Edgar Filing: CONTINENTAL AIRLINES INC /DE/

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2011

¨	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	United Continental Holdings, Inc.	Delaware	36-2675207
	77 W. Wacker Drive, Chicago, Illinois 60601
	(312) 997-8000

001-11355	United Air Lines, Inc.	Delaware	36-2675206
	77 W. Wacker Drive, Chicago, Illinois 60601
	(312) 997-8000

001-10323	Continental Airlines, Inc.	Delaware	74-2099724
	1600 Smith Street, Dept HQSEO, Houston, Texas 77002
	(713) 324-2950

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.


United Continental Holdings, Inc.	Yes x No ¨	United Air Lines, Inc.	Yes x No ¨
Continental Airlines, Inc.	Yes x 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 (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


United Continental Holdings, Inc.	Yes x No ¨	United Air Lines, Inc.	Yes x No ¨
Continental Airlines, Inc.	Yes x 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.


United Continental Holdings, Inc.	Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
United Air Lines, Inc.	Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨
Continental Airlines, Inc.	Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨

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

The number of shares outstanding of each of the issuer’s classes of common stock as of October 21, 2011 is shown below:


United Continental Holdings, Inc.		330,852,949 shares of common stock ($0.01 par value) 205 (100% owned by United Continental Holdings, Inc.)
United Air Lines, Inc.		There is no market for United Air Lines, Inc. common stock. 1,000 (100% owned by United Continental Holdings, Inc.)
Continental Airlines, Inc.		There is no market for Continental Airlines, Inc. common stock.

OMISSION OF CERTAIN INFORMATION

This combined Form 10-Q is separately filed by United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc. United Air Lines, Inc. and Continental Airlines, Inc. meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format allowed under that General Instruction.

United Continental Holdings, Inc.

United Air Lines, Inc.

Continental Airlines, Inc.

Report on Form 10-Q

For the Quarter Ended September 30, 2011


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
United Continental Holdings, Inc.:
Statements of Consolidated Operations		3
Consolidated Balance Sheets		4
Condensed Statements of Consolidated Cash Flows		6

United Air Lines, Inc.:
Statements of Consolidated Operations		7
Consolidated Balance Sheets		8
Condensed Statements of Consolidated Cash Flows		10

Continental Airlines, Inc.:
Statements of Consolidated Operations		11
Consolidated Balance Sheets		12
Condensed Statements of Consolidated Cash Flows		14

Combined Notes to Condensed Consolidated Financial Statements (United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc.)		15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3. Quantitative and Qualitative Disclosures About Market Risk		51
Item 4. Controls and Procedures		52

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		53
Item 1A. Risk Factors		54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 6. Exhibits		54
Signatures		55
Exhibit Index		56

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Operating revenue:
Passenger:
Mainline	$	7,265		$	3,744			19,892		$	10,173
Regional		1,779			1,011			4,945			2,766

Total passenger revenue		9,044			4,755			24,837			12,939
Cargo		283			175			882			522
Special revenue item (Note 1)		—			—			107			—
Other operating revenue		844			487			2,356			1,400

		10,171			5,417			28,182			14,861

Operating expenses:
Aircraft fuel		3,371			1,534			9,270			4,227
Salaries and related costs		2,020			1,129			5,742			3,180
Regional capacity purchase		619			417			1,807			1,210
Landing fees and other rent		476			268			1,451			796
Aircraft maintenance materials and outside repairs		447			262			1,330			729
Depreciation and amortization		384			232			1,157			676
Distribution expenses		377			204			1,102			574
Aircraft rent		255			82			760			244
Special charges (Note 10)		120			63			343			187
Other operating expenses		1,167			685			3,443			1,980

		9,236			4,876			26,405			13,803

Operating income		935			541			1,777			1,058

Nonoperating income (expense):
Interest expense		(227	)		(177	)		(731	)		(540	)
Interest income		6			5			15			8
Interest capitalized		10			2			24			7
Miscellaneous, net		(64	)		16			(94	)		44

		(275	)		(154	)		(786	)		(481	)

Income before income taxes		660			387			991			577
Income tax expense (benefit)		7			—			13			(1	)

Net income	$	653		$	387		$	978		$	578


Earnings per share, basic	$	1.97		$	2.30		$	2.96		$	3.44

Earnings per share, diluted	$	1.69		$	1.75		$	2.59		$	2.78

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	6,984		$	8,069
Short-term investments		1,373			611

Total unrestricted cash, cash equivalents and short-term investments		8,357			8,680
Restricted cash		50			37
Receivables, less allowance for doubtful accounts (2011 — $7; 2010 — $6)		1,713			1,613
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $81; 2010 — $64)		628			466
Deferred income taxes		643			591
Prepaid expenses and other		595			658

		11,986			12,045


Operating property and equipment:
Owned—
Flight equipment		15,692			15,181
Other property and equipment		3,059			2,890

		18,751			18,071
Less — accumulated depreciation and amortization		(3,717	)		(2,858	)

		15,034			15,213

Purchase deposits for flight equipment		359			230
Capital leases—
Flight equipment		1,468			1,741
Other property and equipment		220			217

		1,688			1,958
Less — accumulated amortization		(532	)		(456	)

		1,156			1,502

		16,549			16,945

Other assets:
Goodwill		4,523			4,523
Intangibles, less accumulated amortization (2011 — $630; 2010 — $504)		4,772			4,917
Restricted cash, cash equivalents and investments		337			350
Investments		92			103
Other, net		795			715

		10,519			10,608

	$	39,054		$	39,598

(continued on next page)

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited) September 30, 2011			December 31, 2010
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Advance ticket sales	$	3,761		$	2,998
Frequent flyer deferred revenue		2,507			2,582
Accounts payable		1,808			1,805
Accrued salaries and benefits		1,404			1,470
Current maturities of long-term debt		1,201			2,411
Current maturities of capital leases		138			252
Other		1,079			1,127

		11,898			12,645


Long-term debt		10,873			11,434
Long-term obligations under capital leases		945			1,036

Other liabilities and deferred credits:
Frequent flyer deferred revenue		3,343			3,491
Advanced purchase of miles		1,711			1,159
Postretirement benefit liability		2,393			2,344
Pension liability		1,428			1,473
Deferred income taxes		1,641			1,585
Lease fair value adjustment, net		1,188			1,371
Other		1,322			1,333

		13,026			12,756

Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 330,849,396 and 327,922,565 shares at September 30, 2011 and December 31, 2010, respectively		3			3
Additional capital invested		7,110			7,071
Accumulated deficit		(4,725	)		(5,703	)
Stock held in treasury, at cost		(31	)		(31	)
Accumulated other comprehensive income (loss)		(45	)		387

		2,312			1,727

	$	39,054		$	39,598

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Nine Months Ended September 30,
	2011			2010
Cash Flows from Operating Activities:
Net income	$	978		$	578
Adjustments to reconcile net income to net cash provided (used) by operating activities —
Depreciation and amortization		1,157			676
Amortization of debt and lease fair value adjustment		(171	)		12
Special items, non-cash portion (Notes 1 and 10)		(15	)		112
Increase in advance ticket sales		762			499
Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles		82			(118	)
Increase in receivables		(517	)		(295	)
Increase in accounts payable		1			87
Increase in other current assets		(209	)		(59	)
Increase in other accrued liabilities		24			160
Net change in fuel hedge cash collateral		(61	)		10
Other, net		112			139

Net cash provided by operating activities		2,143			1,801


Cash Flows from Investing Activities:
Capital expenditures		(510	)		(212	)
Aircraft purchase deposits paid, net		(121	)		(42	)
(Increase) decrease in restricted cash		(4	)		71
Proceeds from sale of property and equipment		107			25
Purchases of short-term investments, net		(754	)		—
Other, net		—			6

Net cash used in investing activities		(1,282	)		(152	)


Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		142			1,995
Payments of long-term debt		(1,925	)		(1,529	)
Principal payments under capital leases		(199	)		(201	)
Other, net		36			(18	)

Net cash provided by (used in) financing activities		(1,946	)		247

Increase (decrease) in cash and cash equivalents during the period		(1,085	)		1,896
Cash and cash equivalents at beginning of the period		8,069			3,042

Cash and cash equivalents at end of the period	$	6,984		$	4,938


Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through the issuance of debt	$	130		$	467
Reclassification of debt to advanced purchases of miles		(270	)		—
Reclassification of debt discount to other assets		60			—
UAL 8% Contingent Senior Unsecured Notes, net of discount		49			—
Interest paid in kind on UAL 6% Senior Notes		18			17

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Operating revenue:
Passenger:
Mainline	$	4,032		$	3,744		$	10,916		$	10,173
Regional		1,084			1,011			3,021			2,766

Total passenger revenue		5,116			4,755			13,937			12,939
Cargo		177			175			535			522
Special revenue item (Note 1)		—			—			88			—
Other operating revenue		564			489			1,543			1,406

		5,857			5,419			16,103			14,867

Operating expenses:
Aircraft fuel		1,949			1,534			5,294			4,227
Salaries and related costs		1,092			1,129			3,117			3,180
Regional capacity purchase		407			417			1,190			1,210
Landing fees and other rent		246			268			773			796
Aircraft maintenance materials and outside repairs		299			262			881			729
Depreciation and amortization		228			232			684			676
Distribution expenses		194			204			580			574
Aircraft rent		82			82			243			244
Special charges (Note 10)		72			63			236			187
Other operating expenses		709			679			2,081			1,973

		5,278			4,870			15,079			13,796

Operating income		579			549			1,024			1,071

Nonoperating income (expense):
Interest expense		(135	)		(172	)		(462	)		(525	)
Interest income		2			5			7			8
Interest capitalized		6			2			12			7
Miscellaneous, net		(35	)		15			(43	)		44

		(162	)		(150	)		(486	)		(466	)

Income before income taxes		417			399			538			605
Income tax expense (benefit)		2			—			2			(1	)

Net income	$	415		$	399		$	536		$	606

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited) September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	4,070		$	4,665
Short-term investments		186			—

Total unrestricted cash, cash equivalents and short-term investments		4,256			4,665
Restricted cash		50			37
Receivables, net of allowance for doubtful accounts (2011 — $6; 2010 — $5)		865			1,004
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $69; 2010 — $61)		347			321
Receivables from related parties		228			135
Deferred income taxes		387			373
Prepaid expenses and other		413			366

		6,546			6,901

Operating property and equipment:
Owned—
Flight equipment		9,061			8,718
Other property and equipment		2,213			2,086

		11,274			10,804
Less — accumulated depreciation and amortization		(3,200	)		(2,717	)

		8,074			8,087

Purchase deposits for flight equipment		57			51
Capital leases—
Flight equipment		1,468			1,741
Other property and equipment		52			49

		1,520			1,790
Less — accumulated amortization		(519	)		(453	)

		1,001			1,337

		9,132			9,475

Other assets:
Intangibles, less accumulated amortization (2011 — $518; 2010 — $473)		2,298			2,343
Restricted cash		201			190
Investments		91			97
Other, net		570			622

		3,160			3,252

	$	18,838		$	19,628

(continued on next page)

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited) September 30, 2011			December 31, 2010
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Advance ticket sales	$	2,116		$	1,536
Frequent flyer deferred revenue		1,529			1,703
Accounts payable		1,022			907
Accrued salaries and benefits		907			938
Current maturities of long-term debt		476			1,546
Current maturities of capital leases		135			249
Payables to related parties		61			63
Other		765			950

		7,011			7,892


Long-term debt		5,350			5,480
Long-term obligations under capital leases		765			858

Other liabilities and deferred credits:
Frequent flyer deferred revenue		2,059			2,321
Advanced purchase of miles		1,442			1,159
Postretirement benefit liability		2,127			2,091
Pension liability		105			101
Deferred income taxes		746			731
Other		952			972

		7,431			7,375

Commitments and contingencies
Stockholder’s deficit:
Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 shares at both September 30, 2011 and December 31, 2010		—			—
Additional capital invested		3,430			3,421
Accumulated deficit		(4,953	)		(5,489	)
Accumulated other comprehensive income (loss)		(196	)		91

		(1,719	)		(1,977	)

	$	18,838		$	19,628

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED AIR LINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Nine Months Ended September 30,
	2011			2010
Cash Flows from Operating Activities:
Net income	$	536		$	606
Adjustments to reconcile net income to net cash provided (used) by operating activities—
Depreciation and amortization		684			676
Amortization of debt and lease fair value adjustment		11			12
Special items, non-cash portion (Notes 1 and 10)		(19	)		112
Increase in advance ticket sales		579			499
Decrease in frequent flyer deferred revenue and advanced purchase of miles		(150	)		(118	)
Increase in receivables		(237	)		(294	)
Increase in accounts payable		112			88
Increase in other current assets		(88	)		(92	)
Increase (decrease) in other accrued liabilities		(38	)		161
Net change in fuel hedge cash collateral		(61	)		10
Other, net		109			137

Net cash provided by operating activities		1,438			1,797


Cash Flows from Investing Activities:
Capital expenditures		(332	)		(212	)
Aircraft purchase deposits paid, net		(6	)		(42	)
(Increase) decrease in restricted cash		(28	)		71
Proceeds from sale of property and equipment		15			25
Purchases of short-term investments, net		(180	)		—
Other, net		—			6

Net cash used in investing activities		(531	)		(152	)


Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		—			1,995
Payments of long-term debt		(1,316	)		(1,528	)
Principal payments under capital leases		(198	)		(201	)
Other, net		12			(15	)

Net cash provided by (used in) financing activities		(1,502	)		251

Increase (decrease) in cash and cash equivalents during the period		(595	)		1,896
Cash and cash equivalents at beginning of the period		4,665			3,036

Cash and cash equivalents at end of the period	$	4,070		$	4,932


Investing and Financing Activities Not Affecting Cash:
UAL 8% Contingent Senior Unsecured Notes, net of discount	$	49		$	—
Interest paid in kind on UAL 6% Senior Notes		18			17

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30, 2011			Three Months Ended September 30, 2010			Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
Operating revenue:
Passenger:
Mainline	$	3,229		$	2,884		$	8,970		$	7,777
Regional		695			610			1,924			1,726

Total passenger revenue		3,924			3,494			10,894			9,503
Cargo		105			115			346			328
Special revenue item (Note 1)		—			—			19			—
Other operating revenue		343			326			955			957

		4,372			3,935			12,214			10,788

Operating expenses:
Aircraft fuel		1,422			1,006			3,976			2,872
Salaries and related costs		906			909			2,575			2,527
Regional capacity purchase		211			207			617			608
Landing fees and other rent		230			228			678			656
Aircraft maintenance materials and outside repairs		152			126			455			399
Depreciation and amortization		156			124			473			380
Distribution expenses		183			169			523			474
Aircraft rent		171			230			516			689
Special charges (Note 10)		48			13			107			47
Other operating expenses		533			481			1,531			1,416

		4,012			3,493			11,451			10,068

Operating income		360			442			763			720

Nonoperating income (expense):
Interest expense		(88	)		(102	)		(259	)		(288	)
Interest income		3			2			7			6
Interest capitalized		4			5			12			17
Miscellaneous, net		(41	)		7			(76	)		(13	)

		(122	)		(88	)		(316	)		(278	)

Income before income taxes		238			354			447			442
Income tax expense		2			—			6			1

Net income	$	236		$	354		$	441		$	441


Earnings per share, basic				$	2.52					$	3.16

Earnings per share, diluted				$	2.16					$	2.81

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited) September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	2,908		$	3,398
Short-term investments		1,187			611

Total unrestricted cash, cash equivalents and short-term investments		4,095			4,009
Receivables, net of allowance for doubtful accounts (2011 — $1; 2010 — $1)		848			609
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $12; 2010 — $3)		281			246
Deferred income taxes		254			225
Receivables from related parties		—			3
Prepaid expenses and other		184			185

		5,662			5,277

Operating property and equipment:
Owned—
Flight equipment		6,631			6,463
Other property and equipment		846			804

		7,477			7,267
Less — accumulated depreciation and amortization		(517	)		(141	)

		6,960			7,126
Purchase deposits for flight equipment		302			178
Capital leases — other property and equipment		168			168
Less — accumulated amortization		(13	)		(3	)

		155			165

		7,417			7,469

Other assets:
Goodwill		4,523			4,523
Intangibles, less accumulated amortization (2011 — $112; 2010 — $31)		2,476			2,575
Restricted cash, cash equivalents and investments		135			160
Other, net		368			375

		7,502			7,633

	$	20,581		$	20,379

(continued on next page)

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited) September 30, 2011		December 31, 2010
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Advance ticket sales	$	1,645	$	1,463
Frequent flyer deferred revenue		978		879
Accounts payable		790		902
Accrued salaries and benefits		496		532
Current maturities of long-term debt		724		865
Payables to related parties		66		—
Current maturities of capital leases		3		3
Other		333		236

		5,035		4,880


Long-term debt		5,111		5,536
Long-term obligations under capital leases		180		178

Other liabilities and deferred credits:
Frequent flyer deferred revenue		1,284		1,170
Advanced purchase of miles		270		—
Postretirement benefit liability		265		253
Pension liability		1,323		1,372
Lease fair value adjustment, net		1,192		1,374
Deferred income taxes		817		784
Other		469		522

		5,620		5,475

Commitments and contingencies
Stockholder’s equity:
Common stock at par, $0.01 par value; authorized and outstanding 1,000 shares at both September 30, 2011 and December 31, 2010		—		—
Additional capital invested		4,146		4,115
Retained earnings (accumulated deficit)		346		(95	)
Accumulated other comprehensive income		143		290

		4,635		4,310

	$	20,581	$	20,379

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

CONTINENTAL AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Successor			Predecessor
	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
Cash Flows from Operating Activities:
Net income	$	441		$	441
Adjustments to reconcile net income to net cash provided (used) by operating activities—
Depreciation and amortization		473			380
Amortization of debt and lease fair value adjustment		(182	)		—
Special items, non-cash portion (Notes 1 and 10)		4			18
Increase in advance ticket sales		183			400
Increase in frequent flyer deferred revenue and advanced purchase of miles		233			141
Increase in receivables		(370	)		(199	)
Increase (decrease) in accounts payable		(47	)		44
Increase in other current assets		(83	)		(176	)
Increase in other accrued liabilities		23			230
Other, net		30			28

Net cash provided by operating activities		705			1,307

Cash Flows from Investing Activities:
Capital expenditures		(178	)		(246	)
Aircraft purchase deposits paid, net		(116	)		10
Decrease in restricted cash		25			3
Proceeds from sale of property and equipment		92			32
Purchases of short-term investments, net		(574	)		(171	)

Net cash used in investing activities		(751	)		(372	)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		142			1,025
Payments of long-term debt		(609	)		(836	)
Other, net		23			28

Net cash used in financing activities		(444	)		217

Increase in cash and cash equivalents during the period		(490	)		1,152
Cash and cash equivalents at beginning of the period		3,398			2,546

Cash and cash equivalents at end of the period	$	2,908		$	3,698


Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through the issuance of debt	$	130		$	467
Reclassification of debt to advanced purchases of miles		(270	)		—
Reclassification of debt discount to other assets		60			—

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED CONTINENTAL HOLDINGS, INC.,

UNITED AIR LINES, INC. AND CONTINENTAL AIRLINES, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL”) is a holding company and its principal, wholly-owned subsidiaries are United Air Lines, Inc. (together with its consolidated subsidiaries, “United”) and, effective October 1, 2010, Continental Airlines, Inc. (together with its consolidated subsidiaries, “Continental”). All significant intercompany transactions are eliminated.

This Quarterly Report on Form 10-Q is a combined report of UAL, United and Continental. We sometimes use the words “we,” “our,” “us,” and the “Company” for disclosures that relate to all of UAL, United and Continental Successor (defined below). As UAL consolidates United for financial statement purposes, disclosures that relate to United activities also apply to UAL; and, effective October 1, 2010, disclosures that relate to Continental Successor activities also apply to UAL. When appropriate, UAL, United and Continental are named specifically for their related activities and disclosures.

Continental Acquisition Accounting. As a result of the application of the acquisition method of accounting, Continental’s financial statements prior to October 1, 2010 are not comparable with Continental’s financial statements for periods on or after October 1, 2010. References to “Successor” refer to Continental on or after October 1, 2010, after giving effect to the application of acquisition accounting. References to “Predecessor” refer to Continental as reported prior to October 1, 2010.

Interim Financial Statements. The UAL, United and Continental unaudited condensed consolidated 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 comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The significant reclassifications are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). Effective January 1, 2011, the Company reclassified costs associated with the redemption of frequent flyer miles for awards other than travel on United or Continental from operating revenue to operating expenses. This reclassification increased revenue and other operating expenses in the three and nine months ended September 30, 2010 by $23 million and $65 million, respectively, but had no effect on earnings for those periods. These reclassifications were made to conform the financial statement presentation of UAL, United and Continental. The UAL, United and Continental financial statements should be read together with the information included in the 2010 Annual Report.

NOTE 1—NEW ACCOUNTING PRONOUNCEMENTS

Multiple-Deliverable Revenue Arrangements

Frequent Flyer Awards. United and Continental have frequent flyer programs that are designed to increase customer loyalty. Program participants earn mileage credits (“miles”) by flying on United, Continental and certain other participating airlines. Program participants can also earn miles through purchases from non-airline partners that participate in the Company’s loyalty programs. We sell miles to these partners, which include retail merchants, credit card issuers, hotels and car rental companies, among others. Miles can be redeemed for free, discounted or upgraded air travel and non-travel awards. The Company records its obligation for future award redemptions using a deferred revenue model.

In the case of the sale of air transportation services, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale that represents the fair value of the miles, as described further below. In the case of miles sold to third parties, historically, we have had two primary revenue elements: marketing and air transportation.

The adoption of Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”), as described below, resulted in the revision of the accounting for certain aspects of the Company’s frequent flyer accounting.

Passenger Tickets

Effective January 1, 2011, the Company began applying the provisions of ASU 2009-13, which resulted in a change to the Company’s accounting for passenger ticket sales that include the issuance of miles that may be redeemed for free travel or other products or services at a future date. Under the Company’s accounting policy prior to January 1, 2011, the Company estimated the weighted average equivalent ticket value by assigning a fair value to the miles that were issued in connection with the sale of air transportation. The fair value of the miles was deferred and the residual amount of ticket proceeds was recognized as passenger revenue at the time the air transportation was provided.

Effective January 1, 2011, the Company began applying the new guidance to determine the estimated selling price of the air transportation and miles as if each element were sold on a separate basis and to allocate the total consideration to each of these elements on a pro rata basis. The estimated selling price of miles is computed using an estimated weighted average equivalent ticket value that is adjusted by a sales discount that considers a number of factors, including ultimate fulfillment expectations associated with miles sold in flight transactions to various customer groups.

As a result of the prospective adoption, the new accounting policy was only applied to new sales of air transportation beginning in 2011. Generally, as compared to the historical accounting policy, for passenger tickets sold with miles earned, the new accounting policy decreases the value of miles that the Company records as deferred revenue and increases the passenger revenue recorded at the time air transportation is provided. Due to the average period from the purchase of air transportation to the provision of air transportation, the new accounting policy was only applicable to a portion of the Company’s multiple element ticket transactions recorded during 2011. The application of the new accounting method resulted in the following increases to revenue (in millions, except per share amounts):


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	UAL		United		Continental		UAL		United		Continental
Operating revenue	$	93	$	56	$	37	$	254	$	159	$	95
Per basic share	$	0.28					$	0.77
Per diluted share	$	0.24					$	0.64

We estimate that application of the new accounting method for the last three months of 2011 will increase UAL’s revenue as compared to revenue that would have been recorded under the historical method of accounting, at levels that are expected to be substantially consistent with those recorded during the third quarter.

Co-branded Credit Card Partner Mileage Sales

United and Continental each had significant contracts to sell frequent flyer miles to their co-branded credit card partner, Chase Bank USA, N.A. (“Chase”). Miles can be redeemed for free, discounted or upgraded air travel and non-travel awards. On June 9, 2011, these contracts were modified and the Company entered into one agreement with Chase (the “Co-Brand Agreement”). The Company applied the provisions of ASU 2009-13 to the Co-Brand Agreement as a materially modified contract.

Under the Co-Brand Agreement and ASU 2009-13, we have identified five revenue elements in the agreement: air transportation; use of the United brand and access to frequent flyer member lists; advertising; baggage services; and airport lounge usage (together, excluding air transportation, the “marketing-related deliverables”). The fair value of the elements is determined using management’s estimated selling price of each element. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Co-Brand Agreement in order to determine the allocation of proceeds to each of the multiple elements to be delivered.

The new guidance changed the allocation of arrangement consideration to the number of units of accounting; however, the pattern and timing of revenue recognition for those units did not change. The Company records passenger revenue related to the air transportation element when the transportation is delivered. The other elements are generally recognized as other operating revenue when earned.

The application of the new accounting standard decreases the value of the air transportation deliverable related to the Co-Brand Agreement that the Company records as deferred revenue (and ultimately passenger revenue when redeemed awards are flown) and increases the value primarily of the marketing-related deliverables recorded in other revenue at the time these marketing-related deliverables are provided. Excluding the effects disclosed in the “Special Revenue Item” section below, the impact of adoption of ASU 2009-13 resulted in the following estimated increases to revenue (in millions, except per share amounts):


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	UAL		United		Continental		UAL		United		Continental
Operating revenue	$	42	$	37	$	5	$	58	$	46	$	12
Per basic share	$	0.13					$	0.18
Per diluted share	$	0.11					$	0.15

While revenue recognition is subject to fluctuation based on credit card sales volumes and frequent flyer redemption patterns, the Company expects, as a result of the Co-Brand Agreement, that revenue will increase by approximately $50 million in the fourth quarter of 2011. These estimates are subject to variability primarily depending on the volume of future transactions.

Pending new or materially modified contracts after January 1, 2011, certain other non-airline partners who participate in the loyalty programs and to which we sell miles remain subject to our historical residual accounting method.

Special Revenue Item

The transition provisions of ASU 2009-13 require that the Company’s existing deferred revenue balance be adjusted retroactively to reflect the value of any undelivered element remaining at the date of contract modification as if we had been applying ASU 2009-13 since the initiation of the Co-Brand Agreement. We applied this transition provision by revaluing the undelivered air transportation element using its new estimated selling price as determined in connection with the contract modification. This estimated selling price was lower than the rate at which the undelivered element had been deferred under the previous contracts and thus we recorded the following one-time non-cash adjustment to decrease frequent flyer deferred revenue and increase special revenue (in millions):


	Nine Months Ended September 30, 2011
	UAL		United		Continental
Special revenue item	$	107	$	88	$	19
Per basic share	$	0.33
Per diluted share	$	0.27

NOTE 2—EARNINGS PER SHARE

The table below represents the computation of UAL basic and diluted earnings per share amounts and the number of securities that have been excluded from the computation of diluted earnings per share amounts because they were antidilutive (in millions, except per share amounts):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
UAL basic earnings per share:
Net income	$	653		$	387	$	978		$	578
Less: Income allocable to participating securities		(2	)		—		(3	)		(1	)

Earnings available to common stockholders	$	651		$	387	$	975		$	577

Basic weighted average shares outstanding		330			168		329			168

Earnings per share, basic	$	1.97		$	2.30	$	2.96		$	3.44

UAL diluted earnings per share:
Earnings available to common stockholders	$	651		$	387		975		$	577
Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes		2			18		31			53
Effect of Continental 4.5% Convertible Notes		2			—		7			—
Effect of UAL 5% Senior Convertible Notes		—			4		—			—
Effect of Continental 6% Convertible Junior Subordinated Debentures		4			—		—			—
Effect of UAL 6% Senior Convertible Notes		4			4		13			13

Earnings available to common stockholders including the effect of dilutive securities	$	663		$	413	$	1,026		$	643

UAL diluted shares outstanding:
Basic weighted average shares outstanding		330			168		329			168
Effect of restricted stock units and employee stock options		1			2		2			1
Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes		5			22		13			22
Effect of Continental 4.5% Convertible Notes		12			—		12			—
Effect of UAL 5% Senior Convertible Notes		—			3		—			—
Effect of Continental 6% Convertible Junior Subordinated Debentures		4			—		—			—
Effect of UAL 6% Senior Convertible Notes		40			40		40			40

Diluted weighted average shares outstanding		392			235		396			231

Earnings per share, diluted	$	1.69		$	1.75	$	2.59		$	2.78

UAL potentially dilutive shares excluded from diluted per share amounts:
Restricted stock and units and stock options		7			5		6			5
Continental 6% Convertible Junior Subordinated Debentures		—			—		4			—
UAL 5% Senior Convertible Notes (Note 9)		—			—		—			3

UAL’s 6% Senior Notes due 2031, with a principal amount of $633 million as of September 30, 2011, can be redeemed, and the $62.5 million of UAL’s 8% Contingent Senior Notes (the “8% Notes”), which UAL is obligated to issue no later than February 14, 2012, will be redeemable when issued with either cash or shares of UAL common stock, or in the case of mandatory redemption, a combination thereof, at UAL’s option. These notes are not included in the diluted earnings per share calculation because, if UAL were to redeem the notes, it is UAL’s intent to redeem these notes with cash. See Note 8 of this report for additional information on the 8% Notes.

During the second quarter of 2011, UAL repurchased at par value approximately $570 million of the $726 million outstanding principal amount of its 4.5% Senior Limited-Subordination Convertible Notes due 2021 with cash after the notes were put to UAL by the noteholders. For the nine months ended September 30, 2011, the dilutive effect of the 4.5% Senior Limited-Subordination Convertible Notes due 2021 was excluded from the diluted earnings per share calculations from the date that notice was given of the Company’s intent to pay the notes put to it in cash up to the June 30, 2011 repurchase date.

The table below represents the computation of Continental Predecessor’s basic and diluted earnings per share amounts (in millions, except per share amounts):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2010		2010
Continental Predecessor basic earnings per share:
Earnings available to common stockholders	$	354	$	441

Basic weighted average shares outstanding		140		140

Earnings per share, basic	$	2.52	$	3.16


Continental Predecessor diluted earnings per share:
Earnings available to common stockholders	$	354	$	441
Effect of 5% Convertible Notes		2		10
Effect of 6% Convertible Junior Subordinated Debentures		3		10
Effect of 4.5% Convertible Notes		3		7

Earnings available to common stockholders including the effect of dilutive securities	$	362	$	468


Continental Predecessor diluted shares outstanding:
Basic weighted average shares outstanding		140		140
5% Convertible Notes		9		9
6% Convertible Junior Subordinated Debentures		4		4
4.5% Convertible Notes		12		12
Employee stock options		2		2

Diluted weighted average shares outstanding		167		167

Earnings per share, diluted	$	2.16	$	2.81


Continental Predecessor potentially dilutive shares excluded from diluted per share amounts:
Employee stock options		2		2

NOTE 3—INCOME TAXES

Our effective tax rates are lower than the federal statutory rate of 35% primarily because of the impact of the reduction to existing valuation allowances. We continue to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets will ultimately not be realized.

NOTE 4—EMPLOYEE BENEFIT PLANS

Defined Benefit Pension and Other Postretirement Benefit Plans. The Company’s net periodic benefit cost includes the following components (in millions):


	Pension Benefits Three Months Ended September 30,						Other Postretirement Benefits Three Months Ended September 30,
UAL	2011			2010			2011			2010
Service cost	$	22		$	1		$	11		$	8
Interest cost		44			2			32			29
Expected return on plan assets		(36	)		(2	)		(1	)		(1	)
Amortization of unrecognized gain and prior service cost		(5	)		—			—			(3	)

Net periodic benefit costs	$	25		$	1		$	42		$	33


United
Service cost	$	2		$	1		$	8		$	8
Interest cost		2			2			29			29
Expected return on plan assets		(3	)		(2	)		(1	)		(1	)
Amortization of unrecognized gain and prior service cost		—			—			—			(3	)

Net periodic benefit costs	$	1		$	1		$	36		$	33


Continental (a)
Service cost	$	20		$	17		$	3		$	3
Interest cost		42			40			3			3
Expected return on plan assets		(33	)		(29	)		—			—
Amortization of unrecognized (gain) loss and prior service cost		(5	)		25			—			4

Net periodic benefit costs	$	24		$	53		$	6		$	10

(a)	For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.


	Pension Benefits						Other Postretirement Benefits
	Nine Months Ended September 30,						Nine Months Ended September 30,
UAL	2011			2010			2011			2010
Service cost	$	66		$	4		$	35		$	23
Interest cost		133			7			95			87
Expected return on plan assets		(105	)		(7	)		(2	)		(2	)
Amortization of unrecognized gain and prior service cost		(17	)		(1	)		(1	)		(9	)

Net periodic benefit costs	$	77		$	3		$	127		$	99


United
Service cost	$	5		$	4		$	25		$	23
Interest cost		7			7			85			87
Expected return on plan assets		(8	)		(7	)		(2	)		(2	)
Amortization of unrecognized gain and prior service cost		(1	)		(1	)		—			(9	)

Net periodic benefit costs	$	3		$	3		$	108		$	99


Continental (a)
Service cost	$	61		$	50		$	10		$	7
Interest cost		126			119			10			10
Expected return on plan assets		(97	)		(82	)		—			—
Amortization of unrecognized (gain) loss and prior service cost		(16	)		72			(1	)		13

Net periodic benefit costs	$	74		$	159		$	19		$	30

(a)	For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.

During the nine months ended September 30, 2011, Continental contributed $135 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $31 million to its tax-qualified defined benefit pension plans in October 2011.

Share-Based Compensation. In February 2011, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.5 million shares of restricted stock that vest pro-rata over three years on the anniversary of the grant date. These awards also include approximately 3.0 million performance-based restricted stock units (“RSUs”) (equivalent to approximately 1.9 million RSUs at the target performance level), consisting of approximately 1.2 million RSUs that vest based on UAL’s return on invested capital for the period beginning January 1, 2011 and ending December 31, 2013, and 1.8 million RSUs that vest based on the achievement of merger-related goals. Vesting of a portion of the merger incentive RSUs is based on the achievement of certain merger-related milestones and vesting of the remainder of the merger incentive RSUs is based on the achievement of revenue and cost synergies over a three-year performance period ending December 31, 2013. If the specified performance conditions are achieved, cash payments will be made shortly after the end of the performance period or achievement of the specified merger milestone, as applicable, based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the performance-based RSUs as liability awards. The table below presents information related to share-based compensation expense (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Share-based compensation expense
UAL (a)	$	13	$	9	$	40	$	30
Continental Predecessor				49				57


	September 30, 2011		December 31, 2010
Unrecognized share-based compensation expense	$	57	$	43

(a)	Includes expense recognized in integration-related costs for the three and nine months ended September 30, 2011.

Profit Sharing Plans. In 2011, substantially all employees participate in profit sharing plans, which pay 15% of total pre-tax earnings, excluding special items and stock compensation expense, to eligible employees when pre-tax profit, excluding special items, profit sharing expense and stock-based compensation program expense, exceeds $10 million. Eligible U.S. co-workers in each participating work group will receive a profit sharing payout using a formula based on the ratio of each qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic workgroups. The international profit sharing plan pays eligible non-U.S. co-workers the same percentage of annual pay that is calculated under the U.S. profit sharing plan. Assuming all work groups are eligible to participate in profit sharing, UAL recorded profit sharing and related payroll tax expense of $152 million and $242 million in the three and nine months ended September 30, 2011, respectively. The actual amount of profit sharing that the Company will distribute to eligible employees in 2012 depends on the Company’s full year financial results and the pool of employees eligible to participate. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations.

During 2010, United and Continental maintained separate employee profit sharing plans for the employees of each respective subsidiary. During the three months ended September 30, 2010, United and Continental Predecessor recorded profit sharing and related payroll tax expense of $90 million and $58 million, respectively. During the nine months ended September 30, 2010, United and Continental Predecessor recorded profit sharing and related payroll tax expense of $153 million and $77 million, respectively.

NOTE 5—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements as of September 30, 2011 and December 31, 2010 (in millions):

		00000000			00000000		00000000			00000000		00000000			00000000		00000000			00000000
	September 30, 2011										December 31, 2010
	Total			Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3
	UAL
Cash and cash equivalents	$	6,984		$	6,984	$	—		$	—	$	8,069		$	8,069	$	—		$	—
Short-term investments:
Auction rate securities		121			—		—			121		119			—		—			119
CDARS		276			276		—			—		45			45		—			—
Asset-backed securities		411			411		—			—		258			258		—			—
Corporate debt		474			474		—			—		135			135		—			—
U.S. government and agency notes		25			25		—			—		39			39		—			—
Other fixed income securities		66			66		—			—		15			15		—			—
EETC		60			—		—			60		66			—		—			66
Fuel derivatives, net		(75	)		—		(75	)		—		375			—		375			—
Foreign currency derivatives		(3	)		—		(3	)		—		(7	)		—		(7	)		—
Restricted cash (a)		135			135		—			—		160			160		—			—

		00000000			00000000		00000000			00000000		00000000		00000000		00000000		00000000
	United (a)
Cash and cash equivalents	$	4,070		$	4,070	$	—		$	—	$	4,665	$	4,665	$	—	$	—
Short-term investments:
Asset-backed securities		31			31		—			—		—		—		—		—
Corporate debt		137			137		—			—		—		—		—		—
U.S. government and agency notes		2			2		—			—		—		—		—		—
Other fixed income securities		16			16		—			—		—		—		—		—
EETC		60			—		—			60		66		—		—		66
Fuel derivatives, net		(48	)		—		(48	)		—		277		—		277		—

		00000000			00000000		00000000			00000000			00000000			00000000		00000000			00000000
	Continental
Cash and cash equivalents	$	2,908		$	2,908	$	—		$	—		$	3,398		$	3,398	$	—		$	—
Short-term investments:
Auction rate securities		121			—		—			121			119			—		—			119
CDARS		276			276		—			—			45			45		—			—
Asset-backed securities		380			380		—			—			258			258		—			—
Corporate debt		337			337		—			—			135			135		—			—
U.S. government and agency notes		23			23		—			—			39			39		—			—
Other fixed income securities		50			50		—			—			15			15		—			—
Fuel derivatives, net		(27	)		—		(27	)		—			98			—		98			—
Foreign currency derivatives		(3	)		—		(3	)		—			(7	)		—		(7	)		—
Restricted cash		135			135		—			—			160			160		—			—
Convertible debt derivative asset		199			—		—			199			286			—		—			286
Convertible debt option liability		(103	)		—		—			(103	)		(164	)		—		—			(164	)

(a)	United’s restricted cash is recorded at cost.

The tables below present disclosures about the activity for “Level Three” financial assets and financial liabilities for the three and nine months ended September 30 (in millions):


	Three Months Ended September 30,
	2011						2010
UAL (a)	Auction Rate Securities			EETC			EETC
Balance at June 30	$	121		$	65		$	61
Settlements		—			(2	)		(2	)
Reported in earnings—unrealized		1			—			—
Reported in other comprehensive income		(1	)		(3	)		4

Balance at September 30	$	121		$	60		$	63

(a)	For 2010, amounts also represent United. For 2011, United’s only Level Three recurring measurements are the above EETCs.


	Nine Months Ended September 30,
	2011					2010
UAL (a)	Auction Rate Securities		EETC			EETC
Balance at January 1	$	119	$	66		$	51
Settlements		—		(4	)		(4	)
Reported in earnings—unrealized		2		—			—
Reported in other comprehensive income		—		(2	)		16

Balance at September 30	$	121	$	60		$	63

(a)	For 2010, amounts also represent United. For 2011, United’s only Level Three recurring measurements are the above EETCs.


	Successor - 2011									Predecessor - 2010
Continental	Auction Rate Securities			Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)			Auction Rate Securities		Auction Rate Securities Put Right
Balance at June 30	$	121		$	251		$	(143	)	$	117	$	—
Sales		—			—			—			—		—
Gains (losses):
Reported in earnings:
Realized		—			—			—			—		—
Unrealized		1			(52	)		40			—		—
Reported in other comprehensive income		(1	)		—			—			—		—

Balance at September 30	$	121		$	199		$	(103	)	$	117	$	—

(a)

These derivatives are not designated as hedges. The Convertible Debt Supplemental Derivative Asset is classified in “Other Asset - Other, net”, and the Convertible Debt Conversion Option Liability is classified in “Other liabilities and deferred credits - Other” in Continental’s consolidated balance sheets. The earnings impact is classified in “Nonoperating income (expense) - Miscellaneous, net” in Continental’s statements of consolidated operations.


	Successor - 2011								Predecessor - 2010
Continental	Auction Rate Securities		Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)			Auction Rate Securities			Auction Rate Securities Put Right
Balance at January 1	$	119	$	286		$	(164	)	$	201		$	20
Sales		—		—			—			(106	)		—
Gains (losses):
Reported in earnings:
Realized		—		—			—			23			(21	)
Unrealized		2		(87	)		61			—			1
Reported in other comprehensive income (loss)		—		—			—			(1	)		—

Balance at September 30	$	121	$	199		$	(103	)	$	117		$	—

(a)

As of September 30, 2011, Continental’s auction rate securities, which had a par value of $145 million, an amortized cost basis of $119 million and unrealized gains of $2 million, were variable-rate debt instruments with contractual maturities generally greater than ten years and with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that Continental holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

During the first nine months of 2010, Continental Predecessor sold, at par, auction rate securities having a par value of $106 million. Certain of these auction rate securities were subject to a put right granted to Continental by an institution permitting Continental to sell to the institution certain auction rate securities at their full par value. Continental classified the auction rate securities underlying the put right as trading securities and elected the fair value option under applicable accounting standards for the put right, with changes in the fair value of the put right and the underlying auction rate securities recognized in earnings currently. Continental recognized gains on the sales using the specific identification method. The gains were substantially offset by the cancellation of the related put rights. The net gains are included in miscellaneous nonoperating income (expense) in Continental Predecessor’s statements of consolidated operations and were not material.

As of September 30, 2011, United’s enhanced equipment trust certificate (“EETC”) securities, which were repurchased in open market transactions in 2007, have an amortized cost basis of $66 million and unrealized losses of $6 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

The Continental Successor debt-related derivatives presented in the table above relate to (a) supplemental indenture agreements that provide that Continental’s convertible debt, which was previously convertible into shares of Continental common stock, is convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in Continental’s convertible debt that are required to be separated and accounted for as though they are free-standing derivatives as a result of the Continental debt becoming convertible into the common stock of a different reporting entity. These derivatives are reported in Continental’s separate financial statements and eliminated in consolidation for UAL. See the Company’s 2010 Annual Report for additional information.

The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above as of September 30, 2011 and December 31, 2010 (in millions):


	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
UAL debt	$	12,074	$	12,151	$	13,845	$	14,995
United debt		5,826		5,565		7,026		7,350
Continental Successor debt		5,835		5,717		6,401		6,663

Fair value of the financial instruments included in the tables above was determined as follows:


Description		Fair Value Methodology
Cash, Cash Equivalents, Short-term Investments, Investments and Restricted Cash		The carrying amounts approximate fair value because of the short-term maturity of these assets and liabilities. These assets have maturities of less than one year except for the EETCs, auction rate securities and corporate debt.

		Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, or (c) internally-developed models of the expected future cash flows related to the securities.

Fuel Derivatives		Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.

Foreign Currency Derivatives		Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.

Debt		Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.

Convertible Debt Derivative Asset and Option Liability		The Company used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and discount rate.

NOTE 6—HEDGING ACTIVITIES

Aircraft Fuel Hedges. The Company has a risk management strategy to hedge a portion of its price risk related to projected aircraft fuel requirements. The Company periodically enters into derivative contracts to mitigate the adverse financial impact of potential increases in the price of fuel. The Company does not enter into derivative instruments for non-risk management purposes. Prior to April 1, 2010, United’s fuel hedges were not accounted for as fair value or cash flow hedges under accounting principles related to hedge accounting. Effective April 1, 2010, United designated substantially all of its outstanding fuel derivative contracts, which settle in periods subsequent to June 30, 2010, as cash flow hedges under applicable accounting standards. In addition, substantially all new fuel derivative contracts entered into subsequent to April 1, 2010 were designated as cash flow hedges.

For fuel derivative instruments designated as cash flow hedges, the Company records the effective portion of periodic changes in the fair value of the derivatives in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to miscellaneous nonoperating income (expense) in the statements of consolidated operations. Nonoperating income (expense) for the three and nine months ended September 30, 2011 includes $56 million and $87 million, respectively, of expense resulting from ineffectiveness caused by a decrease in fuel hedge values in excess of the decrease in aircraft fuel prices during the quarter. The impact has been concentrated in hedges utilizing crude oil derivative contracts.

The Company records each derivative instrument as a derivative asset or liability (on a gross basis) in its consolidated balance sheets and, accordingly, records any related collateral on a gross basis.

As of September 30, 2011, our projected fuel requirements for the remainder of 2011 were hedged as follows:


	Maximum Price					Minimum Price
	% of Expected Consumption			Weighted Average Price (per gallon)		% of Expected Consumption			Weighted Average Price (per gallon)
UAL (a)
Heating oil collars		19	%	$	3.27		19	%	$	2.63
Heating oil call options		5			3.23		N/A			N/A
Heating oil swaps		4			2.93		4			2.93
West Texas Intermediate (“WTI”) crude oil call options		12			2.35		N/A			N/A
WTI crude oil swaps		10			2.19		10			2.19
Aircraft fuel call options		2			3.21		N/A			N/A
Aircraft fuel swaps		4			3.03		4			3.03

Total		56	%				37	%

(a)	As of September 30, 2011, UAL had also hedged 34% of projected first half 2012 fuel consumption.

The following tables present information about the financial statement classification of the Company’s derivatives (in millions):


		September 30, 2011						December 31, 2010
Derivatives designated as hedges	Balance Sheet Location	UAL		United		Continental		UAL		United		Continental
Assets:
Fuel contracts due within one year	Receivables	$	25	$	14	$	11	$	375	$	277	$	98

Liabilities:
Fuel contracts due within one year	Other Current Liabilities	$	100	$	62	$	38	$	—	$	—	$	—


	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)					Gain (Loss) Reclassified from AOCI into Income (Fuel Expense) (Effective Portion)					Amount of Gain (Loss) Recognized in Income (Nonoperating Expense) (Ineffective Portion)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,
Fuel contracts	2011			2010		2011		2010			2011			2010
UAL	$	(181	)	$	79	$	94	$	(72	)	$	(56	)	$	12
United		(91	)		79		90		(72	)		(33	)		12
Continental (a)		(90	)		33		4		(16	)		(23	)		—

(a)	For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.


	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)						Gain (Loss) Reclassified from AOCI into Income (Fuel Expense) (Effective Portion)					Amount of Gain (Loss) Recognized in Income (Nonoperating Expense) (Ineffective Portion)
	Nine Months Ended September 30,						Nine Months Ended September 30,					Nine Months Ended September 30,
Fuel contracts	2011			2010			2011		2010			2011			2010
UAL	$	112		$	(66	)	$	526	$	(72	)	$	(87	)	$	9
United		145			(66	)		427		(72	)		(38	)		9
Continental (a)		(33	)		(4	)		99		(23	)		(49	)		(2	)

(a)	For Continental, the 2011 period represents Successor and the 2010 period represents Predecessor.

Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The following table presents information related to the Company’s derivative credit risk as of September 30, 2011 (in millions):


	UAL		United		Continental
Net derivative liability with counterparties	$	75	$	48	$	27
Collateral held by the Company		—		—		—
Collateral posted by the Company (a)		2		2		—
Potential loss related to the failure of the Company’s counterparties to perform		1		—		1

(a)	Classified as a current receivable.

NOTE 7—COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) for the three and nine months ended September 30 included the following (in millions):


	UAL						United						Continental Successor (a)			Continental Predecessor (a)
Three Months Ended September 30,	2011			2010			2011			2010			2011			2010
Net income	$	653		$	387		$	415		$	399		$	236		$	354
Other comprehensive income (loss) adjustments, before tax:
Investments		(4	)		4			(3	)		4			(1	)		—
Fuel derivative financial instruments:
Reclassification into earnings		(94	)		72			(90	)		72			(4	)		16
Change in fair value		(181	)		79			(91	)		79			(90	)		33
Employee benefit plans:
Amortization of net actuarial (gains) losses		(5	)		(3	)		—			(3	)		(5	)		21
Amortization of prior service cost		—			—			—			—			—			8
Other		(1	)		4			—			4			(1	)		(8	)

Comprehensive income (loss) adjustments, before tax		(285	)		156			(184	)		156			(101	)		70

Total comprehensive income (a)	$	368		$	543		$	231		$	555		$	135		$	424

(a)	There were no income tax effects for either period due to the recording of valuation allowance.


	UAL						United						Continental Successor (a)			Continental Predecessor (a)
Nine Months Ended September 30,	2011			2010			2011			2010			2011			2010
Net income	$	978		$	578		$	536		$	606		$	441		$	441
Other comprehensive income (loss) adjustments, before tax:
Investments		(2	)		16			(3	)		16			1			—
Fuel derivative financial instruments:
Reclassification into earnings		(526	)		72			(427	)		72			(99	)		23
Change in fair value		112			(66	)		145			(66	)		(33	)		(4	)
Employee benefit plans:
Amortization of net actuarial (gains) losses		(18	)		(10	)		(1	)		(10	)		(17	)		62
Amortization of prior service cost		—			—			—			—			—			23
Other		2			1			(1	)		1			1			(11	)

Comprehensive income (loss) adjustments, before tax		(432	)		13			(287	)		13			(147	)		93


Total comprehensive income (a)	$	546		$	591		$	249		$	619		$	294		$	534

(a) There were no income tax effects for either period due to the recording of valuation allowance.

NOTE 8—COMMITMENTS AND CONTINGENCIES

General Guarantees and Indemnifications. In the normal course of business, the Company enters into numerous real estate leasing and aircraft financing arrangements that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities under which the Company typically indemnifies the lessors and any tax/financing parties against tort liabilities that arise out of the use, occupancy, operation or maintenance of the leased premises or financed aircraft. Currently, the Company believes that any future payments required under these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). Additionally, certain leased premises such as fueling stations or storage facilities include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premises.

Legal and Environmental Contingencies. The Company has certain contingencies resulting from litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the information currently available, the views of legal counsel, the nature of contingencies to which the Company is subject and prior experience, that the ultimate disposition of these contingencies will not materially affect the Company’s consolidated financial position or results of operations.

The Company records liabilities for legal and environmental claims when a loss is probable and reasonably estimable. These amounts are recorded based on the Company’s assessments of the likelihood of their eventual disposition. The amounts of these liabilities could increase or decrease in the near term, based on revisions to estimates relating to the various claims.

The Company believes that it will have no financial exposure for claims arising out of the events of September 11, 2001 in light of the provisions of the Air Transportation Safety and System Stabilization Act of 2001 limiting claimants’ recoveries to insurance proceeds, the resolution of the wrongful death and personal injury cases by settlement, the resolution of the majority of the property damage claims and the withdrawal of all related proofs of claim from UAL Corporation’s Chapter 11 bankruptcy proceeding.

Contingent Senior Unsecured Notes. UAL is obligated under an indenture to issue to the Pension Benefit Guarantee Corporation (“PBGC”) up to $500 million aggregate principal amount of 8% Notes in up to eight equal tranches of $62.5 million if certain financial triggering events occur (with each tranche issued no later than 45 days following the end of any applicable fiscal year). A triggering event occurs when UAL’s EBITDAR, as defined in the 8% Notes indenture, exceeds $3.5 billion over the prior 12 months ending June 30 or December 31 of any applicable fiscal year. The 12 month measurement periods began with the fiscal year ended December 31, 2009 and will end with the fiscal year ending December 31, 2017. It is the Company’s policy to record an obligation for a tranche at the end of the 12 month measurement period when it is known that a financial triggering event has been met. If any 8% Notes are issued, the Company will not receive any cash. Any 8% Notes

issued will result in a charge to earnings equal to the fair value of the 8% Notes required to be issued. The payment of liabilities arising in connection with the 8% Notes will be included as cash flows from operating activities in the Company’s statements of consolidated cash flows. Two tranches of 8% Notes could be issued on the same date if financial triggering events occur on both EBITDAR measurement periods ended June 30 and December 31 of the same year. UAL common stock can be issued in lieu of the 8% Notes only if the issuance of such 8% Notes would cause a default under other outstanding securities.

A financial triggering event under the 8% Notes indenture occurred at June 30, 2011 and, as a result, UAL is obligated to issue one tranche of $62.5 million of the 8% Notes no later than February 14, 2012. This tranche will mature June 30, 2026, with interest accruing from the triggering event measurement date at a rate of 8% per annum that is payable in cash in semi-annual installments starting June 30, 2012. The tranche of 8% Notes will be callable, at UAL’s option, at any time at par, plus accrued and unpaid interest. UAL recorded a liability for the fair value of the $62.5 million tranche in the second quarter of 2011, which totaled $49 million. This $49 million charge is an integration-related cost classified as a special charge because the financial results of UAL, excluding Continental

United Continental Holdings, Inc.

Yes ¨ No x

United Air Lines, Inc.

Yes ¨ No x

Continental Airlines, Inc.

Yes ¨ No x