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, 2012

¨	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 a 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 15, 2012 is shown below:


United Continental Holdings, Inc.		332,426,868 shares of common stock ($0.01 par value)

United Air Lines, Inc.		205 (100% owned by United Continental Holdings, Inc.) There is no market for United Air Lines, Inc. common stock.

Continental Airlines, Inc.		1,000 (100% owned by United Continental Holdings, 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, 2012


	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3

United Continental Holdings, Inc.:
Statements of Consolidated Operations		3
Statements of Consolidated Comprehensive Income (Loss)		4
Consolidated Balance Sheets		5
Condensed Statements of Consolidated Cash Flows		7

United Air Lines, Inc.:
Statements of Consolidated Operations		8
Statements of Consolidated Comprehensive Income (Loss)		9
Consolidated Balance Sheets		10
Condensed Statements of Consolidated Cash Flows		12

Continental Airlines, Inc.:
Statements of Consolidated Operations		13
Statements of Consolidated Comprehensive Income (Loss)		14
Consolidated Balance Sheets		15
Condensed Statements of Consolidated Cash Flows		17

Combined Notes to Condensed Consolidated Financial Statements (United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc.)		18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		49

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		50
Item 1A. Risk Factors		50
Item 6. Exhibits		51
Signatures		52
Exhibit Index		53

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,
	2012			2011			2012			2011
Operating revenue:
Passenger—Mainline	$	6,993		$	7,237		$	19,891		$	19,780
Passenger—Regional		1,781			1,772			5,159			4,916

Total passenger revenue		8,774			9,009			25,050			24,696
Cargo		246			283			775			882
Special revenue item (Note 10)		—			—			—			107
Other operating revenue		889			879			2,625			2,497

		9,909			10,171			28,450			28,182

Operating expense:
Aircraft fuel		3,406			3,371			10,043			9,270
Salaries and related costs		2,038			2,020			5,959			5,742
Regional capacity purchase		628			619			1,887			1,807
Landing fees and other rent		504			476			1,476			1,451
Aircraft maintenance materials and outside repairs		469			447			1,308			1,330
Depreciation and amortization		379			384			1,137			1,157
Distribution expenses		356			377			1,038			1,102
Aircraft rent		245			255			747			760
Special charges (Note 10)		514			120			884			343
Other operating expenses		1,170			1,167			3,467			3,443

		9,709			9,236			27,946			26,405

Operating income		200			935			504			1,777

Nonoperating income (expense):
Interest expense		(202	)		(227	)		(631	)		(731	)
Interest capitalized		9			10			26			24
Interest income		4			6			16			15
Miscellaneous, net		4			(64	)		(7	)		(94	)

		(185	)		(275	)		(596	)		(786	)

Income (loss) before income taxes		15			660			(92	)		991
Income tax expense		9			7			11			13

Net income (loss)	$	6		$	653		$	(103	)	$	978

Earnings (loss) per share, basic	$	0.02		$	1.97		$	(0.31	)	$	2.96

Earnings (loss) per share, diluted	$	0.02		$	1.69		$	(0.31	)	$	2.59

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Net income (loss)	$	6	$	653		$	(103	)	$	978

Other comprehensive income (loss), net:
Fuel derivative financial instruments:
Reclassification into earnings		38		(94	)		107			(526	)
Change in fair value		133		(181	)		(36	)		112
Employee benefit plans:
Amortization of net actuarial items		4		(5	)		13			(18	)
Investments and other		5		(5	)		14			—

		180		(285	)		98			(432	)

Total comprehensive income (loss), net	$	186	$	368		$	(5	)	$	546

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	5,129		$	6,246
Short-term investments		1,551			1,516

Total unrestricted cash, cash equivalents and short-term investments		6,680			7,762
Restricted cash		79			40
Receivables, less allowance for doubtful accounts (2012 — $12; 2011 — $7)		1,862			1,358
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 — $111; 2011 — $89)		675			615
Deferred income taxes		641			615
Prepaid expenses and other		837			607

		10,774			10,997

Operating property and equipment:
Owned—
Flight equipment		16,753			15,786
Other property and equipment		3,151			3,126

		19,904			18,912
Less — Accumulated depreciation and amortization		(4,750	)		(4,005	)

		15,154			14,907

Purchase deposits for flight equipment		613			382

Capital leases—
Flight equipment		1,484			1,458
Other property and equipment		235			237

		1,719			1,695
Less — Accumulated amortization		(676	)		(565	)

		1,043			1,130

		16,810			16,419

Other assets:
Goodwill		4,523			4,523
Intangibles, less accumulated amortization (2012 — $762; 2011 — $670)		4,650			4,750
Restricted cash		392			529
Other, net		756			770

		10,321			10,572

	$	37,905		$	37,988

(continued on next page)

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2012			December 31, 2011
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Advance ticket sales	$	3,849		$	3,114
Frequent flyer deferred revenue		2,405			2,405
Accounts payable		2,188			1,998
Accrued salaries and benefits		1,328			1,509
Current maturities of long-term debt		1,704			1,186
Current maturities of capital leases		120			125
Other		1,463			1,057

		13,057			11,394

Long-term debt		9,592			10,496
Long-term obligations under capital leases		828			928

Other liabilities and deferred credits:
Frequent flyer deferred revenue		2,839			3,253
Postretirement benefit liability		2,461			2,407
Pension liability		1,788			1,862
Advanced purchase of miles		1,581			1,711
Deferred income taxes		1,649			1,603
Lease fair value adjustment, net		927			1,133
Other		1,356			1,395

		12,601			13,364

Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 332,439,588 and 330,906,192 shares at September 30, 2012 and December 31, 2011, respectively		3			3
Additional capital invested		7,140			7,114
Retained deficit		(4,965	)		(4,863	)
Stock held in treasury, at cost		(32	)		(31	)
Accumulated other comprehensive loss		(319	)		(417	)

		1,827			1,806

	$	37,905		$	37,988

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Nine Months Ended September 30,
	2012			2011
Cash Flows from Operating Activities:
Net income (loss)	$	(103	)	$	978
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities —
Depreciation and amortization		1,137			1,157
Debt and lease discount amortization		(196	)		(171	)
Special items, non-cash portion		61			(15	)
Other, net		112			112
Increase in advance ticket sales		735			762
Increase in receivables		(434	)		(517	)
Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles		(544	)		82
Increase in other current assets		(452	)		(209	)
Increase in accounts payable		169			1
Increase in other liabilities		360			24
Decrease in fuel hedge collateral		—			(61	)

Net cash provided by operating activities		845			2,143


Cash Flows from Investing Activities:
Capital expenditures		(774	)		(510	)
Increase in short-term and other investments, net		(22	)		(754	)
Proceeds from sale of property and equipment		146			107
Aircraft purchase deposits paid, net		(253	)		(121	)
(Increase) decrease in restricted cash, net		98			(4	)

Net cash used in investing activities		(805	)		(1,282	)


Cash Flows from Financing Activities:
Payments of long-term debt		(1,158	)		(1,925	)
Proceeds from issuance of long-term debt		86			142
Principal payments under capital leases		(89	)		(199	)
Other, net		4			36

Net cash used in financing activities		(1,157	)		(1,946	)

Net decrease in cash and cash equivalents during the period		(1,117	)		(1,085	)
Cash and cash equivalents at beginning of the period		6,246			8,069

Cash and cash equivalents at end of the period	$	5,129		$	6,984

Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through the issuance of debt	$	526		$	130
Special facility payment financing		101			—
8% Contingent Senior Unsecured Notes, net of discount		48			49
Airport construction financing		31			—
Reclassification of debt to advanced purchases of miles		—			270
Reclassification of debt discount to other assets		—			60
Interest paid in kind on UAL 6% Senior Notes		—			18

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Operating revenue:
Passenger—Mainline	$	3,734		$	4,007		$	10,587		$	10,812
Passenger—Regional		1,027			1,078			2,936			2,995

Total passenger revenue		4,761			5,085			13,523			13,807
Cargo		157			177			505			535
Special revenue item (Note 10)		—			—			—			88
Other operating revenue		738			595			1,878			1,673

		5,656			5,857			15,906			16,103

Operating expense:
Aircraft fuel		1,914			1,949			5,685			5,294
Salaries and related costs		1,046			1,092			3,166			3,117
Regional capacity purchase		387			407			1,152			1,190
Landing fees and other rent		271			246			807			773
Aircraft maintenance materials and outside repairs		313			299			862			881
Depreciation and amortization		232			228			695			684
Distribution expenses		172			194			526			580
Aircraft rent		78			82			234			243
Special charges (Note 10)		332			72			604			236
Other operating expenses		912			709			2,400			2,081

		5,657			5,278			16,131			15,079

Operating income (loss)		(1	)		579			(225	)		1,024

Nonoperating income (expense):
Interest expense		(122	)		(135	)		(395	)		(462	)
Interest capitalized		4			6			10			12
Interest income		—			2			5			7
Miscellaneous, net		(1	)		(35	)		(8	)		(43	)

		(119	)		(162	)		(388	)		(486	)

Income (loss) before income taxes		(120	)		417			(613	)		538
Income tax expense		7			2			8			2

Net income (loss)	$	(127	)	$	415		$	(621	)	$	536

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income (loss)	$	(127	)	$	415		$	(621	)	$	536

Other comprehensive income (loss), net:
Fuel derivative financial instruments:
Reclassification into earnings		23			(90	)		55			(427	)
Change in fair value		77			(91	)		(13	)		145
Employee benefit plans:
Amortization of net actuarial items		(2	)		—			(4	)		(1	)
Investments and other		3			(3	)		7			(4	)

		101			(184	)		45			(287	)

Total comprehensive income (loss), net	$	(26	)	$	231		$	(576	)	$	249

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	3,005		$	3,458
Short-term investments		346			275

Total unrestricted cash, cash equivalents and short-term investments		3,351			3,733
Restricted cash		79			40
Receivables from related parties (Note 11)		2,708			228
Receivables, less allowance for doubtful accounts (2012 — $10; 2011 — $5)		1,686			763
Deferred income taxes		316			348
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 — $81; 2011 — $73)		379			340
Prepaid expenses and other		633			447

		9,152			5,899

Operating property and equipment:
Owned—
Flight equipment		9,354			9,135
Other property and equipment		2,197			2,260

		11,551			11,395
Less — Accumulated depreciation and amortization		(3,740	)		(3,359	)

		7,811			8,036

Purchase deposits for flight equipment		183			57

Capital leases—
Flight equipment		1,484			1,458
Other property and equipment		65			67

		1,549			1,525
Less — Accumulated amortization		(649	)		(548	)

		900			977

		8,894			9,070

Other assets:
Intangibles, less accumulated amortization (2012 — $575; 2011 — $534)		2,241			2,283
Receivables from related parties (Note 11)		448			—
Restricted cash		275			393
Other, net		595			600

		3,559			3,276

	$	21,605		$	18,245

(continued on next page)

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2012			December 31, 2011
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Advance ticket sales (Note 11)	$	3,776		$	1,652
Frequent flyer deferred revenue (Note 11)		2,405			1,484
Accounts payable		1,426			1,109
Accrued salaries and benefits		760			988
Current maturities of long-term debt		978			615
Current maturities of capital leases		116			122
Payables to related parties		105			104
Other		1,270			853

		10,836			6,927

Long-term debt		4,191			5,130
Long-term obligations under capital leases		652			735

Other liabilities and deferred credits:
Frequent flyer deferred revenue (Note 11)		2,839			2,018
Postretirement benefit liability		2,156			2,115
Advanced purchase of miles (Note 11)		1,581			1,442
Deferred income taxes		692			707
Pension liability		84			92
Other		1,044			983

		8,396			7,357

Commitments and contingencies
Stockholder’s deficit:
Common stock at par, $5 par value; authorized 1,000 shares; issued and outstanding 205 shares at both September 30, 2012 and December 31, 2011		—			—
Additional capital invested		3,442			3,432
Retained deficit		(5,829	)		(5,208	)
Accumulated other comprehensive loss		(83	)		(128	)

		(2,470	)		(1,904	)

	$	21,605		$	18,245

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

UNITED AIR LINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Nine Months Ended September 30,
	2012			2011
Cash Flows from Operating Activities:
Net income (loss)	$	(621	)	$	536
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities —
Depreciation and amortization		695			684
Debt and lease discount amortization		26			11
Special charges, non-cash portion		59			(19	)
Other, net		78			109
Increase in advance ticket sales		2,124			579
Increase in receivables		(885	)		(144	)
Decrease in frequent flyer deferred revenue and advanced purchase of miles		(506	)		(150	)
Increase in other current assets		(392	)		(88	)
Increase in accounts payable		296			113
Increase (decrease) in other liabilities		390			(38	)
Decrease in fuel hedge collateral		—			(61	)
Increase in receivables from related parties		(543	)		(93	)
Increase (decrease) in payables to related parties		2			(1	)

Net cash provided by operating activities		723			1,438


Cash Flows from Investing Activities:
Capital expenditures		(391	)		(332	)
Increase in short-term and other investments, net		(64	)		(180	)
Proceeds from sale of property and equipment		56			15
Aircraft purchase deposits paid, net		(126	)		(6	)
(Increase) decrease in restricted cash, net		79			(28	)

Net cash used in investing activities		(446	)		(531	)


Cash Flows from Financing Activities:
Payments of long-term debt		(634	)		(1,316	)
Principal payments under capital leases		(88	)		(198	)
Other, net		(8	)		12

Net cash used in financing activities		(730	)		(1,502	)

Net decrease in cash and cash equivalents		(453	)		(595	)
Cash and cash equivalents at beginning of the period		3,458			4,665

Cash and cash equivalents at end of the period	$	3,005		$	4,070

Investing and Financing Activities Not Affecting Cash:
Transfer of OnePass frequent flyer liability and advanced purchase of miles from Continental (Note 11)	$	2,387		$	—
8% Contingent Senior Unsecured Notes, net of discount		48			49
Interest paid in kind on UAL 6% Senior Notes		—			18

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Operating revenue:
Passenger – Mainline	$	3,259		$	3,227		$	9,304		$	8,962
Passenger – Regional		754			695			2,223			1,922

Total passenger revenue		4,013			3,922			11,527			10,884
Cargo		89			105			270			346
Special revenue item (Note 10)		—			—			—			19
Other operating revenue		411			345			1,226			965

		4,513			4,372			13,023			12,214
Operating expense:
Aircraft fuel		1,493			1,422			4,359			3,976
Salaries and related costs		943			906			2,692			2,575
Regional capacity purchase		240			211			735			617
Landing fees and other rent		234			230			670			678
Aircraft maintenance materials and outside repairs		171			152			479			455
Depreciation and amortization		147			156			442			473
Distribution expenses		184			183			512			523
Aircraft rent		167			171			513			516
Special charges (Note 10)		182			48			280			107
Other operating expenses		549			533			1,604			1,531

		4,310			4,012			12,286			11,451

Operating income		203			360			737			763

Nonoperating income (expense):
Interest expense		(81	)		(88	)		(241	)		(259	)
Interest capitalized		5			4			16			12
Interest income		5			3			11			7
Miscellaneous, net		(28	)		(41	)		14			(76	)

		(99	)		(122	)		(200	)		(316	)

Income before income taxes		104			238			537			447
Income tax expense		2			2			3			6

Net income	$	102		$	236		$	534		$	441

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

(In millions)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Net income	$	102	$	236		$	534		$	441

Other comprehensive income (loss), net:
Fuel derivative financial instruments:
Reclassification into earnings		15		(4	)		52			(99	)
Change in fair value		56		(90	)		(23	)		(33	)
Employee benefit plans:
Amortization of net actuarial items		6		(5	)		17			(17	)
Investments and other		3		(2	)		8			2

		80		(101	)		54			(147	)

Total comprehensive income, net	$	182	$	135		$	588		$	294

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	2,119		$	2,782
Short-term investments		1,205			1,241

Total unrestricted cash, cash equivalents and short-term investments		3,324			4,023
Receivables, less allowance for doubtful accounts (2012 — $2; 2011 — $2)		176			595
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 — $30; 2011 — $16)		296			275
Deferred income taxes		331			267
Prepaid expenses and other		193			165

		4,320			5,325

Operating property and equipment:
Owned—
Flight equipment		7,399			6,651
Other property and equipment		954			866

		8,353			7,517
Less — Accumulated depreciation and amortization		(1,009	)		(646	)

		7,344			6,871

Purchase deposits for flight equipment		430			324

Capital leases — Other property and equipment		170			170
Less — Accumulated amortization		(27	)		(17	)

		143			153

		7,917			7,348

Other assets:
Goodwill		4,523			4,523
Intangibles, less accumulated amortization (2012 — $187; 2011 — $136)		2,411			2,469
Restricted cash		116			135
Other, net		364			364

		7,414			7,491

	$	19,651		$	20,164

(continued on next page)

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	September 30, 2012			December 31, 2011
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Payables to related parties (Note 11)	$	2,486		$	11
Advance ticket sales (Note 11)		73			1,462
Accounts payable		767			894
Current maturities of long-term debt		726			571
Accrued salaries and benefits		568			521
Current maturities of capital leases		4			3
Frequent flyer deferred revenue (Note 11)		—			921
Other		249			279

		4,873			4,662

Long-term debt		4,998			4,957
Long-term obligations under capital leases		176			193

Other liabilities and deferred credits:
Pension liability		1,704			1,770
Payables to related parties (Note 11)		448			—
Lease fair value adjustment, net		927			1,133
Deferred income taxes		887			820
Postretirement benefit liability		304			292
Frequent flyer deferred revenue (Note 11)		—			1,235
Advanced purchase of miles (Note 11)		—			270
Other		404			507

		4,674			6,027

Commitments and contingencies
Stockholder’s equity:
Common stock at par, $0.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at both September 30, 2012 and December 31, 2011		—			—
Additional capital invested		4,165			4,148
Retained earnings		1,008			474
Accumulated other comprehensive loss		(243	)		(297	)

		4,930			4,325

	$	19,651		$	20,164

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.

CONTINENTAL AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Nine Months Ended September 30,
	2012			2011
Cash Flows from Operating Activities:
Net income	$	534		$	441
Adjustments to reconcile net income to net cash provided (used) by operating activities —
Depreciation and amortization		442			473
Debt and lease discount amortization		(222	)		(182	)
Special charges, non-cash portion		2			4
Other, net		49			30
Increase (decrease) in advance ticket sales		(1,389	)		183
(Increase) decrease in receivables		451			(373	)
Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles		(39	)		233
Increase in other current assets		(72	)		(83	)
Decrease in accounts payable		(127	)		(113	)
Increase (decrease) in other liabilities		(44	)		23
Decrease in receivables from related parties		—			3
Increase in payables to related parties		536			66

Net cash provided by operating activities		121			705


Cash Flows from Investing Activities:
Capital expenditures		(383	)		(178	)
(Increase) decrease in short-term investments, net		43			(574	)
Aircraft purchase deposits paid, net		(127	)		(116	)
Proceeds from sale of property and equipment		90			92
Decrease in restricted cash, net		19			25

Net cash used in investing activities		(358	)		(751	)

Cash Flows from Financing Activities:
Payments of long-term debt		(524	)		(609	)
Proceeds from issuance of long-term debt		86			142
Other, net		12			23

Net cash used in financing activities		(426	)		(444	)

Net decrease in cash and cash equivalents		(663	)		(490	)
Cash and cash equivalents at beginning of the period		2,782			3,398

Cash and cash equivalents at end of the period	$	2,119		$	2,908

Investing and Financing Activities Not Affecting Cash:
Transfer of frequent flyer liability and advanced purchase of miles to United (Note 11)	$	2,387		$	—
Property and equipment acquired through the issuance of debt		526			130
Special facility payment financing		101			—
Airport construction financing		31			—
Reclassification of debt to advanced purchases of miles		—			270
Reclassification of debt discount to other assets		—			60

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these 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 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. As UAL consolidates United and Continental for financial statement purposes, disclosures that relate to United and Continental activities also apply to UAL. When appropriate, UAL, United and Continental are named specifically for their related activities and disclosures.

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. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”). UAL’s quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results.

NOTE 1—FREQUENT FLYER AND PASSENGER REVENUE ACCOUNTING

Frequent Flyer Awards. Effective January 1, 2012, the Company updated its estimated selling price for miles to the contractual rate at which we sell miles to our Star Alliance partners participating in reciprocal frequent flyer programs. This change in estimate has been applied prospectively effective January 1, 2012.

United and Continental account for miles sold and awarded that will never be redeemed by program members, which the Company refers to as “breakage,” using the redemption method. UAL reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns. The Company re-evaluated its population breakage estimates for Continental OnePass miles, which were previously not subject to an expiration policy, and increased the estimate of miles in the population expected to ultimately expire. As a result, the rate at which we recognize redeemed miles has increased.

The Company’s estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions, the expiration policy, program rules or program redemption opportunities may result in material changes to the deferred revenue balance as well as recognized revenues from the Company’s frequent flyer program.

For the three and nine months ended September 30, 2012, the combined net impact of these changes to UAL, United and Continental were not material.

Passenger Revenue Accounting. The Company records an estimate of breakage revenue on the flight date for tickets that will expire unused. These estimates are based on the evaluation of actual historical results. During the three months ended September 30, 2012, Continental revised its estimate of breakage resulting in a reduction of passenger revenue of approximately $60 million.

NOTE 2—NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Fair Value Measurement: Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. Some of the key amendments to the fair value measurement guidance include the highest and best use and valuation premise for nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement and fair value of an instrument classified in a reporting entity’s shareholders’ equity. Additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy include a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation processes in place, a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs and the level in the fair value hierarchy of

items that are not measured at fair value in the consolidated balance sheet but whose fair value must be disclosed. ASU 2011-04 became effective for the Company’s annual and interim periods beginning January 1, 2012, and the required disclosures are disclosed in Note 6 of this report.

NOTE 3—EARNINGS (LOSS) PER SHARE

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
UAL basic earnings (loss) per share:
Net income (loss)	$	6	$	653		$	(103	)	$	978
Less: Income allocable to participating securities		—		(2	)		—			(3	)

Earnings (loss) available to common stockholders	$	6	$	651		$	(103	)	$	975

Basic weighted average shares outstanding		331		330			331			329

Earnings (loss) per share, basic	$	0.02	$	1.97		$	(0.31	)	$	2.96

UAL diluted earnings (loss) per share:
Earnings (loss) available to common stockholders	$	6	$	651		$	(103	)	$	975
Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes		—		2			—			31
Effect of Continental 4.5% Convertible Notes		—		2			—			7
Effect of Continental 6% Convertible Junior Subordinated Debentures		—		4			—			—
Effect of UAL 6% Senior Convertible Notes		—		4			—			13

Earnings (loss) available to common stockholders including the effect of dilutive securities	$	6	$	663		$	(103	)	$	1,026

UAL diluted shares outstanding:
Basic weighted average shares outstanding		331		330			331			329
Effect of stock options		1		1			—			2
Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes		—		5			—			13
Effect of Continental 4.5% Convertible Notes		—		12			—			12
Effect of Continental 6% Convertible Junior Subordinated Debentures		—		4			—			—
Effect of UAL 6% Senior Convertible Notes		—		40			—			40

Diluted weighted average shares outstanding		332		392			331			396

Earnings (loss) per share, diluted	$	0.02	$	1.69		$	(0.31	)	$	2.59

UAL potentially dilutive shares excluded from diluted per share amounts:
Restricted stock and stock options		5		7			6			6
UAL 4.5% Senior Limited-Subordination Convertible Notes		5		—			5			—
Continental 4.5% Convertible Notes		12		—			12			—
Continental 6% Convertible Junior Subordinated Debentures		4		—			4			4
UAL 6% Senior Convertible Notes		40		—			40			—

UAL’s 6% Senior Notes due 2031 (the “6% Senior Notes”), with a principal amount of $652 million as of September 30, 2012, and the $125 million of UAL’s 8% Contingent Senior Notes (the “8% Notes”) issued by UAL in January 2012, are redeemable with either cash or shares of UAL common stock, or in the case of mandatory redemption, a combination thereof, at UAL’s option. The Company is obligated to issue an additional $62.5 million of the 8% Notes by February 2013, which are also redeemable on the same terms as the 6% Senior Notes and the other 8% Notes. These notes are not included in the diluted earnings (loss) per share calculation because it is UAL’s intent to redeem these notes with cash if UAL were to decide to redeem these 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 (the “4.5% Notes”) with cash after the 4.5% Notes were put to UAL by the noteholders. For the three and nine months ended September 30, 2011, the dilutive effect of the 4.5% Notes 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.

NOTE 4—INCOME TAXES

Our effective tax rates are lower than the federal statutory rate of 35% primarily because of the impact of changes 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.

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 deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Although the Company was no longer in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of financial losses in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance was still needed on net deferred tax assets. If UAL achieves significant profitability in 2012 and the economic and industry outlook supports a continued expectation of profitability, then management will evaluate whether its recent history of profitability constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.

NOTE 5—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						Other Postretirement Benefits
	Three Months Ended September 30,						Three Months Ended September 30,
	2012			2011			2012			2011
UAL
Service cost	$	25		$	22		$	11		$	11
Interest cost		45			44			30			32
Expected return on plan assets		(33	)		(36	)		—			(1	)
Amortization of unrecognized (gain) loss and prior service cost		4			(5	)		—			—

Net periodic benefit costs	$	41		$	25		$	41		$	42

United
Service cost	$	2		$	2		$	8		$	8
Interest cost		2			2			27			29
Expected return on plan assets		(2	)		(3	)		—			(1	)
Amortization of unrecognized gain and prior service cost		(1	)		—			(1	)		—

Net periodic benefit costs	$	1		$	1		$	34		$	36

Continental
Service cost	$	23		$	20		$	3		$	3
Interest cost		43			42			3			3
Expected return on plan assets		(31	)		(33	)		—			—
Amortization of unrecognized (gain) loss and prior service cost		5			(5	)		1			—

Net periodic benefit costs	$	40		$	24		$	7		$	6


	Pension Benefits						Other Postretirement Benefits
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
UAL
Service cost	$	75		$	66		$	37		$	35
Interest cost		137			133			93			95
Expected return on plan assets		(103	)		(105	)		(2	)		(2	)
Amortization of unrecognized (gain) loss and prior service cost		15			(17	)		(2	)		(1	)

Net periodic benefit costs	$	124		$	77		$	126		$	127

United
Service cost	$	6		$	5		$	26		$	25
Interest cost		6			7			82			85
Expected return on plan assets		(8	)		(8	)		(2	)		(2	)
Amortization of unrecognized gain and prior service cost		(1	)		(1	)		(3	)		—

Net periodic benefit costs	$	3		$	3		$	103		$	108

Continental
Service cost	$	69		$	61		$	11		$	10
Interest cost		131			126			11			10
Expected return on plan assets		(95	)		(97	)		—			—
Amortization of unrecognized (gain) loss and prior service cost		16			(16	)		1			(1	)

Net periodic benefit costs	$	121		$	74		$	23		$	19

During the nine months ended September 30, 2012, Continental contributed $167 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $41 million to its tax-qualified defined benefit pension plans in October 2012.

Share-Based Compensation. In February 2012, 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 and 0.6 million restricted stock units (“RSUs”) that vest pro-rata over three years on the anniversary of the grant date. In addition, UAL granted 1.3 million performance-based RSUs that will vest based on UAL’s return on invested capital for the three years ending December 31, 2014. If this performance condition is achieved, cash payments will be made after the end of the performance period based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the RSUs as liability awards. The table below presents information related to share-based compensation (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Share-based compensation expense (a)	$	18	$	13	$	44	$	40



	September 30, 2012	December 31, 2011
Unrecognized share-based compensation expense	$43	$43

(a)

Includes $0 and $7 million of expense recognized in integration-related costs for the three and nine months ended September 30, 2012, respectively. Includes $3 million and $12 million of expense recognized in integration-related costs for the three and nine months ended September 30, 2011, respectively.

Profit Sharing Plans. In 2012, substantially all employees participate in profit sharing, which pays 15% of total pre-tax earnings, excluding special items and share-based compensation expense, to eligible employees when pre-tax profit, excluding special items, profit sharing expense and share-based compensation program expense, exceeds $10 million. Eligible U.S. co-workers in each participating work group 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 eligible pay that is calculated under the U.S. profit sharing plan. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations.

NOTE 6—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, 2012 and December 31, 2011 (in millions):


	September 30, 2012										December 31, 2011
	Total			Level 1		Level 2		Level 3			Total			Level 1		Level 2			Level 3
	UAL
Cash and cash equivalents	$	5,129		$	5,129	$	—	$	—		$	6,246		$	6,246	$	—		$	—
Short-term investments:
Asset-backed securities		647			—		647		—			478			—		478			—
Corporate debt		340			—		340		—			515			—		515			—
Certificates of deposit placed through an account registry service (“CDARS”)		404			—		404		—			355			—		355			—
Auction rate securities		115			—		—		115			113			—		—			113
U.S. government and agency notes		15			—		15		—			22			—		22			—
Other fixed income securities		30			—		30		—			33			—		33			—
Enhanced equipment trust certificates (“EETC”)		62			—		—		62			60			—		—			60
Fuel derivatives, net		33			—		33		—			73			—		73			—
Foreign currency derivatives		—			—		—		—			(1	)		—		(1	)		—
Restricted cash		471			471		—		—			569			569		—			—

	United
Cash and cash equivalents	$	3,005		$	3,005	$	—	$	—		$	3,458		$	3,458	$	—		$	—
Short-term investments:
Asset-backed securities		16			—		16		—			29			—		29			—
Corporate debt		140			—		140		—			138			—		138			—
CDARS		156			—		156		—			87			—		87			—
U.S. government and agency notes		8			—		8		—			5			—		5			—
Other fixed income securities		26			—		26		—			16			—		16			—
EETC		62			—		—		62			60			—		—			60
Fuel derivatives, net		24			—		24		—			44			—		44			—
Restricted cash		354			354		—		—			433			433		—			—

	Continental
Cash and cash equivalents	$	2,119		$	2,119	$	—	$	—		$	2,782		$	2,782	$	—		$	—
Short-term investments:
Asset-backed securities		631			—		631		—			449			—		449			—
Corporate debt		200			—		200		—			377			—		377			—
CDARS		248			—		248		—			268			—		268			—
Auction rate securities		115			—		—		115			113			—		—			113
U.S. government and agency notes		7			—		7		—			17			—		17			—
Other fixed income securities		4			—		4		—			17			—		17			—
Fuel derivatives, net		9			—		9		—			29			—		29			—
Foreign currency derivatives		—			—		—		—			(1	)		—		(1	)		—
Restricted cash		116			116		—		—			135			135		—			—
Convertible debt derivative asset		202			—		—		202			193			—		—			193
Convertible debt option liability		(91	)		—		—		(91	)		(95	)		—		—			(95	)

The tables below present disclosures about the activity for “Level 3” financial assets and financial liabilities for the three and nine months ended September 30 (in millions):


	Three Months Ended September 30,
	2012					2011
UAL (a)	Auction Rate Securities		EETC			Auction Rate Securities			EETC
Balance at June 30	$	112	$	63		$	121		$	65
Settlements		—		(2	)		—			(2	)
Gains (losses):
Reported in earnings—unrealized		1		—			1			—
Reported in other comprehensive income (loss)		2		1			(1	)		(3	)

Balance at September 30	$	115	$	62		$	121		$	60

(a)	For 2012 and 2011, United’s only Level 3 recurring measurements are the above EETCs.


	Nine Months Ended September 30,
	2012					2011
UAL (a)	Auction Rate Securities		EETC			Auction Rate Securities		EETC
Balance at January 1	$	113	$	60		$	119	$	66
Settlements		—		(5	)		—		(4	)
Gains (losses):
Reported in earnings—unrealized		—		—			2		—
Reported in other comprehensive income (loss)		2		7			—		(2	)

Balance at September 30	$	115	$	62		$	121	$	60

(a)	For 2012 and 2011, United’s only Level 3 recurring measurements are the above EETCs.


	Three Months Ended September 30,
	2012								2011
Continental	Auction Rate Securities		Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)			Auction Rate Securities			Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)
Balance at June 30	$	112	$	289		$	(147	)	$	121		$	251		$	(143	)
Sales		—		—			—			—			—			—
Gains (losses):
Reported in earnings—unrealized		1		(87	)		56			1			(52	)		40
Reported in other comprehensive income (loss)		2		—			—			(1	)		—			—

Balance at September 30	$	115	$	202		$	(91	)	$	121		$	199		$	(103	)

(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.


	Nine Months Ended September 30,
	2012							2011
Continental	Auction Rate Securities		Convertible Debt Supplemental Derivative Asset (a)		Convertible Debt Conversion Option Liability (a)			Auction Rate Securities		Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)
Balance at January 1	$	113	$	193	$	(95	)	$	119	$	286		$	(164	)
Sales		—		—		—			—		—			—
Gains (losses):
Reported in earnings—unrealized		—		9		4			2		(87	)		61
Reported in other comprehensive income (loss)		2		—		—			—		—			—

Balance at September 30	$	115	$	202	$	(91	)	$	121	$	199		$	(103	)

(a)

As of September 30, 2012, Continental’s auction rate securities, which had a par value of $135 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.

As of September 30, 2012, United’s EETC securities had unrealized gains of $1 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

Continental’s debt-related derivatives presented in the tables 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.

The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above as of September 30, 2012 and December 31, 2011 (in millions):


	Fair Value of Debt by Fair Value Hierarchy Level
	September 30, 2012										December 31, 2011
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3				Total		Level 1		Level 2		Level 3
UAL debt	$	11,296	$	12,320	$	—	$	7,015	$	5,305	$	11,682	$	11,992	$	—	$	859	$	11,133
United debt		5,169		5,436		—		1,994		3,442		5,745		5,630		—		—		5,630
Continental debt		5,724		6,050		—		4,187		1,863		5,528		5,503		—		—		5,503

Quantitative Information About Level 3 Fair Value Measurements as of September 30, 2012 ($ in millions)



Item	Fair Value at September 30, 2012			Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	$	115		Discounted Cash Flows	Credit risk premium (a)	1%
					Illiquidity premium (b)	5%
					Expected repayments (c)	Assumed repayment in years 2013 through 2036
EETC		62		Discounted Cash Flows	Structure credit risk (d)	6% - 7% (7%)
Convertible debt derivative asset		202		Binomial Lattice Model	Expected volatility (e)	45% - 60% (48%)
					Own credit risk (f)	7% - 10% (8%)
Convertible debt option liability		(91	)	Binomial Lattice Model	Expected volatility (e)	45% - 60% (49%)
					Own credit risk (f)	7% - 10% (8%)

(a)	Represents the credit risk premium component of the discount rate that the Company has determined market participants would use in pricing the investments.

(b)	Represents the illiquidity premium component of the discount rate that the Company has determined market participants would use in pricing the investments.

(c)	Represents the estimated timing of principal repayments used in the discounted cash flow model.

(d)	Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use in pricing the instruments.

(e)	Represents the range in volatility estimates that the Company has determined market participants would use when pricing the instruments.

(f)	Represents the range of Company-specific risk adjustments that the Company has determined market participants would use as a model input.

Valuation Processes—Level 3 Measurements—The Company’s internal valuation group is responsible for determining the fair value of financial instruments. Depending on the instrument, the valuation group utilizes discounted cash flow methods or option pricing methods as indicated above. Valuations using discounted cash flow methods are generally conducted by the valuation group. Valuations using option pricing models are generally provided to the Company by third-party valuation experts. Each reporting period, the valuation group reviews the unobservable inputs used by third-party valuation experts for reasonableness utilizing relevant information available to the Company from other published sources. The Company has a formal process to review changes in fair value for satisfactory explanation.

Sensitivity Analysis—Level 3 Measurements—Changes in the unobservable input values would be unlikely to cause material changes in the fair value of the auction rate securities and EETCs.

The significant unobservable inputs used in the fair value measurement of the Continental convertible debt derivative assets and liabilities are the UAL stock expected volatility and the Company’s own credit risk. Significant increases (decreases) in expected volatility would result in a higher (lower) fair value measurement. Significant increases (decreases) in the Company’s own credit risk would result in a lower (higher) fair value measurement. A change in one of the inputs would not necessarily result in a directionally similar change in the other.

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


Description		Fair Value Methodology

Cash and Cash Equivalents		The carrying amounts approximate fair value because of the short-term maturity of these assets.

Short - term Investments, Investments, and Restricted Cash		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. These assets have maturities of less than one year except for the EETCs, auction rate securities and corporate debt.

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 7—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 speculative, non-risk management purposes.

Upon proper qualification, the Company accounts for certain fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted special hedge accounting treatment. The types of instruments the Company utilizes that qualify for special hedge accounting treatment typically include swaps, call options and collars (which consist of a purchased call option and a sold put option). Generally, utilizing the special hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. The Company is exposed to the risk that its hedges may not be effective in offsetting changes in the cost of fuel and that its hedges may not continue to qualify for special hedge accounting. 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 classified as other nonoperating income (expense).

The Company also utilizes certain derivative instruments that are economic hedges but do not qualify for hedge accounting under US GAAP. As with derivatives that qualify for hedge accounting, the purpose of these economic hedges is to mitigate the adverse financial impact of potential increases in the price of fuel. Currently, the only such economic hedges in the Company’s hedging portfolio are three-way collars (which consist of a sold call option, a purchased call option, and a sold put option). The Company records changes in the fair value of three-way collars to other nonoperating income (expense).

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, 2012, our projected fuel requirements for the remainder of 2012 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		20	%	$	3.56		20	%	$	2.80
Brent crude oil collars		14			2.76		14			1.93
Diesel fuel collars		9			3.28		9			2.45
Diesel fuel call options		1			3.25		N/A			N/A

Total		44	%				43	%

(a)	As of September 30, 2012, UAL had also hedged 26% of its projected first half 2013 fuel consumption.

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


		September 30, 2012						December 31, 2011
Classification	Balance Sheet Location	UAL		United		Continental		UAL		United		Continental
Derivatives designated as cash flow hedges
Assets:
Fuel contracts due within one year	Receivables	$	27	$	17	$	10	$	77	$	48	$	29

Liabilities:
Fuel contracts due within one year	Current liabilities: Other	$	7	$	4	$	3	$	4	$	4	$	—

Derivatives not designated as hedges
Assets:
Fuel contracts due within one year	Receivables	$	17	$	13	$	4	$	—	$	—	$	—

Liabilities:
Fuel contracts due within one year	Current liabilities: Other	$	2	$	1	$	1	$	—	$	—	$	—
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		2		1		1		—		—		—

Total liabilities		$	4	$	2	$	2	$	—	$	—	$	—

Total derivatives
Assets:
Fuel contracts due within one year	Receivables	$	44	$	30	$	14	$	77	$	48	$	29

Liabilities:
Fuel contracts due within one year	Current liabilities: Other	$	9	$	5	$	4	$	4	$	4	$	—
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		2		1		1		—		—		—

Total liabilities		$	11	$	6	$	5	$	4	$	4	$	—

The following tables present the impact of derivative instruments and their location within the unaudited Statements of Consolidated Operations:

Derivatives designated as cash flow hedges


	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)						Gain (Loss) Reclassified from AOCI into Income (Fuel Expense)					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	2012			2011			2012			2011		2012			2011
UAL	$	133		$	(181	)	$	(38	)	$	94	$	2		$	(56	)
United		77			(91	)		(23	)		90		1			(33	)
Continental		56			(90	)		(15	)		4		1			(23	)

	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)						Gain (Loss) Reclassified from AOCI into Income (Fuel Expense)					Amount of 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	2012			2011			2012			2011		2012			2011
UAL	$	(36	)	$	112		$	(107	)	$	526	$	(2	)	$	(87	)
United		(13	)		145			(55	)		427		(1	)		(38	)
Continental		(23	)		(33	)		(52	)		99		(1	)		(49	)

Derivatives not designated as hedges


	Amount of Gain Recognized in Income (Nonoperating Expense)				Amount of Gain Recognized in Income (Nonoperating Expense)
	Three Months Ended September 30,				Nine Months Ended September 30,
Fuel contracts	2012		2011		2012		2011
UAL	$	10	$	—	$	10	$	—
United		8		—		8		—
Continental		2		—		2		—

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, 2012 (in millions):


	UAL		United		Continental
Net derivative asset with counterparties	$	33	$	24	$	9
Collateral posted by the Company with its counterparties (a)		—		—		—
Potential loss related to the failure of the Company’s counterparties to perform		34		25		9

(a)	Classified as a current receivable.

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.

Commitments. As of September 30, 2012, UAL, United and Continental had the following commitments to purchase aircraft:

UAL Aircraft Commitments. UAL had firm commitments to purchase 100 new Boeing 737 MAX 9 aircraft scheduled for delivery from 2018 through 2022. UAL also had options to purchase an additional 100 Boeing 737 MAX 9 aircraft. UAL had the right, and intends in the future, to assign its interest under the purchase agreement for the 737 MAX 9 aircraft with respect to one or more of the aircraft to either United or Continental.

United Aircraft Commitments. United had firm commitments to purchase 100 new aircraft (25 Boeing 787 aircraft, 50 Boeing 737-900ER aircraft and 25 Airbus A350XWB aircraft) scheduled for delivery from 2013 through 2019. United also had options and purchase rights for 164 additional Boeing and Airbus aircraft.

Continental Aircraft Commitments. Continental had firm commitments to purchase 68 new aircraft (44 Boeing 737 aircraft and 24 Boeing 787 aircraft) scheduled for delivery from October 1, 2012 through 2016. Continental also had options to purchase 83 Boeing aircraft. From October 1, 2012 through December 31, 2012, Continental expects to take delivery of six Boeing 737-900ER aircraft and four Boeing 787-8 aircraft.

Continental had arranged for EETC financing of 20 Boeing 737-900ER aircraft and six Boeing 787-8 aircraft scheduled for delivery through July 2013. In addition, United had secured considerable backstop financing commitments from its widebody aircraft and engine manufacturers, subject to certain customary conditions. See Note 9 of this report for additional information. However, UAL and United do not have backstop financing or any other financing currently in place for their firm narrowbody aircraft orders with Boeing, and Continental does not have backstop financing or any other financing currently in place for its other Boeing aircraft on order. Financing will be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures. The Company can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to the Company on acceptable terms when necessary or at all.

UAL and Continental have concluded their discussions with Boeing regarding delays in delivery of certain Boeing 787 aircraft, and have reached a resolution with Boeing regarding compensation to be received in connection with those delays, which is reflected in the table below.

The table below summarizes the capital commitments of UAL, United and Continental as of September 30, 2012, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and acquisition of information technology services and assets. As UAL has the right, and intends in the future, to assign its interest under the purchase agreement for the 737 MAX 9 aircraft with respect to one or more of the aircraft to either United or Continental, but has not determined the actual assignment of the Boeing 737 MAX 9 aircraft between United and Continental, the table below assumes that 50% of the Boeing 737 MAX 9 order is assigned to United and 50% of the Boeing 737 MAX 9 order is assigned to Continental.

In billions

UAL

United

Continental

Last three months of 2012

0.9

United Continental Holdings, Inc.

Yes ¨ No x

United Air Lines, Inc.

Yes ¨ No x

Continental Airlines, Inc.

Yes ¨ No x