Edgar Filing: UAL CORP /DE/

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
£	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.	Delaware	36-2675206
	77 W. Wacker Drive
	Chicago, Illinois 60601
	(312) 997-8000

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 R No £
United Air Lines, Inc.	Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

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

UAL Corporation	Large accelerated filer R	Accelerated filer £	Non-accelerated filer £	Smaller reporting company £
			(Do not check if a smaller reporting company)
United Air Lines, Inc.	Large accelerated filer £	Accelerated filer £	Non-accelerated filer R	Smaller reporting company £
			(Do not check if a smaller reporting company)

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 R
United Air Lines, Inc.	Yes £ No R

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 R No £
United Air Lines, Inc.	Yes R No £

OMISSION OF CERTAIN INFORMATION

United Air Lines, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 16, 2009.

UAL Corporation United Air Lines, Inc.	167,040,862 shares of common stock ($0.01 par value) 205 (100% owned by UAL Corporation)
	There is no market for United Air Lines, Inc. common stock.

UAL Corporation and Subsidiary Companies and

United Air Lines, Inc. and Subsidiary Companies

Report on Form 10-Q

For the Quarter Ended September 30, 2009

	Page
PART I. FINANCIAL INFORMATION
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)	13
(UAL Corporation and United Air Lines, Inc.)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	50

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6. Exhibits	51
Signatures	52
Exhibit Index	53

Table of Contents

PART I. FINANCIAL INFORMATION

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,
	2009			2008
				(Adjusted)
Operating revenues:
Passenger — United Airlines	$	3,267		$	4,280
Passenger — Regional Affiliates		844			834
Cargo		125			219
Other operating revenues		197			232
		4,433			5,565
Operating expenses:
Aircraft fuel		1,064			2,461
Salaries and related costs		954			1,037
Regional Affiliates		775			882
Purchased services		279			327
Aircraft maintenance materials and outside repairs		253			256
Landing fees and other rent		226			222
Depreciation and amortization		220			234
Distribution expenses		145			181
Aircraft rent		88			115
Cost of third party sales		59			75
Other impairments and special items (Note 14)		43			(9	)
Other operating expenses		239			275
		4,345			6,056
Earnings (loss) from operations		88			(491	)

Other income (expense):
Interest expense		(146	)		(144	)
Interest income		3			24
Interest capitalized		3			6
Miscellaneous, net		(10	)		(186	)
		(150	)		(300	)
Loss before income taxes and equity in earnings of affiliates		(62	)		(791	)
Income tax expense (benefit)		(4	)		2
Loss before equity in earnings of affiliates		(58	)		(793	)
Equity in earnings of affiliates, net of tax		1			1
Net loss	$	(57	)	$	(792	)
Loss per share, basic and diluted	$	(0.39	)	$	(6.22	)

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

Table of Contents

UAL Corporation and Subsidiary Companies

Condensed Statements of Consolidated Operations (Unaudited)

(In millions, except per share amounts)

	Nine Months Ended September 30,
	2009			2008
				(Adjusted)
Operating revenues:
Passenger — United Airlines	$	8,909		$	11,924
Passenger — Regional Affiliates		2,252			2,346
Cargo		370			674
Other operating revenues		611			703
		12,142			15,647
Operating expenses:
Salaries and related costs		2,838			3,262
Aircraft fuel		2,528			5,884
Regional Affiliates		2,154			2,508
Purchased services		852			1,047
Aircraft maintenance materials and outside repairs		718			868
Landing fees and other rent		676			651
Depreciation and amortization		675			670
Distribution expenses		402			558
Aircraft rent		265			314
Cost of third party sales		172			204
Goodwill impairment (Note 14)		-			2,277
Other impairments and special items (Note 14)		250			214
Other operating expenses		699			816
		12,229			19,273
Loss from operations		(87	)		(3,626	)

Other income (expense):
Interest expense		(415	)		(428	)
Interest income		15			100
Interest capitalized		8			16
Miscellaneous, net		19			(177	)
		(373	)		(489	)
Loss before income taxes and equity in earnings of affiliates		(460	)		(4,115	)
Income tax benefit		(46	)		(30	)
Loss before equity in earnings of affiliates		(414	)		(4,085	)
Equity in earnings of affiliates, net of tax		3			4
Net loss	$	(411	)	$	(4,081	)
Loss per share, basic and diluted	$	(2.83	)	$	(32.62	)

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

Table of Contents

UAL Corporation and Subsidiary Companies

Condensed Statements of Consolidated Financial Position (Unaudited)

(In millions, except shares)

	September 30, 2009			December 31, 2008
				(Adjusted)
Assets
Current assets:
Cash and cash equivalents	$	2,525		$	2,039
Restricted cash		99			54
Receivables, less allowance for doubtful accounts (2009—$14; 2008—$24)		843			714
Prepaid fuel		285			219
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2009—$70; 2008—$48)		216			237
Deferred income taxes		92			268
Fuel hedge collateral deposits		62			953
Prepaid expenses and other		404			382
		4,526			4,866
Operating property and equipment:
Owned—
Flight equipment		8,414			8,766
Other property and equipment		1,722			1,751
		10,136			10,517
Less—accumulated depreciation and amortization		(1,932	)		(1,598	)
		8,204			8,919
Capital leases:
Flight equipment		1,795			1,578
Other property and equipment		43			39
		1,838			1,617
Less—accumulated amortization		(310	)		(224	)
		1,528			1,393
		9,732			10,312
Other assets:
Intangibles, less accumulated amortization (2009—$391; 2008—$339)		2,472			2,693
Aircraft lease deposits		307			297
Restricted cash		210			218
Investments		90			81
Other, net		1,010			998
		4,089			4,287
	$	18,347		$	19,465

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

Table of Contents

UAL Corporation and Subsidiary Companies

Condensed Statements of Consolidated Financial Position (Unaudited)

(In millions, except shares)

	September 30, 2009			December 31, 2008
				(Adjusted)
Liabilities and Stockholders’ Deficit
Current liabilities:
Advance ticket sales	$	1,675		$	1,530
Mileage Plus deferred revenue		1,428			1,414
Accounts payable		807			833
Accrued salaries, wages and benefits		731			756
Long-term debt maturing within one year		651			782
Fuel purchase commitments		285			219
Current obligations under capital leases		177			168
Accrued interest		120			112
Derivative instruments		76			718
Other		687			749
		6,637			7,281
Long-term debt		5,767			5,862
Long-term obligations under capital leases		1,212			1,192

Other liabilities and deferred credits:
Mileage Plus deferred revenue		2,823			2,768
Postretirement benefit liability		1,808			1,812
Advanced purchase of miles		1,087			1,087
Deferred income taxes		576			804
Other		1,082			980
		7,376			7,451
Commitments and contingent liabilities (Note 12)

Stockholders’ deficit:
Preferred stock		—			—
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 148,032,041 and 140,037,928 shares at September 30, 2009 and December 31, 2008, respectively		2			1
Additional capital invested		3,001			2,919
Retained deficit		(5,719	)		(5,308	)
Stock held in treasury, at cost		(28	)		(26	)
Accumulated other comprehensive income		99			93
		(2,645	)		(2,321	)
	$	18,347		$	19,465

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

Table of Contents

UAL Corporation and Subsidiary Companies

Condensed Statements of Consolidated Cash Flows (Unaudited)

(In millions)

	Nine Months Ended September 30,
	2009			2008
				(Adjusted)
Cash flows provided (used) by operating activities:
Net loss	$	(411	)	$	(4,081	)
Adjustments to reconcile to net cash provided (used) by operating activities—
Goodwill impairment		-			2,277
Other impairments and special items		250			214
Depreciation and amortization		675			670
Proceeds from lease amendment		160			—
Increase in Mileage Plus deferred revenue and advanced purchase of miles		140			584
Increase in advance ticket sales		145			333
Net change in fuel derivative instruments and related pending settlements		(870	)		272
(Increase) decrease in fuel hedge collateral		903			(378	)
Increase in receivables		(44	)		(166	)
Other, net		(70	)		25
		878			(250	)
Cash flows provided (used) by investing activities:
Net sales of short-term investments		-			2,295
(Increase) decrease in restricted cash		(37	)		508
Proceeds from asset sale-leasebacks		135			59
Proceeds from litigation on advance deposits		-			41
Additions to property, equipment and deferred software		(230	)		(384	)
Proceeds from asset dispositions		77			43
Other, net		3			14
		(52	)		2,576
Cash flows provided (used) by financing activities:
Proceeds from issuance of long-term debt		321			337
Proceeds from issuance of common stock		90			—
Decrease in lease deposits		22			154
Repayment of Credit Facility		(18	)		(18	)
Repayment of other debt		(615	)		(538	)
Special distribution to common shareholders		-			(253	)
Principal payments under capital leases		(129	)		(209	)
Increase in deferred financing costs		(9	)		(118	)
Other, net		(2	)		(9	)
		(340	)		(654	)
Increase in cash and cash equivalents during the period		486			1,672
Cash and cash equivalents at beginning of the period		2,039			1,259
Cash and cash equivalents at end of the period	$	2,525		$	2,931

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

Table of Contents

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Operations (Unaudited)

(In millions)

	Three Months Ended September 30,
	2009			2008
				(Adjusted)
Operating revenues:
Passenger — United Airlines	$	3,267		$	4,280
Passenger — Regional Affiliates		844			834
Cargo		125			219
Other operating revenues		199			273
		4,435			5,606
Operating expenses:
Aircraft fuel		1,064			2,461
Salaries and related costs		954			1,036
Regional Affiliates		775			882
Purchased services		279			327
Aircraft maintenance materials and outside repairs		253			256
Landing fees and other rent		226			222
Depreciation and amortization		220			234
Distribution expenses		145			181
Aircraft rent		88			116
Cost of third party sales		58			75
Other impairments and special items (Note 14)		43			(9	)
Other operating expenses		240			276
		4,345			6,057
Earnings (loss) from operations		90			(451	)

Other income (expense):
Interest expense		(145	)		(144	)
Interest income		3			24
Interest capitalized		3			6
Miscellaneous, net		(11	)		(185	)
		(150	)		(299	)
Loss before income taxes and equity in earnings of affiliates		(60	)		(750	)
Income tax expense (benefit)		(4	)		3
Loss before equity in earnings of affiliates		(56	)		(753	)
Equity in earnings of affiliates, net of tax		1			1
Net loss	$	(55	)	$	(752	)

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

Table of Contents

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Operations (Unaudited)

(In millions)

	Nine Months Ended September 30,
	2009			2008
				(Adjusted)
Operating revenues:
Passenger — United Airlines	$	8,909		$	11,924
Passenger — Regional Affiliates		2,252			2,346
Cargo		370			674
Other operating revenues		618			744
		12,149			15,688
Operating expenses:
Salaries and related costs		2,838			3,262
Aircraft fuel		2,528			5,884
Regional Affiliates		2,154			2,508
Purchased services		852			1,047
Aircraft maintenance materials and outside repairs		718			868
Landing fees and other rent		676			651
Depreciation and amortization		675			670
Distribution expenses		402			558
Aircraft rent		267			316
Cost of third party sales		171			203
Goodwill impairment (Note 14)		-			2,277
Other impairments and special items (Note 14)		250			214
Other operating expenses		699			844
		12,230			19,302
Loss from operations		(81	)		(3,614	)

Other income (expense):
Interest expense		(414	)		(427	)
Interest income		15			100
Interest capitalized		8			16
Miscellaneous, net		18			(177	)
		(373	)		(488	)
Loss before income taxes and equity in earnings of affiliates		(454	)		(4,102	)
Income tax benefit		(46	)		(30	)
Loss before equity in earnings of affiliates		(408	)		(4,072	)
Equity in earnings of affiliates, net of tax		3			4
Net loss	$	(405	)	$	(4,068	)

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

Table of Contents

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Financial Position (Unaudited)

(In millions, except shares)

	September 30, 2009			December 31, 2008
				(Adjusted)
Assets
Current assets:
Cash and cash equivalents	$	2,519		$	2,033
Restricted cash		99			50
Receivables, less allowance for doubtful accounts (2009 — $14; 2008 — $24)		843			704
Prepaid fuel		285			219
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2009 — $70; 2008 — $48)		216			237
Deferred income taxes		87			265
Fuel hedge collateral deposits		62			953
Receivables from related parties		56			214
Prepaid expenses and other		382			376
		4,549			5,051
Operating property and equipment:
Owned —
Flight equipment		8,414			8,766
Other property and equipment		1,722			1,751
		10,136			10,517
Less — accumulated depreciation and amortization		(1,932	)		(1,598	)
		8,204			8,919
Capital leases:
Flight equipment		1,795			1,578
Other property and equipment		43			39
		1,838			1,617
Less — accumulated amortization		(310	)		(224	)
		1,528			1,393
		9,732			10,312
Other assets:
Intangibles, less accumulated amortization (2009 — $391; 2008 — $339)		2,472			2,693
Aircraft lease deposits		307			297
Restricted cash		210			217
Investments		90			81
Other, net		997			984
		4,076			4,272
	$	18,357		$	19,635

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

Table of Contents

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Financial Position (Unaudited)

(In millions, except shares)

	September 30, 2009			December 31, 2008
				(Adjusted)
Liabilities and Stockholder’s Deficit
Current liabilities:
Advance ticket sales	$	1,675		$	1,530
Mileage Plus deferred revenue		1,428			1,414
Accounts payable		807			833
Accrued salaries, wages and benefits		731			756
Long-term debt maturing within one year		650			780
Fuel purchase commitments		285			219
Current obligations under capital leases		177			168
Accrued interest		120			112
Derivative instruments		76			718
Other		770			1,016
		6,719			7,546
Long-term debt		5,768			5,861
Long-term obligations under capital leases		1,212			1,192

Other liabilities and deferred credits:
Mileage Plus deferred revenue		2,823			2,768
Postretirement benefit liability		1,808			1,812
Advanced purchase of miles		1,087			1,087
Deferred income taxes		494			724
Other		1,082			981
		7,294			7,372
Commitments and contingent liabilities (Note 12)

Stockholder’s deficit:
Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 at both September 30, 2009 and December 31, 2008		—			—
Additional capital invested		2,929			2,831
Retained deficit		(5,664	)		(5,260	)
Accumulated other comprehensive income		99			93
		(2,636	)		(2,336	)
	$	18,357		$	19,635

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

Table of Contents

United Air Lines, Inc. and Subsidiary Companies

Condensed Statements of Consolidated Cash Flows (Unaudited)

(In millions)

	Nine Months Ended September 30,
	2009			2008
				(Adjusted)
Cash flows provided (used) by operating activities:
Net loss	$	(405	)	$	(4,068	)
Adjustments to reconcile to net cash provided (used) by operating activities—
Goodwill impairment		-			2,277
Other impairments and special items		250			214
Depreciation and amortization		675			670
Proceeds from lease amendment		160			—
Increase in Mileage Plus deferred revenue and advanced purchase of miles		140			584
Increase in advance ticket sales		145			333
Net change in fuel derivative instruments and related pending settlements		(870	)		272
(Increase) decrease in fuel hedge collateral		903			(378	)
Increase in receivables		(38	)		(168	)
Other, net		(80	)		71
		880			(193	)
Cash flows provided (used) by investing activities:
Net sales of short-term investments		-			2,259
Proceeds from asset sale-leasebacks		135			59
(Increase) decrease in restricted cash		(42	)		479
Additions to property, equipment and deferred software		(230	)		(384	)
Proceeds from asset dispositions		77			42
Other, net		4			15
		(56	)		2,470
Cash flows provided (used) by financing activities:
Proceeds from issuance of long-term debt		321			337
Capital contribution from parent		89			—
Decrease in lease deposits		22			154
Dividend to parent		-			(258	)
Repayment of Credit Facility		(18	)		(18	)
Repayment of other debt		(614	)		(537	)
Principal payments under capital leases		(129	)		(209	)
Increase in deferred financing costs		(9	)		(118	)
Other, net		-			1
		(338	)		(648	)
Increase in cash and cash equivalents during the period		486			1,629
Cash and cash equivalents at beginning of the period		2,033			1,239
Cash and cash equivalents at end of the period	$	2,519		$	2,868

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

Table of Contents

UAL Corporation and Subsidiary Companies and

United Air Lines, Inc. and Subsidiary Companies

Combined Notes to Condensed Consolidated Financial Statements (Unaudited)

(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) (the “Footnotes”), apply to both UAL and United, unless otherwise noted. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL.

Interim Financial Statements. The UAL and United unaudited condensed consolidated financial statements (the “Financial Statements”) shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that meet accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The Company believes that the disclosures presented here are not misleading. The Financial Statements include all adjustments, including asset impairments, severance and normal recurring adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. Certain historical amounts have been reclassified to conform to the current year’s presentation, including reclassification of December 31, 2008 derivative counterparty settlement payables of $140 million from Fuel derivative instruments to Other current liabilities in the Company’s Financial Statements. These Financial Statements should be read together with the information included in the combined UAL and United Annual Report on Form 10-K for the year ended December 31, 2008 as updated by the Current Report on Form 8-K dated May 1, 2009 (the “2008 Annual Report”).

Restricted Cash. For the 2009 and 2008 periods, restricted cash primarily includes cash collateral to secure workers’ compensation obligations and reserves for institutions that process credit card ticket sales. Industry practice includes classification of restricted cash flows as operating cash flows by some airlines and investing cash flows by others. The Company classifies changes in restricted cash balances associated with workers’ compensation obligations and credit card reserves as an investing activity in its Financial Statements because it considers restricted cash arising from these activities similar to an investment. If UAL had classified these changes in its restricted cash balances as operating activities in the nine months ended September 30, 2009 and 2008, its cash provided (used) by operating activities of $878 million and $(250) million, respectively, would have been reported as $841 million and $258 million, respectively. Additionally, cash provided (used) by investing activities for the nine months ended September 30, 2009 and 2008 of $(52) million and $2,576 million, respectively, would have been reported as $(15) million and $2,068 million, respectively.

(2) New Accounting Pronouncements

In the third quarter of 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The ASC is the single official source of authoritative, nongovernmental GAAP, other than guidance issued by the SEC. The adoption of the ASC did not have any impact on the financial statements included herein.

In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force.” This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The Company has not determined the impact that this update may have on its financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASC Update 2009-05”), an update to ASC 820, Fair Value Measurements and Disclosures. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASC Update 2009-05. ASC Update 2009-05 will become effective for the Company’s annual financial statements for the year ended December 31, 2009. The Company has not determined the impact that this update may have on its financial statements.

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In June 2009, the FASB issued guidance related to accounting for transfers of financial assets. This guidance improves the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a continuing interest in transferred financial assets. In addition, this guidance amends various ASC concepts with respect to accounting for transfers and servicing of financial assets and extinguishments of liabilities, including removing the concept of qualified special purpose entities. This guidance must be applied to transfers occurring on or after the effective date. The Company will adopt this guidance in its first annual and interim reporting periods beginning after November 15, 2009. The Company has not determined the impact that this guidance may have on its financial statements.

In June 2009, the FASB issued guidance which amends certain ASC concepts related to consolidation of variable interest entities. Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The Company will adopt this guidance in its first annual and interim reporting periods beginning after November 15, 2009. The Company has not determined the impact that this guidance may have on its financial statements.

Adoption of ASC 470 Update. The Company adopted new accounting guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion (“ASC 470 Update”), effective January 1, 2009, which required retrospective application. This standard requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The Company has two currently outstanding convertible debt instruments that are impacted by the ASC 470 Update. Upon the original issuance of these two debt instruments in 2006, the Company recorded the net debt obligation as long-term debt in accordance with applicable accounting standards at that time. To adopt this standard effective January 1, 2009, the Company estimated the fair value, as of the date of issuance, of its two applicable convertible debt instruments as if the instruments were issued without the conversion options. The difference between the fair value and the principal amounts of the instruments was $254 million. This amount was retrospectively applied to the Company’s Financial Statements from the issuance date of the debt instruments in 2006, and was retrospectively recorded as a debt discount and as a component of equity. The discount is being amortized over the expected five-year life of the notes resulting in non-cash increases to interest expense in historical and future periods. The full year 2008 interest expense impact is $48 million.

The following tables reflect UAL and United’s previously reported amounts, along with the adjusted amounts after adoption.

(In millions, except per share)

UAL

United

As Reported

As Adjusted

Effect of Change

As Reported

As Adjusted

Effect of Change

Statement of Consolidated Operations (Unaudited)

Three Months Ended September 30, 2008

Interest expense	$	(131	)	$	(144	)	$	(13	)	$	(132	)	$	(144	)	$	(12	)
Nonoperating expense		(287	)		(300	)		(13	)		(287	)		(299	)		(12	)
Loss before income taxes and equity earnings in affiliates		(778	)		(791	)		(13	)		(738	)		(750	)		(12	)
Net loss		(779	)		(792	)		(13	)		(740	)		(752	)		(12	)
Loss per share, basic and diluted		(6.13	)		(6.22	)		(0.09	)	NA			NA			NA
Total comprehensive loss		(791	)		(804	)		(13	)		(752	)		(764	)		(12	)

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Nine months Ended September 30, 2008

Interest expense	$	(392	)	$	(428	)	$	(36	)	$	(392	)	$	(427	)	$	(35	)
Nonoperating expense		(453	)		(489	)		(36	)		(453	)		(488	)		(35	)
Loss before income taxes and equity earnings in affiliates		(4,079	)		(4,115	)		(36	)		(4,067	)		(4,102	)		(35	)
Net loss		(4,045	)		(4,081	)		(36	)		(4,033	)		(4,068	)		(35	)
Loss per share, basic and diluted		(32.34	)		(32.62	)		(0.28	)	NA			NA			NA
Total comprehensive loss		(4,084	)		(4,120	)		(36	)		(4,072	)		(4,107	)		(35	)

Statement of Consolidated Financial Position (Unaudited) (a)

As of December 31, 2008

Long-term debt	$	6,007		$	5,862		$	(145	)	$	6,007		$	5,861		$	(146	)
Additional capital invested		2,666			2,919			253			2,578			2,831			253
Retained deficit		(5,199	)		(5,308	)		(109	)		(5,151	)		(5,260	)		(109	)

____________

(a)

The adoption of the ASC 470 Update also had minor impacts on Other assets and Deferred income taxes as reported in the Company’s Financial Statements. The adoption required an increase to the Company’s deferred tax liability and a decrease to its additional paid in capital. However, these impacts were substantially offset by a corresponding decrease in the valuation allowance for deferred tax assets and increase to additional paid in capital.

The following table provides additional information about UAL’s convertible debt instruments that may be settled for cash.

	September 30, 2009						December 31, 2008
($ and shares in millions, except conversion prices)	$726 million notes			$150 million notes			$726 million notes		$150 million notes
Carrying amount of the equity component	$	216		$	38		$	216	$	38
Principal amount of the liability component		726			150			726		150
Unamortized discount of liability component		92			13			126		20
Net carrying amount of liability component		634			137			600		130
Remaining amortization period of discount	21 months			16 months			(a)		(a)
Conversion price	$	32.64		$	43.90		(a)		(a)
Number of shares to be issued upon conversion		22.2			3.4		(a)		(a)
Effective interest rate on liability component		12.8	%		12.1	%	(a)		(a)

____________

(a)	Not required to be disclosed.

The following table presents the associated interest cost related to UAL’s convertible debt instruments that may be settled for cash, which consists of both the contractual interest coupon and amortization of the discount on the liability component.

	$726 million notes								$150 million notes
	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
(In millions)	September 30,				September 30,				September 30,				September 30,
	2009		2008		2009		2008		2009		2008		2009		2008
Non-cash interest cost recognized (a)	$	12	$	11	$	34	$	30	$	2	$	2	$	6	$	6
Cash interest cost recognized		8		8		24		24		2		2		6		6

____________

(a)	Amounts represent the adoption impact of the ASC 470 Update on interest expense for the three and nine months ended September 30, 2009 and 2008. The related negative adoption impact on loss per share for the three and nine months ended September 30, 2009 is $0.10 and $0.28, respectively.

Adoption of ASC 260 Update. The Company adopted new accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities (“ASC 260 Update”), effective January 1, 2009, requiring retrospective application. The ASC 260 Update clarifies that instruments granted in share-based payment transactions that are considered participating securities prior to vesting should be included in the earnings allocation under the two-class method of calculating earnings per share. The Company determined that its restricted shares granted under UAL’s share-based compensation plans are participating securities because the restricted shares participate in dividends. However, the impact of these shares was not included in the common shareholder basic loss per share computation for the three and nine months ended September 30, 2009 and 2008, because of losses in these periods. There were 0.8 million and 1.5 million nonvested restricted shares at September 30, 2009 and 2008, respectively, that would have been included in the common shareholder basic earnings per share computation had there been income in these periods.

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Other Standards Adopted. Effective January 1, 2009, the Company prospectively adopted ASC guidance related to disclosures about derivative instruments and hedging activities and new ASC guidance related to fair value measurements required for the Company’s nonfinancial assets and nonfinancial liabilities. See Note 11, “Fair Value Measurements and Derivative Instruments,” for disclosures related to the adoption of these ASC updates and the Company’s adoption of ASC updates related to interim disclosures about fair value of financial instruments and recognition and presentation of other-than-temporary impairments, effective April 1, 2009.

(3) Company Operational Plans

Since the second quarter of 2008, the Company has been implementing a plan to address volatility in crude oil prices, industry over-capacity and the severe global recession. The Company is reducing capacity and permanently removing 100 aircraft from its Mainline fleet by the end of 2009, including its entire B737 fleet and six B747 aircraft. In connection with the capacity reductions, the Company is further streamlining its operations and corporate functions in order to cumulatively reduce the size of its workforce by approximately 9,000 positions by the end of 2009. The Company’s workforce reductions have occurred through furloughs and furlough-mitigation programs, such as voluntary early-out options. Future workforce reductions may occur through similar programs. The tables below summarize the accrual activity and expense related to the Company’s implementation of its operational plans.

(In millions)

Reserve Activity	Severance			Leased Aircraft
Balance at December 31, 2008	$	81		$	16
Payments		(44	)		(14	)
Accruals		23			41
Balance at September 30, 2009	$	60		$	43

	Three Months Ended September 30,				Nine Months Ended September 30,
Expense Recognized	2009		2008		2009		2008
Severance	$	22	$	6	$	23	$	88
Leased aircraft		24		-		48		-

All of these charges are within the Mainline segment where the fleet reductions are occurring. Severance expense and leased aircraft expense are classified within Salaries and related costs and Other impairments and special items, respectively, in the Company’s Financial Statements.

The charges related to leased aircraft consist of the present value of future lease payments for aircraft that have been removed from service in advance of their lease termination dates as of September 30, 2009, estimated payments for lease return maintenance conditions related to B737 aircraft and write-off of associated lease fair value valuation balances, which were initially established as part of fresh-start reporting when the Company emerged from bankruptcy. Periodic lease payments will be made over the lease terms of these aircraft unless early return agreements are reached with the lessors; and, lease return maintenance condition payments, if any, will be made upon return of the aircraft to the lessors. The total expected future payments for leased aircraft that were removed from service at September 30, 2009 and that are expected to be removed from service during the fourth quarter of 2009 are $96 million, payable through 2013. Actual lease payments may be less if the Company is able to negotiate early termination of any of its leases.

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The following table provides information regarding the Company’s operating fleet. Amounts reported are applicable to UAL and United, except where noted otherwise.

	B737s (Mainline)						All Other Mainline						Total		Regional
	Owned		Leased		Total		Owned		Leased		Total		Mainline		Affiliates	Total
Aircraft at December 31, 2008	18		28		46		191		172		363		409		280	689
Added to (removed from) operating fleet	(18	)	(17	)	(35	)	(2	)	(1	)	(3	)	(38	)	12	(26)
Transferred from owned to leased	—		—		—		(14	)	14		—		—		—	—
Transferred from leased to owned	—		—		—		1		(1	)	—		—		—	—
Aircraft at September 30, 2009	—		11		11		176		184		360		371		292	663
Nonoperating at December 31, 2008 (a)	24		12		36		3		—		3		39		—	39
Removed from operating fleet	18		17		35		2		1		3		38		—	38
Returned to lessors	—		(9	)	(9	)	—		—		—		(9	)	—	(9)
Nonoperating at September 30, 2009 (a)	42		20		62		5		1		6		68		—	68

____________

(a)	At December 31, 2008 and September 30, 2009, United had one less owned and one more leased nonoperating B737 aircraft as compared to the UAL amounts shown in this table.

Other Costs. As the Company continues to complete its operational plans discussed above, it may incur additional costs related to its conversion of the Company’s fleet of Ted aircraft (including seat reconfiguration to include United First and Economy Plus seating), costs to exit additional facilities such as airports no longer served, lease termination costs, additional severance costs and asset impairment charges, among others. Such future costs and charges may be material.

(4)	Common Stockholders’ Deficit

During the nine months ended September 30, 2009, UAL received net proceeds of $89 million from the issuance of 8.5 million shares of common stock, of which 7.1 million shares were sold during the first nine months of 2009 and 1.4 million shares were sold in 2008. UAL contributed the $89 million of common stock sale proceeds to United.

For the nine months ended September 30, 2009, UAL acquired 202,384 common shares for treasury. These shares were acquired from participants for tax withholding obligations under UAL’s share-based compensation plans. In addition, UAL distributed approximately 1.1 million shares according to the bankruptcy plan of reorganization in the nine months ended September 30, 2009. Approximately 967,000 shares remain to be issued under the reorganization plan.

(5) Per Share Amounts (UAL Only)

UAL basic per share amounts were computed by dividing loss available to common shareholders by the weighted-average number of shares of common stock outstanding. UAL’s $563 million of 6% senior notes are callable at any time at 100% of par value, and can be redeemed with either cash or UAL common stock at UAL’s option. These notes are not deemed potentially dilutive shares, as UAL has the ability and intent to redeem these notes with cash. The table below represents the computation of UAL basic and diluted per share amounts and the number of securities that have been excluded from the computation of diluted per share amounts. Nonvested, participating restricted shares did not impact basic or diluted loss per share in the 2009 and 2008 periods that had losses. See Note 2, “New Accounting Pronouncements,” for additional information related to the adoption of the ASC 260 Update.

	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except per share)	2009			2008			2009			2008
				(Adjusted)						(Adjusted)
Basic loss per share:
Net loss	$	(57	)	$	(792	)	$	(411	)	$	(4,081	)
Preferred stock dividend requirements		-			-			-			(2	)
Loss available to common stockholders (a)	$	(57	)	$	(792	)	$	(411	)	$	(4,083	)
Basic weighted average shares outstanding		145.6			127.3			145.1			125.2
Loss per basic share	$	(0.39	)	$	(6.22	)	$	(2.83	)	$	(32.62	)

Diluted loss per share:
Loss available to common stockholders	$	(57	)	$	(792	)	$	(411	)	$	(4,083	)

Diluted weighted average shares outstanding		145.6			127.3			145.1			125.2
Loss per share, diluted	$	(0.39	)	$	(6.22	)	$	(2.83	)	$	(32.62	)

Potentially dilutive shares excluded from diluted per share amounts:
Stock options		6.6			4.4			6.6			4.4
Restricted shares (a)		0.8			1.5			0.8			1.5
2% preferred securities		-			2.1			-			4.1
4.5% senior limited-subordination convertible notes		22.2			22.2			22.2			22.2
5% convertible notes		3.4			3.4			3.4			3.4
		33.0			33.6			33.0			35.6

____________

(a)	Losses are not allocated to participating securities in the computation of loss per common share.

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(6) Share-Based Compensation Plans

Effective April 1, 2009, the Company made a general grant of 1,773,600 restricted stock units (“RSUs”) and 2,431,800 stock options to certain of its management employees. These grants were made pursuant to the UAL 2008 Incentive Compensation Plan which was approved by UAL’s Board of Directors and shareholders in 2008 and replaced the 2006 Management Equity Incentive Plan, effective June 12, 2008. These awards vest pro-rata over three years on the anniversary of the grant date. The terms of the awards do not provide for the acceleration of vesting upon retirement. The RSUs may be settled in cash or stock at the discretion of the Human Resources Subcommittee of the UAL Board of Directors. The Company’s intent is to settle the RSUs in cash; therefore, the obligations related to these RSUs are classified as liabilities on the Company’s Financial Statements and will be remeasured each reporting period throughout the requisite service period. The remeasurement is based upon the market share price on the last day of the reporting period. A cumulative adjustment is recorded during each reporting period to adjust compensation expense based on the current value of the awards.

Compensation expense associated with the UAL share-based compensation plans has been pushed down to United. The Company recognized share-based compensation expense of $8 million and $13 million during the three and nine months ended September 30, 2009, respectively. The Company recognized share-based compensation expense of $5 million and $23 million during the three and nine months ended September 30, 2008, respectively. The Company’s unrecognized share-based compensation expense was $26 million and $18 million as of September 30, 2009 and December 31, 2008, respectively. At September 30, 2009 and December 31, 2008, 3.1 million and 8.1 million awards were available for future issuance under the Company’s share-based compensation plans for employees, respectively. The weighted average grant date fair value and exercise price of options awarded in the nine months ended September 30, 2009 was $3.70 and $4.91, respectively. The table below summarizes stock option activity for the nine months ended September 30, 2009.

	Options
Outstanding at beginning of period	4,353,672
Granted	2,517,000
Exercised	(10,000)
Canceled	(276,472)
Outstanding at end of period	6,584,200
Exercisable (vested) at end of period	2,863,555

The fair value of RSUs was $16 million at September 30, 2009, which was based upon the closing share price on September 30, 2009. The table below summarizes UAL’s RSU and restricted stock activity for the nine months ended September 30, 2009.

	Restricted Stock Units			Restricted Stock
Nonvested at beginning of period		-			1,430,675
Granted		1,815,600			42,400
Vested		-			(608,306	)
Terminated		(47,800	)		(36,727	)
Nonvested at end of period		1,767,800			828,042

(7) Income Taxes

For the three and nine months ended September 30, 2009, UAL and United each recorded $4 million and $46 million, respectively, of tax benefits primarily due to impairment of indefinite-lived intangibles. For the nine months ended September 30, 2009, UAL and United each had an effective tax rate of approximately 10%. In the 2008 periods, the Company had an insignificant effective tax rate, as compared to the U.S. federal statutory rate of 35%, principally because of goodwill impairment charges in the second quarter that are not deductible for income tax purposes and the tax benefits of the Company’s remaining net operating losses for the periods were almost completely offset by a valuation allowance. The Company’s tax benefit in the 2008 nine month period was primarily due to an indefinite-lived intangible asset impairment.

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The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, including the reversals of deferred tax liabilities during the periods in which those temporary differences will become deductible. The Company’s management assesses the realizability of its deferred tax assets, and records a valuation allowance for the deferred tax assets when it is more likely than not that a portion, or all of the deferred tax assets will not be realized. As a result, the Company has a valuation allowance against its deferred tax assets as of September 30, 2009 and December 31, 2008, to reflect management’s assessment regarding the realizability of those assets. The Company expects to continue to maintain a valuation allowance on deferred tax assets until there is sufficient positive evidence of future realization.

If reversed, the current valuation allowance of $2,988 million and $2,911 million for UAL and United, respectively, will be allocated to reduce income tax expense. As of December 31, 2008, UAL and United had a valuation allowance of $2,886 million (as adjusted) and $2,812 million (as adjusted), respectively. The valuation allowance as of December 31, 2008, as previously reported, was retrospectively adjusted for the adoption of APB 14-1 which is discussed in Note 2, “New Accounting Pronouncements.” UAL’s valuation allowance increased by $102 million in the first nine months of 2009 primarily due to an increase in its net operating loss carryforward.

As of September 30, 2009, UAL and United had a federal net operating loss (“NOL”) carry forward of approximately $7.4 billion, and a combined federal and state income tax NOL carry forward tax benefit of approximately $2.8 billion, which may be used to reduce taxes in future years. If not used, federal tax benefits of $1.0 billion expire in 2022, $0.4 billion expire in 2023, $0.5 billion expire in 2024, $0.4 billion expire in 2025, $20 million expire in 2026, $0.1 billion in 2028 and $0.2 billion in 2029. In addition, the state tax benefit of $179 million, if not used, expires over a five to twenty year period.

The Company’s ability to utilize these benefits may be impaired if the Company were to have a change of ownership within the meaning of Section 382 of the Internal Revenue Code. To reduce the possibility of a potential adverse effect on the Company’s ability to utilize its NOL carry forward benefits, the Company’s certificate of incorporation contains a “5% Ownership Limitation,” applicable to all stockholders except the Pension Benefit Guaranty Corporation (“PBGC”). The 5% Ownership Limitation remains effective until February 1, 2011. Generally, the 5% limitation prohibits (i) the acquisition by a single stockholder of shares representing 5% or more of the common stock of UAL and (ii) any acquisition or disposition of common stock by a stockholder that already owns 5% or more of UAL’s common stock, unless prior written approval is granted by the UAL Board of Directors. At this time, the Company does not believe the limitations imposed by the Internal Revenue Code on the usage of the NOL carry forward and other tax attributes following an ownership change will have an effect on the Company. Therefore, the Company does not believe its exit from bankruptcy has had any material impact on the use of its remaining NOL carry forward and other tax attributes.

In addition to the deferred tax assets listed above, the Company had an $809 million unrecorded tax benefit at September 30, 2009 attributable to the difference between the amount of the financial statement expense and the allowable tax deduction for UAL common stock issued to certain unsecured creditors and employees pursuant to the bankruptcy plan of reorganization. The Company is accounting for this unrecorded tax benefit by analogy to ASC guidance with respect to accounting for share-based payment arrangements which requires recognition of the tax benefit to be deferred until it is realized as a reduction of taxes payable. If not realized, the unrecognized tax benefits of $161 million will expire in 2025, $489 million in 2026 and $159 million over a period from 2027 through 2050. UAL’s income tax returns for tax years after 2003 remain subject to examination by the Internal Revenue Service and state taxing jurisdictions. United is included in UAL’s consolidated income tax returns.

(8) Retirement and Postretirement Plans

UAL and United contribute to defined contribution plans on behalf of most of their employees, particularly within the U.S. Internationally, the Company maintains a number of small pension plans covering much of its local, non-U.S. workforce. The Company also provides certain health care benefits, primarily in the U.S., to retirees and eligible dependents, as well as certain life insurance benefits to certain retirees, which are reflected as “Other Benefits” in the tables below. The Company has reserved the right, subject to collective bargaining and other agreements, to modify or terminate the health care and life insurance benefits for both current and future retirees. The curtailment gain in the nine months ended September 30, 2009 is attributed to a reduction in future service for certain of the Company’s postretirement plans due to reductions in workforce.

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The Company’s net periodic benefit cost included the following components.

	Pension Benefits												Other Benefits
(In millions)	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008			2009			2008			2009			2008		2009		2008
Service cost	$	2		$	2		$	5		$	5		$	7		$	8	$	21	$	24
Interest cost		2			2			6			7			29			31		86		91
Expected return on plan assets		(2	)		(2	)		(5	)		(8	)		(2	)