations			656				335
Other income (expense):
Interest expense			(161	)			(164	)
Interest income			71				72
Interest capitalized			5				3
Miscellaneous, net			(6	)			3
			(91	)			(86	)
Earnings before income taxes and equity in earnings
of affiliates			565				249
Income tax expense			232				60
Earnings before equity in earnings of affiliates			333				189
Equity in earnings of affiliates, net of tax			1				1
Net income		$	334			$	190
Earnings per share, basic		$	2.82			$	1.62
Earnings per share, diluted		$	2.21			$	1.30

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

 

3

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UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Operations (Unaudited)
(In millions, except per share amounts)
		Successor				Successor				Predecessor
		Nine Months				Period from				Period from
		Ended				February 1				January 1
		September 30,				to September 30,				to January 31,
		2007				2006				2006
Operating revenues:
Passenger - United Airlines		$	11,457			$	9,904			$	1,074
Passenger - Regional Affiliates			2,298				1,999				204
Cargo			547				501				56
Special operating items (Note 2)			45				-				-
Other operating revenues			766				892				124
			15,113				13,296				1,458
Operating expenses:
Aircraft fuel			3,571				3,323				362
Salaries and related costs			3,149				2,857				358
Regional affiliates			2,176				1,896				228
Purchased services			980				829				98
Aircraft maintenance materials and outside repairs			860				688				80
Depreciation and amortization			694				592				68
Landing fees and other rent			654				569				75
Distribution expenses (Note 1)			596				564				60
Aircraft rent			307				288				30
Cost of third party sales			238				471				65
Special operating items (Note 2)			(44	)			(30	)			-
Other operating expenses			831				773				86
			14,012				12,820				1,510
Earnings (loss) from operations			1,101				476				(52	)
Other income (expense):
Interest expense (Note 11)			(506	)			(516	)			(42	)
Interest income			191				167				6
Interest capitalized			14				10				-
Miscellaneous, net			(7	)			5				-
			(308	)			(334	)			(36	)
Earnings (loss) before reorganization items, income
taxes and equity in earnings of affiliates			793				142				(88	)
Reorganization items, net			-				-				22,934
Earnings before income taxes and equity in
earnings of affiliates			793				142				22,846
Income tax expense			340				60				-
Earnings before equity in earnings of affiliates			453				82				22,846
Equity in earnings of affiliates, net of tax			3				4				5
Net income		$	456			$	86			$	22,851
Earnings per share, basic		$	3.82			$	0.69			$	196.61
Earnings per share, diluted		$	3.10			$	0.68			$	196.61

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

 

4

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		September 30,				December 31,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	1,263			$	3,832
Short-term investments			2,899				312
Restricted cash			341				341
Receivables, less allowance for doubtful accounts (2007—$29; 2006—$27)			1,095				820
Prepaid fuel			418				283
Aircraft fuel, spare parts and supplies, less
obsolescence allowance (2007—$22; 2006—$6)			230				218
Deferred income taxes			77				122
Prepaid expenses and other			643				345
			6,966				6,273
Operating property and equipment:
Owned—
Flight equipment			9,212				8,958
Advances on flight equipment			103				103
Other property and equipment			1,536				1,441
			10,851				10,502
Less—accumulated depreciation and amortization			(918	)			(503	)
			9,933				9,999
Capital leases:
Flight equipment			1,512				1,511
Other property and equipment			34				34
			1,546				1,545
Less—accumulated amortization			(151	)			(81	)
			1,395				1,464
			11,328				11,463
Other assets:
Intangibles, less accumulated amortization (2007—$285; 2006—$169)			2,912				3,028
Goodwill			2,695				2,703
Restricted cash			447				506
Aircraft lease deposits			327				539
Investments			194				113
Other, net			739				744
			7,314				7,633
		$	25,608			$	25,369

 

 

5

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Condensed Statements of Consolidated Financial Position (Unaudited)

 

		September 30,				December 31,
		2007				2006
Liabilities and Stockholders’ Equity
Current liabilities:
Advance ticket sales		$	2,246			$	1,669
Mileage Plus deferred revenue			1,201				1,111
Accounts payable			830				667
Accrued salaries, wages and benefits			823				795
Advanced purchase of miles			708				681
Long-term debt maturing within one year (Note 11)			654				1,687
Fuel purchase commitments			418				283
Current obligations under capital leases			319				110
Accrued interest			162				241
Other			498				701
			7,859				7,945
Long-term debt (Note 11)			7,027				7,453
Long-term obligations under capital leases			1,129				1,350
Other liabilities and deferred credits:
Mileage Plus deferred revenue			2,666				2,569
Postretirement benefit liability			1,934				1,955
Deferred income taxes			1,048				688
Deferred pension liability			137				130
Other			802				770
			6,587				6,112
Mandatorily convertible preferred securities			366				361
Commitments and contingent liabilities (Note 13)
Stockholders’ equity:
Preferred stock			—				—
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 116,035,322 and 112,280,629 shares at September 30, 2007 and December 31, 2006, respectively			1				1
Additional capital invested			2,122				2,053
Retained earnings			467				16
Stock held in treasury, at cost (Note 4)			(15	)			(4	)
Accumulated other comprehensive income			65				82
			2,640				2,148
		$	25,608			$	25,369

 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

 

6

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		Successor								Predecessor
		Nine Months Ended September 30,				Period from February 1 to September 30,				Period from January 1 to January 31,
		2007				2006				2006
Cash flows provided (used) by operating activities:
Net income (loss) before reorganization items		$	456			$	86			$	(83	)
Adjustments to reconcile to net cash provided (used) by operating activities—
Increase in advance ticket sales			577				339				109
Increase in deferred income taxes			364				60				-
Increase in receivables			(269	)			(95	)			(88	)
Depreciation and amortization			694				592				68
Mileage Plus deferred revenue and advanced purchase of miles			214				153				14
Other, net			(34	)			(27	)			141
			2,002				1,108				161
Cash flows provided (used) by reorganization activities:
Reorganization items, net			—				—				22,934
Increase in other liabilities			—				—				37
Increase in non-aircraft claims accrual			—				—				429
Discharge of claims and liabilities			—				—				(24,628	)
Revaluation of Mileage Plus frequent flyer deferred revenue			—				—				2,399
Revaluation of other assets and liabilities			—				—				(2,106	)
Pension curtailment, settlement and employee claims			—				—				912
			—				—				(23	)
Cash flows provided (used) by investing activities:
Net (purchases) sales of short-term investments			(2,587	)			72				2
Purchases of EETC securities (Notes 1 and 11)			(76	)			—				—
Additions to property and equipment			(428	)			(222	)			(30	)
(Increase) decrease in restricted cash			59				300				(203	)
Decrease in segregated funds			—				200				—
Other, net			(25	)			39				(7	)
			(3,057	)			389				(238	)
Cash flows provided (used) by financing activities:
Proceeds from secured notes			694				—				—
Proceeds from Credit Facility			—				2,961				—
Repayment of Credit Facility			(995	)			(175	)			—
Repayment of DIP Financing			—				(1,157	)			—
Repayment of other long-term debt			(1,149	)			(545	)			(24	)
Principal payments under capital leases			(60	)			(66	)			(5	)
Other, net			(4	)			(65	)			(1	)
			(1,514	)			953				(30	)
Increase (decrease) in cash and cash equivalents during the period			(2,569	)			2,450				(130	)
Cash and cash equivalents at beginning of the period			3,832				1,631				1,761
Cash and cash equivalents at end of the period		$	1,263			$	4,081			$	1,631

 

 

7

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United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Operations (Unaudited)
(In millions)
		Three Months Ended September 30,
		2007				2006
Operating revenues:
Passenger - United Airlines		$	4,225			$	3,916
Passenger - Regional Affiliates			819				773
Cargo			198				183
Special operating items (Note 2)			45				-
Other operating revenues			243				304
			5,530				5,176
Operating expenses:
Aircraft fuel			1,324				1,368
Salaries and related costs			1,059				1,059
Regional affiliates			751				713
Purchased services			344				301
Aircraft maintenance materials and outside repairs			295				252
Depreciation and amortization			245				225
Distribution expenses (Note 1)			211				215
Landing fees and other rent			201				199
Aircraft rent			102				104
Cost of third party sales			67				150
Special operating items (Note 2)			(22	)			(30	)
Other operating expenses			291				281
			4,868				4,837
Earnings from operations			662				339
Other income (expense):
Interest expense			(161	)			(165	)
Interest income			70				79
Interest capitalized			5				3
Miscellaneous, net			(6	)			3
			(92	)			(80	)
Earnings before income taxes and equity in earnings
of affiliates			570				259
Income tax expense			234				65
Earnings before equity in earnings of affiliates			336				194
Equity in earnings of affiliates, net of tax			1				1
Net income		$	337			$	195

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

8

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United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Operations (Unaudited)

(In millions)

		Successor				Successor				Predecessor
		Nine Months				Period from				Period from
		Ended				February 1				January 1
		September 30,				to September 30,				to January 31,
		2007				2006				2006
Operating revenues:
Passenger - United Airlines		$	11,457			$	9,904			$	1,074
Passenger - Regional Affiliates			2,298				1,999				204
Cargo			547				501				56
Special operating items (Note 2)			45				-				-
Other operating revenues			776				889				120
			15,123				13,293				1,454
Operating expenses:
Aircraft fuel			3,571				3,323				362
Salaries and related costs			3,145				2,854				358
Regional affiliates			2,176				1,896				228
Purchased services			980				828				97
Aircraft maintenance materials and outside repairs			860				688				80
Depreciation and amortization			694				591				68
Landing fees and other rent			654				569				75
Distribution expenses (Note 1)			596				564				60
Aircraft rent			308				289				30
Cost of third party sales			235				464				63
Special operating items (Note 2)			(44	)			(30	)			-
Other operating expenses			831				771				85
			14,006				12,807				1,506
Earnings (loss) from operations			1,117				486				(52	)
Other income (expense):
Interest expense (Note 11)			(506	)			(518	)			(42	)
Interest income			194				172				6
Interest capitalized			14				10				-
Miscellaneous, net			(7	)			2				-
			(305	)			(334	)			(36	)
Earnings (loss) before reorganization items, income
taxes and equity in earnings of affiliates			812				152				(88	)
Reorganization items, net			-				-				22,709
Earnings before income taxes and equity in
earnings of affiliates			812				152				22,621
Income tax expense			348				65				-
Earnings before equity in earnings of affiliates			464				87				22,621
Equity in earnings of affiliates, net of tax			3				4				5
Net income		$	467			$	91			$	22,626

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

9

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United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Financial Position (Unaudited)

(In millions, except shares)

				September 30,				December 31,
				2007				2006
Assets
Current assets:
Cash and cash equivalents				$	1,246			$	3,779
Short-term investments					2,860				308
Restricted cash					308				303
Receivables, less allowance for doubtful
accounts (2007 - $29; 2006 - $27)					1,087				814
Prepaid fuel					418				283
Aircraft fuel, spare parts and supplies, less
obsolescence allowance (2007 - $22; 2006 - $6)					230				218
Receivables from related parties					168				154
Deferred income taxes					70				114
Prepaid expenses and other					639				348
					7,026				6,321
Operating property and equipment:
Owned -
Flight equipment					9,206				8,952
Advances on flight equipment					91				91
Other property and equipment					1,536				1,441
					10,833				10,484
Less - accumulated depreciation and amortization					(917	)			(502	)
					9,916				9,982
Capital leases:
Flight equipment					1,512				1,511
Other property and equipment					34				34
					1,546				1,545
Less - accumulated amortization					(151	)			(81	)
					1,395				1,464
					11,311				11,446
Other assets:
Intangibles, less accumulated amortization
	(2007- $285; 2006-$169)				2,912				3,028
Goodwill					2,695				2,703
Restricted cash					447				506
Aircraft lease deposits					327				539
Investments					194				113
Note receivable from affiliate					-				201
Other, net					726				724
					7,301				7,814
				$	25,638			$	25,581

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

10

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United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Financial Position (Unaudited)

(In millions, except shares)

		September 30,				December 31,
		2007				2006
Liabilities and Stockholder’s Equity
Current liabilities:
Advance ticket sales		$	2,246			$	1,669
Mileage Plus deferred revenue			1,201				1,111
Accounts payable			832				671
Accrued salaries, wages and benefits			823				795
Advanced purchase of miles			708				681
Long-term debt maturing within one year (Note 11)			654				1,687
Fuel purchase commitments			418				283
Current obligations under capital leases			319				110
Accrued interest			163				241
Accounts payable to affiliates			6				2
Other			710				920
			8,080				8,170
Long-term debt (Note 11)			7,026				7,449
Long-term obligations under capital leases			1,129				1,350
Other liabilities and deferred credits:
Mileage Plus deferred revenue			2,666				2,569
Postretirement benefit liability			1,934				1,955
Deferred income taxes			966				596
Deferred pension liability			137				130
Other			801				769
			6,504				6,019
Parent company mandatorily convertible     preferred securities			366				361
Commitments and contingent liabilities (Note 13)
Stockholder’s equity:
Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 at both September 30, 2007 and December 31, 2006			-				-
Additional capital invested			1,981				2,127
Retained earnings			487				23
Accumulated other comprehensive income			65				82
			2,533				2,232
		$	25,638			$	25,581

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

11

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 United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Cash Flows (Unaudited)

(In millions)

		Successor								Predecessor
		Nine Months  Ended September 30,				Period from February 1 to September 30,				Period from January 1 to  January 31,
		2007				2006				2006
Cash flows provided (used) by operating activities:
Net income (loss) before reorganization items		$	467			$	91			$	(83	)
Adjustments to reconcile to net cash provided (used) by operating
activities -
Increase in advance ticket sales			577				339				109
Increase in deferred income taxes			372				65				-
Increase in receivables			(271	)			(91	)			(98	)
Depreciation and amortization			694				592				68
Mileage Plus deferred revenue and advanced purchase of miles			214				153				14
Other, net			(65	)			(25	)			153
			1,988				1,124				163
Cash flows provided (used) by reorganization activities:
Reorganization items, net			-				-				22,709
Increase in other liabilities			-				-				38
Increase in non-aircraft claims accrual			-				-				421
Discharge of claims and liabilities			-				-				(24,389	)
Revaluation of Mileage Plus frequent flyer deferred revenue			-				-				2,399
Revaluation of other assets and liabilities			-				-				(2,111	)
Pension curtailment, settlement and employee claims			-				-				912
			-				-				(21	)
Cash flows provided (used) by investing activities:
Net (purchases) sales of short-term investments			(2,552	)			72				2
Purchases of EETC securities (Notes 1 and 11)			(76	)			-				-
Additions to property and equipment			(428	)			(222	)			(30	)
(Increase) decrease in restricted cash			54				303				(203	)
Decrease in segregated funds			-				200				-
Other, net			(26	)			(15	)			(7	)
			(3,028	)			338				(238	)
Cash flows provided (used) by financing activities:
Proceeds from secured notes			694				-				-
Proceeds from Credit Facility			-				2,961				-
Repayment of Credit Facility			(995	)			(175	)			-
Repayment of DIP Financing			-				(1,157	)			-
Repayment of other long-term debt			(1,148	)			(544	)			(24	)
Principal payments under capital leases			(60	)			(66	)			(5	)
Other, net			16				(65	)			(1	)
			(1,493	)			954				(30	)
Increase (decrease) in cash and cash equivalents during the period			(2,533	)			2,416				(126	)
Cash and cash equivalents at beginning of the period			3,779				1,596				1,722
Cash and cash equivalents at end of the period		$	1,246			$	4,012			$	1,596

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

 

12

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UAL Corporation and Subsidiary Companies and

 United Air Lines, Inc. and Subsidiary Companies

 

(1) Basis of Presentation

 

UAL Corporation (together with its consolidated subsidiaries, “UAL”), is a holding company and its principal, wholly-owned subsidiary is United Air Lines, Inc. (together with its consolidated subsidiaries, “United”). We sometimes use the words “we,” “our,” “us,” and the “Company” in this Form 10-Q for disclosures that relate to both UAL and United.

 

This Quarterly Report on Form 10-Q is a combined report of UAL and United. Therefore, these Combined Notes to Condensed Consolidated Financial Statements (Unaudited) apply to both UAL and United, unless otherwise noted. As UAL consolidates United, disclosures that relate to activities of United also apply to UAL.

 

Interim Financial Statements. The UAL and United unaudited condensed consolidated financial statements shown here have been prepared as required by the Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that meet generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by the SEC. UAL and United believe that the disclosures presented here are not misleading. The financial statements include all adjustments, which include only normal recurring adjustments and adjustments required by fresh-start reporting and reorganization items as described below, that are considered necessary for a fair presentation of the financial position and results of operations of UAL and United. These financial statements should be read together with the information included in UAL’s and United’s Annual Reports on Form 10-K for the year ended December 31, 2006 (the “2006 Annual Reports”).

 

Investments. The Company’s cash equivalents and short-term investments are classified as held-to-maturity. In addition, the Company has $76 million of debt securities that are reported as non-current investments, which are classified as available-for-sale. The non-current debt investments are certain of the Company’s previously issued debt instruments that were acquired in open market transactions during the third quarter of 2007.  See Note 11, "Debt Obligations," for further information related to the $76 million of non-current debt securities.

 

Mileage Plus Accounting. The following is an update to the accounting policy disclosures in the 2006 Annual Reports. For further information related to Mileage Plus accounting, refer to the 2006 Annual Reports and Critical Accounting Policies in this Form 10-Q.

 

United recognizes revenue for customer accounts that are cancelled after a period of inactivity as defined by the Mileage Plus program. United estimates the number of accounts that it expects to deactivate and ratably recognizes revenue for these accounts over the expiration period. In early 2007, United announced a reduction in the expiration period from 36 months to 18 months. Based on this program change, United reduced the period over which it recognizes revenue for deactivated accounts from 36 months to 18 months. This change provided a benefit to United’s operating revenues of approximately $50 million and $125 million for the three and nine month periods ended September 30, 2007, respectively, and United estimates that it will provide a total benefit of approximately $180 million for the year ended December 31, 2007. The pre-tax diluted per share benefit to UAL was approximately $0.32 and $0.81 for the three and nine months ended September 30, 2007, respectively.

 

Reclassifications. In the first quarter of 2007, United and UAL changed their classification of certain distribution-related costs, previously included in purchased services and commissions, to classify these costs as distribution expenses in the Condensed Statements of Consolidated Operations (Unaudited). The distribution expenses previously reported for 2006 were reclassified to provide a comparable presentation in each of the 2007 quarterly reports on Form 10-Q. Amounts previously reported as commissions and purchased services in the UAL and United 2006 quarterly reports on Form 10-Q are shown below:

 

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				Predecessor				Successor
2006 (In millions)				January 1 to January 31,				Period from February 1 to March 31,				Three Months Ended June 30,				Three Months Ended September 30,				Three Months Ended December 31,
Commissions (historical) (a)				$	24			$	51			$	82			$	91			$	67
Purchased services (historical) (b)					36				90				126				124				107
Distribution expenses (revised)				$	60			$	141			$	208			$	215			$	174

____________________ 

(a)

Commissions were previously reported as a separate expense item in the UAL and United 2006 quarterly reports on Form 10-Q and the 2006 Annual Reports.

 

(b)

Consists of credit card transaction fees and global distribution systems (“GDS”) transaction expenses that were classified as components of purchased services in the UAL and United quarterly reports on Form 10-Q and the 2006 Annual Reports. For 2007 Form 10-Q reporting purposes, the revised purchased services amounts for the 2006 periods are the result of decreasing the amounts previously reported in the UAL and United 2006 quarterly reports on Form 10-Q by these same adjustments.

 

Fresh-Start Reporting. As a result of the adoption of fresh-start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), the financial statements prior to February 1, 2006 are not comparable with the financial statements for periods on or after February 1, 2006. SOP 90-7 requires that the financial statements for periods after a Chapter 11 filing separate transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Bankruptcy reorganization items are classified as reorganization items, net in the Condensed Statements of Consolidated Operations (Unaudited). UAL common and preferred securities outstanding at January 31, 2006 were cancelled and new securities were issued to unsecured creditors and employees. In addition, fresh-start reporting required that most of the Company’s’ tangible and intangible assets and liabilities be recorded at fair value upon its emergence from bankruptcy. References to “Successor ” refer to UAL or United on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to “Predecessor” refer to UAL or United prior to February 1, 2006.

 

(2) Voluntary Reorganization Under Chapter 11

 

Bankruptcy Considerations. The following discussion provides general background information regarding UAL and United pending litigation related to their bankruptcy reorganization, and is not intended to be an exhaustive summary. Detailed information pertaining to the bankruptcy filings may be obtained at www.pd-ual.com and in the 2006 Annual Reports.

 

On December 9, 2002 (the “Petition Date”), UAL Corporation, United Air Lines, Inc. and 26 direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). On January 20, 2006, the Bankruptcy Court confirmed the Plan of Reorganization, which became effective February 1, 2006 (the “Effective Date”). On the Effective Date, UAL and United emerged from bankruptcy protection and implemented fresh-start reporting.

 

The Plan of Reorganization generally provided for the full payment or reinstatement of allowed administrative claims, priority claims and secured claims, and the distribution of new UAL equity and UAL and United debt securities to the Debtors’ creditors and employees in satisfaction of allowed unsecured and deemed claims. UAL common and preferred securities outstanding at January 31, 2006 were cancelled. The Plan of Reorganization contemplated UAL issuing up to 125 million shares of new UAL common stock consisting of 115 million shares to be issued to unsecured creditors and employees and 10 million shares to be issued pursuant to UAL’s share-based management and director compensation plans. The new UAL common stock was listed on a NASDAQ market and began trading under the symbol “UAUA” on February 2, 2006.

 

Significant Matters Resolved in Chapter 11 Cases Since Filing the UAL and United Annual Reports on Form 10-K for the Fiscal Year ended December 31, 2006. The following material matters have been resolved in the Bankruptcy Court since the filing of the 2006 Annual Reports:

 

(a)

Pilot Plan Termination Order. In December 2004, the Pension Benefit Guaranty Corporation (“PBGC”) filed an involuntary termination proceeding against United, as plan administrator for the United Airlines Pilot Defined Benefit Pension Plan (the “Pilot Plan”), in the District Court.

 

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In January 2005, the District Court granted a motion filed by United and referred the involuntary termination proceeding to the Bankruptcy Court. Air Line Pilots Association (“ALPA”) and United Retired Pilots Benefit Protection Association and seven retired pilots (collectively, “URPBPA”) were later granted leave to intervene in the involuntary termination proceeding.

      

After several months, the Bankruptcy Court conducted a trial and determined that the Pilot Plan should be involuntarily terminated under the Employee Retirement Income Security Act (“ERISA”) Section 4042 with a termination date of December 30, 2004. Subsequently, on October 28, 2005 the Bankruptcy Court entered an order authorizing termination of the Pilot Plan.

 

The PBGC, ALPA and URPBPA filed notices of appeal with the District Court. In February 2006, the District Court reversed and remanded the Bankruptcy Court’s termination order on the grounds that the matter was not a core proceeding in which it could issue a final order, but rather, could only issue proposed findings of fact and conclusions of law for consideration by the District Court. Upon remand and after the Bankruptcy Court made proposed findings of fact and conclusions of law, in June 2006 the District Court entered an order approving the termination of the Pilot Plan. ALPA, URPBPA and PBGC each filed an appeal with the Court of Appeals. On October 25, 2006, the Court of Appeals affirmed the District Court’s order approving the termination of the Pilot Plan effective December 30, 2004. On November 6, 2006, ALPA filed a petition for rehearing in the Court of Appeals which motion has been denied. ALPA and URPBPA filed petitions for writ of certiorari from the United States Supreme Court on the plan termination. On April 2, 2007, the Supreme Court denied such petitions, effectively terminating these proceedings.

 

(b)

Pilot Plan Non-Qualified Pension Benefits—October 2005 Order. After the PBGC commenced its involuntary termination proceeding and sought a December 30, 2004 termination date, United suspended payment of non-qualified pension benefits under the Pilot Plan pending the setting of such a termination date. In the first quarter of 2005, the Bankruptcy Court required United to continue paying non-qualified pension benefits to retired pilots pending the outcome of the involuntary termination proceeding, notwithstanding the possibility that the Pilot Plan might be terminated retroactively to December 30, 2004. Then, on October 6, 2005, despite its oral ruling terminating the Pilot Plan, the Bankruptcy Court entered an order requiring United to continue paying non-qualified pension benefits until entry of a written order. However, United appealed that order and placed approximately $6 million necessary to pay non-qualified benefits for the month of October 2005 in a segregated account.

 

Following the entry of the Bankruptcy Court’s termination order on October 28, 2005, United once again ceased paying non-qualified benefits. Subsequently, during the first quarter of 2006, the District Court dismissed United’s appeal of the Bankruptcy Court’s October 6, 2005 order in light of its earlier decision reversing the Bankruptcy Court’s termination order. United filed a notice of appeal of the District Court’s ruling regarding the October 6, 2005 order to the Court of Appeals. On October 25, 2006, the Court of Appeals reversed the District Court’s order dismissing for lack of ripeness the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order and remanded the case with instructions to reverse the Bankruptcy Court’s order compelling payment of non-qualified benefits for October 2005 or later months. On November 6, 2006, ALPA filed a petition for rehearing on the Court of Appeals reversal of the October 6, 2005 order, which motion has been denied. ALPA and URPBPA filed petitions for writ of certiorari from the Supreme Court. On April 2, 2007, the Supreme Court denied such petitions, effectively terminating these proceedings. The $6 million deposit was released from the segregated account in June 2007.

 

(c)

Pilot Plan Non-Qualified Pension Benefits—March 2006 Order. In March 2006, in a separate proceeding related to the matter described in item (b) above, the Bankruptcy Court ruled that United was obligated to make payment of all non-qualified pension benefits for the months of November and December 2005 and January 2006. The Bankruptcy Court also ruled that United’s obligation to pay non-qualified pension benefits ceased as of January 31, 2006. United filed a notice of appeal of the Bankruptcy Court’s ruling to the District Court. URPBPA and ALPA also filed notices of appeal with respect to the Bankruptcy Court’s order, which were subsequently consolidated with United’s appeal. United agreed with URPBPA and ALPA to pay, into an escrow account, the disputed non-qualified pension benefits for the months of November and December 2005 and January 2006, an aggregate amount totaling approximately $17 million. The District Court affirmed the Bankruptcy Court’s ruling in September 2006. United filed a notice of appeal of the District Court’s ruling to the Court of Appeals. URPBPA and ALPA also appealed the District Court’s decision. The Company subsequently filed a motion to consolidate its appeal from the Bankruptcy Court’s October 2005 non-qualified benefits order with

 

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the three appeals from the Bankruptcy Court’s March 2006 non-qualified benefits order. The Court of Appeals denied the Company’s motion, but issued an order staying briefing on the March 2006 non-qualified benefits order until further order of the Court of Appeals. On April 19, 2007, the Court of Appeals reversed the March 2006 order and remanded the case with instructions to the District Court to enter judgment for entry of an order in United’s favor. The deadline for filing a petition for a writ of certiorari, July 19, 2007, has passed without such a petition being filed, which effectively brings this matter to conclusion. The $17 million deposit was released from the escrow account in July 2007.

 

Significant Matters Remaining to be Resolved in Chapter 11 Cases. The following material matters remain to be resolved in the Bankruptcy Court or another court:

 

(a)

SFO Municipal Bond Secured Interest. HSBC Bank Inc. (“HSBC”), as trustee for the 1997 municipal bonds related to San Francisco International Airport (“SFO”), filed a complaint against United asserting a security interest in United’s leasehold for portions of its maintenance base at SFO. Pursuant to Section 506(a) of the Bankruptcy Code, HSBC alleges that it is entitled to be paid the value of that security interest, which HSBC had claimed was as much as $257 million. HSBC and United went to trial in April 2006 and the Bankruptcy Court rejected as a matter of law HSBC’s $257 million claim. HSBC subsequently alleged that it was entitled to $154 million, or at a minimum, approximately $93 million. The parties tried the case and filed post-trial briefs which were heard by the Bankruptcy Court. In the third quarter of 2006, the Company recorded a special item of $30 million as a benefit to income from continuing operations to reduce the Company’s recorded obligation for the SFO municipal bonds to a revised estimate of a probable amount to be allowed by the Bankruptcy Court, in accordance with AICPA Practice Bulletin 11, “Accounting for Preconfirmation Contingencies in Fresh-Start Reporting” (“Practice Bulletin 11”). In October 2006, the Bankruptcy Court issued its written opinion holding that the value of the security interest is approximately $27 million. United has accrued this amount as its estimated obligation as of September 30, 2007. After the Bankruptcy Court denied various post-trial motions, both parties have appealed to the District Court and those appeals are pending.

 

(b)

LAX Municipal Bond Secured Interest. There is pending litigation before the Bankruptcy Court regarding the extent to which the Los Angeles International Airport (“LAX”) municipal bond debt is entitled to secured status under Section 506(a) of the Bankruptcy Code. At December 31, 2006, United had accrued $60 million for this matter. Trial on this matter occurred during April 2007 and the two parties filed post-trial briefs in the second quarter of 2007. During the first quarter of 2007 the Company reduced its accrual for this matter by $19 million. In August 2007, the Bankruptcy Court issued its written opinion holding that the value of the security interest is approximately $33 million. During the third quarter of 2007, United adjusted the accrual for this matter to $33 million resulting in a favorable adjustment of $8 million that is classified as part of special items in the Company’s Condensed Statements of Consolidated Operations (Unaudited).

 

Claims Resolution Process. As permitted under the bankruptcy process, the Debtors’ creditors filed proofs of claim with the Bankruptcy Court. Through the claims resolution process, the Company identified many claims which were disallowed by the Bankruptcy Court for a number of reasons, such as claims that were duplicative, amended or superseded by later filed claims, were without merit, or were otherwise overstated. Throughout the Chapter 11 proceedings, the Company resolved many claims through settlement or objections ordered by the Bankruptcy Court. The Company will continue to settle claims and file additional objections with the Bankruptcy Court.

 

With respect to unsecured claims, once a claim is deemed to be valid, either through the Bankruptcy Court process or through other means, the claimant is entitled to a distribution of new UAL common stock. Pursuant to the terms of the Plan of Reorganization, 115 million shares of new UAL common stock have been authorized to satisfy valid unsecured claims. The Bankruptcy Court confirmed the Plan of Reorganization and established January 20, 2006 as the record date for purposes of establishing the persons that are claimholders of record to receive distributions. Approximately 111.4 million shares of UAL common stock have been issued and distributed to holders of valid unsecured claims between February 2, 2006, the first distribution date established in the Plan of Reorganization, and September 30, 2007. As of September 30, 2007, approximately 46,000 valid unsecured claims aggregating to approximately $29.1 billion in claim value had received those shares to partially satisfy those claims. As of September 30, 2007, there are 3,560,374 remaining shares of UAL common stock being held in reserve to satisfy all of the remaining disputed and undisputed unsecured claim values, once the remaining claim disputes are resolved. In November 2007, approximately 1 million additional UAL common shares are expected to be distributed. The final distributions of shares will not occur until 2008 or later, pending resolution of bankruptcy matters such as those discussed above.

 

 

 

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    UAL and United currently estimate that the probable range of unsecured claims to be ultimately allowed by the Bankruptcy Court will be between $29.3 billion and $29.6 billion. Differences between claim amounts filed and

management’s estimates are being investigated and will be resolved in connection with the claims resolution process. However, there will be no further financial impact to the Company associated with the settlement of such unsecured claims, as the holders of all allowed unsecured claims will receive under the Plan of Reorganization only their pro rata share of the distribution of the 115 million shares of new UAL common stock, together with the previously-agreed issuance of certain other securities.

 

With respect to valid administrative and priority claims, pursuant to the terms of the Plan of Reorganization these claims will be satisfied with cash. Many asserted administrative and priority claims still remain unpaid, and the Company will continue to settle claims and file objections with the Bankruptcy Court to eliminate or reduce such claims. In addition, certain disputes, the most significant of which are discussed in “Significant Matters Remaining to be Resolved in Chapter 11 Cases,” above, still remain with respect to the valuation of certain claims. The Company accrued an obligation for claims it believed were reasonably estimable and probable at the Effective Date. However, the claims resolution process is uncertain and adjustments to claims estimates could result in material adjustments to the Successor Company’s financial statements in future periods as a result of court rulings, the receipt of new or revised information or the finalization of these matters.

 

The table below includes activity related to the administrative and priority claims and other bankruptcy-related claim reserves including reserves related to legal, professional and tax matters, among others, for the Successor Company for the three and nine months ended September 30, 2007. These reserves are primarily classified in other current liabilities and other non-current liabilities in the Condensed Statements of Consolidated Financial Position (Unaudited) based on the expected timing of resolution of these matters.  Certain of the accrual adjustments identified below are a direct result of the Company's ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies and do not relate directly to the Company's ongoing performance; therefore, the Company considers these adjustments to be special.

 

		Three months				Nine months
		Ended