**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended September 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                   to                  **

**Commissionfile number 001-11355**

**UNITED AIR LINES, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                                     |   | **36-2675206**       |
|----------------------------------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                                                 |   | (I.R.S. Employer     |
| incorporation or  organization)                                                  |   | Identification  No.) |
| **Location:  1200 East Algonquin Road,  Elk Grove Township, Illinois** |   | **60007**            |
| **Mailing  Address:  P. O. Box 66919,  Chicago, Illinois**             |   | **60666**            |
| (Address of  principal executive offices)                                        |   | (Zip Code)           |
| **(847) 700-4000**                                                               |
| **(Registrant’s  telephone number, including area code)**                   |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x      No  o

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

Large acceleratedfiler  o                   Acceleratedfiler  o                 Non-acceleratedfiler  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o     No  x

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.Yes x     No  o

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

|                              | **Class** | ** ** | ** ** | ** ** | **Outstanding at  November 10, 2006** | ** ** |
|------------------------------|-----------|------------|------------|------------|---------------------------------------|------------|
| Common Stock ($5  par value) |      | 205        |

 

 

 

----

**United Air Lines, Inc. andSubsidiary Companies Report on Form 10-QFor the Quarter Ended September 30, 2006**

**Index**

|                    |   |                                                                                       |                                                                                         | **Page No.** |
|--------------------|--------|--------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|-------------------|
| PART I.       |   | FINANCIAL  INFORMATION                                                                     |                                                                                         |              |   |
|               |   | Item 1. Financial Statements                                                               |                                                                                         |              |   |
|               |   | Condensed Statements of  Consolidated Financial Position (Unaudited)                       |                                                                                         | 3                 |   |
|               |   | Condensed Statements of  Consolidated Operations (Unaudited)                               |                                                                                         | 5                 |   |
|               |   | Condensed Statements of  Consolidated Cash Flows (Unaudited)                               |                                                                                         | 7                 |   |
|               |   | Condensed Statements of  Consolidated Stockholder’s Equity (Deficit) (Unaudited) |                                                                                         | 8                 |   |
|               |   | Notes to Condensed Consolidated  Financial Statements (Unaudited)                          |                                                                                         | 9                 |   |
|               |   | Item 2.                                                                                    | Management’s Discussion and  Analysis of Financial Condition and  Results of Operations |              | 49 |   |
|               |   | Item 3. Quantitative and  Qualitative Disclosures About Market Risk                        |                                                                                         | 70                |   |
|               |   | Item 4. Controls and Procedures                                                            |                                                                                         | 71                |   |
| PART II.      |   | OTHER INFORMATION                                                                          |                                                                                         | 72                |   |
|               |   | Item 1. Legal Proceedings                                                                  |                                                                                         | 72                |   |
|               |   | Item 6. Exhibits                                                                           |                                                                                         | 73                |   |
| Signature          |   | 74                                                                                         |                                                                                         |
| Exhibit Index |   | 75                                                                                         |                                                                                         |
|                    |        |                                                                                            |                                                                                              |                   |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1.**                        Financial Statements

**United Air Lines, Inc. and Subsidiary CompaniesCondensed Statements of Consolidated Financial Position**(Unaudited)(In Millions,Except Shares)

|                                                                                                |   | Successor          |   | Predecessor       |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                                                                |   | September 30, |   | December 31, |   |
|                                                                                                |   | 2006               |   | 2005              |   |
| Assets                                                                                              |   |               |   |              |   |   |   |   |   |   |
| Current assets:                                                                                     |   |               |   |              |   |   |   |   |   |   |
| Cash and cash equivalents                                                                           |   |               | $      | 4,012             |   |   |   | $ | 1,722 |   |   |   |
| Restricted cash                                                                                     |   |               | 308    |              |   |   | 643 |   |   |   |
| Short-term investments                                                                              |   |               | 2      |              |   |   | 77 |   |   |   |
| Receivables, less allowance for  doubtful accounts  (2006—$32; 2005—$22)        |   |               | 1,029  |              |   |   | 822 |   |   |   |
| Prepaid fuel                                                                                        |   |               | 250    |              |   |   | 258 |   |   |   |
| Aircraft fuel, spare parts and supplies, less obsolescence  allowance (2006—$4; 2005—$66) |   |               | 210    |              |   |   | 193 |   |   |   |
| Deferred income taxes                                                                               |   |               | 119    |              |   |   | — |   |   |   |
| Receivables from related parties                                                                    |   |               | 137    |              |   |   | 201 |   |   |   |
| Prepaid expenses and other                                                                          |   |               | 505    |              |   |   | 486 |   |   |   |
|                                                                                                |   |               | 6,572  |              |   |   | 4,402 |   |   |   |
| Operating property and equipment:                                                                   |   |               |   |              |   |   |   |   |   |   |
| Owned—                                                                                         |   |               |   |              |   |   |   |   |   |   |
| Flight equipment                                                                                    |   |               | 8,914  |              |   |   | 13,443 |   |   |   |
| Advances on flight equipment                                                                        |   |               | 91     |              |   |   | 116 |   |   |   |
| Other property and equipment                                                                        |   |               | 1,377  |              |   |   | 3,833 |   |   |   |
|                                                                                                |   |               | 10,382 |              |   |   | 17,392 |   |   |   |
| Less—accumulated depreciation and amortization                                                 |   |               | (364   | )                 |   |   | (6,104 | ) |   |   |
|                                                                                                |   |               | 10,018 |              |   |   | 11,288 |   |   |   |
| Capital leases:                                                                                     |   |               |   |              |   |   |   |   |   |   |
| Flight equipment                                                                                    |   |               | 1,538  |              |   |   | 2,581 |   |   |   |
| Other property and equipment                                                                        |   |               | 18     |              |   |   | 84 |   |   |   |
|                                                                                                |   |               | 1,556  |              |   |   | 2,665 |   |   |   |
| Less—accumulated amortization                                                                  |   |               | (59    | )                 |   |   | (739 | ) |   |   |
|                                                                                                |   |               | 1,497  |              |   |   | 1,926 |   |   |   |
|                                                                                                |   |               | 11,515 |              |   |   | 13,214 |   |   |   |
| Other assets:                                                                                       |   |               |   |              |   |   |   |   |   |   |
| Intangibles, less accumulated amortization (2006—$120;  2005—$207)                        |   |               | 3,047  |              |   |   | 370 |   |   |   |
| Goodwill                                                                                            |   |               | 2,803  |              |   |   | 2 |   |   |   |
| Aircraft lease deposits                                                                             |   |               | 523    |              |   |   | 477 |   |   |   |
| Restricted cash                                                                                     |   |               | 520    |              |   |   | 285 |   |   |   |
| Long-term related party note receivable                                                             |   |               | 201    |              |   |   | — |   |   |   |
| Investments                                                                                         |   |               | 113    |              |   |   | 20 |   |   |   |
| Prepaid rent                                                                                        |   |               | 7      |              |   |   | 67 |   |   |   |
| Other, net                                                                                          |   |               | 744    |              |   |   | 559 |   |   |   |
|                                                                                                |   |               | 7,958  |              |   |   | 1,780 |   |   |   |
|                                                                                                |   |               | $      | 26,045            |   |   |   | $ | 19,396 |   |   |   |

 

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

3

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**UnitedAir Lines, Inc. and Subsidiary CompaniesCondensed Statements of Consolidated Financial Position**(Unaudited)(In Millions, Except Shares)

|                                                                                                                                         |   | Successor          |   | Predecessor       |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                                                                                                         |   | September 30, |   | December 31, |   |
|                                                                                                                                         |   | 2006               |   | 2005              |   |
| Liabilities and  Stockholder’s Equity                                                                                                   |   |               |   |              |   |   |   |   |   |
| Current liabilities:                                                                                                                         |   |               |   |              |   |   |   |   |   |
| Advance ticket  sales                                                                                                                        |   |               | $      | 2,004             |   |   |   | $ | 1,575 |   |   |
| Mileage Plus  deferred revenue                                                                                                               |   |               | 1,032  |              |   |   | 681 |   |   |
| Accrued salaries,  wages and benefits                                                                                                        |   |               | 804    |              |   |   | 842 |   |   |
| Advanced purchase  of miles (Note 15)                                                                                                        |   |               | 694    |              |   |   | 679 |   |   |
| Long-term debt maturing  within one year (Note 9)                                                                                            |   |               | 665    |              |   |   | 13 |   |   |
| Accounts payable                                                                                                                             |   |               | 639    |              |   |   | 595 |   |   |
| Accrued interest                                                                                                                             |   |               | 271    |              |   |   | 32 |   |   |
| Fuel purchase  commitments                                                                                                                   |   |               | 250    |              |   |   | 258 |   |   |
| Payables to  related parties                                                                                                                 |   |               | 249    |              |   |   | 463 |   |   |
| Current  obligations under capital leases (Note 13)                                                                                          |   |               | 101    |              |   |   | 20 |   |   |
| Other                                                                                                                                        |   |               | 762    |              |   |   | 479 |   |   |
|                                                                                                                                         |   |               | 7,471  |              |   |   | 5,637 |   |   |
| Long-term debt  (Note 9)                                                                                                                     |   |               | 8,564  |              |   |   | 1,298 |   |   |
| Long-term obligations  under capital leases (Note 13)                                                                                        |   |               | 1,357  |              |   |   | 102 |   |   |
| Other liabilities  and deferred credits:                                                                                                     |   |               |   |              |   |   |   |   |   |
| Mileage Plus  deferred revenue                                                                                                               |   |               | 2,509  |              |   |   | 242 |   |   |
| Postretirement  benefit liability (Note 5)                                                                                                   |   |               | 2,066  |              |   |   | 1,932 |   |   |
| Deferred income  taxes                                                                                                                       |   |               | 660    |              |   |   | 354 |   |   |
| Deferred pension  liability (Note 5)                                                                                                         |   |               | 129    |              |   |   | 95 |   |   |
| Other                                                                                                                                        |   |               | 766    |              |   |   | 545 |   |   |
|                                                                                                                                         |   |               | 6,130  |              |   |   | 3,168 |   |   |
| Liabilities subject to  compromise                                                                                                           |   |               | — |              |   |   | 35,060 |   |   |
| Parent company  mandatorily convertible preferred securities (Note 10)                                                                       |   |               | 356    |              |   |   | — |   |   |
| Commitments and  contingent liabilities (Note 12)                                                                                            |   |               |   |              |   |   |   |   |   |
| Stockholder’s  equity (deficit):                                                                                                        |   |               |   |              |   |   |   |   |   |
| Predecessor  Company common stock at par, $5 par value; authorized 1,000 shares;  issued 205 shares at December 31, 2005 |   |               | — |              |   |   | — |   |   |
| Successor Company  common stock at par, $5 par value; authorized 1,000 shares; issued 205  shares at September 30, 2006            |   |               | — |              |   |   | — |   |   |
| Additional  capital invested                                                                                                                 |   |               | 2,089  |              |   |   | 4,213 |   |   |
| Retained earnings  (deficit)                                                                                                                 |   |               | 87     |              |   |   | (28,809 | ) |   |
| Accumulated other  comprehensive loss                                                                                                        |   |               | (9     | )                 |   |   | (36 | ) |   |
| Receivables from  affiliates                                                                                                                 |   |               | — |              |   |   | (1,237 | ) |   |
|                                                                                                                                         |   |               | 2,167  |              |   |   | (25,869 | ) |   |
|                                                                                                                                         |   |               | $      | 26,045            |   |   |   | $ | 19,396 |   |   |

 

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

4

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**UnitedAir Lines, Inc. and Subsidiary CompaniesCondensed Statements of Consolidated Operations (Unaudited)(In Millions)**

|                                                                                          |   | Successor                                                                                                                          |   | Predecessor                                                                                                                        |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                          |   | Three Months Ended September 30,                                                                               |   |
|                                                                                          |   |           2006            |   |            2005           |   |
| Operating revenues:                                                                           |   |                                                                                                                               |   |                                                                                                                               |   |   |   |   |   |
| Passenger—United  Airlines                                                               |   |                                                                                                                               | $      | 3,916                                                                                                                              |   |   |   | $ | 3,467 |   |   |
| Passenger—Regional  Affiliates                                                           |   |                                                                                                                               | 773    |                                                                                                                               |   |   | 662 |   |   |
| Cargo                                                                                         |   |                                                                                                                               | 183    |                                                                                                                               |   |   | 174 |   |   |
| Other operating  revenues                                                                     |   |                                                                                                                               | 304    |                                                                                                                               |   |   | 345 |   |   |
|                                                                                          |   |                                                                                                                               | 5,176  |                                                                                                                               |   |   | 4,648 |   |   |
| Operating expenses:                                                                           |   |                                                                                                                               |   |                                                                                                                               |   |   |   |   |   |
| Aircraft fuel                                                                                 |   |                                                                                                                               | 1,368  |                                                                                                                               |   |   | 1,106 |   |   |
| Salaries and  related costs                                                                   |   |                                                                                                                               | 1,059  |                                                                                                                               |   |   | 1,000 |   |   |
| Regional  affiliates                                                                          |   |                                                                                                                               | 713    |                                                                                                                               |   |   | 722 |   |   |
| Purchased  services                                                                           |   |                                                                                                                               | 425    |                                                                                                                               |   |   | 374 |   |   |
| Aircraft  maintenance materials and outside repairs                                           |   |                                                                                                                               | 252    |                                                                                                                               |   |   | 199 |   |   |
| Depreciation and  amortization                                                                |   |                                                                                                                               | 225    |                                                                                                                               |   |   | 205 |   |   |
| Landing fees and  other rent                                                                  |   |                                                                                                                               | 199    |                                                                                                                               |   |   | 235 |   |   |
| Cost of third  party sales                                                                    |   |                                                                                                                               | 150    |                                                                                                                               |   |   | 182 |   |   |
| Aircraft rent                                                                                 |   |                                                                                                                               | 104    |                                                                                                                               |   |   | 87 |   |   |
| Commissions                                                                                   |   |                                                                                                                               | 91     |                                                                                                                               |   |   | 74 |   |   |
| Special operating  items (Note 17)                                                            |   |                                                                                                                               | (30    | )                                                                                                                                  |   |   | — |   |   |
| Other operating  expenses                                                                     |   |                                                                                                                               | 281    |                                                                                                                               |   |   | 286 |   |   |
|                                                                                          |   |                                                                                                                               | 4,837  |                                                                                                                               |   |   | 4,470 |   |   |
| Earnings from  operations                                                                     |   |                                                                                                                               | 339    |                                                                                                                               |   |   | 178 |   |   |
| Other income (expense):                                                                       |   |                                                                                                                               |   |                                                                                                                               |   |   |   |   |   |
| Interest expense                                                                              |   |                                                                                                                               | (165   | )                                                                                                                                  |   |   | (131 | ) |   |
| Interest income                                                                               |   |                                                                                                                               | 79     |                                                                                                                               |   |   | 8 |   |   |
| Interest  capitalized                                                                         |   |                                                                                                                               | 3      |                                                                                                                               |   |   | 1 |   |   |
| Miscellaneous,  net                                                                           |   |                                                                                                                               | 3      |                                                                                                                               |   |   | 12 |   |   |
|                                                                                          |   |                                                                                                                               | (80    | )                                                                                                                                  |   |   | (110 | ) |   |
| Earnings before  reorganization items, income taxes and equity in earnings of affiliates |   |                                                                                                                               | 259    |                                                                                                                               |   |   | 68 |   |   |
| Reorganization  items, net                                                                    |   |                                                                                                                               | — |                                                                                                                               |   |   | (1,709 | ) |   |
| Earnings (loss) before  income taxes and equity in earnings of affiliates                     |   |                                                                                                                               | 259    |                                                                                                                               |   |   | (1,641 | ) |   |
| Income taxes                                                                                  |   |                                                                                                                               | 65     |                                                                                                                               |   |   | — |   |   |
| Earnings (loss)  before equity in earnings of affiliates                                      |   |                                                                                                                               | 194    |                                                                                                                               |   |   | (1,641 | ) |   |
| Equity in  earnings of affiliates                                                             |   |                                                                                                                               | 1      |                                                                                                                               |   |   | — |   |   |
| Net income (loss)                                                                             |   |                                                                                                                               | $      | 195                                                                                                                                |   |   |   | $ | (1,641 | ) |   |

 

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

5

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**UnitedAir Lines, Inc. and Subsidiary CompaniesCondensed Statements of Consolidated Operations (Unaudited)(In Millions)**

|                                                                                                 |   | Successor                                                     |   |   | Predecessor                                                      |   |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|--------|------------------------------------------------------------------|--------|
|                                                                                                 |   | Period from  February 1  to September 30, |   |   | Period from  January 1 to   January 31, |   | Nine Months Ended   September 30, |   |
|                                                                                                 |   | 2006                                                          |   |   | 2006                                                             |   | 2005 |   |
| Operating revenues:                                                                                  |   |                                                          |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Passenger—United  Airlines                                                                      |   |                                                          | $      | 9,904  |                                                             |   |   |   | $ | 1,074 |   |   |   | $ | 9,684 |   |   |
| Passenger—Regional  Affiliates                                                                  |   |                                                          | 1,999  |   |                                                             |   |   | 204 |   |   |   | 1,818 |   |   |
| Cargo                                                                                                |   |                                                          | 501    |   |                                                             |   |   | 56 |   |   |   | 526 |   |   |
| Other operating  revenues                                                                            |   |                                                          | 889    |   |                                                             |   |   | 120 |   |   |   | 910 |   |   |
|                                                                                                 |   |                                                          | 13,293 |   |                                                             |   |   | 1,454 |   |   |   | 12,938 |   |   |
| Operating expenses:                                                                                  |   |                                                          |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Aircraft fuel                                                                                        |   |                                                          | 3,323  |   |                                                             |   |   | 362 |   |   |   | 2,866 |   |   |
| Salaries and  related costs                                                                          |   |                                                          | 2,854  |   |                                                             |   |   | 358 |   |   |   | 3,081 |   |   |
| Regional  affiliates                                                                                 |   |                                                          | 1,896  |   |                                                             |   |   | 228 |   |   |   | 2,052 |   |   |
| Purchased  services                                                                                  |   |                                                          | 1,168  |   |                                                             |   |   | 133 |   |   |   | 1,116 |   |   |
| Aircraft  maintenance materials and outside repairs                                                  |   |                                                          | 688    |   |                                                             |   |   | 80 |   |   |   | 645 |   |   |
| Depreciation and  amortization                                                                       |   |                                                          | 591    |   |                                                             |   |   | 68 |   |   |   | 618 |   |   |
| Landing fees and  other rent                                                                         |   |                                                          | 569    |   |                                                             |   |   | 75 |   |   |   | 693 |   |   |
| Cost of third  party sales                                                                           |   |                                                          | 464    |   |                                                             |   |   | 63 |   |   |   | 459 |   |   |
| Aircraft rent                                                                                        |   |                                                          | 289    |   |                                                             |   |   | 30 |   |   |   | 318 |   |   |
| Commissions                                                                                          |   |                                                          | 224    |   |                                                             |   |   | 24 |   |   |   | 227 |   |   |
| Special operating  items (Note 17)                                                                   |   |                                                          | (30    | )      |                                                             |   |   | — |   |   |   | 5 |   |   |
| Other operating  expenses                                                                            |   |                                                          | 771    |   |                                                             |   |   | 85 |   |   |   | 895 |   |   |
|                                                                                                 |   |                                                          | 12,807 |   |                                                             |   |   | 1,506 |   |   |   | 12,975 |   |   |
| Earnings (loss)  from operations                                                                     |   |                                                          | 486    |   |                                                             |   |   | (52 | ) |   |   | (37 | ) |   |
| Other income  (expense):                                                                             |   |                                                          |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                                     |   |                                                          | (518   | )      |                                                             |   |   | (42 | ) |   |   | (357 | ) |   |
| Interest income                                                                                      |   |                                                          | 172    |   |                                                             |   |   | 6 |   |   |   | 17 |   |   |
| Interest  capitalized                                                                                |   |                                                          | 10     |   |                                                             |   |   | — |   |   |   | (4 | ) |   |
| Miscellaneous,  net                                                                                  |   |                                                          | 2      |   |                                                             |   |   | — |   |   |   | 78 |   |   |
|                                                                                                 |   |                                                          | (334   | )      |                                                             |   |   | (36 | ) |   |   | (266 | ) |   |
| Earnings (loss) before  reorganization items, income taxes and equity in earnings of affiliates |   |                                                          | 152    |   |                                                             |   |   | (88 | ) |   |   | (303 | ) |   |
| Reorganization  items, net                                                                           |   |                                                          | — |   |                                                             |   |   | 22,709 |   |   |   | (3,825 | ) |   |
| Earnings (loss)  before income taxes and equity in earnings of affiliates                            |   |                                                          | 152    |   |                                                             |   |   | 22,621 |   |   |   | (4,128 | ) |   |
| Income taxes                                                                                         |   |                                                          | 65     |   |                                                             |   |   | — |   |   |   | — |   |   |
| Earnings (loss)  before equity in earnings of affiliates                                             |   |                                                          | 87     |   |                                                             |   |   | 22,621 |   |   |   | (4,128 | ) |   |
| Equity in  earnings of affiliates                                                                    |   |                                                          | 4      |   |                                                             |   |   | 5 |   |   |   | 4 |   |   |
| Net income (loss)                                                                                    |   |                                                          | $      | 91     |                                                             |   |   |   | $ | 22,626 |   |   |   | $ | (4,124 | ) |   |

 

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

6

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**UnitedAir Lines, Inc. and Subsidiary CompaniesCondensed Statements of Consolidated Cash Flows (Unaudited)(In Millions)**

|                                                                                |   | Successor                                                           |   |   |   | Predecessor                                                      |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------|--------|
|                                                                                |   | Period from  February 1 to  September 30,  2006 |   |   |   | Period from  January 1 to  January 31,  2006 |   | Nine Months  Ended September 30,  2005 |   |
| Cash flows provided (used) by operating activities:                                 |   |                                                                |   |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)  before reorganization items                                    |   |                                                                | $      | 91     |   |                                                             |   |   |   | $ | (83 | ) |   |   | $ | (299 | ) |   |
| Adjustments to reconcile  to net cash provided (used) by operating activities— |   |                                                                |   |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                      |   |                                                                | 592    |   |   |                                                             |   |   | 68 |   |   |   | 616 |   |   |
| Increase in advance  ticket sales                                                   |   |                                                                | 339    |   |   |                                                             |   |   | 109 |   |   |   | 499 |   |   |
| Increase (decrease) in  accrued liabilities                                         |   |                                                                | (259   | )      |   |                                                             |   |   | 146 |   |   |   | 128 |   |   |
| Mileage Plus deferred  revenue                                                      |   |                                                                | 153    |   |   |                                                             |   |   | 14 |   |   |   | 69 |   |   |
| Stock-based compensation                                                            |   |                                                                | 137    |   |   |                                                             |   |   | — |   |   |   | — |   |   |
| Increase in other current  assets                                                   |   |                                                                | (116   | )      |   |                                                             |   |   | (26 | ) |   |   | (296 | ) |   |
| Increase in receivables                                                             |   |                                                                | (91    | )      |   |                                                             |   |   | (98 | ) |   |   | (101 | ) |   |
| Postretirement benefits                                                             |   |                                                                | 73     |   |   |                                                             |   |   | (9 | ) |   |   | (36 | ) |   |
| Increase in deferred  income taxes                                                  |   |                                                                | 65     |   |   |                                                             |   |   | — |   |   |   | — |   |   |
| Increase in related party  receivables and payables, net                            |   |                                                                | 17     |   |   |                                                             |   |   | — |   |   |   | — |   |   |
| Increase (decrease) in  accounts payable                                            |   |                                                                | 11     |   |   |                                                             |   |   | 25 |   |   |   | (40 | ) |   |
| Increase (decrease) in  accrued aircraft rent                                       |   |                                                                | (5     | )      |   |                                                             |   |   | 6 |   |   |   | 15 |   |   |
| Pension expense                                                                     |   |                                                                | (1     | )      |   |                                                             |   |   | 8 |   |   |   | 176 |   |   |
| Amortization of deferred  gains                                                     |   |                                                                | — |   |   |                                                             |   |   | (6 | ) |   |   | (64 | ) |   |
| Other, net                                                                          |   |                                                                | 118    |   |   |                                                             |   |   | 9 |   |   |   | 109 |   |   |
|                                                                                |   |                                                                | 1,124  |   |   |                                                             |   |   | 163 |   |   |   | 776 |   |   |
| Cash flows provided (used) by reorganization  activities:                           |   |                                                                |   |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Reorganization items, net                                                           |   |                                                                | — |   |   |                                                             |   |   | 22,709 |   |   |   | (3,825 | ) |   |
| Discharge of claims and  liabilities                                                |   |                                                                | — |   |   |                                                             |   |   | (24,389 | ) |   |   | — |   |   |
| Revaluation of Mileage  Plus frequent flyer deferred revenue                        |   |                                                                | — |   |   |                                                             |   |   | 2,399 |   |   |   | — |   |   |
| Revaluation of other  assets and liabilities                                        |   |                                                                | — |   |   |                                                             |   |   | (2,111 | ) |   |   | — |   |   |
| Pension curtailment,  settlement and employee claims                                |   |                                                                | — |   |   |                                                             |   |   | 912 |   |   |   | 1,045 |   |   |
| Increase in non-aircraft  claims accrual                                            |   |                                                                | — |   |   |                                                             |   |   | 421 |   |   |   | 549 |   |   |
| Increase in other  liabilities                                                      |   |                                                                | — |   |   |                                                             |   |   | 38 |   |   |   | 77 |   |   |
| Increase in aircraft  rejection liability                                           |   |                                                                | — |   |   |                                                             |   |   | — |   |   |   | 2,028 |   |   |
|                                                                                |   |                                                                | — |   |   |                                                             |   |   | (21 | ) |   |   | (126 | ) |   |
| Cash flows provided (used) by investing activities:                                 |   |                                                                |   |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in  restricted cash                                             |   |                                                                | 303    |   |   |                                                             |   |   | (203 | ) |   |   | (70 | ) |   |
| Additions to property and  equipment                                                |   |                                                                | (222   | )      |   |                                                             |   |   | (30 | ) |   |   | (251 | ) |   |
| Decrease in segregated  funds                                                       |   |                                                                | 200    |   |   |                                                             |   |   | — |   |   |   | — |   |   |
| Decrease in short-term  investments                                                 |   |                                                                | 72     |   |   |                                                             |   |   | 2 |   |   |   | 2 |   |   |
| Proceeds on disposition  of property and equipment                                  |   |                                                                | 20     |   |   |                                                             |   |   | (1 | ) |   |   | 153 |   |   |
| Other, net                                                                          |   |                                                                | (35    | )      |   |                                                             |   |   | (6 | ) |   |   | (64 | ) |   |
|                                                                                |   |                                                                | 338    |   |   |                                                             |   |   | (238 | ) |   |   | (230 | ) |   |
| Cash flows provided (used) by financing activities:                                 |   |                                                                |   |   |   |                                                             |   |   |   |   |   |   |   |   |   |
| Proceeds from Credit Facility                                                       |   |                                                                | 2,961  |   |   |                                                             |   |   | — |   |   |   | — |   |   |
| Repayment of Credit  Facility                                                       |   |                                                                | (175   | )      |   |                                                             |   |   | — |   |   |   | — |   |   |
| Proceeds from DIP  Financing                                                        |   |                                                                | — |   |   |                                                             |   |   | — |   |   |   | 310 |   |   |
| Repayment of DIP  Financing                                                         |   |                                                                | (1,157 | )      |   |                                                             |   |   | — |   |   |   | (11 | ) |   |
| Repayment of other  long-term debt                                                  |   |                                                                | (544   | )      |   |                                                             |   |   | (24 | ) |   |   | (156 | ) |   |
| Principal payments under  capital leases                                            |   |                                                                | (66    | )      |   |                                                             |   |   | (5 | ) |   |   | (70 | ) |   |
| Increase in deferred  financing costs                                               |   |                                                                | (65    | )      |   |                                                             |   |   | (1 | ) |   |   | (26 | ) |   |
| Decrease in  advances/loans with affiliates                                         |   |                                                                | — |   |   |                                                             |   |   | — |   |   |   | 8 |   |   |
|                                                                                |   |                                                                | 954    |   |   |                                                             |   |   | (30 | ) |   |   | 55 |   |   |
| Increase (decrease) in cash and cash equivalents  during the period                 |   |                                                                | 2,416  |   |   |                                                             |   |   | (126 | ) |   |   | 475 |   |   |
| Cash and cash equivalents at beginning of the period                                |   |                                                                | 1,596  |   |   |                                                             |   |   | 1,722 |   |   |   | 1,203 |   |   |
| Cash and cash  equivalents at end of the period                                     |   |                                                                | $      | 4,012  |   |                                                             |   |   |   | $ | 1,596 |   |   |   | $ | 1,678 |   |   |

 

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

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**United Air Lines, Inc. andSubsidiary CompaniesCondensed Statements of Consolidated Stockholder’s Equity (Deficit)(Unaudited)(In Millions)**

|                                                                                           |   |       |   |   |   |       |   |      |   | Accumulated        |   |   |   |
|------------------------------------------------------------------------------------------------|--------|------------|--------|--------|--------|------------|--------|-----------|--------|--------------------|--------|--------|--------|
|                                                                                           |   | Receivable |   |   |   | Additional |   | Retained  |   | Other              |   |   |   |
|                                                                                           |   | from       |   | Common |   | Capital    |   | Earnings  |   | Comprehensive      |   |   |   |
|                                                                                           |   | Affiliates |   | Stock  |   | Invested   |   | (Deficit) |   | Income (Loss) |   | Total  |   |
| Balance at  December 31, 2005, (Predecessor Company)                                      |   |       | $      | (1,237 | )      |       |   | $         | — |               |   |   | $      | 4,213 |   |   | $ | (28,809 | ) |   | $ | (36 | ) |   | $ | (25,869 | ) |
| Net  loss before reorganization items—January 2006                                        |   |       | — |   |   |       | — |      |   |               | — |   |   | (83 | ) |   | — |   |   | (83 | ) |
| Reorganization  items—January 2006                                                   |   |       | — |   |   |       | — |      |   |               | — |   |   | (1,392 | ) |   | — |   |   | (1,392 | ) |
| Subtotal (Predecessor  Company)                                                                |   |       | (1,237 | )      |   |       | — |      |   |               | 4,213  |   |   | (30,284 | ) |   | (36 | ) |   | (27,344 | ) |
| Fresh start adjustments:                                                                       |   |       |   |   |   |       |   |      |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Unsecured  claims and debt discharge                                                           |   |       | — |   |   |       | — |      |   |               | — |   |   | 24,389 |   |   | — |   |   | 24,389 |   |
| Valuation  adjustments, net                                                                    |   |       | — |   |   |       | — |      |   |               | — |   |   | (288 | ) |   | — |   |   | (288 | ) |
| Balance at  January 31, 2006, (Predecessor Company)                                       |   |       | (1,237 | )      |   |       | — |      |   |               | 4,213  |   |   | (6,183 | ) |   | (36 | ) |   | (3,243 | ) |
| Fresh start adjustments:                                                                       |   |       |   |   |   |       |   |      |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Elimination  of Predecessor accumulated deficit and accumulated other comprehensive  loss |   |       | — |   |   |       | — |      |   |               | — |   |   | 6,183 |   |   | 36 |   |   | 6,219 |   |
| Cancellation  of receivable from affiliates and additional capital invested                    |   |       | 1,237  |   |   |       | — |      |   |               | (4,213 | )      |   | — |   |   | — |   |   | (2,976 | ) |
| Issuance  of new equity interests in connection with emergence from Chapter 11                 |   |       | — |   |   |       | — |      |   |               | 1,952  |   |   | — |   |   | — |   |   | 1,952 |   |
| Balance at  February 1, 2006, (Successor Company)                                         |   |       | — |   |   |       | — |      |   |               | 1,952  |   |   | — |   |   | — |   |   | 1,952 |   |
| Net  income from February 1 to September 30, 2006                                    |   |       | — |   |   |       | — |      |   |               | — |   |   | 91 |   |   | — |   |   | 91 |   |
| Preferred  stock dividends (Note 10)                                                      |   |       | — |   |   |       | — |      |   |               | — |   |   | (4 | ) |   | — |   |   | (4 | ) |
| Unrealized  loss on derivatives                                                                |   |       | — |   |   |       | — |      |   |               | — |   |   | — |   |   | (9 | ) |   | (9 | ) |
| Stock-based  compensation                                                                      |   |       | — |   |   |       | — |      |   |               | 137    |   |   | — |   |   | — |   |   | 137 |   |
| Balance at September 30, 2006, (Successor Company)                                        |   |       | $      | — |   |       |   | $         | — |               |   |   | $      | 2,089 |   |   | $ | 87 |   |   | $ | (9 | ) |   | $ | 2,167 |   |

 

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

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**UnitedAir Lines, Inc. and Subsidiary CompaniesNotes to Condensed Consolidated Financial Statements (Unaudited)**

**The Company**

United Air Lines, Inc.(together with its consolidated subsidiaries, “we,” “our,” “us,” “United” orthe “Company”) is a wholly-owned subsidiary of UAL Corporation (“UAL”).

**Interim FinancialStatements**

The Company has prepared the unaudited condensedconsolidated financial statements shown here as required by the Securities andExchange Commission (the “SEC”). Some information and footnote disclosuresnormally included in financial statements that meet generally acceptedaccounting principles (“GAAP”) have been condensed or omitted as permitted bythe SEC. The Company believes that the disclosures presented here are notmisleading. The financial statements include all adjustments (which includeonly normal recurring adjustments, adjustments required by fresh-startreporting and reorganization items described below) that are considerednecessary for a fair presentation of its financial position and operatingresults. These financial statements should be read together with theinformation included in United’s most recent Annual Report on Form 10-Kfor the year 2005.

As a result of theadoption of fresh-start reporting in accordance with American Institute ofCertified Public Accountants’ Statement of Position 90-7 “*Financial Reporting by Entities in Reorganization under the BankruptcyCode*” (“SOP 90-7”), the financial statements prior to February 1,2006 are not comparable with the financial statements for periods on or after February 1,2006. References to “Successor Company” refer to United on or after February 1,2006, after giving effect to the adoption of fresh-start reporting. Referencesto “Predecessor Company” refer to United prior to February 1, 2006. SeeNote 1, “Voluntary Reorganization Under Chapter 11 - Fresh-Start Reporting” forfurther details.

**(1)**          Voluntary ReorganizationUnder Chapter 11 

***BankruptcyConsiderations.***   The following discussionprovides general background information regarding the Company’s Chapter 11cases, and is not intended to be an exhaustive summary. Detailed informationpertaining to the bankruptcy filings may be obtained at www.pd-ual.com.

On December 9, 2002 (the “Petition Date”), UAL,United and 26 direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”)filed voluntary petitions to reorganize their businesses under Chapter 11 ofthe United States Bankruptcy Code in the United States Bankruptcy Court for theNorthern District of Illinois, Eastern Division (the “Bankruptcy Court”). On January 20,2006, the Bankruptcy Court confirmed the Debtors’ Second Amended Joint Plan ofReorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the“Plan of Reorganization”).The Plan of Reorganization became effective and the Debtors emerged frombankruptcy protection on February 1, 2006 (the “Effective Date”). On theEffective Date, United implemented fresh-start reporting.

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The Plan ofReorganization generally provided for the full payment or reinstatement ofallowed administrative claims, priority claims and secured claims, and thedistribution of new equity and debt securities of UAL to the Debtors’ creditorsand employees in satisfaction of allowed unsecured and deemed claims. The Planof Reorganization contemplated UAL issuing up to 125 million shares of commonstock (out of the one billion shares of new common stock authorized under UAL’scertificate of incorporation). The new common stock was listed on the NASDAQNational Market and began trading under the symbol “UAUA” on February 2,2006. The distributions of common stock, subject to certain holdbacks asdescribed in the Plan of Reorganization, will be as follows:

·       Approximately 115 millionshares of UAL common stock to unsecured creditors and employees;

·       Upto 9.825 million shares of UAL common stock (or options or other rights toacquire shares) under the management equity incentive plan approved by theBankruptcy Court; and

·       Upto 175,000 shares of UAL common stock (or options or other rights to acquireshares) under the director equity incentive plan approved by the BankruptcyCourt.

The Plan ofReorganization also provided for the issuance of the following securities byUAL:

·       5million shares of 2% mandatorily convertible preferred stock, which were issuedto the Pension Benefit Guaranty Corporation (“PBGC”) shortly after theEffective Date;

·       Approximately$150 million in aggregate principal amount of 5% senior convertible notes,which were issued to holders of certain municipal bonds shortly after theEffective Date;

·       $726million in aggregate principal amount of 4.5% senior limited-subordinationconvertible notes, which were issued in July 2006 to certain irrevocabletrusts established for the benefit of certain employees (the “Limited-SubordinationNotes”);

·       $500million in aggregate principal amount of 6% senior notes, which were issued tothe PBCG shortly after the Effective Date; and

·       $500million in aggregate principal amount of 8% senior contingent notes (in up toeight equal tranches of $62.5 million) issuable to the PBGC upon thesatisfaction of certain contingencies.

Pursuant to the Company’s Plan of Reorganization, theLimited-Subordination Notes were required to be issued within 180 days of theEffective Date with a conversion price equal to 125% of the average closingprice of UAL common stock for the 60 consecutive trading days following February 1,2006, and an interest rate established so the notes would trade at par uponissuance. In July 2006, UAL reached agreement with five of the seveneligible employee groups to modify the conversion price to instead be basedupon the volume-weighted average price of UAL common stock over the two tradingdays ending on July 25, 2006, the date the notes were issued to the trusts.The modification in terms resulted in a new conversion price of $34.84, insteadof $46.86 which was the conversion price under the initial terms of the notes. Sincethe reduction in the conversion price resulted in a benefit to noteholders, UALissued the notes at an interest rate of 4.5%, which is a lower rate of interestthan would have been required under the initial terms in order for the notes totrade at par upon issuance. UAL reached agreement with the two other employeegroups to pay them cash totaling approximately $0.4 million rather than issuingadditional notes of similar value. See Note 9, “Debt Obligations” forfurther information.

Pursuant to the Plan of Reorganization, UAL commonstock, preferred stock and Trust Originated Preferred Securities issued priorto the Petition Date were canceled on the Effective Date, and no distributionwas made to holders of those securities.

On the Effective Date, the Company secured access to$3.0 billion in secured exit financing (the “Credit Facility”) which consistsof a $2.45 billion term loan, a $350 million delayed draw term loan and a $200million revolving credit line. On the Effective Date, the $2.45 billion termloan and the entire 

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revolving credit line,consisting of $161 million in cash and $39 million of letters of credit, weredrawn and used to repay the Debtor-In-Possession credit facility (the “DIPFinancing”) and to make other payments required upon exit from bankruptcy, aswell as to provide ongoing liquidity to conduct post-reorganization operations.Subsequently, during the first quarter of 2006, the Company repaid the entireoutstanding balance on the revolving credit line and accessed the $350 milliondelayed draw term loan.

***Significant Matters Resolved Since Emergence fromBankruptcy.*****  **Duringthe course of the Chapter 11 proceedings, the Debtors successfully reachedsettlements with most of their creditor constituencies and resolved mostpending claims. The following material matters have been resolved in theBankruptcy Court since the Effective Date:

(a)          *1997 EETCAircraft Financings.  *The Company had an ongoing dispute withrespect to a group of mostly-public financiers (the “Public Debt Group”)involving 14 aircraft financed under the Series 1997-1 EnhancedEquipment Trust Certificates (“1997-1 EETC”). During the first quarter of2006, the Company resolved the dispute and entered into a settlement agreementthat was approved by the Bankruptcy Court. The settlement agreement resolvedall pending litigation in connection with the 1997-1 EETC transaction andaircraft and provided for a permanent mutual release of all related claims. TheCompany remitted $281 million to the 1997-1 EETC trustee as final paymentto the holders of the Tranche A certificates. The Company previously acquiredthe 1997-1 EETC Tranche B and Tranche C certificates as a precursor toutilizing the transaction par buyout mechanism to purchase the Tranche Acertificates. Following shortly thereafter in the first quarter of 2006, theCompany refinanced the 14 aircraft with the $350 million delayed draw term loanprovided under the Credit Facility. The Company recorded the 1997-1 EETCdebt at fair market value upon its emergence from bankruptcy in accordance withfresh-start reporting. As a result, no gain or loss was realized on theextinguishment of debt.

(b)         *Wells FargoAppeal of Confirmation Order.  *Wells Fargo Bank Northwest,N.A., not individually but in its capacity as a trustee, filed a notice ofappeal of the confirmation order to the United States District Court for theNorthern District of Illinois (“District Court”). The parties subsequentlyfiled a stipulation agreeing to voluntarily dismiss the appeal, and the appealhas been dismissed.

(c)          *Pre- andPost-1997 EETC Aircraft Financings.  *In August 2005,United entered into term sheets to restructure the three post-1997Enhanced Equipment Trust Certificate (“EETC”) transactions, financing 80aircraft in United’s fleet that were controlled by the Public Debt Group. In May 2006,the Company reached a settlement with the Public Debt Group with respect tothese financing transactions. In conjunction with the settlement, the Companyand the EETC trustees agreed to cooperate and to use reasonable efforts tocomplete definitive documentation. The settlement was approved by theBankruptcy Court in June 2006. The Company completed definitivedocumentation on the three post-1997 EETC transactions in July 2006and met its obligations to have the transactions rated by both Standard andPoor’s and Moody’s.

In addition, in August 2005,United entered into term sheets to restructure the pre-1997 transactionsfinancing 19 aircraft that are controlled by the Public Debt Group. United hassubsequently closed transactions covering all of the associated aircraft.

(d)         *MunicipalBond Litigation at DEN, JFK, SFO and LAX.  *United is a party tonumerous long-term agreements to lease certain airport and maintenancefacilities that are financed through tax-exempt municipal bonds that are issuedby various local municipalities to build or improve airport and maintenancefacilities. During 2003, the Company filed four complaints for declaratoryjudgment and corresponding motions for temporary restraining orders concerningUnited’s municipal bond obligations for facilities at Denver InternationalAirport (“DEN”), John F. Kennedy International Airport (“JFK”), San FranciscoInternational Airport (“SFO”), and Los 

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Angeles InternationalAirport (“LAX”). In each case, United sought clarification of its obligationsto pay principal and interest under the applicable municipal bonds, and theprotection of its rights concerning related airport lease agreements at theapplicable airports. With respect to SFO, LAX and JFK, the Bankruptcy Courtruled in United’s favor. With respect to DEN, the Bankruptcy Court ruled againstUnited. The Bankruptcy Court’s rulings with respect to each of the four matterswere subsequently appealed to the District Court. The District Court reversedthe Bankruptcy Court’s rulings with respect to SFO and LAX but upheld theBankruptcy Court’s rulings with respect to JFK and DEN. All four of theDistrict Court’s rulings in turn were appealed to the United States Court ofAppeals for the Seventh Circuit (“Court of Appeals”). The Court of Appealsreversed the District Court’s ruling against the Company with respect to theSFO adversary proceeding and the SFO defendants’ petition for a rehearing wasdenied. The defendants in the SFO matter petitioned the United States SupremeCourt (“Supreme Court”) for a writ of certiorari, which was denied in March 2006.As a result of this final non-appealable order in favor of United,approximately $24 million in interim payments made by United into an escrowaccount, plus interest, were returned to United in April 2006. Inaddition, see “*Significant**Matters Remainingto be Resolved in Chapter 11 Cases,* item (a)” for details on thesecurity interest claim filed by the trustee of the SFO municipal bonds as aresult of United’s success in this matter. In May 2006, the Court ofAppeals also reversed the District Court’s ruling against the Company withrespect to the LAX matter. The deadline for the defendants to file a writ ofcertiorari has now passed. Nonetheless, even though the LAX obligations havebeen determined to be financings and not true leases, there remains an issueregarding the extent to which those financings are considered to have asecurity interest in the underlying leasehold or the value thereof, asdiscussed in “*Significant**MattersRemaining to be Resolved in Chapter 11 Cases,* item (b)”. TheCourt of Appeals affirmed the District Court’s ruling with respect to the JFKadversary proceeding. The defendants in the JFK matter filed a petition forrehearing with the Court of Appeals, which was denied. The time for filing apetition for writ of certiorari in the JFK matter has expired. In July 2006,the Court of Appeals also affirmed the District Court’s ruling against theCompany with respect to the DEN matter. The Company has accepted the ruling andthe deadline to file a writ of certiorari to the Supreme Court has now passed.

(e)          *O’HareAirport Use Agreement.  *In 2003, United filed a complaint fordeclaratory judgment for all of its municipal bond issues relating to itsfacilities at O’Hare International Airport (“O’Hare”), seeking a declarationthat a certain cross-default provision in the O’Hare airport lease wasunenforceable. In 2005, the Bankruptcy Court approved an agreement (“O’HareSettlement Agreement”) resolving the disputes between United, the trustees andthe bondholders. The City of Chicago, a party to these adversary proceedings,was not a party to the O’Hare Settlement Agreement. Subsequently, the Companyannounced that it had reached an agreement in principle with the City ofChicago, with respect to all unresolved disputes relating to our facilities atO’Hare. However, the parties were unable to finalize the terms of thissettlement as the City of Chicago continued to maintain that it could revokeUnited’s exclusive rights to terminals in place of “preferential” rights ifUnited did not meet the terms of the cross-default provision (the O’HareAirport Use Agreement (“AUA”) did not define or provide for any usage rights,other than exclusive rights).

In July 2006, the Bankruptcy Court held that theAUA is a self-contained agreement, governing United’s use of O’Hare andproviding the full consideration for that use. To realize the full value ofUnited’s estate, the Bankruptcy Code allows United to assume the AUA free fromobligations imposed under the separate bond payment agreements, notwithstandingthe cross-default provisions. The time for the City of Chicago to appeal thisruling has expired.

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(f)            *ALPAAgreement Approval.  *In January 2005, United filed amotion seeking approval of an agreement to restructure the Air Line PilotsAssociation (“ALPA”) collective bargaining agreement pursuant toSection 363(b) of the Bankruptcy Code. The Bankruptcy Court approvedthe ALPA agreement over the objections of various parties. The active pilotsratified the agreement, and the Bankruptcy Court entered an order approving theALPA agreement (the “ALPA Order”). In February 2005, the United RetiredPilots Benefit Protection Association and seven retired pilots (collectively,“URPBPA”) filed its notice of appeal of the ALPA Order based principally on theallegation that the ALPA Order unfairly failed to provide for the distributionof the Limited-Subordination Notes to the retired pilots as provided to theactive pilots pursuant to the ALPA agreement. The ALPA Order was approved bythe District Court and, in March 2006, by the Court of Appeals. InJune 2006, URPBPA filed a petition for a writ of certiorari from theSupreme Court to review the Court ofAppeals’ ruling with respect to this matter. In October 2006, the SupremeCourt denied the petition for a writ of certiorari, which effectively concludedthis matter.

***Significant Matters Remaining to be Resolved in Chapter11 Cases.******  ***Thefollowing material matters remain to be resolved in the Bankruptcy Court oranother court:

(a)          *SFOMunicipal Bond Secured Interest*.   HSBC Bank Inc. (“HSBC”), astrustee for the 1997 municipal bonds related to SFO, filed a complaint againstUnited asserting a security interest in United’s leasehold for portions of itsmaintenance base at SFO. Pursuant to Section 506(a) of the BankruptcyCode, HSBC alleges that it is entitled to be paid the value of that securityinterest, which HSBC had claimed was as much as $257 million. HSBC and Unitedwent to trial in April 2006 and the Bankruptcy Court rejected as a matterof law HSBC’s $257 million claim. HSBC subsequently alleged that it wasentitled to $154 million, or at a minimum, approximately $93 million. Theparties tried the case and filed post-trial briefs which were heard by theBankruptcy Court. In October 2006, the Bankruptcy Court issued its writtenopinion holding that the value of the security interest is approximately $27million. Both parties have filed additional post-trial motions, and,accordingly, time periods to appeal have not yet expired.

(b)         *LAXMunicipal Bond Secured Interest.*   In addition, there is pendinglitigation before the Bankruptcy Court regarding the extent to which the LAXmunicipal bond debt is entitled to secured status under Section 506(a) ofthe Bankruptcy Code. In July 2006, the Bankruptcy Court entered an order settingdiscovery deadlines and scheduling a trial for January 2007. The Companyhas recorded its best estimate of this liability, which may change based onfuture developments.

(c)          *Pilot PlanTermination Order*.   In December 2004, the PBGC filed aninvoluntary termination proceeding against United, as plan administrator forthe United Airlines Pilot Defined Benefit Pension Plan (the “Pilot Plan”), inthe District Court. In January 2005, the District Court granted a motionfiled by the Company and referred the involuntary termination proceeding to theBankruptcy Court. ALPA and URPBPA were later granted leave to intervene in theinvoluntary termination proceeding.

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

The PBGC, ALPA andURPBPA filed notices of appeal with the District Court. In February 2006,the District Court reversed and remanded the Bankruptcy Court’s terminationorder on the grounds that the matter was not a core proceeding in which itcould issue a final order, but rather, could only issue proposed findings offact and conclusions of law for 

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consideration bythe District Court. Upon remand and after the Bankruptcy Court made proposedfindings of fact and conclusions of law, in June 2006, the District Court enteredan order approving the termination of the Pilot Plan. ALPA and URPBPA filed anappeal with the Court of Appeals. In July 2006, the Court of Appealsgranted United’s motion to consolidate this termination appeal with URPBPA’sappeal of the District Court’s dismissal of URPBPA’s appeal of the Plan ofReorganization confirmation order, as discussed in (e) below. Briefing on both appeals was completed in August 2006and oral argument occurred in September 2006. On October 25, 2006,the Court of Appeals affirmed the District Court’s order approving thetermination of the Pilot Plan effective December 30, 2004. The parties mayseek rehearing or petition the Supreme Court for a writ of certiorari on orbefore November 9, 2006 (December 9, 2006 for PBGC) or January 23,2007, respectively. If the termination order was ultimately reversed onappeal, it could have a materially adverse effect on the Company’s financialperformance, should such determination result in the reversal of thetermination of one or more defined benefit pension plans.

(d)         *Pilot PlanNon-Qualified Pension Benefits.  *After the PBGC commenced itsinvoluntary termination proceeding and sought a December 30, 2004termination date, the Company suspended payment of non-qualified pensionbenefits under the Pilot Plan pending the setting of such a termination date. Inthe first quarter of 2005, the Bankruptcy Court required the Company tocontinue paying non-qualified pension benefits to retired pilots pending atermination in the involuntary termination proceeding, notwithstanding thepossibility that the Pilot Plan might be terminated retroactively to December 30,2004. Then, on October 6, 2005, despite its oral ruling terminating thePilot Plan, the Bankruptcy Court entered an order requiring the Company tocontinue paying non-qualified pension benefits until entry of a written order. However,United appealed that order and placed approximately $6 million necessary to paynon-qualified benefits for the month of October 2005 in a segregatedaccount. Following the entry of the Bankruptcy Court’s termination order on October 28,2005, United ceased paying non-qualified benefits. Subsequently, during thefirst quarter of 2006, the District Court dismissed the Company’s appeal of theBankruptcy Court’s October 6, 2005 order in light of its earlier decisionreversing the Bankruptcy Court’s termination order. The Company filed a noticeof appeal of the District Court’s ruling regarding the October 6, 2005 order tothe Court of Appeals. Briefing on the Company’s appeal was completed in August 2006and oral argument on this matter occurred in September 2006. On October 25,2006, the Court of Appeals reversed the District Court’s order dismissing forlack of ripeness the Company’s appeal of the Bankruptcy Court’s October 6,2005 order and remanded the case with instructions to reverse the BankruptcyCourt’s order compelling payment of non-qualified benefits for October 2005or later months. The parties may seek rehearing or petition the Supreme Courtfor a writ of certiorari on orbefore November 9, 2006 or January 23, 2007, respectively. On November 6,2006, ALPA filed a petition for rehearing on the Court of Appeals reversal ofthe October 6, 2005 order.

In March 2006,the Bankruptcy Court ruled that the Company was obligated to make payment ofall non-qualified pension benefits for the months of November and December 2005and January 2006. The Bankruptcy Court also ruled that the Company’sobligation to pay non-qualified pension benefits ceased as of January 31,2006. The Company filed a notice of appeal of the Bankruptcy Court’s ruling tothe District Court. URPBPA and ALPA also filed notices of appeal with respectto the Bankruptcy Court’s order, which were subsequently consolidated with theCompany’s appeal. United agreed with URPBPA and ALPA to pay the disputednon-qualified pension benefits for the months of November and December 2005and January 2006, an aggregate amount totaling approximately $17 million,into an escrow account. TheDistrict Court affirmed the Bankruptcy Court’s ruling in September 2006. TheCompany filed a notice of appeal of the District Court’s ruling to the Court ofAppeals. URPBPA and ALPA also appealed the 

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District Court’s decision. The Company subsequently filed a motion toconsolidate its appeal from the Bankruptcy Court’s October 2005non-qualified benefits order with the three appeals from the Bankruptcy Court’sMarch 2006 non-qualified benefits order. The Court of Appeals denied theCompany’s motion, but issued an order staying briefing on the March 2006non-qualified benefits order until further order of the Court of Appeals. Inlight of the Court of Appeals’ October 25, 2006 decision described above,the Company is reasonably optimistic of a successful outcome of its appeal inthis matter, although there can be no assurances that the ultimate outcome ofthis appeal will be favorable to the Company.

(e)          *URPBPAAppeal of Confirmation Order.* In January 2006, URPBPA filed a noticeand brief supporting an appeal of the order confirming the Plan ofReorganization. In February 2006, United filed a motion to dismiss theappeal based on the substantial consummation of the Plan of Reorganization. In June 2006,the District Court dismissed URPBPA’s appeal for lack of ripeness. Subsequently,URPBPA filed a notice of appeal of the decision to the Court of Appeals. In July 2006,the Court of Appeals granted United’s motion to consolidate URPBPA’s appealwith URPBPA and ALPA’s Pilot Plan termination appeal, as discussed in (c) above.Briefing on both appeals was completed in August 2006 and oral argument occurred in September 2006. On October 25, 2006, the Court of Appeals reversed the District Court’sorder dismissing for lack of ripeness URPBPA’s appeal of the confirmation orderand remanded the case to the District Court with instructions to affirm theconfirmation order. The parties may seek rehearing or petition the SupremeCourt for a writ of certiorari on or before November 9, 2006 or January 23,2007, respectively. If the confirmation order was ultimately reversed onappeal, it could have a materially adverse effect on the Company’s financialperformance.

***Claims ResolutionProcess.  ***Aspermitted under the bankruptcy process, the Debtors’ creditors filed proofs ofclaim with the Bankruptcy Court. Through the claims resolution process, theDebtors identified many claims which were disallowed by the Bankruptcy Courtfor a number of reasons, such as claims that were duplicative, amended orsuperseded by later filed claims, were without merit, or were otherwiseoverstated. Throughout the Chapter 11 proceedings, the Debtors resolved manyclaims through settlement or objections ordered by the Bankruptcy Court. TheDebtors will continue to settle claims and file additional objections with theBankruptcy Court.

With respect to unsecured claims, once a claim isdeemed to be valid, either through the Bankruptcy Court process or throughother means, the claimant is entitled to a distribution of UAL common stock. Pursuantto the terms of the Plan of Reorganization, 115 million shares of UAL commonstock have been authorized to satisfy valid unsecured claims. The Bankruptcy Court confirmed the Plan ofReorganization and established January 20, 2006 as the record date forpurposes of establishing the persons that are claimholders of record to receivedistributions. Approximately 107 million shares have been issued anddistributed to holders of valid unsecured claims between February 2, 2006,the first distribution date established in the Plan of Reorganization, and September 30,2006. As of September 30, 2006, approximately 45,000 valid unsecuredclaims aggregating to approximately $29 billion in claim value had received UALcommon shares to partially satisfy those claims. The approximate 8 millionremaining shares are being held in reserve to satisfy all of the remainingdisputed and undisputed unsecured claim values, once the remaining claimdisputes are resolved.

The Debtors’ current estimate of the probable range ofunsecured claims to be allowed by the Bankruptcy Court is between $29 and $30billion. Differences between claim amounts filed and the Debtors’ estimates arebeing investigated and will be resolved in connection with the claimsresolution process. However, there will be no further financial impact to theCompany associated with the settlement of such unsecured claims, as the holdersof all allowed unsecured claims will receive under the Plan of Reorganizationonly their pro rata share of the distribution of the 115 million shares of UALcommon stock, together with the previously-agreed issuance of certainsecurities.

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With respect to valid administrative and priorityclaims, pursuant to the terms of the Plan of Reorganization these claims willbe satisfied with cash. Many asserted administrative and priority claims stillremain unpaid, and the Debtors will continue to settle claims and fileobjections with the Bankruptcy Court to eliminate or reduce such claims. Anestimate of these claims has been accrued by the Successor Company based uponthe best available evidence of amounts to be paid. However, it should be notedthat the claims resolution process is uncertain and adjustments to claims estimatescould result in material adjustments to the Successor Company’s financialstatements in future periods.

Additionally, secured claims were deemed unimpairedunder the Plan of Reorganization, pursuant to which these claims were satisfiedby reinstatement of the obligations in the Successor Company, surrendering thecollateral to the secured party, or by making full payment in cash. However,certain disputes, the most significant of which are discussed in “*Significant Matters Remaining to be Resolved in Chapter 11 Cases,*”above, still remain with respect to the valuation of certain claims. Revisionsto the Company’s estimates of its liability for these claims due to the receiptof new information or final court rulings on these claims may result in materialfuture adjustments to the Company’s financial statements.

Thefollowing is a reconciliation of activity related to the administrative andpriority claims and other bankruptcy-related claim reserves for the SuccessorCompany for the eight months ended September 30, 2006:

| **(In millions)**              |   |   |   |
|-------------------------------------|--------|--------|--------|
| Balance at  February 1, 2006   |   | $      | 583    |   |
| Accruals                            |   | 11     |   |
| Accrual adjustments                 |   | (56    | )      |
| Payments                            |   | (181   | )      |
| Balance at  September 30, 2006 |   | $      | 357    |   |

 

***FinancialStatement Presentation.****  *The Company hasprepared the accompanying consolidated financial statements in accordance withSOP 90-7 and on a going-concern basis, which assumes continuity ofoperations, realization of assets and satisfaction of liabilities in theordinary course of business.

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SOP 90-7requires that the financial statements for periods subsequent to a Chapter 11filing separate transactions and events that are directly associated with thereorganization from the ongoing operations of the business. Accordingly, alltransactions (including, but not limited to, all professional fees, realizedgains and losses and provisions for losses) directly associated with thereorganization and restructuring of the business are reported separately in thefinancial statements as reorganization items, net. For the month ended January 31,2006 and the three and nine months ended September 30, 2005, thePredecessor Company recognized the following primarily non-cash reorganizationincome (expense) in its financial statements: 

| ** **                                   | ** ** | **Period from**                | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **January 1 to 31,** | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| **(In millions)**                       | ** ** | **2006**                            | ** ** | **2005**                          | ** ** | **2005**                          | ** ** |
| Discharge of  claims and liabilities         |       |                                | $          | 24,389                            |       |                              |       | $ | — |   |   |   | $ | — |   | [a] |
| Revaluation of  frequent flyer obligations   |       |                                | (2,399     | )                                 |       |                              | —     |   |   |   | — |   | [b] |
| Revaluation of  other assets and liabilities |       |                                | 2,111      |                              |       |                              | —     |   |   |   | — |   | [c] |
| Employee-related  charges                    |       |                                | (898       | )                                 |       |                              | (10        | ) |   |   | (23 | ) | [d] |
| Contract  rejection charges                  |       |                                | (421       | )                                 |       |                              | (34        | ) |   |   | (543 | ) | [e] |
| Professional fees                            |       |                                | (47        | )                                 |       |                              | (42        | ) |   |   | (134 | ) |   |
| Pension-related  charges                     |       |                                | (14        | )                                 |       |                              | —     |   |   |   | (1,045 | ) | [f] |
| Aircraft claim  charges                      |       |                                | —     |                              |       |                              | (1,689     | ) |   |   | (2,156 | ) | [g] |
| Impairment on  lease certificates            |       |                                | —     |                              |       |                              | (3         | ) |   |   | (3 | ) | [h] |
| Aircraft  refinance adjustments              |       |                                | —     |                              |       |                              | 59         |   |   |   | 59 |   | [h] |
| Other                                        |       |                                | (12        | )                                 |       |                              | 10         |   |   |   | 20 |   |   |
|                                         |       |                                | $          | 22,709                            |       |                              |       | $ | (1,709 | ) |   |   | $ | (3,825 | ) |   |

 

(a)           The discharge of claims and liabilities primarilyrelates to those unsecured claims arising during the bankruptcy process, suchas those arising from the termination and settlement of the Company’s U.S.defined benefit pension plans and other employee claims; aircraft-relatedclaims, such as those arising as a result of aircraft rejections; otherunsecured claims due to the rejection or modification of executory contracts,unexpired leases and regional carrier contracts; and claims associated withcertain municipal bond obligations based upon their rejection, settlement orthe estimated impact of the outcome of pending litigation. In accordance withthe Plan of Reorganization, the Company discharged its obligations to unsecuredcreditors in exchange for the distribution of 115 million new UAL common sharesand the issuance of certain other securities. Accordingly, the Companyrecognized a non-cash reorganization gain of $24.4 billion.

(b)          The Company revalued its Mileage Plus frequent flyerobligations at fair value as a result of fresh-start reporting, which resultedin a $2.4 billion non-cash reorganization charge.

(c)           In accordance with fresh-start reporting, the Companyrevalued its assets at their estimated fair value and liabilities at estimatedfair value or the present value of amounts to be paid. This resulted in anon-cash reorganization gain of $2.1 billion, primarily as a result of newlyrecognized intangible assets, offset partly by reductions in the fair value oftangible property and equipment.

(d)          In January 2006, the Company recorded the valueof the deemed claim that the salaried and management group received uponconfirmation of the Plan of Reorganization. The deemed claim was based upon thecost savings provided by this employee group during the bankruptcy process.

(e)           Contract rejection charges are non-cash costs thatinclude estimated claim values resulting from the Company’s rejection ornegotiated modification of certain contractual obligations such as executorycontracts, unexpired leases and regional carrier contracts.

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(f)             In the first and second quarters of 2005, the Companyrecognized non-cash pension curtailment charges of $433 million and $207million, respectively, associated with actions taken by the PBGC toinvoluntarily terminate United Air Lines, Inc. Ground Employees’Retirement Plan (the “Ground Employees Plan”), United Airlines Flight AttendantDefined Benefit Pension Plan (the “Flight Attendant Plan”) and United AirlinesManagement, Administrative and Public Contact Defined Benefit Pension Plan (“MAPCPlan”). The PBGC was appointed trustee for the Ground Employees Plan effective May 23,2005 and the MAPC Plan and the Flight Attendant Plan effective June 30,2005, assuming all rights and powers over the pension assets and obligations ofeach plan. Upon termination and settlement of these plans in the second quarterof 2005, the Company recognized a non-cash net settlement loss of approximately$395 million in accordance with SFAS No. 88, “*Employer’sAccounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits”*(“SFAS 88”). In addition, the Companyrecognized a non-cash settlement loss in the amount of $10 million for thetermination of the non-qualified supplemental retirement plan for managementemployees who have benefits under the tax-qualified pension plan that cannot bepaid due to Internal Revenue Code limits on compensation or benefits.

(g)           Aircraft claim charges include the Company’s estimateof claims incurred as a result of the rejection of certain aircraft leases andreturn of aircraft as part of the bankruptcy process, together with certainclaims resulting from the modification of other aircraft financings inbankruptcy.

(h)          In accordance with the term sheets reached with thePublic Debt Group, the Company agreed to cancel certain 1997-1 EETCcertificates that were held by a related party. Accordingly, the Companyrecorded a non-cash charge in the amount of $3 million for principal andinterest on such certificates. In addition, the Company recorded adjustmentsretroactively for aircraft rent and interest expense in the amount of $59million to reflect the revised financing terms.

The Condensed Statements of Consolidated FinancialPosition (Unaudited) distinguish pre-petition liabilitiessubject to compromise from both those pre-petition liabilities that are notsubject to compromise and from post-petition liabilities. Liabilities subjectto compromise were reported at the amounts expected to be allowed by the BankruptcyCourt, even if they were settled for lesser amounts.

At December 31,2005, United had liabilities subject to compromise consisting of the following:

| (In millions)                                     |   |   |   |   |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|
| Employee claims  and deemed claims                     |   | $      | 18,007 |   |
| Long-term debt,  including accrued interest            |   | 6,528  |   |
| Aircraft-related  obligations and deferred gains       |   | 6,031  |   |
| Capital lease  obligations, including accrued interest |   | 1,631  |   |
| Municipal bond  obligations and claims                 |   | 1,344  |   |
| Accounts payable                                       |   | 260    |   |
| Intercompany  accounts payable and loans               |   | 214    |   |
| Early termination  fees                                |   | 162    |   |
| Other                                                  |   | 883    |   |
|                                                   |   | $      | 35,060 |   |

 

***DIPFinancing.******  ***At January 31,2006, the Company’s outstanding balance of its DIP Financing was $1.2 billion.   On the Effective Date, the proceeds from theCredit Facility were drawn and used to repay the DIP Financing. For furtherdetails on the Credit Facility, see Note 9, “Debt Obligations.”

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***Fresh-StartReporting.******  ***Uponemergence from its Chapter 11 proceedings on February 1, 2006, the Companyadopted fresh-start reporting in accordance with SOP 90-7. The Company’s emergence from Chapter 11resulted in a new reporting entity with no retained earnings or accumulateddeficit. Accordingly, the Company’s consolidated financial statements forperiods prior to February 1, 2006 are not comparable to consolidatedfinancial statements presented on or after February 1, 2006.

Fresh-start reporting reflects the value of theCompany as determined in the confirmed Plan of Reorganization. Underfresh-start reporting, the Company’s asset values are remeasured using fair value, and are allocated inconformity with Statement of Financial Accounting Standards No. 141, “*Business Combinations*” (“SFAS 141”). The excess ofreorganization value over the fair value of tangible and identifiableintangible assets is recorded as goodwill in the accompanying CondensedStatements of Consolidated Financial Position (Unaudited). In addition,fresh-start reporting also requires that all liabilities, other than deferredtaxes, should be stated at fair value or at the present values of the amountsto be paid using appropriate market interest rates. Deferred taxes aredetermined in conformity with Statement of Financial Accounting Standards No. 109,“*Accounting for Income Taxes*” (“SFAS 109”).

Estimates of fairvalue represent the Company’s best estimates based on independent appraisalsand valuations and, where the foregoing have not yet been completed or are notavailable, industry data and trends and by reference to relevant market ratesand transactions. The foregoing estimates and assumptions are inherentlysubject to significant uncertainties and contingencies beyond the control ofthe Company. Accordingly, we cannot provide assurance that the estimates,assumptions, and values reflected in the valuations will be realized, andactual results could vary materially. In accordance with SFAS 141, thepreliminary allocation of the reorganization value is subject to additionaladjustment within one year after emergence from bankruptcy when additional orimproved information on asset and liability valuations becomes available. TheCompany expects that adjustments to recorded fair values may include thoserelating to:

·       Completionof valuation reports associated with long—lived tangible and newly identifiedintangible assets, and certain liabilities, such as the Mileage Plus frequentflyer liability, and debt discounts which may change based on the considerationof new or improved information by the Company and its valuation consultants;

·       Deferredtax assets and liabilities, which may be adjusted based upon additionalinformation, including adjustments to fair value estimates of underlying assetsor liabilities and the determination of cancellation of indebtedness income;and

·       Adjustmentsto recorded fair values and deferred tax assets and liabilities which couldchange the amount of recorded goodwill, as well as the allocation of suchgoodwill to reportable segments.

To facilitate the calculation of the enterprise valueof the Successor Company, the Company developed a set of financial projections.Based on these financial projections and with the assistance of financialadvisors, the equity value was determined by the Company, using variousvaluation methods, including (i) a comparison of the Company and itsprojected performance to the market values of comparable companies; (ii) areview and analysis of several recent transactions of companies in similarindustries to the Company; and (iii) a calculation of the present value ofthe future cash flows of the Company under its projections.

The estimated enterprise value, and correspondingequity value, is highly dependent upon achieving the future financial resultsset forth in the projections as well as the realization of certain otherassumptions. The estimated equity value of UAL was calculated to beapproximately $1.9 billion. After including certain adjustments to reflect thefair value of the assets and liabilities of United and certain related partytransactions, the equity value of the Company was calculated to be approximately$2.0 billion. The estimates and assumptions made in this valuation areinherently subject to significant uncertainties 

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and the resolution ofcontingencies beyond the reasonable control of the Company. Accordingly, therecan be no assurance that the estimates, assumptions, and amounts reflected inthe valuations will be realized, and actual results could vary materially.

In accordance with SOP 90-7, the Company wasrequired to adopt on February 1, 2006 all accounting guidance that wasgoing to become effective within the subsequent twelve-month period. See Note2(m), “Summary of Significant Accounting Policies - New AccountingPronouncements.”

Thefollowing fresh-start balance sheet illustrates the financial effects ofthe implementation of the Plan of Reorganization and the adoption offresh-start reporting. In addition, it reflects the effect of the consummation of the transactionscontemplated in the Plan of Reorganization, including settlement of variousliabilities, issuance of certain UAL securities, incurrence of newindebtedness, repayment of old indebtedness, and other cash payments.

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As aresult of the adoption of fresh-start reporting, the Company’s financialstatements on or after February 1, 2006 are not comparable with itspre-emergence financial statements because they are, in effect, those of a newentity. The effects of the Plan of Reorganization and fresh-start reporting onthe Company’s Condensed Statements of Consolidated Financial Position(Unaudited) are as follows (in millions, except shares): 

|                                                 |       | Fresh-Start Adjustments |       |
|------------------------------------------------------|------------|------------------------------|------------|
|                                                 |       | Predecessor                  |       | (a)  Settlement  of  Unsecured  Claims |   | (b)  Reinstatement  of  Liabilities |   | (c)  Revaluation  of Assets  and  Liabilities |   | Successor |   |
| **Assets**                                           | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current assets:**                                  | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash  and cash equivalents                           |       |                         | $          | 1,596 |   |   |   | $ | — |   |   |   | $ | — | ** ** |   |   | $ | — |   |   |   | $ | 1,596 | ** ** |   |
| Restricted  cash                                     |       |                         | 818        |   |   |   | — |   |   |   | — | ** ** |   |   | 1 |   |   |   | 819 | ** ** |   |
| Short-term  investments                              |       |                         | 75         |   |   |   | — |   |   |   | — | ** ** |   |   | — |   |   |   | 75 | ** ** |   |
| Receivables,  net                                    |       |                         | 928        |   |   |   | — |   |   |   | — | ** ** |   |   | 10 |   |   |   | 938 | ** ** |   |
| Prepaid  fuel                                        |       |                         | 280        |   |   |   | — |   |   |   | — | ** ** |   |   | — |   |   |   | 280 | ** ** |   |
| Receivables  from related parties                    |       |                         | 204        |   |   |   | — |   |   |   | — | ** ** |   |   | (57 | ) |   |   | 147 | ** ** |   |
| Aircraft  fuel, spare parts and supplies, net        |       |                         | 195        |   |   |   | — |   |   |   | — | ** ** |   |   | (24 | ) |   |   | 171 | ** ** |   |
| Deferred  income taxes                               |       |                         | —     |   |   |   | — |   |   |   | — | ** ** |   |   | 112 |   |   |   | 112 | ** ** |   |
| Prepaid  expenses and other                     |       |                         | 498        |   |   |   | — |   |   |   | — | ** ** |   |   | 107 |   |   |   | 605 | ** ** |   |
|                                                 |       |                         | 4,594      |   |   |   | — |   |   |   | — | ** ** |   |   | 149 |   |   |   | 4,743 | ** ** |   |
| **Operating  property and equipment:**               | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Owned—                                          |       |                         |       |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |
| Flight  equipment                                    |       |                         | 13,446     |   |   |   | — |   |   |   | — | ** ** |   |   | (4,823 | ) |   |   | 8,623 | ** ** |   |
| Advances  on flight equipment                        |       |                         | 116        |   |   |   | (25 | ) |   |   | — | ** ** |   |   | — |   |   |   | 91 | ** ** |   |
| Other  property and equipment                        |       |                         | 3,840      |   |   |   | — |   |   |   | — | ** ** |   |   | (2,547 | ) |   |   | 1,293 | ** ** |   |
|                                                 |       |                         | 17,402     |   |   |   | (25 | ) |   |   | — | ** ** |   |   | (7,370 | ) |   |   | 10,007 | ** ** |   |
| Less—Accumulated  depreciation and amortization |       |                         | (6,156     | ) |   |   | — |   |   |   | — | ** ** |   |   | 6,156 |   |   |   | — | ** ** |   |
|                                                 |       |                         | 11,246     |   |   |   | (25 | ) |   |   | — | ** ** |   |   | (1,214 | ) |   |   | 10,007 | ** ** |   |
| Capital  leases                                      |       |                         |       |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |
| Flight  equipment                                    |       |                         | 2,581      |   |   |   | — |   |   |   | — | ** ** |   |   | (1,145 | ) |   |   | 1,436 | ** ** |   |
| Other  property and equipment                        |       |                         | 84         |   |   |   | — |   |   |   | — | ** ** |   |   | (69 | ) |   |   | 15 | ** ** |   |
|                                                 |       |                         | 2,665      |   |   |   | — |   |   |   | — | ** ** |   |   | (1,214 | ) |   |   | 1,451 | ** ** |   |
| Less—Accumulated  amortization                  |       |                         | (747       | ) |   |   | — |   |   |   | — | ** ** |   |   | 747 |   |   |   | — | ** ** |   |
|                                                 |       |                         | 1,918      |   |   |   | — |   |   |   | — | ** ** |   |   | (467 | ) |   |   | 1,451 | ** ** |   |
|                                                 |       |                         | 13,164     |   |   |   | (25 | ) |   |   | — | ** ** |   |   | (1,681 | ) |   |   | 11,458 | ** ** |   |
| **Other  assets:**                                   | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Restricted  cash                                     |       |                         | 315        |   |   |   | — |   |   |   | — | ** ** |   |   | — |   |   |   | 315 | ** ** |   |
| Investments                                          |       |                         | 25         |   |   |   | — |   |   |   | — | ** ** |   |   | 87 |   |   |   | 112 | ** ** |   |
| Goodwill                                             |       |                         | 2          |   |   |   | 14 |   |   |   | — | ** ** |   |   | 2,787 |   |   |   | 2,803 | ** ** |   |
| Intangibles,  net                                    |       |                         | 361        |   |   |   | — |   |   |   | — | ** ** |   |   | 2,801 |   |   |   | 3,162 | ** ** |   |
| Pension  assets                                      |       |                         | 10         |   |   |   | — |   |   |   | — | ** ** |   |   | (9 | ) |   |   | 1 | ** ** |   |
| Aircraft  lease deposits                             |       |                         | 492        |   |   |   | — |   |   |   | — | ** ** |   |   | — |   |   |   | 492 | ** ** |   |
| Prepaid  rent                                        |       |                         | 66         |   |   |   | — |   |   |   | — | ** ** |   |   | (58 | ) |   |   | 8 | ** ** |   |
| Long-term  related party note receivable             |       |                         | —     |   |   |   | — |   |   |   | — | ** ** |   |   | 201 |   |   |   | 201 | ** ** |   |
| Other,  net                                          |       |                         | 554        |   |   |   | — |   |   |   | — | ** ** |   |   | 168 |   |   |   | 722 | ** ** |   |
| **Total other assets**                               |       |                         | 1,825      |   |   |   | 14 |   |   |   | — | ** ** |   |   | 5,977 |   |   |   | 7,816 | ** ** |   |
| **Total  assets**                                    |       |                         | $          | 19,583 |   |   |   | $ | (11 | ) |   |   | $ | — | ** ** |   |   | $ | 4,445 |   |   |   | $ | 24,017 | ** ** |   |

 

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|                                                        |       | Fresh-Start Adjustments |       |
|-------------------------------------------------------------|------------|------------------------------|------------|
|                                                        |       | Predecessor                  |       | (a)  Settlement  of  Unsecured  Claims |   | (b)  Reinstatement  of Liabilities |   | (c)  Revaluation of  Assets and  Liabilities |   | Successor |   |
| **Liabilities &  Stockholder’s Equity**       | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current liabilities:                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Long-term debt maturing  within one year                    |       |                         | $          | 13 |   |   |   | $ | — |   |   |   | $ | 519 |   |   |   | $ | — |   |   |   | $ | 532 | ** ** |   |
| Advanced purchase of  miles                                 |       |                         | 686        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 686 | ** ** |   |
| Current obligations under  capital leases                   |       |                         | 20         |   |   |   | — |   |   |   | 77 |   |   |   | — |   |   |   | 97 | ** ** |   |
| Advance ticket sales                                        |       |                         | 1,679      |   |   |   | — |   |   |   | — |   |   |   | (14 | ) |   |   | 1,665 | ** ** |   |
| Accounts payable                                            |       |                         | 618        |   |   |   | — |   |   |   | — |   |   |   | 10 |   |   |   | 628 | ** ** |   |
| Accrued salaries, wages  and benefits                       |       |                         | 927        |   |   |   | 37 |   |   |   | — |   |   |   | — |   |   |   | 964 | ** ** |   |
| Payables to related  parties                                |       |                         | 464        |   |   |   | — |   |   |   | — |   |   |   | (216 | ) |   |   | 248 | ** ** |   |
| Fuel purchase  commitments                                  |       |                         | 280        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 280 | ** ** |   |
| Mileage Plus deferred  revenue                              |       |                         | 709        |   |   |   | — |   |   |   | — |   |   |   | 350 |   |   |   | 1,059 | ** ** |   |
| Other                                                       |       |                         | 566        |   |   |   | 93 |   |   |   | 546 |   |   |   | 3 |   |   |   | 1,208 | ** ** |   |
|                                                        |       |                         | 5,962      |   |   |   | 130 |   |   |   | 1,142 |   |   |   | 133 |   |   |   | 7,367 | ** ** |   |
| Long-term debt :                                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| DIP Financing                                               |       |                         | 1,157      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,157 | ** ** |   |
| Other                                                       |       |                         | 141        |   |   |   | 1,130 |   |   |   | 5,115 |   |   |   | (140 | ) |   |   | 6,246 | ** ** |   |
|                                                        |       |                         | 1,298      |   |   |   | 1,130 |   |   |   | 5,115 |   |   |   | (140 | ) |   |   | 7,403 | ** ** |   |
| Long-term obligations  under capital leases                 |       |                         | 101        |   |   |   | — |   |   |   | 1,209 |   |   |   | (35 | ) |   |   | 1,275 | ** ** |   |
| **Other  liabilities and deferred credits:**                | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Deferred pension  liability                                 |       |                         | 95         |   |   |   | — |   |   |   | — |   |   |   | 29 |   |   |   | 124 | ** ** |   |
| Postretirement benefit  liability                           |       |                         | 1,918      |   |   |   | — |   |   |   | — |   |   |   | 66 |   |   |   | 1,984 | ** ** |   |
| Deferred income taxes                                       |       |                         | 369        |   |   |   | — |   |   |   | — |   |   |   | 228 |   |   |   | 597 | ** ** |   |
| Mileage Plus deferred  revenue                              |       |                         | 276        |   |   |   | — |   |   |   | — |   |   |   | 2,061 |   |   |   | 2,337 | ** ** |   |
| Other                                                       |       |                         | 529        |   |   |   | — |   |   |   | 79 |   |   |   | 18 |   |   |   | 626 | ** ** |   |
|                                                        |       |                         | 3,187      |   |   |   | — |   |   |   | 79 |   |   |   | 2,402 |   |   |   | 5,668 | ** ** |   |
| Liabilities subject to  compromise                          |       |                         | 36,379     |   |   |   | (27,964 | ) |   |   | (7,545 | ) |   |   | (870 | ) |   |   | — | ** ** |   |
| Parent company mandatorily  convertible preferred stock     |       |                         | —     |   |   |   | 352 |   |   |   | — |   |   |   | — |   |   |   | 352 | ** ** |   |
| **Stockholder’s  equity:**                             | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Serial preferred stock                                      |       |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — | ** ** |   |
| ESOP preferred stock                                        |       |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — | ** ** |   |
| Common stock at par                                         |       |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — | ** ** |   |
| Additional capital  invested                                |       |                         | 4,213      |   |   |   | 1,952 |   |   |   | — |   |   |   | (4,213 | ) |   |   | 1,952 | ** ** |   |
| Retained deficit                                            |       |                         | (30,284    | ) |   |   | 24,389 |   |   |   | — |   |   |   | 5,895 |   |   |   | — | ** ** |   |
| Receivables from  affiliates                                |       |                         | (1,237     | ) |   |   | — |   |   |   | — |   |   |   | 1,237 |   |   |   | — | ** ** |   |
| Accumulated other  comprehensive loss                       |       |                         | (36        | ) |   |   | — |   |   |   | — |   |   |   | 36 |   |   |   | — | ** ** |   |
|                                                        |       |                         | (27,344    | ) |   |   | 26,341 |   |   |   | — |   |   |   | 2,955 |   |   |   | 1,952 | ** ** |   |
| **Total liabilities & stockholders’  equity** |       |                         | $          | 19,583 |   |   |   | $ | (11 | ) |   |   | $ | — |   |   |   | $ | 4,445 |   |   |   | $ | 24,017 | ** ** |   |

 

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(a)           *Settlementof Unsecured Claims.*   Thiscolumn reflects a discharge of $28.0 billion of liabilities subject tocompromise pursuant to the terms of the Plan of Reorganization. Along withother creditor and employee claims incurred through the bankruptcy proceedings(i.e., by the rejection of aircraft, executory contracts, etc.), dischargedliabilities include claims related to termination of the Debtors’ definedbenefit pension plans. Pursuant to the Plan of Reorganization, the unsecuredcreditors will receive 115 million UAL common shares in satisfaction of suchclaims, together with certain debt securities and preferred stock. The Companyrecorded a $24.4 billion non-cash reorganization gain on the discharge ofunsecured claims net of newly-issued securities. See above “VoluntaryReorganization Under Chapter 11—Financial Statement Presentation” and Note 9, “DebtObligations” for further details.

(b)          *Reinstatement of Liabilities.  *This column reflects thereinstatement of certain secured liabilities pursuant to the terms of the Planof Reorganization. As a result of the reinstatement of liabilities, the Companyreclassified $7.5 billion of liabilities subject to compromise.

·        $7.1billion represents the reinstatement of secured debt plus accrued interest.

·        $0.4billion represents accruals for administrative and priority payments,reinstatement of certain municipal bond obligations, and other accruals ofpayments required under the Plan of Reorganization.

(c)           *Revaluation of Assets and Liabilities*.   Fresh-startadjustments are made to reflect asset values at their estimated fair value andliabilities at estimated fair value or the present value of amounts to be paid,including:

·        Recognitionof additional estimated fair value of $2.8 billion for international routeauthorities, airport slots, trade names and other separately-identifiableintangible assets,

·        Recognitionof additional estimated fair value of $2.4 billion for the Mileage Plusfrequent flyer liability,

·        Adjustmentsof $1.3 billion to reduce the values of operating property and equipment totheir estimated fair market value,

·        Theelimination of the Predecessor Company’s equity accounts, and establishment ofthe opening equity of the Successor Company,

·        Adjustmentsof $0.4 billion to reduce recorded flight equipment net book value as a resultof refinancing certain aircraft from mortgage and capital lease financing tooperating lease financing, and

·        Netchanges in deferred tax assets and liabilities, together with othermiscellaneous adjustments.

Additionally, goodwill of $2.8 billion was recorded toreflect the excess of the Successor Company’s reorganization value over theestimated fair value of tangible and identifiable intangible assets. During theeight months ended September 30, 2006, goodwill was increased by $47million as a result of net adjustments in the fair values of certain assets andliabilities in accordance with SFAS 141. Additional changes in the fair valuesof these assets and liabilities from the current estimated values, as well aschanges in other assumptions could significantly impact the reported value ofgoodwill. Accordingly, there can be no assurance that the estimates,assumptions, and values reflected in the valuations will be realized, andactual results could vary materially.

***Post-Emergence Items.******  ***Certain additional SuccessorCompany material transactions occurred on or after February 2, 2006 andhave been reflected in the accompanying Condensed Statements of ConsolidatedFinancial Position (Unaudited) as of September 30, 2006.

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*Releaseof Segregated Funds.*   The Company reclassified$271 million for the release of cash previously restricted by a certain creditcard processor. Additionally, $200 million of cash segregated for the paymentof certain tax liabilities and recorded as other current assets prior to theEffective Date, was released and reclassified to unrestricted cash.

*CreditFacility Financing Transactions.*   On theEffective Date, the Company received $1.4 billion in net proceeds from theCredit Facility, consisting of borrowings of $2.65 billion under the CreditFacility which includes $200 million of revolving credit, and the simultaneousrepayment of the Company’s $1.2 billion DIP Financing. For further details, seeNote 9, “Debt Obligations.”

*SFO Municipal BondsSecurity Interest.**  *In thethird quarter of 2006, the Company recorded a special item of $30 million as abenefit to income from continuing operations to reduce the Company’s recordedobligation for the SFO municipal bonds to the amount the Company now estimatesis probable to be allowed by the Bankruptcy Court, in accordance with AICPAPractice Bulletin 11, “*Accounting forPreconfirmation Contingencies in Fresh-Start Reporting,*” (“PracticeBulletin 11”). See Note 17, “Special Items” for further information.

**(2)   Summaryof Significant Accounting Policies **

Described below are the Successor Company’ssignificant accounting policies which, in some cases, materially differ fromthe policies of the Predecessor Company that were disclosed in United’s mostrecent Annual Report filed on Form 10-K for the year 2005. These policychanges are primarily a result of the adoption of fresh-start reporting inaccordance with SOP 90-7.

(a)           ***Basisof Presentation***—United is a wholly-owned subsidiary of UAL. Theconsolidated financial statements include the accounts of United and all of ourmajority-owned affiliates. All significant intercompany transactions areeliminated. Certain prior year amounts have been reclassified to conform to thecurrent year’s presentation.

Upon emergence from its Chapter 11 proceedings, theCompany adopted fresh-start reporting in accordance with SOP 90-7 as of February 1,2006. The Company’semergence from reorganization resulted in a new reporting entity with noretained earnings or accumulated deficit as of February 1, 2006. Accordingly,the Company’s consolidated financial statements for periods prior to February 1,2006 are not comparable to consolidated financial statements presented on orafter February 1, 2006.

(b)          ***Useof Estimates***—The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

Under fresh-start reporting, the Company’s assetvalues are remeasured using fair value, which is allocated using the purchasemethod of accounting in conformity with SFAS 141. In addition, fresh-startreporting also requires that all liabilities, other than deferred taxes, shouldbe stated at fair value, or at the present values of the amounts to be paidusing appropriate market interest rates. Deferred taxes are determined inconformity with SFAS 109.

Estimates of fair value represent the Company’s bestestimates based on appraisals and valuations and, where the foregoing have notyet been completed or are not available, industry data and trends and byreference to relevant market rates and transactions. The foregoing estimatesand assumptions are inherently subject to significant uncertainties andcontingencies beyond the control of the Company. Accordingly, the Companycannot provide assurance that the estimates, assumptions, and values reflectedin the valuations will be realized, and actual results could vary materially. Inaccordance with SFAS 141, the preliminary allocation of the fair value ofassets and liabilities is subject to additional adjustment within one yearafter emergence from bankruptcy.

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(c)           ***AirlineRevenues***—The value of unused passenger tickets and miscellaneouscharge orders (“MCO’s”) are included in current liabilities as advance ticketsales. United records passenger ticket sales as operating revenues when thetransportation is provided or when the ticket expires. Non-refundable ticketsgenerally expire on the date of the intended flight, unless the date isextended by notification from the customer on or before the intended flightdate. Refundable tickets expire after one year. MCO’s are stored valuedocuments that are either exchanged for a passenger ticket or refundedsubsequent to issuance. United records an estimate of MCO’s that will not beexchanged or refunded as revenue ratably over the validity period based onhistorical results. Due to complex industry pricing structures, refund andexchange policies, and interline agreements with other airlines, certainamounts are recognized as revenue using estimates both as to the timing ofrecognition and the amount of revenue to be recognized. These estimates arebased on the evaluation of actual historical results. United recognizes cargoand mail revenue as service is provided.

(d)          ***Cashand Cash Equivalents, Short-Term Investments and Restricted Cash****—*Cash in excess of operating requirements is invested inshort-term, highly liquid, income-producing investments. Investments with amaturity of three months or less on their acquisition date are classified ascash and cash equivalents. Other investments are classified as short-terminvestments. Investments classified as held-to-maturity are stated at cost,which approximates market due to their short-term maturities. Investments indebt securities classified as available-for-sale are stated at fair value. Thegains or losses from sales of available-for-sale securities are included ininterest income.

At September 30, 2006, the Successor Company’sinvestments in debt securities classified as held-to-maturity included $4.0billion recorded in cash and cash equivalents and $2 million recorded inshort-term investments. At December 31, 2005, the Predecessor Company’sinvestments in debt securities included $1.6 billion classified asheld-to-maturity and recorded in cash and cash equivalents and $77 millionclassified as available-for-sale and recorded in short-term investments.

The Successor Company had $308 million classified asshort-term restricted cash at September 30, 2006 while the PredecessorCompany had $643 million in short-term restricted cash at December 31,2005, representing security for workers’ compensation obligations, securitydeposits for airport leases and reserves with institutions that process ourcredit card ticket sales. In addition, the Successor Company had $520 million,and the Predecessor Company had $285 million, in long-term restricted cash at September 30,2006 and December 31, 2005, respectively.

(e)           ***AircraftFuel, Spare Parts and Supplies***—In accordance with fresh-startreporting, aircraft fuel, maintenance and operating supplies were revalued toestimated fair values on February 1, 2006. Flight equipment spare partswere also stated at estimated fair value at the Effective Date. The SuccessorCompany records fuel, maintenance, operating supplies, and aircraft spare partsat cost when acquired, and provides an obsolescence allowance for aircraftspare parts.

(f)             ***OperatingProperty and Equipment***—Owned operating property and equipment,and equipment under capital leases, were stated at fair value as ofFebruary 1, 2006. The Successor Company records additions to ownedoperating property and equipment at cost when acquired. Property under capitalleases, and the related obligation for future lease payments, is recorded at anamount equal to the initial present value of those lease payments.

Depreciation and amortization of owned depreciableassets is based on the straight-line method over the assets’ estimated servicelives. Leasehold improvements are amortized over the remaining term of thelease, including estimated facility renewal options when renewal is reasonablyassured at key airports, or the estimated service life of the related asset,whichever is less. Aircraft are depreciated to estimated salvage values,generally over lives of 27 to 30 years; buildings are depreciated over lives of25 to 45 years; and other property and equipment are depreciated over lives of4 to 15 years.

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Properties under capital leases are amortized on thestraight-line method over the life of the lease or, in the case of certainaircraft, over their estimated service lives. Lease terms are 9 to 17 years foraircraft and 40 years for buildings. Amortization of capital leases is includedin depreciation and amortization expense.

Maintenance andrepairs, including the cost of minor replacements, are charged to maintenanceexpense as incurred, except for costs incurred under our power-by-the-hourengine maintenance agreements, which are expensed based upon the number ofhours flown. Costs of additions to and renewals of units of property arecapitalized as property and equipment additions.

(g)           ***MileagePlus Awards***—As a result of the adoption of fresh-start reporting,the Mileage Plus frequent flyer obligation was revalued at the Effective Dateto reflect the estimated fair value of miles to be redeemed in the future. Outstandingmiles earned by flying United or its partner carriers were revalued using aweighted-average per-mile equivalent ticket value, taking into account suchfactors as differing classes of service and domestic and international ticketitineraries, which can be reflected in awards chosen by Mileage Plus members.

The Successor Company also elected to change itsaccounting policy as of the Effective Date from an incremental cost basis to adeferred revenue model, to measure its obligation for miles to be redeemedbased upon the equivalent ticket value of similar fares on United or amountspaid to other Star Alliance partners, as applicable. United’s policy for thecancellation of miles is to deactivate Mileage Plus customer accounts for whichthere has been no activity for three consecutive years. The Company recognizesrevenue from the breakage of miles in such deactivated accounts by amortizingsuch breakage over the 36-month validity period.

At September 30, 2006, the Successor Company hadrecorded deferred revenue for its frequent flyer program of $3.5 billionrelated to award travel, of which $1.0 billion was current. At December 31,2005, the Predecessor Company had recorded deferred revenue totaling $923million, of which $681 million was current.

United has anagreement with Chase Bank USA N.A. (“Chase”) under which United sells miles toChase, which Chase allocates to its customers for frequent flyer miles earnedby Mileage Plus members for making purchases using the Mileage Plus Visa Card. Theagreement requires certain guaranteed payments. In addition, miles that havebeen purchased by Chase, but that have not been earned or allocated tocustomers are classified as advanced purchase of miles in our CondensedConsolidated Statements of Financial Position (Unaudited). As part ofUnited’s restructuring and emergence from bankruptcy, the Company providedChase with a junior lien upon, and security interest in, all collateral pledgedor in which security interest is granted, as security in connection with theCredit Facility. The security interest is junior to other Credit Facility debt,and will apply to no more than $850 million in total advance purchases at anytime. See Note 15, “Advanced Purchase of Miles” for additional information.

(h)          ***UnitedExpress***—United has capacity and prorate agreements under whichindependent regional carriers, flying under the United Express name, connectpassengers to other United Express and/or United flights (the latter of whom wealso refer to as “mainline” operations, to distinguish them from United Expressregional operations).

United Express operating expenses include bothallocated and direct costs. Direct costs represent expenses that arespecifically and exclusively related to United Express flying activities, suchas capacity agreement payments, commissions, booking fees, fuel expenses anddedicated staffing. Allocated costs represent United Express’ portion of sharedexpenses and include charges for items such as airport operating costs,reservation-related costs, credit card discount fees and facility rents. 

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For each of these expense categories, we estimate UnitedExpress’ portion of total expense and allocate the applicable portion ofexpense to the United Express carrier.

Additionally, contractual payments made to UnitedExpress regional carriers include payments for aircraft operated by them aspart of the United Express capacity agreements. UAL has the right toexclusively operate and direct the operations of these aircraft, andaccordingly the minimum future lease payments for these United Express-operatedaircraft are included in our lease obligations as described in Note 13, “LeaseObligations.”

The Company recognizes revenue as flown on a net basisfor the United Express prorate carriers.

United has calloptions on 152 regional jet aircraft currently being operated by certain UnitedExpress carriers. Generally, these options are intended to allow United tosecure control over regional jets used for United Express routes only when aUnited Express carrier contract is terminated early due to performance issues. Theoptions would allow United to have an alternative to replace capacity that waspreviously provided by a cancelled United Express contract. The conditionsunder which United can exercise these call options vary by contract, butinclude operational performance metrics and in some cases the financialstanding of one or both of the parties. At this time, none of the call optionsare exercisable.

(i)             ***Advertising***—Advertising costs, which are included in otheroperating expenses, are expensed as incurred. Upon adoption of fresh-startreporting, the Company changed its accounting policy to record earned MileagePlus mileage to the deferred revenue basis. Prior to emergence from bankruptcy,the Predecessor Company recorded advertising expense related to outstandingflight miles that were eligible for a mileage award on an incremental costbasis.

(j)              ***Intangibles***—Goodwillrepresents the excess of the reorganization value of the Successor Company overthe fair value of tangible assets and identifiable intangible assets resultingfrom the application of SOP 90-7. Identifiable intangible assets consistprimarily of international route authorities, trade-names, the Mileage Pluscustomer database, airport slots and gates, certain favorable contracts, hubs,patents, and other items. Most airport slots and gates, international routeauthorities and trade-names are indefinite-lived and, as such, are notamortized. Instead, these indefinite-lived intangible assets are reviewed forimpairment annually or more frequently if events or circumstances indicate thatthe asset may be impaired. Definite-lived intangible assets are amortized on astraight-line basis over the estimated lives of the related assets except forthe Mileage Plus customer database and certain other customer relationshipswhich are included in the contracts category in the table below. The MileagePlus customer database is amortized on an accelerated basis utilizing cashflows correlating to the expected attrition rate of the Mileage Plus database. Theother customer relationships are amortized in a manner consistent with thetiming and amount of revenues that the Company expects to generate from thesecustomer relationships.

In accordance with Statement ofFinancial Accounting Standards No. 142, “*Goodwill andOther Intangible Assets*” (“SFAS 142”), the Company will apply a fairvalue-based impairment test to the net book value of goodwill andindefinite-lived intangible assets on an annual basis or on an interim basiswhen a triggering event occurs. The annual impairment test date for ourgoodwill and indefinite-lived intangible assets is October 1. The Company has not performed impairmenttesting on amounts of goodwill or indefinite-lived intangible assets subsequentto February 1, 2006, as there have been no events or changes that wouldindicate that such assets may be impaired.

As discussed in Note 7, “Segment Information,*”*the Company has five reportable segments that reflect the management ofits business: North America, the Pacific, the Atlantic, Latin America and UALLoyalty Services, LLC (“ULS”). The Company allocated goodwill as of theEffective Date to three of these reportable segments, the Pacific, the Atlanticand ULS. SFAS 142 requires thata 

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two-stepimpairment test be performed on goodwill. In the first step, the Companycompares the fair value of each reportable segment to its carrying value. Ifthe fair value of a reportable segment exceeds the carrying value of the netassets of the reportable segment, goodwill is not impaired and the Company isnot required to perform further testing. If the carrying value of the netassets of a reportable segment exceeds the fair value of the reportablesegment, then the Company must perform the second step in order to determinethe implied fair value of the goodwill and compare it to the carrying value ofthe goodwill. If the carrying value of goodwill exceeds its implied fair value,then the Company must record an impairment charge equal to such difference.

The Company expects to assess the fair value of itsreportable segments considering both the market and income approaches. Underthe market approach, the fair value of the reportable segment is based on acomparison of similar publicly traded companies. Under the income approach, thefair value of the reportable segment is based on the present value of estimatedfuture cash flows. The income approach is dependent on a number of factorsincluding estimates of future capacity, passenger yield, traffic, operatingcosts including jet fuel prices, appropriate discount rates and other relevantassumptions.

The following table presents information about ourintangible assets, including goodwill, at September 30, 2006 and December 31,2005:

|                          |   |         |   | Successor                    |   | Predecessor                 |   |
|-------------------------------|--------|--------------|--------|------------------------------|--------|-----------------------------|--------|
|                          |   |         |   | September 30, 2006 |   | December 31, 2005 |   |
|                          |   | Asset        |   | Gross Carrying          |   | Accumulated                 |   | Gross Carrying |   | Accumulated |   |
| (In millions)            |   | Life         |   | Amount                       |   | Amortization                |   | Amount |   | Amortization |   |
| Amortized intangible assets   |   |         |   |                         |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Airport slots and gates       |   | 1 to 9 yrs   |   |                         | $      | 72                          |   |   |   | $ | 10 |   |   |   | $ | 32 |   |   |   | $ | 19 |   |   |
| Hubs                          |   | 16 to 20 yrs |   |                         | 145    |                        |   |   | 5 |   |   |   | — |   |   |   | — |   |   |
| Patents                       |   | 3 yrs        |   |                         | 70     |                        |   |   | 15 |   |   |   | — |   |   |   | — |   |   |
| Mileage Plus database         |   | 7 yrs        |   |                         | 521    |                        |   |   | 56 |   |   |   | — |   |   |   | — |   |   |
| Contracts                     |   | 2 to 20 yrs  |   |                         | 211    |                        |   |   | 32 |   |   |   | — |   |   |   | — |   |   |
| Other                         |   | 7 to 22 yrs  |   |                         | 18     |                        |   |   | 2 |   |   |   | 36 |   |   |   | 23 |   |   |
|                          |   |         |   |                         | $      | 1,037                       |   |   |   | $ | 120 |   |   |   | $ | 68 |   |   |   | $ | 42 |   |   |
| Unamortized intangible assets |   |         |   |                         |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                      |   |         |   |                         | $      | 2,803                       |   |   |   |   |   |   |   | $ | 2 |   |   |   |   |   |   |
| Airport slots and gates       |   |         |   |                         | 255    |                        |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Route authorities             |   |         |   |                         | 1,132  |                        |   |   |   |   |   |   | 344 |   |   |   |   |   |   |
| Trade-name                    |   |         |   |                         | 743    |                        |   |   |   |   |   |   | — |   |   |   |   |   |   |
|                          |   |         |   |                         | $      | 4,933                       |   |   |   |   |   |   |   | $ | 346 |   |   |   |   |   |   |

 

During the eight month period ended September 30,2006, goodwill was increased by $47 million as a result of net adjustments inthe fair values of certain assets and liabilities in accordance with SFAS 141. Total amortization expense recognized wasapproximately $43 million and $2 million for the three month periods ended September 30,2006 and 2005, respectively, $1 million for the one month period ended January 31,2006, $120 million for the eight month period ended September 30, 2006 and$5 million for the nine month period ended September 30, 2005. The Companyexpects to record amortization expense of $46 million for remaining threemonths of 2006, and $152 million, $93 million, $70 million and $64 million for2007, 2008, 2009 and 2010, respectively.

(k)          ***Measurementof Impairments****—*In accordancewith SFAS No. 144, “*Accounting for theImpairment or Disposal of Long-Lived Assets*” and SFAS 142, theCompany evaluates the carrying value of long-lived assets and intangible assetssubject to amortization whenever events or changes in circumstances indicatethat an impairment may exist. An impairment charge is recognized when the asset’scarrying 

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value exceeds its netundiscounted future cash flows and its fair market value. The amount of thecharge is the difference between the asset’s carrying value and fair marketvalue.

(l)             ***Share-BasedCompensation***—The Company adopted Statement of Financial Accounting Standards No. 123 (Revised2004), “*Share-Based Payment*” (“SFAS 123R”)effective January 1, 2006. This pronouncement requires companies tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. The fairvalue is estimated using option-pricing models. The resulting cost isrecognized over the period during which an employee is required to provideservice in exchange for the award, usually the vesting period.

(m)      ***New Accounting Pronouncements****—*In February 2006,the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 155,“*Accounting for Certain Hybrid FinancialInstruments*” (“SFAS155”), which amends Statement of Financial Accounting Standards No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*” (“SFAS 133”)and Statement of Financial Accounting Standards No. 140, “*Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*.” SFAS 155 simplifies the accounting for certainderivatives embedded in other financial instruments by allowing them to beaccounted for as a whole if the holder elects to account for the wholeinstrument on a fair value basis. The Company is currently evaluating the newstatement to determine the potential impact, if any, that this would have onits financial statements. SFAS 155 is effective for fiscal years beginningafter September 15, 2006.

In July 2006, the FASB issued FASB InterpretationNo. 48, “*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*” (“FIN 48”),which clarifies the accounting and disclosure associated with certain aspectsof recognition and measurement related to accounting for income taxes. TheCompany has not yet determined the impact, if any, that FIN 48 will have on itsfinancial statements. FIN 48 is effective for fiscal years beginning after December 15,2006.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “*Fair ValueMeasurements*” (“SFAS 157”), which defines fair value, establishes aframework for measuring fair value, and expands disclosure about fair valuemeasurements. SFAS 157 does not require any new fair value measurements; ratherit specifies valuation methods to be applied when fair value measurements arerequired under existing or future accounting pronouncements. SFAS 157 iseffective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. Early application of the statement isencouraged. Generally, this statement will be applied prospectively. TheCompany has not yet determined the impact, if any, that SFAS 157 will have onits financial condition or results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, *“Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106, and 132(R)”* (“SFASNo. 158”), which requires companies to recognize the overfunded orunderfunded status of all defined benefit postretirement plans as an asset orliability in the statement of financial position and to recognize changes inthat funded status through comprehensive income in the year in which thechanges occur. The Company is required to initially recognize the funded statusof all defined benefit postretirement plans and provide the requireddisclosures as of December 31, 2006. Due to the application of fresh-startreporting in accordance with SOP 90-7 as of the Effective Date, thefunded status for the Company’s defined benefit postretirement plans hasalready been recognized as a liability in the Company’s Condensed Statementsof Consolidated Financial Position (Unaudited). The Company anticipatesthat the adoption of SFAS No. 158 will not have a material impact on its Statementof Consolidated Financial Position (Unaudited) at December 31, 2006. However,future other comprehensive income will be subject to more volatility as theCompany will be required to recognize gains or losses annually from changes inactuarial assumptions that impact the results of actuarial valuations.

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In September 2006,the SEC issued Staff Accounting Bulletin No. 108 (“SAB No. 108”),which provides guidance for the quantification of financial statementmisstatements. SAB No. 108 will be effective for the Company as of January 1,2007. The adoption of SAB No. 108 is not expected to have a materialimpact on the Company.

(n)          ***Tax Contingencies***—Inaccordance with SFAS No. 5, “*Accounting forContingencies,”*the Company has recorded reserves for taxes andassociated interest that may become payable in future years as a result ofaudits by tax authorities. Although we believe that the positions taken by theCompany on previously filed tax returns are reasonable, the Companynevertheless has established tax and interest reserves in recognition thatvarious taxing authorities may challenge certain of the positions taken by theCompany, potentially resulting in additional liabilities for taxes and interest.The Company’s tax contingency reserves are reviewed periodically and areadjusted as events occur that affect its estimates, such as the lapsing of applicablestatutes of limitations, the conclusion of tax audits, the measurement ofadditional estimated liability based on current calculations, theidentification of new tax contingencies, the release of administrative taxguidance affecting its estimates of tax liabilities, or the rendering ofrelevant court decisions.

**(3)**          Share-BasedCompensation Plans

The Company adopted SFAS 123R effective January 1,2006. This pronouncement requires companies to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award. The resulting cost is recognized over theperiod during which an employee is required to provide service in exchange forthe award, usually the vesting period. Prior to the adoption of SFAS 123R, thisaccounting treatment was optional with pro forma disclosures required.

***Predecessor Company***—Asof January 31, 2006, a total of 9 million UAL stock options wereoutstanding. UAL did not issue any awards during 2005. Under the Company’s Planof Reorganization, these UAL stock options were canceled upon the EffectiveDate. No material share-based compensation expense was incurred as a result ofthese outstanding options for the month of January 2006.

***Successor Company***—As partof the Plan of Reorganization and as described in more detail below, theBankruptcy Court approved the Company’s share-based compensation plans known asthe Director Equity Incentive Plan (“DEIP”) and the Management Equity Incentive Plan (“MEIP”) which becameeffective on February 1, 2006. The following table summarizes the numberof awards authorized, issued, canceled and available for future grants undereach plan as of September 30, 2006:

|                         |   | DEIP     |   | MEIP       |   | Total      |   |
|------------------------------|--------|----------|--------|------------|--------|------------|--------|
| Authorized                   |   | 175,000  |   | 9,825,000  |   | 10,000,000 |   |
| Issued                       |   | (100,000 | )      | (9,781,150 | )      | (9,881,150 | )      |
| Canceled                     |   | —   |   | 966,218    |   | 966,218    |   |
| Available for  future grants |   | 75,000   |   | 1,010,068  |   | 1,085,068  |   |

 

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The Company recognized share-based compensationexpense for each plan during the three months and eight months ended September 30,2006 as follows:

|                               |   | Successor                                        |   |
|------------------------------------|--------|--------------------------------------------------|--------|
|                               |   | Three Months  Ended September 30, |   | Eight Months  Ended September 30, |   |
|                               |   | 2006                                             |   | 2006 |   |
| (in millions)                 |   |                                             |   |   |   |
| Director Equity  Incentive Plan:   |   |                                             | $      | — |   |   |   | $ | 3 |   |   |
| Unrestricted  UAL Stock            |   |                                             |   |   |   |   |   |   |   |
| Management Equity  Incentive Plan: |   |                                             |   |   |   |   |   |   |   |
| UAL Stock options                  |   |                                             | 13     |   |   |   | 61 |   |   |
| UAL Restricted  stock              |   |                                             | 15     |   |   |   | 73 |   |   |
| Total                              |   |                                             | $      | 28 |   |   |   | $ | 137 |   |   |

 

During the second quarter of 2006, the Company revisedits initial estimated award forfeiture rate of 7.5% to 15% based upon actualattrition. As a result, the share-based compensation expense was reduced byapproximately $7 million for the eight month period ended September 30, 2006.

As of September 30, 2006, approximately $99million of total unrecognized costs related to nonvested UAL shares areexpected to be recognized over the remaining weighted-average period of 3.3years.

*Director EquityIncentive Plan.*   The Nominating/GovernanceCommittee of the UAL Board (the “Governance Committee”) is authorized to grantequity-based awards to non-employee directors of UAL under the plan. The DEIPauthorizes the Governance Committee to grant any of a variety of incentiveawards to participants, including the following:

·       non-qualifiedUAL stock options,

·       UALstock appreciation rights, which provide the participant the right to receivethe excess (if any) of the fair market value of a specified number of shares ofUAL common stock at the time of exercise over the grant price of the stockappreciation right,

·       stockawards to be granted at no cost to the participant, including grants in theform of (i) an immediate transfer of UAL shares which are subject toforfeiture and certain transfer restrictions (“Restricted Stock”); and (ii) animmediate transfer of UAL shares which are not subject to forfeiture or adeferred transfer of UAL shares if and when the conditions specified by the Human Resources Subcommittee of the UAL Board(the “HR Subcommittee”) are met (“Unrestricted Stock”),

·       annualcompensation in the form of credits to a participant’s share accountestablished under the DEIP, and

·       sharesof UAL common stock in lieu of receipt of all or any portion of cash amountspayable by the Company to a participant including retainer fees, boardattendance fees and committee fees (but excluding expense reimbursements andsimilar items).

The shares may be issued from authorized and unissuedshares of UAL common stock or from UAL’s treasury stock. The exercise price foreach underlying share of UAL common stock under all options and stockappreciation rights awarded under the DEIP will not be less than the fairmarket value of a share of UAL common stock on the date of grant. Each optiongranted under the DEIP will generally expire 10 years after its date of grant. The100,000 unrestricted UAL shares issued under the DEIP in the eight month periodended September 30, 2006 immediately vested on the grant date.

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*ManagementEquity Incentive Plan.*   The HR Subcommitteeis authorized under the plan to grant equity-based and other performance-basedawards (“Award(s)”) to executive officers and other key management employees ofthe Company and its subsidiaries.

All executiveofficers and other key management employees of the Company and its subsidiariesare eligible to become participants in the MEIP. The HR Subcommittee willselect from time to time, from among all eligible individuals, the persons whowill be granted an Award. The MEIP authorizes the HR Subcommittee to grant anyof a variety of incentive Awards to participants, including the following:

·       UALstock options, including both tax qualified and non-qualified options,

·       UALstock appreciation rights, which provide the participant the right to receivethe excess (if any) of the fair market value of a specified number of shares ofUAL common stock at the time of exercise over the grant price of the UAL stockappreciation right,

·       UALstock awards to be granted at no cost to the participant, including grants inthe form of UAL Restricted Stock and Unrestricted Stock, and

·       performance-basedawards, in which the HR Subcommittee may grant a stock award that will entitlethe holder to receive a specified number of shares of UAL common stock, or thecash value thereof, if certain performance goals are met.

The shares may be issued from authorized and unissuedshares of UAL common stock or from UAL’s treasury stock. The exercise price foreach underlying share of UAL common stock under all options and stockappreciation rights awarded under the MEIP will not be less than the fairmarket value of a share of UAL common stock on the date of grant.

Thetable below summarizes UAL stock option activity pursuant to our MEIP stockoptions for the period February 1 through September 30, 2006:

|                                |   | UAL  Stock  Options |   | Weighted-  Average  Exercise Price |   | Weighted-  Average  Remaining  Contractual  Life (in years) |   | Aggregate  Intrinsic Value  (in millions) |   |
|-------------------------------------|--------|---------------------|--------|-----------------------------------------|--------|-----------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
| Outstanding at  beginning of period |   | —              |   |                                    | — |                                                                  |   |                                                | — |   |   |   | $ | — |   |   |
| Granted                             |   | 5,880,445           |   |                                    | $      | 35.16                                                                 |   |                                                |   |   |   |   |   |   |   |   |
| Exercised                           |   | —              |   |                                    | — |                                                                  |   |                                                |   |   |   |   |   |   |   |
| Canceled                            |   | (588,523            | )      |                                    | $      | 35.25                                                                 |   |                                                |   |   |   |   |   |   |   |   |
| Outstanding at  end of period       |   | 5,291,922           |   |                                    | $      | 35.15                                                                 |   |                                                |   | 9.4 |   |   |   | $ | — |   |   |
| Exercisable at  end of period       |   | 1,087,241           |   |                                    | $      | 35.25                                                                 |   |                                                |   | 9.3 |   |   |   | $ | — |   |   |

 

Theweighted-average fair value of UAL options granted for the period February 1,2006, to September 30, 2006, was determined to be $21.45 based on thefollowing assumptions:

| Risk-free  interest rate                              |   | 4.7 – 5.0   | %      |
|-------------------------------------------------------|--------|------------------|--------|
| Dividend yield                                        |   | 0                | %      |
| Expected market  price volatility of our common stock |   | 55 – 57     | %      |
| Expected life of options  (years)                     |   | 5.00 – 6.21 |   |

 

The fair value of UAL options is determined at thegrant date using a Black-Scholes option pricing model, which requires us tomake several assumptions. The risk-free interest rate is based on the U.S. Treasuryyield curve in effect for the expected term of the option at the time of grant.The dividend 

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yield on our common stockis assumed to be zero since we do not pay dividends and have no current plansto do so in the future.

The volatility assumptions were based upon historicalvolatilities of comparable airlines whose shares are traded using daily stockprice returns equivalent to the contractual term of the option. Due to itsemergence from more than three years in bankruptcy, historical volatility datafor UAL was not considered in determining expected volatility. The Company didconsider implied volatility data for both UAL and comparable airlines, usingcurrent exchange-traded options.

The expected life of the options was determined basedupon a simplified assumption that the option will be exercised evenly fromvesting to expiration under the transitional guidance of Staff AccountingBulletin No. 107, Topic 14, “Share-Based Payments.”

The UAL stock options typically vest over a four yearperiod, except for awards to retirement-eligible employees, which areconsidered vested at the grant date.

Thetable below summarizes UAL Restricted Stock activity for the period February 1through September 30, 2006:

|                              |   |                  |      | Weighted-        |   |
|-----------------------------------|--------|-----------------------|-----------|------------------|--------|
|                              |   | UAL                   |      | Average          |   |
|                              |   | Restricted Stock |      | Grant Price |   |
| Nonvested at  beginning of period |   |                  | —    |             |   |   | — |   |   |
| Granted                           |   |                  | 3,900,705 |             |   |   | $ | 36.83 |   |   |
| Vested                            |   |                  | (821,219  | )                |   |   | $ | 36.95 |   |   |
| Terminated                        |   |                  | (377,695  | )                |   |   | $ | 36.95 |   |   |
| Nonvested at end of  period       |   |                  | 2,701,791 |             |   |   | $ | 36.77 |   |   |

 

Under SFAS 123R, the fairvalue of the UAL Restricted Stock awards was based upon the volume weightedaverage share price on the date of grant. The UAL Restricted Stock awardstypically vest over four years, except for awards to retirement-eligibleemployees, which are considered vested at the grant date.

**(4)**          IncomeTaxes

For the three and nine months ended September 30,2006 and 2005, United incurredboth a regular tax loss and an alternative minimum tax (“AMT”) loss. Theprimary differences between its regular tax loss and AMT loss were certaindepreciation adjustments and preferences.

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Temporarydifferences and carry forwards that give rise to a significant portion ofdeferred tax assets and liabilities at September 30, 2006 and December 31,2005 were as follows:

|                                                              |   | Successor                    |   | Predecessor                 |   |
|-------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                              |   | September 30, 2006 |   | December 31, 2005 |   |
|                                                              |   | Deferred  Tax                |   | Deferred  Tax               |   | Deferred  Tax |   | Deferred  Tax |   |
|                                                              |   | Assets                       |   | Liabilities                 |   | Assets |   | Liabilities |   |
| (In millions)                                                |   |                         |   |                        |   |   |   |   |   |   |   |
| Employee  benefits, including postretirement, medical and ESOP    |   |                         | $      | 1,474                       |   |   |   | $ | 37 |   |   | $ | 5,470 |   |   | $ | 28 |   |   |
| Depreciation,  capitalized interest and transfers of tax benefits |   |                         | — |                        |   |   | 2,714 |   |   | — |   |   | 3,445 |   |   |
| Federal and state  net operating loss carry forwards              |   |                         | 3,201  |                        |   |   | — |   |   | 2,688 |   |   | — |   |   |
| Mileage Plus  deferred revenue                                    |   |                         | 946    |                        |   |   | — |   |   | 50 |   |   | — |   |   |
| Gains on sale and  leasebacks                                     |   |                         | 2      |                        |   |   | — |   |   | 69 |   |   | — |   |   |
| Rent expense                                                      |   |                         | — |                        |   |   | 44 |   |   | 525 |   |   | — |   |   |
| AMT credit carry  forwards                                        |   |                         | 291    |                        |   |   | — |   |   | 294 |   |   | — |   |   |
| Intangibles                                                       |   |                         | — |                        |   |   | 1,061 |   |   | 18 |   |   | — |   |   |
| Restructuring  charges                                            |   |                         | 151    |                        |   |   | — |   |   | 4,457 |   |   | — |   |   |
| Other                                                             |   |                         | 1,444  |                        |   |   | 1,429 |   |   | 1,517 |   |   | 1,489 |   |   |
| Less: Valuation allowance                                         |   |                         | (2,765 | )                           |   |   | — |   |   | (10,494 | ) |   | — |   |   |
|                                                              |   |                         | $      | 4,744                       |   |   |   | $ | 5,285 |   |   | $ | 4,594 |   |   | $ | 4,962 |   |   |
|                                                                   |        |                              |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As a result of the Company’s emergence frombankruptcy, the Company has an unrealized tax benefit of $709 million at September 30,2006, resulting from an excess tax deduction of $1.9 billion. The excess taxdeduction represents the difference between the total tax deductionavailable, which is equal to the fair value of the UAL common stock issued tocertain unsecured creditors pursuant to the Plan of Reorganization, and theamount of the deduction attributable to the amount expensed, which is the valueof the stock determined in the Plan of Reorganization. The Company willrecognize this excess tax deduction when it is realized in a manner similar tothe provisions of SFAS 123R.

At September 30, 2006, United and its subsidiaries had $291 million of federal AMTcredits, $2.9 billion of federal tax benefits and $0.3 billion of state taxbenefits, resulting from $8.2 billion of net operating losses which may becarried forward to reduce the tax liabilities of future years. If not utilized,the federal tax benefits of $0.2 billion expire in 2022, $1.2 billion expire in2023, $0.4 billion expire in 2024, $0.5billion expire in 2025, $0.4 billion expire in 2026 and $0.2 billion expire in2027. In addition, the state tax benefit, if not utilized, expires over a fiveto twenty year period.

The Company has a valuation allowance against itsdeferred tax assets as of September 30, 2006 and December 31, 2005,to reflect management’s assessment of whether it is more likely than not thatsome portion of the deferred tax assets will not be realized. The Company has determined that it is morelikely than not that our net deferred tax asset at September 30, 2006,will be realized through the reversals of existing deferred tax credits.

At September 30, 2006, the federal and state netoperating loss carryforwards (“NOLs”) were reduced by discharge of indebtednessincome of $1.1 billion that resulted from the bankruptcy proceedings. At thistime, the Company does not believe that the limitations imposed by the InternalRevenue Code on the usage of NOLs following an ownership change will apply tothe Company.  Therefore, the Company doesnot believe its exit from bankruptcy has had any material impact on theutilization of its remaining NOLs.

The effective tax ratediffers from the statutory rate primarily due to meals and entertainment andkey executive non-deductible expenses, state income taxes and Medicare Part Dnon-taxable income.

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**(5)**          Retirementand Postretirement Plans

Thenet periodic benefit cost included the following components: 

|                                               |   | Pension Benefits                                |   |                                                                                                                                                         | Other Benefits                                  |                                                                                                                                                         |
|----------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               |   | Successor                                            |   | Predecessor                                                                                                                                                  |                                                 |                                                                                                                                                         | Successor |   | Predecessor |   |
|                                               |   | Three Months Ended September 30, |   |                                                                                                                                                         | Three Months Ended September 30, |                                                                                                                                                         |
| (In millions)                                 |   |                                                 |   | **            **2006**            ** |                                                 | **            **2005**            ** |   |   | **            **2006**            ** |   | **            **2005**            ** |   |
| Service cost                                       |   |                                                 | $      | 3                                                                                                                                                            |                                                 |                                                                                                                                                         |   | $ | 4 |   |   |   |   | $ | 9 |   |   |   | $ | 10 |   |   |
| Interest cost                                      |   |                                                 | 2      |                                                                                                                                                         |                                                 |                                                                                                                                                         | 63 |   |   |   |   | 31 |   |   |   | 30 |   |   |
| Expected return  on plan assets                    |   |                                                 | (2     | )                                                                                                                                                            |                                                 |                                                                                                                                                         | (51 | ) |   |   |   | (1 | ) |   |   | (2 | ) |   |
| Amortization of  prior service cost (credit)       |   |                                                 |   |                                                                                                                                                         |                                                 |                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|    including  transition obligation |   |                                                 | — |                                                                                                                                                         |                                                 |                                                                                                                                                         | 2 |   |   |   |   | — |   |   |   | (35 | ) |   |
| Recognized  actuarial loss                         |   |                                                 | — |                                                                                                                                                         |                                                 |                                                                                                                                                         | 13 |   |   |   |   | — |   |   |   | 22 |   |   |
| Net periodic benefit  costs                        |   |                                                 | $      | 3                                                                                                                                                            |                                                 |                                                                                                                                                         |   | $ | 31 |   |   |   |   | $ | 39 |   |   |   | $ | 25 |   |   |
|                                                    |        |                                                      |        |                                                                                                                                                              |                                                      |                                                                                                                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                                                                              |   | Pension Benefits |   |                                                                | Other Benefits |                                                                   |
|-----------------------------------------------------------------------------------|--------|-----------------------|--------|---------------------------------------------------------------------|---------------------|------------------------------------------------------------------------|
|                                                                              |   | Successor             |   | Predecessor                                                         |                |                                                                   | Successor |   | Predecessor |   |
| (In millions)                                                                |   |                  |   | Period from  February 1  to September 30,  2006 |                | Period from  January 1 to   January 31,  2006 |   | Nine Months  Ended  September 30,  2005 |   |   | Period from  February 1  to September 30,  2006 |   | Period from  January 1 to  January 31,  2006 |   | Nine Months  Ended  September 30,

2005 |   |
| Service cost                                                                      |   |                  | $      | 7                                                                   |                |                                                                   |   | $ | 1 |   |   |   | $ | 65 |   |   |   |   | $ | 24 |   |   |   | $ | 3 |   |   |   | $ | 32 |   |   |
| Interest cost                                                                     |   |                  | 6      |                                                                |                |                                                                   | 1 |   |   |   | 458 |   |   |   |   | 84 |   |   |   | 11 |   |   |   | 95 |   |   |
| Expected return on  plan assets                                                   |   |                  | (6     | )                                                                   |                |                                                                   | (1 | ) |   |   | (379 | ) |   |   |   | (4 | ) |   |   | (1 | ) |   |   | (7 | ) |   |
| Amortization of  prior service cost (credit) including transition obligation |   |                  | — |                                                                |                |                                                                   | — |   |   |   | 16 |   |   |   |   | — |   |   |   | (13 | ) |   |   | (107 | ) |   |
| Curtailment charge                                                                |   |                  | — |                                                                |                |                                                                   | — |   |   |   | 640 |   |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Settlement losses,  net                                                           |   |                  | — |                                                                |                |                                                                   | — |   |   |   | 390 |   |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Recognized  actuarial loss                                                        |   |                  | — |                                                                |                |                                                                   | — |   |   |   | 98 |   |   |   |   | — |   |   |   | 8 |   |   |   | 70 |   |   |
| Revaluation of  liability                                                         |   |                  | — |                                                                |                |                                                                   | 43 |   |   |   | — |   |   |   |   | — |   |   |   | 73 |   |   |   | — |   |   |
| Net periodic benefit  costs                                                       |   |                  | $      | 7                                                                   |                |                                                                   |   | $ | 44 |   |   |   | $ | 1,288 |   |   |   |   | $ | 104 |   |   |   | $ | 81 |   |   |   | $ | 83 |   |   |
|                                                                                   |        |                       |        |                                                                     |                     |                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Upon emergence from bankruptcy on February 1, 2006, the Companycompleted a revaluation of the post-retirement liabilities as of January 1,2006, and updated the assumed discount rate from a weighted-average of 5.68%(as of December 31, 2005) to 5.84% (as of February 1, 2006),resulting in a reduction of the net accumulated benefit obligation byapproximately $28 million. In accordance with SOP 90-7, the Company alsoaccelerated the recognition of $73 million in net unrecognized actuarial andprior service gains and losses upon emergence as reorganization expense. TheCompany also accelerated the recognition of all net unrecognized actuarial andprior service gains and losses pertaining to our foreign pension plans uponemergence, and recorded a reorganization expense of $43 million thereon.

With the termination of the Company’s domestic defined benefit retirementplans (see Note 1, “Voluntary Reorganization Under Chapter 11—SignificantMatters Remaining to be Resolved in Chapter 11 Cases” items (c) through(e) for further details on pending matters), the Company has reachedagreements with all of its employee groups to implement replacement plans,largely defined contribution 

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plans. Contributions under the Company’sdefined contribution plans are based on matching percentages, years ofservice and/or employee eligible earnings. The International Association ofMachinists (“IAM”) replacement plan is a multi-employer plan whereby the assetscontributed by the Company (based on hours worked) may be used to providebenefits to employees of other participating companies, since assetscontributed by all participating companies are not segregated or restricted toprovide benefits specifically to employees of one participating company. TheIAM replacement plan became effective on of March 1, 2006, while allothers were effective during the entire quarter ended March 31, 2006. ThePredecessor Company recorded expense of $16 million for the month of January 2006,while the Successor Company recognized $57 million and $150 million of expensefor the third quarter of 2006 and for the eight months ended September 30,2006, respectively, for all of the Company’s defined contribution employeeretirement plans.

In the first and second quarter of 2005, the Company recognized pensioncurtailment charges of $433 million and $207 million, respectively, associatedwith actions taken by the PBGC to involuntarily terminate the Company’s definedbenefit pension plans for the Ground Employees Plan as of March 11, 2005and for the MAPC Plan and the Flight Attendant Plan as of September 30,2005. These pension plans were projected to have benefit obligations and planassets aggregating approximately $8.0 billion and $4.2 billion, respectively,as of December 31, 2004. In May 2005, the PBGC was appointed trusteefor the Ground Employees Plan and in June 2005, the PBGC was appointedtrustee for the MAPC Plan and the Flight Attendant Plan, assuming all rightsand powers over the pension assets and obligations. Upon termination andsettlement of these plans, the Company recognized a net settlement loss ofapproximately $395 million in accordance with SFAS 88.

A $1.9 billion allowable claim for the PBGC fromthe terminations of the Ground Employee Plan, MAPC Plan and the FlightAttendant Plan was recorded in the second quarter of 2005 in accordance with SFAS No. 5,“*Accounting for Contingencies,*” and FASBInterpretation No. 14, “*Reasonable Estimation ofthe Amount of Loss*” and was classified as Liabilities Subject toCompromise on the Condensed Statements of Consolidated Financial Position (Unaudited).

**(6)**          RestrictedCash 

At September 30, 2006, United had $828 million inrestricted cash (of which $308 million is classified as current), primarilyrepresenting security for workers’ compensation obligations, security depositsfor airport leases and reserves with institutions that process our credit cardticket sales. There can be no assurance that these institutions will notrequire additional levels of security deposits or reserve holdbacks.

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**(7)**          SegmentInformation 

Unitedhas five reportable segments that reflect the management of our business: NorthAmerica, the Pacific, the Atlantic, Latin America and UAL Loyalty Services, LLC(“ULS”). For internal management and decision-making purposes, we haveallocated expenses and revenues (as incorporated in our consolidated financialstatements) to these segments for the three months ended September 30,2006 and 2005, as well as the one month period ended January 31, 2006, theeight month period ended September 30, 2006 and the nine month periodended September 30, 2005 as follows:****

|                                                   |   | Three Months Ended September 30, 2006 (Successor) |   |    |
|--------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|---------|
|                                                   |   |                                                                            |   |    |   |   |   |   |   |   |   | Inter- |   | United |   |   |
|                                                   |   | North                                                                           |   |    |   |   |   | Latin |   |   |   | Segment |   | Consolidated |   |   |
| (In millions)                                     |   |                                                                            |   | America |   | Pacific |   | Atlantic |   | America |   | ULS |   | Elimination |   | Total |   |   |
| Revenue                                                |   |                                                                            | $      | 3,297   |   |   |   | $ | 898 |   |   |   | $ | 631 |   |   |   | $ | 133 |   |   | $ | 217 |   |   | $ | — |   |   |   | $ | 5,176 |   |   |
| Intersegment revenue                                   |   |                                                                            | 73     |    |   |   | 26 |   |   |   | 17 |   |   |   | 4 |   |   | 14 |   |   | (134 | ) |   |   | — |   |   |
| Earnings (loss) before  income taxes and special items |   |                                                                            | 66     |    |   |   | 15 |   |   |   | 43 |   |   |   | (6 | ) |   | 112 |   |   | — |   |   |   | 230 |   |   |
| Goodwill                                               |   |                                                                            | $      | —  |   |   |   | $ | 664 |   |   |   | $ | 667 |   |   |   | $ | — |   |   | $ | 1,472 |   |   | $ | — |   |   |   | $ | 2,803 |   |   |
|                                                        |        |                                                                                 |        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                                                                   |   | Three Months Ended September 30, 2005 (Predecessor) |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                   |   |                                                |   |   |   |   |   |   |   |   |   | Inter- |   | United |   |
|                                                                   |   | North                                               |   |   |   |   |   | Latin |   |   |   | Segment |   | Consolidated |   |
| (In millions)                                                     |   |                                                |   | America |   | Pacific |   | Atlantic |   | America |   | ULS |   | Elimination |   | Total |   |
| Revenue                                                                |   |                                                | $      | 2,928 |   |   | $ | 820 |   |   | $ | 567 |   |   |   | $ | 106 |   |   | $ | 227 |   |   | $ | — |   |   |   | $ | 4,648 |   |   |
| Intersegment  revenue                                                  |   |                                                | 72     |   |   | 26 |   |   | 18 |   |   |   | 3 |   |   | 13 |   |   | (132 | ) |   |   | — |   |   |
| Earnings (loss)  before income taxes, reorganization and special items |   |                                                | $      | (52 | ) |   | $ | 12 |   |   | $ | 26 |   |   |   | $ | (10 | ) |   | $ | 92 |   |   | $ | — |   |   |   | $ | 68 |   |   |
|                                                                        |        |                                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                                                          |   | Period January 1 to January 31, 2006 (Predecessor) |   |
|---------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                          |   |                                               |   |   |   |   |   |   |   |   |   | Inter- |   | United |   |
|                                                          |   | North                                              |   |   |   |   |   | Latin |   |   |   | Segment |   | Consolidated |   |
| (In millions)                                            |   |                                               |   | America |   | Pacific |   | Atlantic |   | America |   | ULS |   | Elimination |   | Total |   |
| Revenue                                                       |   |                                               | $      | 905 |   |   | $ | 265 |   |   | $ | 158 |   |   |   | $ | 51 |   |   | $ | 75 |   |   | $ | — |   |   |   | $ | 1,454 |   |   |
| Intersegment  revenue                                         |   |                                               | 29     |   |   | 11 |   |   | 6 |   |   |   | 2 |   |   | 7 |   |   | (55 | ) |   |   | — |   |   |
| Earnings (loss)  before income taxes and reorganization items |   |                                               | $      | (81 | ) |   | $ | (5 | ) |   | $ | (13 | ) |   |   | $ | (10 | ) |   | $ | 26 |   |   | $ | — |   |   |   | $ | (83 | ) |   |
|                                                               |        |                                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                                                   |   | Period February 1 to September 30, 2006 (Successor) |   |
|--------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                   |   |                                                |   |   |   |   |   |   |   |   |   | Inter- |   | United |   |
|                                                   |   | North                                               |   |   |   |   |   | Latin |   |   |   | Segment |   | Consolidated |   |
| (In millions)                                     |   |                                                |   | America |   | Pacific |   | Atlantic |   | America |   | ULS |   | Elimination |   | Total |   |
| Revenue                                                |   |                                                | $      | 8,587 |   |   | $ | 2,239 |   |   | $ | 1,506 |   |   |   | $ | 368 |   |   | $ | 593 |   |   | $ | — |   |   |   | $ | 13,293 |   |   |
| Intersegment  revenue                                  |   |                                                | 210    |   |   | 71 |   |   | 45 |   |   |   | 12 |   |   | 47 |   |   | (385 | ) |   |   | — |   |   |
| Earnings (loss)  before income taxes and special items |   |                                                | $      | 12 |   |   | $ | (101 | ) |   | $ | 40 |   |   |   | $ | (42 | ) |   | $ | 217 |   |   | $ | — |   |   |   | $ | 126 |   |   |
| Goodwill                                               |   |                                                | $      | — |   |   | $ | 664 |   |   | $ | 667 |   |   |   | $ | — |   |   | $ | 1,472 |   |   | $ | — |   |   |   | $ | 2,803 |   |   |
|                                                        |        |                                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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|                                                                   |   | Nine Months Ended September 30, 2005 (Predecessor) |   |
|------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                   |   |                                               |   |   |   |   |   |   |   |   |   | Inter- |   | United |   |
|                                                                   |   | North                                              |   |   |   |   |   | Latin |   |   |   | Segment |   | Consolidated |   |
| (In millions)                                                     |   |                                               |   | America |   | Pacific |   | Atlantic |   | America |   | ULS |   | Elimination |   | Total |   |
| Revenue                                                                |   |                                               | $      | 8,070 |   |   | $ | 2,282 |   |   | $ | 1,563 |   |   |   | $ | 347 |   |   | $ | 676 |   |   | $ | — |   |   |   | $ | 12,938 |   |   |
| Intersegment  revenue                                                  |   |                                               | 221    |   |   | 81 |   |   | 52 |   |   |   | 12 |   |   | 46 |   |   | (412 | ) |   |   | — |   |   |
| Earnings (loss) before  income taxes, reorganization and special items |   |                                               | $      | (467 | ) |   | $ | (49 | ) |   | $ | (5 | ) |   |   | $ | (46 | ) |   | $ | 273 |   |   | $ | — |   |   |   | $ | (294 | ) |   |
|                                                                        |        |                                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Areconciliation of the total amounts reported by reportable segments to theapplicable amounts in the consolidated financial statements follows:

|                                           |   | Successor                                        |   | Predecessor                                                   |   | Successor |   |                                                       |   | Predecessor                                 |   |
|------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------------|--------|-----------|--------|------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                           |   | Three Months Ended  September 30, |   | Period from  February 1 to  September 30, |   |      |   | Period from  January 1  to January 31, |   | Nine Months  Ended  September 30, |   |
| (In millions)                             |   |                                             |   | 2006                                                          |   | 2005      |   | 2006                                                       |   |                                        |   | 2006 |   | 2005 |   |
| Total earnings  (loss) for reportable segments |   |                                             | $      | 230                                                           |   |      |   | $                                                          | 68     |                                        |   |   | $ | 126 |   |   |   |   |   | $ | (83 | ) |   |   | $ | (294 | ) |   |
| Reorganization items, net                      |   |                                             | — |                                                          |   |      | (1,709 | )                                                          |   |                                        | — |   |   |   |   |   | 22,709 |   |   |   | (3,825 | ) |   |
| Special items                                  |   |                                             | 30     |                                                          |   |      | — |                                                       |   |                                        | 30     |   |   |   |   |   | — |   |   |   | (5 | ) |   |
| Earnings (loss) before  income taxes           |   |                                             | $      | 260                                                           |   |      |   | $                                                          | (1,641 | )                                           |   |   | $ | 156 |   |   |   |   |   | $ | 22,626 |   |   |   | $ | (4,124 | ) |   |
|                                                |        |                                                  |        |                                                               |        |           |        |                                                            |        |                                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

United’s operations involve an insignificant level ofdedicated revenue-producing assets by reportable segment as the overwhelmingmajority of the Company’s revenue producing assets (primarily U. S. registeredaircraft) generally can be deployed in any of its reportable segments, as anygiven aircraft may be used in multiple segments on any given day. ULS had $2.1billion in total assets as of September 30, 2006. 

In accordance with SFAS142, on the Effective Date the Company allocated goodwill upon adoption offresh-start reporting in a manner similar to how the amount of goodwillrecognized in a business combination is determined. This required thedetermination of the fair value of each reportable segment to calculate anestimated purchase price for such segment. This purchase price was thenallocated to the individual assets and liabilities assumed to be related tothat segment. Any excess purchase price is the amount of goodwill assigned tothat reporting unit. As stated above, the overwhelming majority of the Company’srevenue producing assets and the related liabilities relate to aircraft thatmay be used in multiple segments on any given day. As a result, the Companyallocated such asset values and the related liabilities on the basis ofavailable seat miles flown in each segment. To the extent that individual assetsand liabilities could be assigned directly to specific segments, those assetsand liabilities were so assigned. In accordance with SFAS 141, any adjustmentsto the preliminary allocation of reorganization value could change the amountof recorded goodwill and the allocation of such goodwill to the reportablesegments. During the eight months ended September 30, 2006, goodwillincreased by $47 million as a result of valuation adjustments to certain assetsand liabilities, which resulted in minor adjustments to allocated goodwillvalues.

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**(8)**          ComprehensiveIncome (Loss)

The Company includes inother comprehensive income (loss) changes in minimum pension liabilities andchanges in the fair value of derivative financial instruments that qualify forhedge accounting. For the three months ended September 30, 2006 and 2005,total comprehensive income (loss) amounted to $144 million and $(1.6)billion, respectively. For the one month period ended January 31, 2006,eight month period ended September 30, 2006 and nine month period ended September 30,2005, total comprehensive income (loss) amounted to $22.6 billion, $82 millionand $(2.2) billion, respectively. Total comprehensive loss for the nine monthsended September 30, 2005 included a $1.9 billion net adjustment relatingto the termination of various pension plans, as discussed in Note 5, “Retirementand Postretirement Plans.”

**(9)**          DebtObligations

Inaccordance with the Plan of Reorganization, the Company issued new debt,entered into the Credit Facility, reinstated certain secured aircraft debt andentered into other debt agreements negotiated during the bankruptcy process(including aircraft financings), which consist of the following:

| (in millions)                               |   |   |   | September 30, 2006 |   |
|--------------------------------------------------|--------|--------|--------|------------------------------|--------|
| Secured notes,  5.38% to 9.52%, due 2006 to 2019 |   |   | $      | 5,318                        |   |   |
| Credit Facility,  9.125% and 9.25%, due 2012     |   |   | 2,786  |                         |   |
| Limited-Subordination  notes, 4.5%, due 2021     |   |   | 726    |                         |   |
| 6% senior notes,  due 2031                       |   |   | 500    |                         |   |
| 5% senior  convertible notes, due 2021           |   |   | 150    |                         |   |
| Total debt                                       |   |   | 9,480  |                         |   |
| Less: unamortized  debt discount                 |   |   | (251   | )                            |   |
| Less: current  portion                           |   |   | (665   | )                            |   |
| Long-term debt, less  current portion            |   |   | $      | 8,564                        |   |   |

 

*SecuredNotes.**  *Duringthe second quarter of 2006, the Company identified and corrected $186 millionof certain omissions previously reported in the Annual Report on Form 10-Kfor the year of 2005. Specifically, Form 10-K Note 8, “Long-Term Debt,”understated the amount of 2007 anticipated principal payments under long-termdebt agreements by $186 million. In addition, the Company identified andcorrected $186 million of certain misclassifications previously reported in theQuarterly Report on Form 10-Q within the Statements of ConsolidatedFinancial Position (Unaudited) for the first quarter of 2006. Form 10-Qinaccurately classified $186 million between the current and the long-termportions of debt thereby understating current debt and overstating thelong-term portion.

*CreditFacility.**  *On theEffective Date, United entered into the Credit Facility provided by a syndicateof banks and other financial institutions led by J.P. Morgan Securities Inc.and Citicorp Global Markets Inc., as joint lead arrangers and joint bookrunners; JPMorgan Chase Bank, N.A. (“JPMCB”) and Citicorp USA, Inc. (“CITI”),as co-administrative agents and co-collateral agents; General Electric CapitalCorporation, as syndication agent; and JPMCB as paying agent. The CreditFacility provides for a total commitment of up to $3.0 billion, comprising twoseparate tranches: (i) Tranche A consisting of up to $200 millionrevolving commitment available for Tranche A loans and for standby letters ofcredit to be issued in the ordinary course of business of United or one of itssubsidiary guarantors; and (ii) Tranche B consisting of a term loancommitment of up to $2.45 billion available at the time of closing andadditional term loan commitments of up to $350 million available upon, amongother things, United’s acquiring unencumbered title to some or all of the 14airframes and related engines that were subject to United’s 1997-1 EETCfinancing. The Credit Facility matures on February 1, 2012.

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Borrowings under the CreditFacility bear interest at a floating rate, which can be either a baserate, or at our option, a LIBOR rate, plus an applicable margin of 2.75% in thecase of the base rate loans and 3.75% in the case of the LIBOR loans. TheTranche B term loan requires regularly scheduled semi-annual payments ofprincipal equal to 0.5% of the original principal amount of the Tranche B termloan. Interest is payable on the last day of the applicable interest period butin no event less than quarterly. In March 2006, the Company entered intoan interest rate swap to mitigate its exposure to increases in interest rates. Forfurther details, see Note 11, “Financial Instruments and Risk Management.” Atany time prior to February 1, 2007, United may use the proceeds from anylower-cost refinancing to redeem some or all of the term loans at a price equalto 101% of the principal amount plus accrued and unpaid interest, if any, tothe date of redemption. Prepayment penalties do not apply to any term noteredemptions after February 1, 2007.

The obligations under the CreditFacility are unconditionally guaranteed by UAL and certain of the directand indirect domestic subsidiaries of UAL (other than United) (the “Guarantors”),and are secured by a security interest in substantially all of the tangible andintangible assets of the Guarantors. The obligations under the Credit Facilityare also secured by a pledge of the capital stock of United and the direct and indirectsubsidiaries of UAL and United, except that a pledge of any first-tier foreignsubsidiary is limited to 65% of the stock of such subsidiary and such foreignsubsidiaries are not required to pledge the stock of their subsidiaries.

The Credit Facility contains covenants that will limitthe ability of United and the Guarantors to, among other things, incur orguarantee additional indebtedness, create liens, pay dividends on or repurchasestock, make certain types of investments, pay dividends or other payments fromUnited’s direct or indirect subsidiaries, enter into transactions withaffiliates, sell assets or merge with other companies, modify corporatedocuments or change lines of business. The Credit Facility also requirescompliance with several financial covenants, including (i) a minimum ratioof earnings before interest, taxes, depreciation and amortization and aircraftrent (“EBITDAR”) to the sum of cash interest expense, cash aircraft rent (otherthan capitalized leases) and scheduled debt payments; (ii) a minimumunrestricted cash balance of $1.2 billion, to be reduced to $1.0 billion after December 31,2006 assuming United is in compliance with the ratio calculated under (i) above;and (iii) the market value of the collateral must be greater than 150% ofthe sum of (a) the aggregate outstanding amount of the loans plus (b) theundrawn amount of outstanding letters of credit, plus (c) the unreimbursedamount of drawings under any letters of credit, and (d) the terminationvalue of certain interest rate protection and hedging agreements with the exitlenders and their affiliates. TheCredit Facility received a rating of B+ from Standard & Poor’s and B1from Moody’s Investment Services.

United used all $2.45 billion of the availableborrowings under Tranche B and $161 million of the $200 million available underTranche A of the Credit Facility at the Effective Date to finance workingcapital needs and for other general corporate purposes, including repayment ofthe borrowings outstanding under the DIP Financing. Subsequently, the Companyrepaid $161 million on the revolving credit line borrowings and accessed theremaining $350 million of the delayed draw term loan. The Company expects to remain in compliance with Credit Facilitycovenants, but there are no assurances it will be able to do so. Failure tocomply with our Credit Facility covenants could result in a default under theCredit Facility unless we obtain a waiver of, or otherwise mitigate, thedefault. Additionally, the Credit Facility contains a cross-default provisionwith respect to defaults on our other credit arrangements that exceed $40million. A default could result in a termination of the Credit Facility and arequirement to accelerate repayment of all outstanding borrowings.

As of September 30, 2006, the Company hadoutstanding borrowings of $2.8 billion of which $2.4 billion is subject to aninterest rate of 9.25% with the remaining balance of $348 million at 9.125%. Inaddition, letters of credit were issued under the Credit Facility in anaggregate amount of $58 million subject to an interest rate of 3.75%. TheCompany is in compliance with the Credit Facility covenants.

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***Push Down of UALSecurities.****  *Pursuantto the Plan of Reorganization, UAL issued debt and equity instruments to certainunsecured creditors and employees of United. The following instruments havebeen pushed down to United and are reflected as debt of United as part offresh-start reporting:

*Limited-SubordinationNotes.**  *Asdiscussed in Note 1, “Voluntary Reorganization Under Chapter 11,” UALreached an agreement with five of the seven eligible employee groups to modifycertain terms of the notes.

In July 2006, UAL issued $726 million aggregateprincipal amount of 4.5% senior limited-subordination convertible notes to irrevocabletrusts established for the benefit of certain of its employees, includingemployees under collective bargaining agreements. The notes are unsecured,mature on June 30, 2021 and do not require any payment of principal priorto maturity. Interest is payable semi-annually, in arrears. Interest for thefirst year may be paid in shares of common stock, at the option of UAL. Thesenotes may be converted into UAL common stock at any time after October 23,2006, at an initial conversion price of $34.84 which may be subject toadjustment for certain dilutive items and events. The notes are junior in rightof payment upon liquidation to UAL’s obligations under the 5% seniorconvertible notes and 6% senior notes discussed below in “Newly-issued Debt.” Thenotes are callable in cash and/or UAL common stock beginning approximately fiveyears after the issuance date, except that UAL may elect to pay in common stockonly if the common stock has traded at not less than 125% of the conversionprice for the 60 consecutive trading days immediately prior to the redemptiondate. In addition, on each of June 30, 2011 and June 30, 2016,holders have the option to require UAL to repurchase its notes, which UAL mayelect to do through the payment of cash or UAL common stock, or a combinationof both.

Pursuant to the Plan ofReorganization, the notes were to be issued at a conversion rate of $46.86,which was based on a conversion price equal to 125% of the average closingstock price for the 60 consecutive trading days following February 1,2006, and an interest rate established so that the notes would trade at parupon issuance. Since the original conversion option was priced significantlyout of the money as of the note issuance date of July 25, 2006, UAL agreedwith employee groups to modify the conversion price to make the notes moremarketable and to provide UAL with a more favorable interest rate. Thismodification did not alter or eliminate the requirement that an interest ratebe selected so that the notes would trade at par upon issuance. Had UAL notmodified the conversion price, the interest rate required to meet the partrading requirement would have been significantly higher than 4.5%.

The Company accounted for this modification of debt inaccordance with EITF Issue No. 96-19, *“Debtor’s Accounting for aModification or Exchange of Debt Instruments”* and EITF Issue No. 05-7,*“Accounting for Modifications to Conversion OptionsEmbedded in Debt Instruments and Related Issues”* (“EITF 05-7”). TheCompany evaluated the original and modified terms of this debt instrument(including performing a fair valuation of the conversion feature before andafter the modification), and determined that the modification qualified to beaccounted for as an extinguishment of debt. As a result, the modifiedLimited-Subordination Notes were recorded at fair market value on their date ofissuance, which approximated the book value of the original extinguished notes,and no gain or loss was realized on the extinguishment. The Company had recordedthe original Limited-Subordination Notes at fair market value upon itsemergence from bankruptcy in accordance with fresh-start reporting.

Subsequent to the issuance of themodified notes in July 2006, the trusts sold the notes to third partiesand remitted the proceeds to the employee beneficiaries.

*Newly-issued Debt.**  *In addition to the mandatorily convertible preferredsecurities discussed in Note 10, “Parent Company Mandatorily ConvertiblePreferred Stock,” UAL issued the following new debt instruments on theEffective Date:

·       5%senior convertible notes were issued to certain holders of the O’Hare municipalbonds. The notes are unsecured, have a term of 15 years from the date ofissuance and do not require any 

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payment of principal priorto maturity. Interest is payable semi-annually, in arrears. Interest for thefirst year may be paid in kind, at the option of the Company, in UAL commonstock. These 5% senior convertible notes may be converted into UAL commonstock, at any time, at a per share price of $46.86. This conversion price issubject to adjustment for certain dilutive items and events. These notes arecallable at UAL’s option in cash or UAL common stock, under certain conditions,5 years after the issuance date. The holders have the option to require UAL torepurchase its notes on the 5th and 10th anniversary of the date of issuance, which UALmay elect to do through the payment of cash or UAL common stock, or acombination of both.

·       6%senior notes were issued to the PBGC on the Effective Date. These notes areunsecured, mature 25 years from issuance date and do not require any payment ofprincipal prior to maturity. Interest is payable semi-annually, in arrears. Interestmay be paid with cash, in kind notes or UAL common stock through 2011 andthereafter in cash. These notes are callable at any time at 100% of par value.

*Contingent SeniorUnsecured Notes.**  *Inaddition to the newly-issued debt as noted above, UAL is obligated to issue tothe PBGC 8% senior unsecured notes with an aggregate $500 millionprincipal amount in up to eight equal tranches of $62.5 million (with no morethan two tranches issued on a single date) upon the occurrence ofcertain financial trigger events. Any required tranche will be issued no laterthan 45 days following the end of any fiscal year in which there is an issuance trigger date*,*starting with the fiscal year2009 and ending with the fiscal year 2017. An issuance trigger date occurswhen, among other things, UAL’s EBITDAR exceeds $3.5 billion over the priortwelve months ending September 30 or December 31 of any applicablefiscal year, beginning with the fiscal year 2009. However, if the issuance of atranche would cause a default under any other securities then existing, UAL maysatisfy its obligations with respect to such tranche by issuing UAL commonstock having a market value equal to $62.5 million. Each issued tranche willmature 15 years from its respective issuance date; with interest payable incash in semi-annual installments; and will be callable at any time at 100% ofpar value**,**plus accrued and unpaid interest.

**(10)**   ParentCompany Mandatorily Convertible Preferred Stock

The following instrument has been pushed down toUnited and is reflected on United’s books as part of fresh-start reporting:

The 2% convertible preferred stock was issued to thePBGC on the Effective Date. The shares were issued at a liquidation value of$100 per share, convertible at any time following the second anniversary of theissuance date into UAL common stock at a conversion price of $46.86 per commonshare; with dividends payable in kind semi-annually (in the form of increasesto the liquidation value of the issued and outstanding shares); the preferredstock ranks pari passu with all current and future UAL or United preferredstock and is redeemable at any time at the then-current liquidation value (plus accrued andunpaid dividends) at the optionof the issuer. The preferred stock is mandatorily convertible 15 years from thedate of issuance. Upon a fundamental change or a change in ownership as definedin UAL’s restated certificate of incorporation, holders of shares of thepreferred stock are also entitled to receive payment equal to the amount theywould receive in an actual liquidation of UAL. At September 30, 2006, 5million shares of 2% convertible preferred stock were outstanding with anaggregate liquidation value of $504 million, which includes $4 million individends that were declared in June 2006.

At September 30,2006, the carrying value of the 2% convertible preferred stock was $356 millionwhich includes $4 million in dividends that were declared in June 2006. Duringthe third quarter of 2006, the Company accrued an additional $3 million ofdividends that will be payable during the fourth quarter of 2006.

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**(11)**   FinancialInstruments and Risk Management

Instruments designated as cash flow hedges receivefavorable accounting treatment under SFAS 133, as long as the hedge iseffective and the underlying transaction is probable. If both factors arepresent, the effective portion of the changes in fair value of these contractsis recorded in accumulated other comprehensive income (loss) until earnings areaffected by the cash flows being hedged.

Instruments classified as economic hedges do notqualify for hedge accounting under SFAS 133. Under this classification allchanges in the fair value of these contracts are recorded currently inoperating income, with the offset to either current assets or liabilities eachreporting period.

*AircraftFuel Hedges.*   In the one month endedJanuary 31, 2006, the Predecessor Company had no fuel hedges in place. Inthe eight months ended September 30, 2006, the Successor Company enteredinto and settled aircraft fuel hedges for its mainline operations that wereclassified as economic hedges. The Successor Company used swaps, collars andthree-way options to hedge a portion of its price risk related to projectedfuel requirements.

In the eight months ended September 30, 2006, theSuccessor Company recognized a loss of $11 million which included a $15 millionrealized gain for settled contracts, and $26 million of unrealizedmark-to-market losses for contracts settling after September 30, 2006, allof which were classified as mainline fuel expense in the CondensedStatements of Consolidated Operations (Unaudited). In the nine months endedSeptember 30, 2005, the Predecessor Company recognized gains of $50million in non-operating income, which included income of $4 million relatingto the options’ time-value, with hedge ineffectiveness being immaterial.

The Successor Company recognized a loss of $18 millionfor the three months ended September 30, 2006, which included an $8million realized gain and $26 million of unrealized mark-to-market losses, allof which were classified as mainline fuel expense in the CondensedStatements of Consolidated Operations (Unaudited). In the three monthsended September 30, 2005, the Predecessor Company recognized a gain of $10million (which included a loss of $1 million relating to the options’time-value and a gain of $11 million as a result of ineffective hedges) innon-operating income, mainly due to non-designated fuel hedges.

As of October 30, 2006, the Company had hedged34% of forecasted fourth quarter 2006 fuel consumption through crude oilcollars and swaps. On a weighted-average basis, hedge protection begins ifcrude exceeds $69 per barrel. Conversely, payment obligations begin if crude,on a weighted-average basis, drops below the same $69 per barrel.

As of October 30, 2006, the Company had hedged25% of forecasted fuel consumption for the first quarter 2007 predominantlythrough crude oil three-way collars with upside protection, on aweighted-average basis, beginning from $65 per barrel and capped at $74 perbarrel. Payment obligations, on a weighted-average basis, begin if crude dropsbelow $59 per barrel.

*InterestRate Swap.**  *TheCompany uses interest rate swap agreements to effectively limit exposure tointerest rate movements within the parameters of the Company’s interest ratehedging policy. In March 2006, the Successor Company entered into aninterest rate swap with an initial notional amount of $2.45 billion thatdecreases to $1.8 billion over the term of the swap. The swap expires in February 2012and requires that the Company pay a fixed rate of 5.14% and receive a floatingrate based on the three-month LIBOR rate. This swap is designated as a cashflow hedge under SFAS 133.

Assuming prevailinginterest rates, the fair value of our interest rate derivative agreement is theestimated amount that we would pay or receive to terminate the agreement. TheSuccessor Company recorded losses of $57 million and $15 million in accumulatedother comprehensive income for the three and eight months ended September 30,2006, respectively.

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**(12)**   Commitments,Contingent Liabilities and Uncertainties

***Legal ***and Environmental Contingencies.***  ***Unitedhas certain contingencies resulting from litigation and claims (includingenvironmental issues) incident to the ordinary course of business. Managementbelieves, after considering a number of factors, including (but not limited to)the views of legal counsel, the nature of contingencies to which we are subjectand prior experience, that the ultimate disposition of these contingencies willnot materially affect the Company’s consolidated financial position or resultsof operations.

The Company records liabilities for legal andenvironmental claims when a loss is probable and reasonably estimatable. Theseamounts are recorded based on our assessments of the likelihood of theireventual disposition. The amounts of these liabilities could increase or decreasein the near term, based on revisions to estimates relating to the variousclaims.

The Company anticipates that if ultimately foundliable, its damages from claims arising from the events of September 11,2001 could be significant; however, the Company believes that, under the AirTransportation Safety and System Stabilization Act of 2001, its liability willbe limited to its insurance coverage.

The Company has not incurred any materialenvironmental obligations relating to the events of September 11, 2001.

***Commitments.******  ***At September 30, 2006,future commitments for the purchase of property and equipment, principallyaircraft, approximated $2.5 billion, after deducting advance payments. TheCompany’s current commitments would require the payment of an estimated $0.1billion in 2006, $0.1 billion for the combined years of 2007 and 2008,$0.1 billion for the combined years of 2009 and 2010 and $2.2 billionthereafter primarily for the purchase of A319 and A320 aircraft. However, theCompany has the right to cancel these orders. Such action could cause theforfeiture of $91 million of advance payments if United does not take futuredelivery of these aircraft.

***Guarantees.***

*FuelConsortia.  *The Company participates innumerous fuel consortia with other carriers at major airports to reduce thecosts of fuel distribution and storage. Interline agreements govern the rightsand responsibilities of the consortia members and provide for the allocation ofthe overall costs to operate the consortia based on usage. The consortium (andin limited cases, the participating carriers) have entered into long-termagreements to lease certain airport fuel storage and distribution facilitiesthat are typically financed through tax-exempt bonds (either special facilitieslease revenue bonds or general airport revenue bonds), issued by various localmunicipalities. In general, each consortium lease agreement requires theconsortium to make lease payments in amounts sufficient to pay the maturingprincipal and interest payments on the bonds. As of December 31, 2005,approximately $449 million principal amount of such bonds were secured by fuelfacility leases at major hubs in which we participate. United’s maximum exposureis approximately $143 million principal amount of such bonds based on its pastconsortia participation and will only trigger if the other participatingcarriers or consortia members default on their lease payments. The guaranteeswill expire when the tax-exempt bonds are paid in full, which ranges from 2010to 2028. The Company did not record a liability at the time these indirectguarantees were made.

*Municipal BondGuarantees.*   The Company has entered intolong-term agreements to lease certain airport and maintenance facilities thatare financed through tax-exempt municipal bonds. These bonds were issued byvarious local municipalities to build or improve airport and maintenancefacilities. Under these lease agreements, United is required to make rentalpayments in amounts sufficient to pay the maturing principal and interestpayments on the bonds. However, as a result of the bankruptcy filing, Unitedwas not permitted to make payments on unsecured pre-petition debt. The Companywas advised 

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that thesemunicipal bonds may be unsecured (or in certain instances, partially secured). Theprincipal amounts of certain of these bonds are recorded in the CondensedStatements of Consolidated Financial Position (Unaudited) in accordance with GAAP. See Note 1, “Voluntary ReorganizationUnder Chapter 11—Significant Matters Remaining to be Resolved in Chapter11 Cases,”****for a discussion of ongoing litigationwith respect to certain of these obligations.

**(13)**   LeaseObligations

United leases aircraft, airport passenger terminalspace, aircraft hangars and related maintenance facilities, cargo terminals,other airport facilities, other commercial real estate, office and computerequipment and vehicles. As allowed under Section 365 of the BankruptcyCode, during our reorganization the Company assumed, assumed and assigned, orrejected certain executory contracts and unexpired leases, including leases ofreal property, aircraft and aircraft engines, subject to the approval of theBankruptcy Court and certain other conditions. During bankruptcy, the Companyalso entered into numerous aircraft financing term sheets with financiers, someof which were implemented prior to the Effective Date, and others of which wereimplemented on the Effective Date. These term sheets required the Company toapply lease modification testing as of fresh-start, which resulted in thereclassification of some financings as capital leases or operating leases forthe Successor Company, which were different from classifications for thePredecessor Company.

In connection with fresh-start reporting, aircraftoperating leases were adjusted to fair value and a net deferred assetof $263 million was established in the Condensed Statements of ConsolidatedFinancial Position (Unaudited) on the Effective Date, representing the netpresent value of the differences between stated lease rates in agreed termsheets and the fair market rates for similar aircraft. These deferred amountsare amortized on a straight-line basis as an increase to aircraft rent expenseover the applicable remaining lease periods, generally one to 18 years.

At September 30,2006, scheduled future minimum lease payments under capital leases(substantially all of which are for aircraft) and operating leases havinginitial or remaining noncancelable lease terms of more than one year were asfollows:

|                                          |   | Operating Leases |   | Capital      |   |
|-----------------------------------------------|--------|-----------------------|--------|--------------|--------|
| (In millions)                            |   | Aircraft              |   | Non-aircraft |   | Leases |   |
| Payable during—                          |   |                  |   |         |   |   |   |   |   |
| 2006                                          |   | $                     | 183    |         |   | $ | 120 |   |   | $ | 78 |   |
| 2007                                          |   | 774                   |   |         | 461    |   |   | 246 |   |
| 2008                                          |   | 762                   |   |         | 449    |   |   | 309 |   |
| 2009                                          |   | 729                   |   |         | 439    |   |   | 173 |   |
| 2010                                          |   | 692                   |   |         | 424    |   |   | 426 |   |
| After 2010                                    |   | 3,014                 |   |         | 3,211  |   |   | 861 |   |
| Total minimum  lease payments                 |   | $                     | 6,154  |         |   | $ | 5,104 |   |   | $ | 2,093 |   |
| Imputed interest  (at rates of 1.1% to 10.0%) |   |                  |   |         |   |   |   | (635 | ) |
| Present value of  minimum lease payments      |   |                  |   |         |   |   |   | 1,458 |   |
| Current portion                               |   |                  |   |         |   |   |   | (101 | ) |
| Long-term obligations  under capital leases   |   |                  |   |         |   |   |   | $ | 1,357 |   |

 

In May 2006, United entered into an agreementwith DEN to vacate certain leased gates over a twelve-month transition period. Inexchange, DEN agreed to build a regional jet facility and reduce United’sannual rental expense at DEN by $5 million in 2006 and no more than $10 millionper year thereafter, through 2024.

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At September 30, 2006, United leased 218 mainlineaircraft, 50 of which were accounted for as capital leases. These leases haveinitial terms of 5 to 26 years, with expiration dates ranging from 2007 through2024. Under the terms of most leases, we have the right to purchase theaircraft at the end of the lease term, in some cases at fair market value andin others at fair market value or a percentage of cost. Additionally, theamounts in the above table include lease payments related to our United Expresscontracts for 28 aircraft under capital leases and 262 aircraft under operatingleases as described in Note 2(h), “Summary of Significant AccountingPolicies—United Express.”

Certain of our aircraft lease transactions containprovisions such as put options giving the lessor the right to require us topurchase the aircraft at lease termination for a certain amount resulting inresidual value guarantees. Leases containing this or similar provisions arerecorded as capital leases on the balance sheet and, accordingly, any and allresidual value guarantee amounts contained in an aircraft lease are fullyreflected as capital lease obligations on the Condensed Statements ofConsolidated Financial Position (Unaudited).

In connection with certaineuro-denominated aircraft financings accounted for as capital leases, Unitedhad on deposit in certain banks at September 30, 2006 an aggregate 400million euros ($506 million) and $17 million in U.S. denominated deposits,and had pledged an irrevocable security interest in such deposits to certain ofthe aircraft lessors. These deposits will be used to repay an equivalent amountof recorded capital lease obligations, and are classified as aircraft leasedeposits in the accompanying Condensed Statements of Consolidated FinancialPosition (Unaudited).

**(14)**   Statementof Consolidated Cash Flows—Supplemental Disclosures

Supplementaldisclosures of cash flow information and non-cash investing and financingactivities were as follows:

|                                                   |   | Successor                                                     |   |   | Predecessor                                       |   |
|--------------------------------------------------------|--------|---------------------------------------------------------------|--------|--------|---------------------------------------------------|--------|
|                                                   |   | Period from  February 1  to September 30, |   |   | Period from  January 1 to 31, |   | Nine Months  Ended September 30, |   |
| (In millions)                                     |   | 2006                                                          |   |   | 2006                                              |   | 2005 |   |
| Cash paid during  the period for:                      |   |                                                          |   |   |                                              |   |   |   |   |   |   |   |   |   |
| Interest (net of amounts capitalized)                  |   |                                                          | $      | 496    |                                              |   |   |   | $ | 35 |   |   |   | $ | 302 |   |   |
| Income taxes                                           |   |                                                          | — |   |                                              |   |   | — |   |   |   | — |   |   |
| Non-cash transactions:                                 |   |                                                          |   |   |                                              |   |   |   |   |   |   |   |   |   |
| Long-term debt incurred for additions to other  assets |   |                                                          | $      | 362    |                                              |   |   |   | $ | — |   |   |   | $ | 21 |   |   |
| Decrease (increase) in pension intangible assets       |   |                                                          | — |   |                                              |   |   | (4 | ) |   |   | 657 |   |   |
| Net unrealized  gain (loss) on derivatives             |   |                                                          | (15    | )      |                                              |   |   | 24 |   |   |   | 28 |   |   |

 

In addition to the abovenon-cash transactions, see Note 1, “Voluntary Reorganization Under Chapter 11”,Note 9, “Debt Obligations” and Note 10, “Parent Company Mandatorily ConvertiblePreferred Stock.”

**(15)**   AdvancedPurchase of Miles

In October 2005, we entered into an amendment toour agreement with Chase regarding the Mileage Plus Visa card under which Chasepays for frequent flyer miles earned by Mileage Plus members for makingpurchases using the Mileage Plus Visa card. The existing agreement includes anannual guaranteed payment for the purchase of frequent flyer miles.

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In addition to extending the agreement until 2012 andmaking certain other adjustments in the relationship, the agreement providedfor an advance purchase of miles of $200 million. This advanced purchase ofmiles will reduce the annual guaranteed payment for 2006 through 2009 by $75million per year. In addition, the Company provided a junior lien upon, andsecurity interest in, all collateral pledged or in which security interest isgranted, as security in connection with the Credit Facility. The securityinterest is junior to other Credit Facility debt, and will apply to no morethan $850 million in total advance purchases at any time. As of September 30,2006 and December 31, 2005, the total advanced purchase of miles was $694million and $679 million, respectively.

At the Effective Date,upon adoption of fresh-start reporting in accordance with SOP 90-7, theCompany began to accrue imputed interest expense on its advanced purchase ofmiles balance. The accounting for imputed interest was based on Emerging IssuesTask Force Issue No. 88-18, “Sales of Future Revenues” (“EITF 88-18”).Due to the existence of the security interest, the agreement with Chase wasconsidered to be similar to debt. In the third quarter of 2006, the Companyreevaluated its accounting for this agreement and reached a final determinationthat the amounts received under the Chase agreement are deferred revenue. As aresult of this conclusion, in the third quarter of 2006 United reversed $30million of accrued interest that had been recorded between February and June 2006.

**(16)**   RelatedParty Transactions

At September 30, 2006 and December 31, 2005, United,through one of its wholly-owned subsidiaries, had a $200 million notereceivable from UAL, originally due on December 31, 2005. The balance atDecember 31, 2005 was classified as a reduction of United’s stockholder’sequity. The note has been retroactively amended and is now due December 31,2010 and has a variable interest rate.

Air Wis Services, Inc., a wholly-owned subsidiaryof UAL, owns Air Wisconsin, Inc. At January 31, 2006 and December 31,2005, United had outstanding loans to Air Wisconsin, Inc. in the amount of$115 million and $114 million, respectively. As a result of the bankruptcyfiling, these loans were classified as liabilities subject to compromise and weresubsequently eliminated upon exit. Air Wisconsin, Inc. and Air WisServices, Inc. have no relationship to Air Wisconsin Airlines Corporation,which is an independent regional carrier.

As of result of thebankruptcy filing in the predecessor period, we reclassified all intercompanyaccounts receivable to equity and all intercompany accounts payable toliabilities subject to compromise. At exit, certain intercompany balances wereeliminated and the remainder was reclassified to their pre-bankruptcy categories.

**(17)**   SpecialItems

*SFOMunicipal Bonds Security Interest.**  *InOctober 2006, the Bankruptcy Court issued an order declaring that theowners of certain municipal bonds, issued before the Petition Date to financeconstruction of certain leasehold improvements at SFO, shall be allowed asecured claim of approximately $27 million, based upon the court-determinedfair value of United’s underlying leasehold. Both parties have filed motionsfor reconsideration which may cause the Bankruptcy Court to make minoradjustments to the final amount of the secured claim. In accordance with SOP 90-7,as of the Effective Date, United recorded $60 million as its best estimate ofthe probable security interest to be awarded in this unresolved litigation. Inthe third quarter of 2006 the Company recorded a special item of $30 million asa benefit to income from continuing operations, to reduce the Company’srecorded obligation for the SFO municipal bonds to the amount the Company nowestimates is probable to be allowed by the Bankruptcy Court, in accordancewith Practice Bulletin 11. See Note 1, “Voluntary Reorganization Under Chapter 11—SignificantMatters Remaining to be Resolved in Chapter 11 Cases, item (a)” for furtherinformation.

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*Aircraft Impairment.*   Duringthe second quarter of 2005, the Company recognized a charge of $5 million foraircraft impairments related to the planned accelerated retirement of certainaircraft.

**(18)**   SeveranceAccrual

The Company has implemented several cost savinginitiatives that have resulted in a reduction in workforce such as theoutsourcing of administrative functions, the closing of certain call centersand its announcement of the elimination of certain salaried and managementpositions through attrition and layoffs. The Company’s severance policyprovides the affected employees salary continuation as well as certaininsurance benefits for a specified period of time. Accordingly, the Company hasestimated its severance obligations to be $20 million as of September 30,2006 in accordance with Statement of Financial Accounting Standards No. 112(As Amended),  “*Employers’Accounting for Postemployment Benefits—anamendment of FASB Statements No. 5 and 43.*”

Thefollowing is a reconciliation of activity related to the severance accrual forthe nine months ended September 30, 2006:

| (In millions)                                       |   |   |   |
|----------------------------------------------------------|--------|--------|--------|
| Balance at  December 31, 2005 (Predecessor Company) |   | $      | 7      |   |
| Accruals                                                 |   | 29     |   |
| Payments                                                 |   | (16    | )      |
| Balance at  September 30, 2006 (Successor Company)  |   | $      | 20     |   |

 

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

United Air Lines, Inc. (together with itsconsolidated subsidiaries, “we,” “our,” “us,” “United” or the “Company”) is awholly-owned subsidiary of UAL Corporation (“UAL”). United’s operations consistprimarily of the transportation of persons, property, and mail throughout theU.S. and abroad. United provides these services through full-sized jet aircraft(which we refer to as our “mainline” operations), as well as smaller aircraftin its regional operations conducted under contract by “United Express®” carriers.

United is one of the largest passenger airlines in theworld with more than 3,700 flights a day to more than 210 destinations throughits mainline and United Express services. United offers more than 1,600 averagedaily mainline departures (including Ted(SM)) to more than 120 destinations in 28countries and two U.S. territories. United provides regional service connectingprimarily with United’s domestic hubs through marketing relationships withUnited Express carriers, which provide more than 2,000 average daily departuresto more than 150 destinations. United serves virtually every major marketaround the world, either directly or through its participation in the StarAlliance®, the world’slargest airline network.

***Bankruptcy Matters.******  ***On December 9, 2002 (the“Petition Date”), UAL, United and 26 direct and indirect wholly-ownedsubsidiaries (collectively, the “Debtors”) filed voluntary petitions toreorganize their businesses under Chapter 11 of the United States BankruptcyCode in the United States Bankruptcy Court for the Northern District ofIllinois, Eastern Division (the “Bankruptcy Court”). On January 20, 2006,the Bankruptcy Court confirmed the Debtors’ Second Amended Joint Plan ofReorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the“Plan of Reorganization”). The Plan ofReorganization became effective and the Debtors emerged from bankruptcyprotection on February 1, 2006 (the “Effective Date”). In connection withUnited’s emergence from Chapter 11 bankruptcy protection, the Company adoptedfresh-start reporting, which resulted in significant changes to the historicalfinancial statements as discussed in the “Financial Results”******section below. See Note 1, “Voluntary Reorganization UnderChapter 11” in the Notes to Condensed Consolidated Financial Statements(Unaudited) for further information regarding bankruptcy matters.

The Company believes its restructuring has made Unitedcompetitive with network airline peers. The Company’s financial results clearlydemonstrate this progress—in every year of the restructuring, beginning in2003, United’s financial performance has improved despite continued significantincreases in fuel prices. While the annual cost of mainline fuel increased bymore than $2.0 billion between 2002 and 2005, United has reduced annualoperating losses by approximately $2.6 billion through 2005 and results ofoperations have continued to improve since the Effective Date.

***Recent Developments.******  ***United seeks to continuouslyimprove the delivery of its products and services to its customers, reduce itscosts, and increase its revenues. Some of these initiatives and other 2006developments include the following:

·       Inthe second quarter of 2006, the Company announced a program to reduce projected2007 expenses by $400 million. United has identified some specific programs torealize a portion of these savings, and continues to identify and evaluateother savings opportunities. For example, the Company expects to reduce costsby approximately $200 million through savings in such areas astelecommunications, airport services, catering, maintenance materials, aircraftground handling and regional affiliates. United also expects to reduceadvertising and marketing costs by as much as $60 million. The implementationof a new flight planning system, and reduced block time opportunities, areexpected to generate approximately $40 million in savings. In addition, theCompany estimates a $100 million reduction in general and administrativeexpense, which includes a reduction of salaried and management positions. TheCompany has realized approximately $135 million of these cost reductions in2006 and is on track to achieve the remaining $265 million in 2007.

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·       Inthe second quarter of 2006, the General Services Administration (“GSA”) awardedits annual U.S. government employee travel contracts for its upcoming fiscalyear beginning October 1, 2006. The GSA selected United to provide certainair transportation services for which the estimated annual revenue to Unitedwill be approximately $540 million, or 27.4% of the total estimated GSAemployee travel award. This award level represents a 6.7 point increase overthe prior contract year.

·       EffectiveSeptember 2006, United began charging travel agents within North America a$3.50 per passenger segment fee if low cost booking channels are not used. Overthe last few months, the Company has also renegotiated its agreements with thefour major global distributions system (“GDS”) providers to allow access to lowcost booking options for travel agencies. Increased use of low cost bookingchannels is expected to reduce the Company’s product distribution expenses.

·       Inthe third quarter of 2006, United announced the addition of 22 new flights fromWashington Dulles, which is expected to increase departures from Dulles by 14percent in the fall of 2006 as compared to the fall of 2005. In addition,United recently applied for nonstop service between Dulles and Beijing with theDepartment of Transportation. If approved, the new service would begin in March 2007.

·       TheCompany continues to identify and implement continuous improvement programs,and is actively training key employees in continuous improvement strategies andtechniques. These include such initiatives as optimization of aircraft andairport facilities and selected outsourcing of activities to morecost-effective service providers. The Company expects that these programs, aswell as the aforementioned expense reduction programs, will produce economicbenefits which will be necessary to mitigate inflationary cost pressures inother categories of operating expenses, such as airport usage fees, aircraftmaintenance, and employee healthcare benefits, among others.

***Financial Results.******  ***Upon United’s emergence fromChapter 11 bankruptcy protection, the Company adopted fresh-start reporting inaccordance with American Institute of Certified Public Accountants’ Statementof Position 90-7 “*Financial Reporting byEntities in Reorganization under the Bankruptcy Code*” (“SOP 90-7”).Thus, the consolidated financial statements prior to February 1, 2006,reflect results based upon the historical cost basis of the Company while thepost-emergence consolidated financial statements reflect the new basis ofaccounting which incorporates fair value adjustments recorded from theapplication of SOP 90-7. Therefore, financial statements for thepost-emergence periods are not comparable to the pre-emergence period financialstatements.

However, for purposes of preparing year-over-yeardiscussions of the results of operations, management has compared the SuccessorCompany’s results for the three months ending September 30, 2006, to thePredecessor Company’s results for the three months ending September 30,2005; and, has compared the combined results for the one month ended January 31,2006, and eight months ended September 30, 2006, to the PredecessorCompany’s results for the nine months ended September 30, 2005. Management’speriod-to-period comparisons include the identification of significantdifferences in results of operations attributable to the adoption offresh-start reporting. References to “Successor Company” refer to United on orafter February 1, 2006, after giving the effect to the application offresh-start reporting. References to “Predecessor Company” refer to Unitedprior to February 1, 2006.

In addition, the table below presents a reconciliationof the Company’s net income (loss) to net income (loss), excludingreorganization items. The Company believes that these year-over-yearcomparisons of the results of operations and the table below provide managementand investors a better perspective of the Company’s core business and on-goingoperational and financial performance and trends.

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The following tablepresents the Company’s net income (loss) for the three and nine month periodsended September 30, 2006, as compared to the year-ago periods:

|                                                    |   | Successor                                        |   | Predecessor                                                   |   | Successor                                                  |   | Predecessor                                 |   | Combined                                   |   | Predecessor |   |
|---------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|-------------|--------|
|                                                    |   | Three Months  Ended September 30, |   | Period from  February 1 to  September 30, |   | Period from  January 1  to January 31, |   | Nine Months  Ended  September 30, |   | Nine Months  Ended  September 30 |   |
| (in millions)                                      |   | 2006                                             |   | 2005                                                          |   | 2006                                                       |   | 2006                                        |   | 2006                                       |   | 2005        |   |
| Net income (loss)                                       |   |                                             | $      | 195                                                           |   |                                                       |   | $                                           | (1,641 | )                                          |   |        | $      | 91 |   |   |   | $ | 22,626 |   |   |   | $ | 22,717 |   |   |   | $ | (4,124 | ) |   |
| Reorganization  items, net                              |   |                                             | — |                                                          |   |                                                       | 1,709  |                                        |   |                                       | — |        |   |   | (22,709 | ) |   |   | (22,709 | ) |   |   | 3,825 |   |   |
| Net income (loss),  excluding reorganization items, net |   |                                             | $      | 195                                                           |   |                                                       |   | $                                           | 68     |                                       |   |        | $      | 91 |   |   |   | $ | (83 | ) |   |   | $ | 8 |   |   |   | $ | (299 | ) |   |

 

The Company’simproved results of operations in 2006, as compared with the year-ago periodsis primarily due to the following:

·       Operatingrevenues increased $528 million, or 11%, and $1.8 billion, or 14%, in the threeand nine month periods ended September 30, 2006, respectively, as comparedto the same year-ago periods. These revenue increases were due to United’simproved world-wide network optimization and a healthy revenue environment forUnited and the airline industry. In addition, the Company has experienced someslowing in year-over-year revenue growth in the late third quarter and earlyfourth quarter of 2006, relative to the strong summer period of 2006.

·       Regionalaffiliates’ contribution to results of operations increased significantly inthe 2006 periods as compared to the 2005 periods as a result of an improvedregional operation cost structure resulting from the bankruptcy reorganization,and increased revenues as noted above.

The improvementsnoted above were partially offset by the following:

·       Mainlinefuel costs increased $262 million and $819 million in the three and nine monthperiods of 2006, respectively, as compared to the same periods in 2005. Theseincreases primarily resulted from significant increases in the average pricepaid for jet fuel between periods.

·       TheCompany incurred non-cash stock based compensation expense of $28 million and$137 million in the three and nine month periods of 2006, respectively, as aresult of the adoption of stock-based compensation plans as of the EffectiveDate. There was no stock based-compensation expense in the same periods of2005.

·       Aircraftmaintenance materials and outside repairs expense increased $53 million and$123 million in the three and nine month periods ended September 30, 2006,respectively, as compared to the year-ago periods. As further discussed in “Resultsof Operations” below, the increases are due to higher volumes of outsourcedmaintenance and increased rates under certain maintenance contracts.

·       Unitedincurred increased non-cash amortization and depreciation charges of $23million and $49 million in the three and nine month periods ended September 30,2006, respectively, as compared to the same year-ago periods, on assets thatwere recorded at fair value as part of fresh-start reporting, including theamortization of definite-lived intangible assets newly recorded underfresh-start reporting. These charges were partially offset by a favorable $30million special item recognized in the third quarter of 2006 resulting from theresolution of a preconfirmation contingency for bankruptcy-related municipalbond litigation. United did not recognize similar expense impacts in theyear-ago periods.

·       Interestexpense increased in the three and nine month periods in 2006, as compared withthe same periods of 2005, primarily due to increased debt outstanding as aresult of the Company’s new 

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capital structureresulting from its emergence from bankruptcy. The Company also recordednon-cash interest expense in the 2006 periods resulting from the amortizationof certain fair value adjustments to its outstanding debt as of the EffectiveDate under fresh-start reporting. In addition, the Company reported interestincome of $79 million and $178 million in the three and nine month periodsended September 30, 2006, respectively, as compared to a total of $21million and $47 million in the 2005 periods. The 2005 interest income amountsincluded $13 million and $30 million that were recorded in reorganizationexpense.

The January 2006 reorganization income ofapproximately $22.7 billion primarily relates to the discharge of liabilitiesand other fresh-start adjustments recorded in connection with the Company’semergence from bankruptcy. In the three and nine months ended September 30,2005, the reorganization charges of approximately $1.7 billion and $3.8billion, respectively, were primarily for pension-related and aircraft claimcharges. For complete information related to the Company’s fresh-startadjustments, see Note 1, “Voluntary Reorganization Under Chapter 11—Fresh StartReporting” in the Notes to Condensed Consolidated Financial Statements(Unaudited).

***Liquidity.******  ***As of September 30,2006, the Company had total cash, including restricted cash and short-terminvestments, of $4.8 billion. The Company’s strong cash position resulted fromits recapitalization upon United’s emergence from bankruptcy and strongoperating cash flows of $1.3 billion during the combined nine month period of2006, as compared to operating cash flow of $776 million in the same period of2005.

***Capital Commitments.******  ***At September 30, 2006,future commitments for the purchase of property and equipment, principallyaircraft, approximated $2.5 billion, after deducting advance payments. Forfurther details, see Note 12, “Commitments, Contingent Liabilities andUncertainties” in the Notes to Condensed Consolidated Financial Statements(Unaudited).

***Contingencies.******  ***During the course of itsChapter 11 proceedings, the Company successfully reached settlements with mostof its creditors and resolved most pending claims against the Debtors. However,the following material matters remain to be resolved in the Bankruptcy Court. Thefollowing discussion provides an overview of the status of unresolvedbankruptcy matters as well as other contingencies. For further details on thesematters, see Note 1, “Voluntary Reorganization Under Chapter 11—BankruptcyConsiderations” and Note 12, “Commitments, Contingent Liabilities andUncertainties” in the Notes to Condensed Consolidated Financial Statements(Unaudited).

*MunicipalBond Obligations.*   The Company is a party tonumerous long-term agreements to lease certain airport and maintenancefacilities that are financed through tax-exempt municipal bonds that are issuedby various local municipalities to build or improve airport and maintenance facilities.As a result of the Company’s bankruptcy filing, United was not permitted tomake payments on unsecured pre-petition debt. The Company had been advised thatthese municipal bonds may be unsecured (or in certain instances, partiallysecured) pre-petition debt. Therefore, through the bankruptcy process, theCompany had either settled or rejected certain pre-petition debt associatedwith the municipal bonds. Certain ofthe Company’s municipal bond obligations relating to John F. KennedyInternational Airport (“JFK”), LosAngeles International Airport (“LAX”),and San Francisco International Airport (“SFO”) have been conclusively adjudicated as financings and not true leases,while the bonds relating to Denver International Airport (“DEN”) have been conclusively adjudicated as a truelease. There remains pending litigation to determine the value of the securityinterests, if any, that the bondholders at LAX and SFO have in the underlyingUnited leaseholds.

*PensionBenefit Terminations.*   In June 2006, theUnited States District Court for the Northern District of Illinois (“DistrictCourt”) entered an order approving the termination of the United Airlines PilotDefined Benefit Pension Plan (“Pilot Plan”). Air Line Pilots Association (“ALPA”)and United Retired Pilots Benefit Protection Association (“URPBPA”) filed anappeal with the United States Court 

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of Appeals for the SeventhCircuit (“Court of Appeals”). In July 2006, the Court of Appeals grantedUnited’s motion to consolidate this appeal with URPBPA’s Plan of ReorganizationConfirmation Order appeal, discussed below. Briefing on both appeals was completed in August 2006and oral argument occurred in September 2006. On October 25, 2006,the Court of Appeals affirmed the District Court’s order approving thetermination of the Pilot Plan effective December 30, 2004. The parties mayseek rehearing or petition the United States Supreme Court (“Supreme Court”)for a writ of certiorari on or before November 9, 2006 (December 9,2006 for PBGC) or January 23, 2007, respectively.****Ifthe termination order is ultimately reversed on appeal and it results in thereversal of the termination of one or more defined benefit pension plans, itcould have a materially adverse effect on our results of operation andfinancial condition.

There is also a dispute with respect to the continuingobligation of United to pay non-qualified pension benefits to retired pilotspending settlement of the involuntary termination proceeding. On October 6,2005, the Bankruptcy Court ruled that the Company was obligated to make paymentof all non-qualified pension benefits for October 2005. Subsequently, during the first quarter of2006, the District Court dismissed the Company’s appeal of the Bankruptcy Court’sOctober 6, 2005 order in light of its earlier decision reversing theBankruptcy Court’s termination order. On October 25, 2006, the Court ofAppeals reversed the District Court’s order dismissing for lack of ripeness theCompany’s appeal of the Bankruptcy Court’s October 6, 2005 order andremanded the case with instructions to reverse the Bankruptcy Court’s ordercompelling payment of non-qualified benefits for October 2005 or latermonths. The parties may seek rehearing or petition the Supreme Court for a writof certiorari on or before November 9, 2006 (December 9, 2006 forPBGC) or January 23, 2007, respectively. On November 6, 2006, ALPAfiled a petition for rehearing on the Court of Appeals reversal of the October 6,2005 order.

In March 2006, the Bankruptcy Court ruled thatthe Company was obligated to make payment of all non-qualified pension benefitsfor the months of November and December 2005 and January 2006. TheBankruptcy Court also ruled that the Company’s obligation to pay non-qualifiedpension benefits ceased as of January 31, 2006. The Company filed a noticeof appeal of the Bankruptcy Court’s ruling to the District Court. URPBPA andALPA also filed notices of appeal with respect to the Bankruptcy Court’s order,which were subsequently consolidated with the Company’s appeal. United agreedwith URPBPA and ALPA to pay the disputed non-qualified pension benefits for themonths of November and December 2005 and January 2006, anaggregate amount totaling approximately $17 million, into an escrow account. The District Court affirmed the BankruptcyCourt’s ruling in September 2006. The Company filed a notice of appeal ofthe District Court’s ruling to the Court of Appeals. URPBPA and ALPA alsoappealed the District Court’s decision. The Company subsequently filed a motionto consolidate its appeal from the Bankruptcy Court’s October 2005non-qualified benefits order with the three appeals from the Bankruptcy Court’sMarch 2006 non-qualified benefits order. The Court of Appeals denied theCompany’s motion, but issued an order staying briefing on the March 2006non-qualified benefits order until further order of the Court of Appeals. Inlight of the Court of Appeals’ October 25, 2006 decision described above,the Company is reasonably optimistic of a successful outcome of its appeal inthis matter, although there can be no assurances that the ultimate outcome ofthis appeal will be favorable to the Company.

*Objectionto the Plan of Reorganization Confirmation.*   URPBPAfiled a notice of appeal to the Court of Appeals challenging the District Court’sapproval of the Bankruptcy Court’s Plan of Reorganization confirmation order. InFebruary 2006, United filed a motion to dismiss the appeal based on thesubstantial consummation of the Plan of Reorganization. In June 2006, theDistrict Court dismissed URPBPA’s appeal. Subsequently, URPBPA filed a noticeof appeal of the decision to the Court of Appeals. In July 2006, the Courtof Appeals granted United’s motion to consolidate URPBPA’s appeal with URPBPAand ALPA’s Pilot Plan termination appeal. Briefing on both appeals wascompleted in August 2006 and the Court of Appeals heard oral argument in September 2006,with respect to the termination appeal. On October 25, 2006, the Court ofAppeals reversed the District Court’s order dismissing for lack of ripeness 

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URPBPA’s appeal of theconfirmation order and remanded the case to the District Court withinstructions to affirm the confirmation order. The parties may seek rehearingor petition the Supreme Court for a writ of certiorari on or before November 9,2006 (December 9, 2006 for PBGC) or January 23, 2007, respectively. Ifthe confirmation order was ultimately reversed on appeal, it could have amaterially adverse effect on the Company’s financial performance.

*Legal andEnvironmental.**  *Unitedhas certain contingencies resulting from litigation and claims (includingenvironmental issues) incident to the ordinary course of business. Managementbelieves, after considering a number of factors, including (but not limited to)the views of legal counsel, the nature of contingencies to which we are subjectand prior experience, that the ultimate disposition of these contingencies willnot materially affect the Company’s consolidated financial position or resultsof operations. When appropriate the Company accrues for these matters based onits assessments of the likelihood of their eventual disposition. The amounts ofthese liabilities could increase or decrease in the near term, based onrevisions to estimates relating to the various claims.

The Company anticipatesthat if ultimately found liable, its damages from claims arising from theevents of September 11, 2001, could be significant; however, the Companybelieves that, under the Air Transportation Safety and System Stabilization Actof 2001, its liability will be limited to its insurance coverage. We have notincurred any material environmental obligations relating to the events of September 11,2001.

**Results of Operations**

*The air travelbusiness is subject to seasonal fluctuations and historically, results ofoperations are better in*the second and third quarters. United’s operations can be impacted by adverseweather in any period and our first and fourth quarter results normally reflectreduced travel demand.

*Third Quarter 2006 Compared with Third Quarter 2005*

Earnings from operationsincreased $161 million to $339 million in the three months ended September 30,2006 as compared to $178 million in the year-ago period. Net income was $195million in the 2006 period which represents a $127 million increase over 2005net income of $68 million, excluding reorganization charges of $1.7 billion. Theseimprovements are due to the net impact of the items discussed below. See “Overview”above, for further information on the exclusion of reorganization items. Alsosee Note 1, “Voluntary Reorganization Under Chapter 11—FinancialStatement Presentation and Fresh-Start Reporting” in the Notes to CondensedConsolidated Financial Statements (Unaudited) for further information onreorganization items.

*Operating Revenues.  *Thefollowing table illustrates the year-over-year percentage change in majorcategories of operating revenues on a consolidated basis.

|                               |   | Successor                                                                                                                    |   | Predecessor                                                                                                                  |   |       |   |   |   |
|------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|--------|
|                               |   | Three Months Ended September 30,                                                                         |   | Increase/                                                                                                               |   | %          |   |
| (in millions)                 |   |           2006           |   |           2005           |   | (Decrease) |   | Change |   |
| Operating  revenues:               |   |                                                                                                                         |   |                                                                                                                         |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Passenger—United Airlines     |   |                                                                                                                         | $      | 3,916                                                                                                                        |   |       |   | $      | 3,467  |   |   |   | $ | 449 |   |   |   | 13.0 |   |   |
| Passenger—Regional Affiliates |   |                                                                                                                         | 773    |                                                                                                                         |   |       | 662    |   |   |   | 111 |   |   |   | 16.8 |   |   |
| Cargo                              |   |                                                                                                                         | 183    |                                                                                                                         |   |       | 174    |   |   |   | 9 |   |   |   | 5.2 |   |   |
| Other operating revenues           |   |                                                                                                                         | 304    |                                                                                                                         |   |       | 345    |   |   |   | (41 | ) |   |   | (11.9 | ) |   |
|                               |   |                                                                                                                         | $      | 5,176                                                                                                                        |   |       |   | $      | 4,648  |   |   |   | $ | 528 |   |   |   | 11.4 |   |   |

 

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Mainline operating revenue per available seat mile (“RASM”)increased 7% during the quarter. Mainline traffic increased 2% on a 3% increasein capacity, resulting in a 0.3 point decrease in load factor to 83.6%.The lower load factor along with a 10% increase in yield produced a 10%year-over-year increase in mainline passenger revenue per available seat mile (“PRASM”).Regional affiliate PRASM was 9% higher than last year driven by a 6% increasein yield and a 2.2 point increase in load factor as compared to the thirdquarter of 2005. The decrease in other operating revenues is primarily due to a$10 million reduction in United Aviation Fuels Corporation (“UAFC”) third partysales and an $8 million reduction in third party maintenance service revenues.

The tablebelow sets forth selected operating data by reportable segment and regionalaffiliates for United consolidated operations:

|                                                        |   | (a)         |   |    |   |     |   |   |   |     |   | (a)            |   |         |   |
|-------------------------------------------------------------|--------|-------------|--------|---------|--------|----------|--------|--------|--------|----------|--------|----------------|--------|--------------|--------|
|                                                        |   | North  |   |    |   |     |   |   |   |     |   | Regional  |   |         |   |
|                                                        |   | America     |   | Pacific |   | Atlantic |   | Latin  |   | Mainline |   | Affiliates     |   | Consolidated |   |
| Three Months Ended  September 30, 2006: |   |        |   |    |   |     |   |   |   |     |   |           |   |         |   |   |   |   |   |   |   |
| Available seat miles  (“ASM”) (in millions)  |   | 22,632      |   | 8,012   |   |     | 5,141  |   |   | 1,316    |   | 37,101         |   |         | 4,145  |   |   |   | 41,246 |   |   |
| Revenue passenger miles  (“RPM”) (in millions)    |   | 18,716      |   | 6,735   |   |     | 4,504  |   |   | 1,076    |   | 31,031         |   |         | 3,248  |   |   |   | 34,279 |   |   |
| Passenger revenues (in millions)                       |   | $           | 2,436  |    | $      | 792      |   |   | $      | 566      |   |           | $      | 122          |   | $ | 3,916 |   |   | $ | 773 |   |   |   | $ | 4,689 |   |   |
| PRASM (cents)                                               |   | 10.76       |   | 9.89    |   |     | 11.02  |   |   | 9.29     |   | 10.55          |   |         | 18.65  |   |   |   | 11.37 |   |   |
| Yield (cents) (b)                                           |   | 12.93       |   | 11.74   |   |     | 12.41  |   |   | 11.19    |   | 12.58          |   |         | 23.80  |   |   |   | 13.64 |   |   |
| Load factor (percent)                                       |   | 82.7        |   | 84.1    |   |     | 87.6   |   |   | 81.9     |   | 83.6           |   |         | 78.4   |   |   |   | 83.1 |   |   |
| Three Months  Ended September 30, 2005:                |   |        |   |    |   |     |   |   |   |     |   |           |   |         |   |   |   |   |   |   |   |
| ASM (in millions)                                           |   | 21,710      |   | 8,195   |   |     | 5,094  |   |   | 1,118    |   | 36,117         |   |         | 3,878  |   |   |   | 39,995 |   |   |
| RPM (in millions)                                           |   | 18,187      |   | 6,800   |   |     | 4,404  |   |   | 915      |   | 30,306         |   |         | 2,956  |   |   |   | 33,262 |   |   |
| Passenger revenues (in millions)                       |   | $           | 2,153  |    | $      | 710      |   |   | $      | 507      |   |           | $      | 97           |   | $ | 3,467 |   |   | $ | 662 |   |   |   | $ | 4,129 |   |   |
| PRASM (cents)                                               |   | 9.92        |   | 8.67    |   |     | 9.95   |   |   | 8.66     |   | 9.60           |   |         | 17.08  |   |   |   | 10.32 |   |   |
| Yield (cents) (b)                                           |   | 11.78       |   | 10.41   |   |     | 11.45  |   |   | 10.42    |   | 11.39          |   |         | 22.41  |   |   |   | 12.37 |   |   |
| Load factor (percent)                                       |   | 83.8        |   | 83.0    |   |     | 86.5   |   |   | 81.9     |   | 83.9           |   |         | 76.2   |   |   |   | 83.2 |   |   |

 

(a)              TheCompany aggregates Regional Affiliates results within the North America segmentfor segment reporting purposes in accordance with Statement of FinancialAccounting Standards No. 131, “*Disclosures about Segmentsof an Enterprise and Related Information*” (“SFAS 131”). See further discussion of segments in Note 7—“SegmentInformation” in the Notes to Condensed Consolidated Financial Statements(Unaudited).

(b)             Segmentyields exclude charter revenue and revenue passenger miles. Yield is calculatedas Passenger Revenues divided by RPM.

All of United’s segments posted positive unit revenuegrowth due to strong customer demand and an improved pricing environment.Strong domestic demand and significant capacity reductions in the domesticmarket led to an 8% increase in North America PRASM. North America posted a 13%increase in passenger revenue due to 4% higher capacity and 10% higher yield. A1.1 point lower load factor partially offset these improvements. Pacificpassenger revenue was up 12% due to 13% higher yield and a 1.1 pointincrease in load factor. Atlantic passenger revenue was up 12% due to 8% higheryield and 1.1 point higher load factor. Latin America passenger revenuewas up 26% due to an 18% increase in passenger miles and 7% higher yield.

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*Operating Expenses*.   The following table illustrates theyear-over-year percentage change in operating expenses on a consolidated basis.Cost per available seat mile (“CASM”) is calculated by dividing total operatingexpenses by available seat miles:

|                                               |   | Successor                                                                                                                          |   | Predecessor                                                                                                                        |   |       |   |   |   |
|----------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|--------|
|                                               |   | Three Months Ended September 30,                                                                               |   | Increase/                                                                                                                          |   | %          |   |
| (in millions)                                 |   |           2006            |   |           2005            |   | (Decrease) |   | Change |   |
| Operating  expenses:                               |   |                                                                                                                               |   |                                                                                                                               |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Aircraft fuel                                      |   |                                                                                                                               | $      | 1,368                                                                                                                              |   |       |   | $      | 1,106  |   |   |   | $ | 262 |   |   |   | 23.7 |   |   |
| Salaries and related costs                         |   |                                                                                                                               | 1,059  |                                                                                                                               |   |       | 1,000  |   |   |   | 59 |   |   |   | 5.9 |   |   |
| Regional affiliates                                |   |                                                                                                                               | 713    |                                                                                                                               |   |       | 722    |   |   |   | (9 | ) |   |   | (1.2 | ) |   |
| Purchased services                                 |   |                                                                                                                               | 425    |                                                                                                                               |   |       | 374    |   |   |   | 51 |   |   |   | 13.6 |   |   |
| Aircraft maintenance materials and outside repairs |   |                                                                                                                               | 252    |                                                                                                                               |   |       | 199    |   |   |   | 53 |   |   |   | 26.6 |   |   |
| Depreciation and amortization                      |   |                                                                                                                               | 225    |                                                                                                                               |   |       | 205    |   |   |   | 20 |   |   |   | 9.8 |   |   |
| Landing fees and other rent                        |   |                                                                                                                               | 199    |                                                                                                                               |   |       | 235    |   |   |   | (36 | ) |   |   | (15.3 | ) |   |
| Cost of third party sales                          |   |                                                                                                                               | 150    |                                                                                                                               |   |       | 182    |   |   |   | (32 | ) |   |   | (17.6 | ) |   |
| Aircraft rent                                      |   |                                                                                                                               | 104    |                                                                                                                               |   |       | 87     |   |   |   | 17 |   |   |   | 19.5 |   |   |
| Commissions                                        |   |                                                                                                                               | 91     |                                                                                                                               |   |       | 74     |   |   |   | 17 |   |   |   | 23.0 |   |   |
| Special operating items                            |   |                                                                                                                               | (30    | )                                                                                                                                  |   |       | — |   |   |   | (30 | ) |   |   | — |   |   |
| Other operating expenses                           |   |                                                                                                                               | 281    |                                                                                                                               |   |       | 286    |   |   |   | (5 | ) |   |   | (1.7 | ) |   |
| Total operating  expense                           |   |                                                                                                                               | $      | 4,837                                                                                                                              |   |       |   | $      | 4,470  |   |   |   | $ | 367 |   |   |   | 8.2 |   |   |

 

Higher fuel costs have had a significant adverseeffect on operating expenses. For the third quarter, mainline fuel expenseincreased 24% from $1.1 billion in 2005 to $1.4 billion in 2006,which was primarily due to a mainline fuel price increase of 21% from anaverage of $1.90 per gallon in the 2005 period to $2.30 per gallon in the 2006period. The 2006 fuel costs include a net loss of $18 million on economichedges, including realized gains of $8 million and unrealized mark-to-marketlosses of $26 million. The 2005 period did not include any significant hedgeimpacts in fuel costs. Although the Company incurred a net hedge loss due to arecent decline in the price of crude oil, its unhedged fuel costs did notsignificantly benefit from the jet fuel price decline that occurred late in thethird quarter of 2006 because its mainline fuel procurement process generallysets the price for fuel approximately three to four weeks prior to the actualdate of fuel consumption, thus delaying the favorable impact of current pricedeclines.

Salaries and related costs increased by$59 million in the third quarter of 2006, as compared to the same quartera year ago. The Company recorded $28 million of expense for stock-basedcompensation resulting from the adoption of SFAS 123R effective January 1,2006. Stock-based compensation expense will continue to impact the Company’s salariesand related costs during the remainder of 2006, with expense of$20 million anticipated for the fourth quarter and $157 million forthe full year of 2006. Expenses for the Company’s success sharing and profitsharing programs increased $17 million in the third quarter of 2006, ascompared to the same quarter a year ago. These two programs allow employees toearn additional compensation if the Company meets a set of quarterlyreliability, customer satisfaction and unit cost targets, and some compensationcan also be earned based upon annual performance goals. The Company’spostretirement welfare cost increased by $14 million in the third quarter of2006 due to fresh-start reporting impacts.

Labor productivity improved between quarters due tothe Company’s continuous improvement efforts across its operations and theoutsourcing of certain non-core business functions to third parties.Productivity, which is calculated as ASMs divided by average full-timeequivalent employees,  improved 6% duringthe third quarter of 2006, as compared to the third quarter of 2005, sincefull-time equivalent employees decreased by 3% while mainline capacityincreased by 3% between periods.

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Regional affiliates expense decreased $9 million, or1%, during the third quarter of 2006 compared to the same period of 2005. Thecost of reimbursing regional affiliate jet fuel rose 16% to $224 millionin the third quarter of 2006 from $193 million in the same period of 2005.Regional affiliate CASM decreased by 8% despite the fuel price increaseyear-over-year; capacity grew by 7% between periods. The Company has completedits transition from the Air Wisconsin Aviation Corporation (“AWAC”) capacityagreement to new regional carriers, and also received the cost benefit of therestructured lower-cost regional carrier capacity agreements negotiated duringbankruptcy during the third quarter of 2006. The improvements from the Company’soverall network optimization, together with the replacement of some 50-seatregional jets with 70-seat regional jets, have also contributed to thereduction of regional affiliate CASM.

Purchased services increased $51 million, or 14%,for the third quarter of 2006, as compared to the same period in 2005,primarily driven by a $33 million increase in outsourcing costs,$9 million increase in post-bankruptcy professional fees which wereclassified as reorganization expenses by the Predecessor Company and a$6 million increase in credit card fees due to higher revenues sold oncredit cards. The Company recently outsourced certain categories of itstechnology operations, and has further increased the outsourcing of callcenters and certain airport functions. The offsetting benefits of higheroutsourcing costs are reflected in the 3% reduction in manpower noted above forsalaries and related costs. The Company expects to continue to increaseoutsourcing of various functions in future periods wherever this produceseconomic and operational benefits.

Aircraft maintenance materials and outside repairsexpense increased by $53 million, or 27%, over the third quarter of 2005,driven by higher volumes of outsourced engine maintenance and the rateincreases built into the V2500 power-by-the-hour engine maintenance contract toaccount for increased engine age.  Goingforward, United expects to face higher inflationary cost pressure on enginematerials expense that are not covered under long-term repair agreements, andhigher engine power-by-the-hour rates as engines continue to age.

Landing fees and other rent decreased $36 million, or15%, primarily due to a $13 million credit received from O’Hare airport forrate adjustments pertaining to 2004 and $12 million attributable to additionalcredits received under the Company’s Denver airport leases.

Depreciation and amortization increased $20 million,or approximately 10%, year-over-year. The Company estimates that therevaluation of its assets and the recording of definite-lived intangible assetsas part of fresh-start reporting unfavorably impacted this category of expenseby approximately $23 million in the third quarter of 2006, as compared to theyear-ago quarter. See Note 1, “Voluntary Reorganization UnderChapter 11—Fresh Start Reporting” in the**Notes to CondensedConsolidated Financial Statements (Unaudited) for further information.

Cost of third party sales decreased by $32 million, or18%, primarily due a $9 million reduction in UAFC third party cost of fuelsales and a $12 million reduction in the cost to provide maintenance services.

Aircraft rent increased $17 million, or 20%,year-over-year primarily due to fresh-start reporting impacts. On the EffectiveDate, the Company recorded its operating leases at fair value in accordancewith SOP 90-7. Since most of the leases had terms that were favorable ascompared to current market rates, the Company recorded a deferred charge thatis being amortized over the remaining term of the leases. This amortizationincreased aircraft rent expense by approximately $9 million. In addition,United received the benefit from amortization of deferred gains on aircraftsale-leaseback transactions during 2005. The Company did not receive a similarbenefit in 2006, since the deferred gains were eliminated as part offresh-start reporting.

Commissions increased $17 million, or 23%, primarilydue to higher commissionable revenues between quarters and a higher commissionrate on new contract terms with some online distribution 

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partners. These newcontracts, while lowering the Company’s overall distribution expenses, resultedin a shift of expense from GDS fees to the commissions expense category.

During the third quarter of 2006, the Companyrecognized a benefit to operating expense in accordance with AICPA PracticeBulletin 11, “*Accounting for Preconfirmation Contingenciesin Fresh-Start Reporting*” (“Practice Bulletin 11”), of approximately$30 million to reflect a revision of the Company’s estimated liability for itsSFO lease based on a recent Bankruptcy Court ruling. See Note 17, “SpecialItems” in the Notes to Condensed Consolidated Financial Statements forfurther information.

*Non-operating expenses.  *Compared to the third quarter of 2005, non-operatingexpenses excluding reorganization items decreased by $30 million, from$110 million in the third quarter of 2005 to $80 million in the thirdquarter of 2006.

|                     |   | Successor                                                                                                                    |   | Predecessor                                                                                                                  |   |    |   |   |   |
|--------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|
|                     |   | Three Months Ended September 30,                                                                         |   | Better/                                                                                                                      |   | %       |   |
| (in millions)       |   |           2006           |   |           2005           |   | (Worse) |   | Change |   |
| Other income  (expense): |   |                                                                                                                         |   |                                                                                                                         |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense         |   |                                                                                                                         | $      | (165                                                                                                                         | )      |    |   | $      | (131   | ) |   |   | $ | (34 | ) |   |   | (26.0 | ) |   |
| Interest income          |   |                                                                                                                         | 79     |                                                                                                                         |   |    | 8      |   |   |   | 71 |   |   |   | 887.5 |   |   |
| Interest capitalized     |   |                                                                                                                         | 3      |                                                                                                                         |   |    | 1      |   |   |   | 2 |   |   |   | 200.0 |   |   |
| Miscellaneous, net       |   |                                                                                                                         | 3      |                                                                                                                         |   |    | 12     |   |   |   | (9 | ) |   |   | (75.0 | ) |   |
|                     |   |                                                                                                                         | $      | (80                                                                                                                          | )      |    |   | $      | (110   | ) |   |   | $ | 30 |   |   |   | 27.3 |   |   |

 

The $12 million of miscellaneous income in the thirdquarter of 2005 was primarily related to net gains recorded for jet fuel hedgeswhich did not qualify for hedge accounting; in 2006, most hedges wereclassified as economic hedges and the related gains and losses were recorded infuel expense. Interest cost on the Credit Facility in the third quarter of 2006was higher than interest cost for the DIP Financing in the prior year,primarily due to a significantly higher outstanding principal balance in the2006 period. The Company also recorded non-cash interest costs in the thirdquarter of 2006 associated with the amortization of various discounts to debtinstruments and capital leases which were recorded at the Effective Date torecord these obligations at fair value in accordance with fresh-startreporting. Increases in interest income of $71 million resulted fromhigher cash balances and improved rates of return on short-term investments;additionally, in 2005 most interest income was classified as a reorganizationitem under SOP 90-7.

Interest expense for the three months ended September 30,2006, also includes a net positive non-cash adjustment of $30 million resultingfrom our discontinuation of the accrual of imputed interest expense associatedwith the advanced purchase of miles recorded in the Company’s CondensedStatements of Consolidated Financial Position (Unaudited). In the third quarter of 2006, the Company reversed allamounts that were accrued between February 2006 and June 2006. See Note 15, “Advanced Purchase of Miles”in the**Notes to Condensed Consolidated Financial Statements (Unaudited)for further information.

*Income Taxes.  *In the third quarter of 2006, the Successor Companyrecorded income tax expense for the eight month period ended September 30,2006 based on an estimated 2006 effective tax rate of approximately 41%. Noincome tax expense was recognized in comparable periods of 2005 or in the firsttwo quarters of 2006.

*First Nine Monthsof 2006 Compared with First Nine Months of 2005*

Earnings from operations increased $471 million to$434 million in the combined nine months ended September 30, 2006 ascompared to a loss of $37 million reported in the year ago period. Excludingthe reorganization income (charges) of $22.7 billion in 2006, and $(3.8)billion in 2005, net income improved by $307 million in the 2006 period.

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*Operating Revenues*.   Thefollowing table illustrates the year-over-year percentage change in revenues ona consolidated basis:

|                               |   | Predecessor                                    |   | Successor                                         |   | Combined                  |   | Predecessor               |   |      |   |   |   |
|------------------------------------|--------|------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|-----------|--------|--------|--------|
|                               |   | Period from                               |   | Period from                                  |   | Periods                   |   | Nine Months          |   |      |   |   |   |
|                               |   | January 1 to  January  31, |   | February 1  to September  30, |   | Ended  September 30, |   | Ended  September 30, |   | Increase/ |   | %      |   |
| (in millions)                 |   | 2006                                           |   | 2006                                              |   | 2006 (a)             |   | 2005                      |   | Decrease  |   | Change |   |
| Operating  revenues:               |   |                                           |   |                                              |   |                      |   |                      |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Passenger—United Airlines     |   |                                           | $      | 1,074                                             |   |                      |   | $                         | 9,904  |      |   |   | $      | 10,978 |   |   |   | $ | 9,684 |   |   |   | $ | 1,294 |   |   |   | 13.4 |   |   |
| Passenger—Regional Affiliates |   |                                           | 204    |                                              |   |                      | 1,999  |                      |   |      | 2,203  |   |   |   | 1,818 |   |   |   | 385 |   |   |   | 21.2 |   |   |
| Cargo                              |   |                                           | 56     |                                              |   |                      | 501    |                      |   |      | 557    |   |   |   | 526 |   |   |   | 31 |   |   |   | 5.9 |   |   |
| Other operating revenues           |   |                                           | 120    |                                              |   |                      | 889    |                      |   |      | 1,009  |   |   |   | 910 |   |   |   | 99 |   |   |   | 10.9 |   |   |
|                               |   |                                           | $      | 1,454                                             |   |                      |   | $                         | 13,293 |      |   |   | $      | 14,747 |   |   |   | $ | 12,938 |   |   |   | $ | 1,809 |   |   |   | 14.0 |   |   |

 

(a)              Thecombined period includes the results for one month ended January 31, 2006(Predecessor Company) and eight months ended September 30, 2006(Successor Company).

Similar to the third quarter of 2006, strong demand,industry capacity restraint and yield improvements all contributed to a$1.7 billion, or 15%, increase in total passenger revenue to$13.2 billion for the nine months ended September 30, 2006 on only a2.7% increase in the Company’s consolidated capacity. The increase in cargorevenue was primarily due to improved yield and higher fuel surcharge revenues.The increase in other revenue of $99 million was primarily due to a$72 million increase in UAFC third-party fuel trading revenue.

Mainline yield increased 10% and mainline trafficincreased 3% on a 2% increase in capacity and a 0.9 point increase in loadfactor, resulting in an 11% year-over-year increase in mainline PRASM. Regionalaffiliate PRASM was 12% higher than last year driven by an 8% increase in yieldand a 3.1 point increase in load factor. Consolidated PRASM increased 12%year-over-year, while consolidated RASM increased 11%.

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Thetable below presents selected operating data by reportable segment and regionalaffiliates for United consolidated operations:

|                                                                     |   | (c)  North   America |   | Pacific |   | Atlantic |   | Latin  |   | Mainline |   | (c)  Regional  Affiliates |   | Consolidated |    |
|---------------------------------------------------------------------|--------|---------------------------|--------|---------|--------|----------|--------|--------|--------|----------|--------|---------------------------|--------|--------------|---------|
| Nine Months Ended  September 30, 2006 (a): |   |                      |   |    |   |     |   |   |   |     |   |                      |   |         |    |
| ASM (in millions)                                                   |   | 65,502                    |   | 23,673  |   | 14,255   |   | 4,350  |   | 107,780  |   | 11,767                    |   |         | 119,547 |   |   |
| RPM (in millions)                                                   |   | 53,986                    |   | 19,753  |   | 11,972   |   | 3,525  |   | 89,236   |   | 9,220                     |   |         | 98,456  |   |   |
| Passenger revenues (in millions)                               |   | $                         | 6,951  |    | $      | 2,177    |   | $      | 1,468  |     | $      | 382                       |   | $            | 10,978  |   | $ | 2,203 |   |   | $ | 13,181 |   |   |
| PRASM (cents)                                                       |   | 10.61                     |   | 9.20    |   | 10.30    |   | 8.78   |   | 10.19    |   | 18.72                     |   |         | 11.03   |   |   |
| Yield (cents) (b)                                                   |   | 12.82                     |   | 11.00   |   | 12.16    |   | 10.64  |   | 12.26    |   | 23.90                     |   |         | 13.35   |   |   |
| Load factor (percent)                                               |   | 82.4                      |   | 83.4    |   | 84.0     |   | 81.1   |   | 82.8     |   | 78.4                      |   |         | 82.4    |   |   |
| Nine Months Ended  September 30, 2005:                         |   |                      |   |    |   |     |   |   |   |     |   |                      |   |         |    |   |   |
| ASM (in millions)                                                   |   | 62,921                    |   | 23,807  |   | 14,888   |   | 3,892  |   | 105,508  |   | 10,901                    |   |         | 116,409 |   |   |
| RPM (in millions)                                                   |   | 51,560                    |   | 19,415  |   | 12,354   |   | 3,062  |   | 86,391   |   | 8,206                     |   |         | 94,597  |   |   |
| Passenger revenues (in  millions)                                   |   | $                         | 5,983  |    | $      | 1,986    |   | $      | 1,396  |     | $      | 319                       |   | $            | 9,684   |   | $ | 1,818 |   |   | $ | 11,502 |   |   |
| PRASM (cents)                                                       |   | 9.51                      |   | 8.34    |   | 9.38     |   | 8.19   |   | 9.18     |   | 16.68                     |   |         | 9.88    |   |   |
| Yield (cents) (b)                                                   |   | 11.56                     |   | 10.18   |   | 11.11    |   | 10.13  |   | 11.16    |   | 22.15                     |   |         | 12.11   |   |   |
| Load factor (percent)                                               |   | 81.9                      |   | 81.6    |   | 83.0     |   | 78.7   |   | 81.9     |   | 75.3                      |   |         | 81.3    |   |   |

 

(a)              The combined periodincludes the results for one month ended January 31, 2006 (PredecessorCompany) and eight months ended September 30, 2006 (SuccessorCompany). 

(b)             Segment yieldsexclude charter revenue and revenue passenger miles.

(c)              The Companyaggregates Regional Affiliates results within the North America segment forsegment reporting purposes in accordance with SFAS 131. See further discussionof segments in Note 7—“Segment Information” in the Notes to CondensedConsolidated Financial Statements (Unaudited).

Mainline and regional affiliates showed strong revenueperformance in the first nine months of 2006 due to increased demand andcompetitive capacity restraint. Consolidated PRASM increased 12% year-over-yearprimarily driven by a 10% increase in yield.

For the nine months ended September 30, 2006,mainline passenger revenue increased 13% year-over-year due to 10% higher yieldand a 0.9 point increase in load factor. The North America segment posteda 16% increase in passenger revenue due to 11% higher yield and a0.5 point increase in load factor. Pacific posted a 10% increase in passengerrevenue due to 8% higher yield and a 1.8 point increase in load factor.Atlantic posted a 5% increase in passenger revenue due to 9% higher yield and a1.0 point increase in load factor. Latin posted a 20% increase inpassenger revenue due to a 15% increase in passenger miles, 5% higher yield anda 2.4 point increase in load factor.

Regional Affiliates passenger revenue increased 21%due to a 12% increase in passenger miles, 8% higher yield and a 3.1 pointincrease in load factor. Consolidated passenger revenue increased 15% due to2.7% higher capacity, 10% higher yield and a 1.1 point increase in loadfactor.

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*Operating Expenses.**  *The following table illustrates the year-over-yearpercentage change in operating expenses on a consolidated basis: 

|                                                    |   | Predecessor                                                      |   | Successor                                                                 |   | Combined                                 |   | Predecessor                                 |   |      |   |   |   |
|----------------------------------------------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|------------------------------------------|--------|---------------------------------------------|--------|-----------|--------|--------|--------|
|                                               |   | Period from  January 1 to  January  31, |   | Period from  February 1 to   September  30, |   | Periods  Ended   September 30, |   | Nine Months  Ended  September 30, |   | Increase/ |   | %      |   |
| (in millions)                                 |   | 2006                                                             |   | 2006                                                                      |   | 2006 (a)                            |   | 2005                                        |   | Decrease  |   | Change |   |
| Operating expenses:                           |   |                                                             |   |                                                                      |   |                                     |   |                                        |   |      |   |   |   |
| Aircraft fuel                                      |   |                                                             | $      | 362                                                                       |   |                                     |   | $                                           | 3,323  |      |   |   | $      | 3,685 |   |   |   | $ | 2,866 |   |   |   | $ | 819 |   |   |   | 28.6 |   |   |
| Salaries and related costs                         |   |                                                             | 358    |                                                                      |   |                                     | 2,854  |                                        |   |      | 3,212  |   |   |   | 3,081 |   |   |   | 131 |   |   |   | 4.3 |   |   |
| Regional affiliates                                |   |                                                             | 228    |                                                                      |   |                                     | 1,896  |                                        |   |      | 2,124  |   |   |   | 2,052 |   |   |   | 72 |   |   |   | 3.5 |   |   |
| Purchased services                                 |   |                                                             | 133    |                                                                      |   |                                     | 1,168  |                                        |   |      | 1,301  |   |   |   | 1,116 |   |   |   | 185 |   |   |   | 16.6 |   |   |
| Aircraft maintenance materials and outside repairs |   |                                                             | 80     |                                                                      |   |                                     | 688    |                                        |   |      | 768    |   |   |   | 645 |   |   |   | 123 |   |   |   | 19.1 |   |   |
| Depreciation and amortization                      |   |                                                             | 68     |                                                                      |   |                                     | 591    |                                        |   |      | 659    |   |   |   | 618 |   |   |   | 41 |   |   |   | 6.6 |   |   |
| Landing fees and other rent                        |   |                                                             | 75     |                                                                      |   |                                     | 569    |                                        |   |      | 644    |   |   |   | 693 |   |   |   | (49 | ) |   |   | (7.1 | ) |   |
| Cost of third party sales                          |   |                                                             | 63     |                                                                      |   |                                     | 464    |                                        |   |      | 527    |   |   |   | 459 |   |   |   | 68 |   |   |   | 14.8 |   |   |
| Aircraft rent                                      |   |                                                             | 30     |                                                                      |   |                                     | 289    |                                        |   |      | 319    |   |   |   | 318 |   |   |   | 1 |   |   |   | 0.3 |   |   |
| Commissions                                        |   |                                                             | 24     |                                                                      |   |                                     | 224    |                                        |   |      | 248    |   |   |   | 227 |   |   |   | 21 |   |   |   | 9.3 |   |   |
| Special operating items                            |   |                                                             | — |                                                                      |   |                                     | (30    | )                                           |   |      | (30    | )      |   |   | 5 |   |   |   | (35 | ) |   |   | — |   |   |
| Other operating expenses                           |   |                                                             | 85     |                                                                      |   |                                     | 771    |                                        |   |      | 856    |   |   |   | 895 |   |   |   | (39 | ) |   |   | (4.4 | ) |   |
|                                               |   |                                                             | $      | 1,506                                                                     |   |                                     |   | $                                           | 12,807 |      |   |   | $      | 14,313 |   |   |   | $ | 12,975 |   |   |   | $ | 1,338 |   |   |   | 10.3 |   |   |

 

(a)              Thecombined period includes the results for one month ended January 31, 2006(Predecessor Company) and eight months ended September 30, 2006(Successor Company). 

Higher fuel costs have had a significant adverseeffect on the Company’s operating expenses and contributed significantly to a7% increase in the Company’s consolidated CASM during the first nine months of2006, compared to the same period of 2005. 

For the first nine months ended September 30,2006, mainline aircraft fuel expense increased 29% from $2.9 billion in2005 to $3.7 billion in 2006. Mainline fuel price increased from anaverage of $1.69 per gallon to $2.14 per gallon, while fuel consumptionincreased 1.8% on a 2% increase in mainline capacity. The Company alsorecognized a net fuel hedge loss of $11 million in aircraft fuel expensein the first nine months of 2006. 

Salaries and related costs increased$131 million, or 4%, year-over-year primarily as a result of$137 million of expense recorded for the Successor Company’s stock-basedcompensation plans in the first nine months of 2006 in accordance with theadoption of SFAS 123R, effective January 1, 2006. The Company alsorecorded severance-related charges of approximately $22 million in thesecond quarter of 2006. These cost increases were partially offset by a 6%year-over-year improvement in labor productivity resulting from the Company’scontinuous improvement efforts and selective outsourcing of certain non-corefunctions.

Regional affiliate expense increased $72 million,or 4% during the first nine months of 2006 compared to the same period lastyear, due to an 8% increase in capacity and a 26% increase in fuel costs.Regional affiliate CASM declined 4% despite the fuel price increaseyear-over-year due to the benefits of restructured lower-cost regional carriercapacity agreements during the first nine months of 2006 along with regionalcarrier network optimization and the replacement of some 50-seat regional jetswith 70-seat regional jets. 

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Purchased servicesincreased $185 million, or 17%, during the first nine months of 2006,compared to the same period in 2005, primarily due to a $92 millionincrease in outsourcing costs reflecting increased outsourcing of variousnon-core work activities, a $28 million increase in post-bankruptcyprofessional fees, which were classified as reorganization expenses by thePredecessor Company, and a $16 million increase in credit card fees due tohigher revenue. The offsetting benefits of higher outsourcing costs arereflected in a 4% reduction in manpower associated with the 6% laborproductivity improvement noted for salaries and related costs.

For the first nine monthsended September 30, 2006, aircraft maintenance materials and outsiderepairs expense increased $123 million, or 19%, year-over-year primarilydue to engine-related maintenance cost increases as noted in the discussion ofthird quarter aircraft maintenance costs, above. 

As discussed inNote 1, “Voluntary Reorganization Under Chapter 11—Fresh StartReporting” in the Notes to Condensed Consolidated Financial Statements(Unaudited), the Company revalued its assets and liabilities to estimatedfair values. The $2.8 billion increase in intangible assets was primarilyresponsible for the $41 million increase in the Company’s depreciation andamortization expense in the nine month period in 2006 as compared with the sameperiod in 2005. The net impact of increased intangible asset amortizationoffset by decreased depreciation expense from fresh-start reporting adjustmentswas approximately $49 million for the nine months ended September 30, 2006.

The increase in cost ofthird party sales was primarily due to higher UAFC third-party cost of fuelsales of $70 million which is consistent with the related increase in UAFCthird-party fuel revenues noted above.

Other operating expensedecreased $39 million in the first nine months of 2006, as compared to thefirst nine months of 2005. Upon adoption of fresh-start reporting, the Companyrevalued its frequent flyer accrual to estimated fair value and changed itsaccounting policy to a deferred revenue model for the Successor Company. Forperiods on or after February 1, 2006, adjustments to the frequent flyeraccrual are recorded to passenger and other operating revenues, whereasperiodic adjustments under the incremental cost basis were recognized in otheroperating expense. See “Critical Accounting Policies” below, for furtherdetails.

During the third quarterof 2006, the Company recognized a benefit of approximately $30 million tooperating expense to reflect a revision to its estimated liability for its SFOlease based on a recent Bankruptcy Court ruling. In 2005, the Companyrecognized a charge of $5 million for aircraft impairments related to theplanned accelerated retirement of certain aircraft. See Note 17, “Special Items”in the Notes to Condensed Consolidated Financial Statements (Unaudited)for further information. 

*Non-operatingexpenses.  **Compared to the first nine months of 2005,non-operating expenses excluding reorganization items increased $104 million.*

|                                   |   | Predecessor                                                      |   | Successor                                                                 |   | Combined                                 |   | Predecessor                                 |   |    |   |   |   |
|-----------------------------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|------------------------------------------|--------|---------------------------------------------|--------|---------|--------|--------|--------|
|                              |   | Period from  January 1 to  January  31, |   | Period from  February 1 to   September  30, |   | Periods  Ended   September 30, |   | Nine Months  Ended  September 30, |   | Better/ |   | %      |   |
| (in millions)                |   | 2006                                                             |   | 2006                                                                      |   | 2006 (a)                            |   | 2005                                        |   | Worse   |   | Change |   |
| Other income (expense): |   |                                                             |   |                                                                      |   |                                     |   |                                        |   |    |   |   |   |
| Interest expense                  |   |                                                             | $      | (42                                                                       | )      |                                     |   | $                                           | (518   | )       |   |   | $      | (560 | ) |   |   | $ | (357 | ) |   | $ | (203 | ) |   | (56.9 | ) |   |
| Interest income                   |   |                                                             | 6      |                                                                      |   |                                     | 172    |                                        |   |    | 178    |   |   |   | 17 |   |   | 161 |   |   | 947.1 |   |   |
| Interest capitalized              |   |                                                             | — |                                                                      |   |                                     | 10     |                                        |   |    | 10     |   |   |   | (4 | ) |   | 14 |   |   | — |   |   |
| Miscellaneous, net                |   |                                                             | — |                                                                      |   |                                     | 2      |                                        |   |    | 2      |   |   |   | 78 |   |   | (76 | ) |   | (97.4 | ) |   |
|                              |   |                                                             | $      | (36                                                                       | )      |                                     |   | $                                           | (334   | )       |   |   | $      | (370 | ) |   |   | $ | (266 | ) |   | $ | (104 | ) |   | 39.1 |   |   |

 

(a)              Thecombined period includes the results for one month ended January 31, 2006(Predecessor Company) and eight months ended September 30, 2006(Successor Company).

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The Company incurred a$203 million increase in interest expense, which was partly due to thehigher outstanding principal balance of the Credit Facility for the SuccessorCompany, as compared to the lower DIP Financing balance for the PredecessorCompany. Interest expense in the combined nine month period of 2006 was alsounfavorably impacted by the associated amortization of various discounts whichwere recorded on debt instruments and capital leases to record theseobligations at fair value in accordance with fresh-start reporting. Interestincome increased $161 million year-over-year reflecting a higher cashbalance in 2006, as well as higher rates of return on certain investments;interest income also increased due to the classification of most interestincome in 2005 as restructuring items in accordance with SOP 90-7. In the firstnine months of 2005, the Company recorded $50 million of fuel hedge gainswhich did not qualify for hedge accounting in non-operating income, while inthe combined nine month period of 2006 the $11 million net realized andunrealized loss from economic fuel hedges was recognized in aircraft fuelexpense.

*Income Taxes.**  *The Successor Company recorded income taxes for theeight month period ended September 30, 2006 based on its estimatedeffective tax rate of approximately 41%.

**Liquidity and Capital Resources**

***Liquidity.****  *United’s total of cash, cashequivalents and short-term investments, including restricted cash, was $4.8billion at September 30, 2006 compared to $2.7 billion at December 31,2005.

As of September 30,2006, the Company had $828 million in restricted cash, a decrease of $100 millionas compared to December 31, 2005. Restricted cash primarily representscash collateral to secure workers’ compensation obligations, security depositsfor airport leases and reserves with institutions that process our credit cardticket sales. We may be required to post significant additional cash collateralto meet such obligations in the future.

In October 2005, theCompany entered into a new processing agreement for MasterCard and Visa creditcard transactions with JP Morgan Chase Bank, N.A. and Paymentech, L.P. Theagreement replaces our former processing agreement with National ProcessingCompany (which expired on January 15, 2006) and provides credit cardprocessing services for transactions on and after January 16, 2006. Theprocessing agreement required us to initially establish a restricted cashreserve to secure the potential obligations to customers using a credit cardform of payment in the event the Company does not provide the ticketedtransportation services. The amount of this reserve is determined by applying areserve percentage to the Company’s aggregate then-outstanding bank card airtraffic liability. The reserve percentage will vary between zero and 100% basedupon our credit rating and our ability to comply with the fixed charge ratioand unrestricted cash covenants under the Credit Facility. The processingagreement expires on December 31, 2012. At September 30, 2006 theamount of the reserve was $297 million. This reserve was calculated using areserve percentage less than the maximum requirement. Any significant futureincrease in the actual reserve percentage required under the processingagreement could have a material adverse effect on the Company’s liquidity.

Concurrently with enteringinto the processing agreement, the Company entered into an amendment to itsagreement with Chase regarding the Mileage Plus Visa card under which Chasepays for frequent flyer miles earned by Mileage Plus members for makingpurchases using the Mileage Plus Visa card. The amended agreement includes anannual guaranteed payment for the purchase of frequent flyer miles. In additionto extending the agreement until 2012 and making certain other adjustments inthe relationship, the amended agreement provides for an advance purchase ofmiles of $200 million. Thisadvanced purchase of miles will reduce the annual guaranteed payment for 2006through 2009 by $75 million per year. In addition, the Company provided ajunior lien upon, and security interest in, all collateral pledged or in whichsecurity interest is granted, as security in connection with the CreditFacility. The security interest is junior to other Credit Facility debt, andwill apply to no more than $850 million in total advance purchases at any time.

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*OperatingActivities.  *The Company generated cash fromoperations of $1.3 billion in the combined nine month period endedSeptember 30, 2006. Cash generated from operations was $776 million forthe nine months ended September 30, 2005. The higher operating cash flowgenerated in 2006 was due to improved results of operations, among othersmaller changes.

The Company made cash contributions of $225 millionrelated to its defined contribution plans during the combined nine month periodof 2006. Detailed information regarding the Company’s defined benefit anddefined contribution plans is included in Note 5, “Retirement andPostretirement Plans” in the Notes to Condensed Consolidated FinancialStatements (Unaudited).

*InvestingActivities.  *Cash provided by investingactivities was $103 million in the combined nine month period endedSeptember 30, 2006, compared to cash used of $230 million in the ninemonth period ended September 30, 2005. Cash released from segregated fundsin the combined nine month period of 2006 provided $200 million in proceeds.Cash proceeds from short-term investments decreased by $72 million in thecombined nine months ended September 30, 2006, as compared to the firstnine months of 2005. The reduction in restricted cash balances provided $100million of cash proceeds in the combined nine month period of 2006, as comparedto cash used to increase restricted cash of $70 million in the nine monthsended September 30, 2005.

During the nine months ended September 30, 2006,the Company did not reject or return any aircraft under Section 1110 ofthe Bankruptcy Code, although the sale of nine non-operating B767-200 aircraftduring this period provided $19 million in cash proceeds from the dispositionof property and equipment.

*FinancingActivities.**  *Cashgenerated through financing activities was $924 million in the combined ninemonth period ended September 30, 2006, compared to $55 million during thefirst nine months of 2005. During the combined nine months of 2006, the Companymade principal payments under long-term debt and capital lease obligations of$1.7 billion and $71 million, respectively, including the repayment of the DIPfacility. In addition, the Company made a scheduled payment of $14 millionaccording to the terms of the Credit Facility during the third quarter of 2006.

The Company obtained access to up to $3.0 billion insecured exit financing which consists of a $2.45 billion term loan, $350million additional draw term loan and a $200 million revolving credit line. Onthe Effective Date, $2.45 billion of the $2.8 billion term loan and the entirerevolving credit line was drawn and used to repay the DIP Financing as notedbelow and to make other payments required upon exit from bankruptcy, as well asto provide ongoing liquidity to conduct post-reorganization operations. Subsequently,the Company repaid $161 million on the revolving credit line and accessed theremaining $350 million on the delayed draw term loan. For further details onthe Credit Facility, see Note 9, “Debt Obligations” in the Notes toCondensed Consolidated Financial Statements (Unaudited).

At September 30, 2006, the Company had a total of$2.8 billion of debt and $58 million in letters of credit outstanding under theCredit Facility. The DIP Financing was repaid on the Effective Date with theproceeds from the Credit Facility. Forfurther details, see Note 1, “Voluntary Reorganization Under Chapter 11—DIPFinancing” in the Notes to Condensed Consolidated FinancialStatements (Unaudited).

During the combined nine months of 2006, the Companysecured control of 14 aircraft that were included in the 1997-1 EETCtransaction by remitting $281 million to the 1997-1 EETC trustee onbehalf of the holders of the Tranche A certificates. The Company subsequentlyrefinanced the 14 aircraft on March 28, 2006 with the $350 million delayeddraw term loan provided under the Credit Facility. The 14 aircraft arecomprised of four B737 aircraft, two B747 aircraft, four B777 aircraft and fourA320 aircraft. In addition, the Company completed definitive documentation in July 2006,as discussed in Note 1—“Voluntary Reorganization Under Chapter 11,” with regardto the three post-1997 EETC financing transactions. This resulted in sixB757 aircraft and one B747 aircraft converting from leased to owned status.

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At September 30,2006, future commitments for the purchase of property and equipment,principally aircraft, approximated $2.5 billion, after deducting advancepayments. Our current commitments are primarily for the purchase of A319 andA320 aircraft. The Company has the right to cancel these orders. Such actioncould cause the forfeiture of $91 million of advance payments if United doesnot take future delivery of these aircraft. For further details, see Note 12, “Commitments,Contingent Liabilities and Uncertainties” in the Notes to CondensedConsolidated Financial Statements (Unaudited).

**Critical AccountingPolicies**

For complete information regarding the Company’scritical accounting policies, see “Critical Accounting Policies” in Management’sDiscussion and Analysis of Financial Condition and Results of Operations inUnited’s Annual Report on Form 10-K for the year 2005. The followinginformation details significant changes to the Company’s critical accountingpolicies since year-end.

*Fresh-StartReporting.*   In connection with its emergencefrom Chapter 11 protection as of February 1, 2006, the Company adoptedfresh-start reporting in accordance with SOP 90-7. Accordingly, United’sassets, liabilities and equity were valued at their respective fair values as ofthe Effective Date. The excess reorganization value over the fair value oftangible and identifiable intangible assets has been reflected as goodwill inthe accompanying Condensed Statements of Consolidated Financial Position(Unaudited).

Fair values of assets and liabilities represent theCompany’s best estimates based on independent appraisals and valuations and,where the foregoing have not yet been completed or are not available, industrydata and trends and by reference to relevant market rates and transactions. Accordingly,we cannot provide assurance that the estimates, assumptions, and valuesreflected in the asset and liability valuations will be realized, and actualresults could vary materially from those estimates. In accordance with SFAS141, the preliminary measurement and allocation of fair value to assets andliabilities is subject to additional adjustment within one year after emergencefrom bankruptcy as additional or improved information on asset and liabilityvaluations becomes available.

To facilitate the calculation of the enterprise valueof the Successor Company, we developed a set of financial projections. Based onthese financial projections, and with the assistance of financial advisors, theequity value was estimated by the Company, using various valuation methods,including (i) a comparison of the Company and its projected performance tothe market values of comparable companies, (ii) a review and analysis ofseveral recent transactions of companies in similar industries to the Company,and (iii) a calculation of the present value of projected future cashflows using the Company’s financial projections.

The estimated enterprise value, and correspondingequity value, is highly dependent upon achieving the future financial results setforth in the projections as well as the realization of certain otherassumptions that cannot be guaranteed. The estimated equity value of theCompany was calculated to be approximately $2.0 billion. The foregoingestimates and assumptions are inherently subject to significant uncertaintiesand contingencies beyond the reasonable control of the Company.

See Note 1, “Voluntary Reorganization Under Chapter 11—Fresh-StartReporting” in the Notes to the Condensed Consolidated Financial Statements(Unaudited) for further details related to the fresh-start fair valueadjustments.

*FrequentFlyer Accounting.*   In accordance withfresh-start reporting, the Company revalued its frequent flyer award liabilityto estimated fair value at the Effective Date. The Successor Company also haselected to change its accounting policy for its Mileage Plus Frequent Flyer Programto a deferred revenue model. The Company believes that accounting for frequentflyer miles using a deferred revenue model is preferable, as it establishes aconsistent valuation methodology for both miles earned by frequent flyers andmiles sold to non-airline business partners.

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Prior to the Effective Date, the Predecessor Companyhad used the current industry practice of accounting for frequent flyer milesearned on United flights on an incremental cost basis as an accrued liabilityand as advertising expense, while miles sold to non-airline business partnerswere accounted for on a deferred revenue basis. As of the Effective Date, thedeferred revenue value of all frequent flyer miles will be measured usingequivalent ticket value as described below, and all associated adjustments willbe made to operating revenues.

The deferred revenue measurement method used to recordfair value of the frequent flyer award liability on and subsequent to theEffective Date was to allocate an equivalent weighted-average ticket value toeach outstanding mile, based upon projected redemption patterns for availableaward choices when such miles are consumed. Such value was estimated assumingredemptions on both United and other participating carriers in the Mileage Plusprogram, and by estimating the relative proportions of awards to be redeemed byclass of service within broad geographic segments of the Company’s operations,including North America, Atlantic, Pacific and Latin America.

The fresh-start valuation adjustment at the EffectiveDate resulted in a $2.4 billion increase to the frequent flyer award liability.

Under the previous method of accounting for thisprogram, the Company estimates that for the 11-month period ending December 31,2006 it would have recognized approximately $18 million in advertising expense,and would have reduced earned revenues by approximately $135 million, in orderto account for the effects of the program on its financial statements for thathypothetical period. Such estimated adjustments would have been required torecognize the effect of an assumed 2.8% growth in outstanding miles, amongother assumptions such as projected miles to be earned and redeemed, the rateof breakage of miles, and the ongoing award redemption patterns of members.

Under the new method of accounting for this program,the Company estimates that for the 11-month period ending December 31,2006 it will reduce earned revenue by approximately $217 million in order toaccount for the effects of the program on its financial statements for thathypothetical period. This estimated adjustment would be required using the sameassumed 2.8% annual growth rate in outstanding miles, among other keyassumptions such as projected miles to be earned and redeemed and ongoing awardredemption patterns by Mileage Plus members. The projected hypotheticalaccounting impact under this new policy would be to earned revenues only, sincethe Company’s new accounting policy does not continue the use of the formerincremental cost method, which was adjusted to advertising expense under thatprior policy.

The estimation of deferred revenue to value each awardmile requires the use of several significant assumptions, for which significantmanagement judgment is required. For example, management must estimate how manymiles are projected to be redeemed on United, versus on other airline partners.Since the equivalent ticket value of miles redeemed on United and on othercarriers can vary significantly, this assumption can significantly affect thecalculation of the weighted-average ticket value from period to period.

Management must also estimate the expected redemptionpatterns of Mileage Plus customers, who have a number of different awardchoices when redeeming their miles, each of which can have materially differentvalues. Such choices include different classes of service (first, business andseveral coach award levels), as well as different flight itineraries, such asdomestic and international routings, and different itineraries within domesticand international regions of United’s and other participating carriers’ flightnetworks. Customer redemption patterns may also be influenced by programchanges which occur from time to time and which introduce new award choices, ormake material changes to the terms of existing award choices; management mustoften estimate the probable impact of such program changes on future customerbehavior using limited data, which requires the use of significant judgment. Managementuses historical customer redemption patterns as the best single indicator offuture redemption behavior in 

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making its estimates, butchanges in customer mileage redemption behavior to patterns which are notconsistent with historical behavior can result in material changes to deferredrevenue balances, and to recognized revenue as well.

Management’s estimate of the expected breakage ofmiles as of the fresh-start date, and for recognition of breakagepost-emergence, also requires significant management judgment. United’s policyfor the cancellation of miles is to deactivate Mileage Plus customer accountsfor which there has been no activity for three consecutive years; however,deactivated accounts can be reactivated upon customer request. Managementconsiders historical patterns of account breakage to be a useful indicator whenestimating future breakage. Under its new deferred revenue accounting policy,the Company recognizes revenue from breakage of miles by amortizing suchestimated breakage over the 36-month validity period. However, currentand future changes to program rules and program redemption opportunitiescan significantly alter customer behavior from historical patterns with respectto inactive accounts. Such changes may result in material changes to thedeferred revenue balance, as well as recognized revenues from the program. Ahypothetical 1% change in our estimated breakage rate, currently estimated at14% annually, has approximately an $18 million effect on the liability.

At September 30, 2006, our outstanding number ofmiles was approximately 495.2 billion. The Company currently estimates thatapproximately 427.0 billion of these miles will ultimately be redeemed and,accordingly, has recorded deferred revenue of $3.5 billion. A hypothetical 1%change in our outstanding number of miles or the weighted-average ticket valuehas approximately a $41 million effect on the liability.

*Goodwilland Intangible Assets.**  *Inaccordance with SFAS 142, the Company applies a fair value-based impairmenttest to the book value of goodwill and indefinite-lived intangible assets on anannual basis and, if certain events or circumstances indicate that animpairment loss may have been incurred, on an interim basis. An impairmentcharge could have a material adverse effect on the Company’s financial positionand results of operations in the period of recognition.

Upon the implementation of fresh-start reporting (see Note 1, “Voluntary Reorganization UnderChapter 11—Fresh-Start Reporting” in the Notes to CondensedConsolidated Financial (Unaudited)) the Company’s assets, liabilities andequity were valued at their respective fair values. The excess ofreorganization value over the fair value of tangible and identifiableintangible assets has been reflected as goodwill in the accompanying CondensedStatements of Consolidated Financial Position (Unaudited) on the EffectiveDate. As discussed in Note 7, “Segment Information” in the Notes toCondensed Consolidated Financial Statements (Unaudited), there are threereportable segments with assigned goodwill aggregating $2.8 billion at September 30,2006. In addition, the adoption of fresh-start reporting resulted in therecognition of $2.1 billion of indefinite-lived intangible assets.

SFAS 142 requires that a two-step impairment test beperformed on goodwill. In the first step, the Company compares the fair valueof the reportable segment to its carrying value. If the fair value of thereportable segment exceeds the carrying value of the net assets of thereportable segment, goodwill is not impaired and the Company is not required toperform further testing. If the carrying value of the net assets of thereportable segment exceeds the fair value of the reportable segment, then theCompany must perform the second step in order to determine the implied fairvalue of the goodwill and compare it to the carrying value of the goodwill. Ifthe carrying value of goodwill exceeds its implied fair value, then the Companymust record an impairment charge equal to such difference.

We expect to assess the fair value of our reportablesegments considering both the market and income approaches. Under the marketapproach, the fair value of the reportable segment is based on quoted marketprices and recent transaction values of peer companies. Under the incomeapproach, the fair value of the reportable segment is based on the presentvalue of estimated future cash flows. The income 

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approach is dependent on anumber of factors including estimates of future capacity, passenger yield,traffic, operating costs, appropriate discount rates and other relevantfactors.

We will perform the impairment test for ourindefinite-lived intangible assets by comparing the asset’s fair value to itscarrying value. We expect to determine the estimated fair value based uponprojected discounted future cash flows. We will recognize an impairment chargeif the asset’s carrying value exceeds its estimated fair value.

We have not performedimpairment testing on amounts of goodwill or indefinite-lived intangible assetssubsequent to February 1, 2006, as there have been no events or changesthat would indicate that such assets are impaired. We will perform annualimpairment testing on goodwill and indefinite-lived intangible assets in thefourth quarter of 2006.

**Outlook**

As aresult of improvement initiatives underway, the Company expects to achieve aportion of the planned 2007 cost savings ahead of schedule in 2006. Thefollowing is capacity guidance for the fourth quarter of 2006, full-year 2006and full-year 2007:

| Capacity (ASMs) |   |                  |   | Fourth Quarter  |   | 2006       |   | 2007 |   |
|----------------------|--------|-----------------------|--------|----------------------|--------|------------|--------|------|--------|
| Mainline             |   | +2.0 to 2.5 percent   |   | +2.0 to 2.5 percent  |   | +1 percent |   |
| Regional  Affiliates |   | +15.5 to 16.5 percent |   | +9.5 to 10.5 percent |   | +3 percent |   |
| Consolidated         |   | +3.0 to 3.5 percent   |   | +2.5 to 3.0 percent  |   | +1 percent |   |

 

2007 capacity increases are expected to be driven bythe full-year effect of higher aircraft utilization as a result of the Company’s2006 resource optimization efforts. The Company does not expect its fleet willincrease in 2007.

As of October 30, 2006, the Company had hedged34% of forecasted fourth quarter 2006 fuel consumption through crude oilcollars and swaps. On a weighted-average basis, hedge protection begins if crudeexceeds $69 per barrel. Conversely, payment obligations begin if crude, on aweighted-average basis, drops below the same $69 per barrel.

As of October 30, 2006, the Company had hedged25% of forecasted fuel consumption for the first quarter 2007 predominantlythrough crude oil three-way collars with upside protection, on aweighted-average basis, beginning from $65 per barrel and capped at $74 perbarrel. Payment obligations, on a weighted-average basis, begin if crude dropsbelow $59 per barrel.

The Company estimates that if all outstanding crudecontracts settled at a hypothetical price that was 10% above the $62.91 perbarrel West Texas Intermediate crude NYMEX futures price on the last tradingday of September 2006, the contracts would result in an accounting gain of$38 million. However, if all outstanding crude contracts settled 10% below thesame closing price, there would be an accounting loss of $35 million.

The Company expectsmainline jet fuel price per gallon to average $2.02 per gallon in the fourthquarter of 2006.

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**Forward-LookingInformation**

Certain statements throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operationsand elsewhere in this report are forward-looking and thus reflect our currentexpectations and beliefs with respect to certain current and future events andfinancial performance. Such forward-looking statements are and will be subjectto many risks and uncertainties relating to our operations and businessenvironment that may cause actual results to differ materially from any futureresults expressed or implied in such forward-looking statements. Words such as “expects,”“will,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,”“outlook” and similar expressions are intended to identify forward-lookingstatements.

Additionally, forward-looking statements includestatements which do not relate solely to historical facts, such as statementswhich identify uncertainties or trends, discuss the possible future effects ofcurrent known trends or uncertainties, or which indicate that the futureeffects of known trends or uncertainties cannot be predicted, guaranteed orassured. All forward-looking statements in this report are based uponinformation available to us on the date of this report. We undertake noobligation to publicly update or revise any forward-looking statement, whetheras a result of new information, future events, changed circumstances orotherwise.

Our actual results coulddiffer materially from these forward-looking statements due to numerous factorsincluding, without limitation, the following: our ability to comply with theterms of our senior secured revolving credit facility and term loan, as well asother financing arrangements; the costs and availability of financing; ourability to execute our business plan; our ability to realize benefits from ourresource optimization efforts and cost reduction initiative programs; ourability to utilize our net operating losses; our ability to attract, motivateand/or retain key employees; our ability to attract and retain customers;demand for transportation in the markets in which we operate; general economicconditions (including interest rates, foreign currency exchange rates, crudeoil prices, costs of aviation fuel and refining capacity in relevant markets);our ability to cost-effectively hedge against increases in the price ofaviation fuel; the effects of any hostilities, act of war or terrorist attack;the ability of other air carriers with whom we have alliances or partnershipsto provide the services contemplated by the respective arrangements with suchcarriers; the costs and availability of aircraft insurance; the costsassociated with security measures and practices; labor costs; competitivepressures on pricing (particularly from lower-cost competitors) and on demand;capacity decisions of our competitors; U.S. or foreign governmentallegislation, regulation and other actions; our ability to maintain satisfactorylabor relations; any disruptions to operations dueto any potential actions by our labor groups; weather conditions; and otherrisks and uncertainties set forth under the caption “Risk Factors” in Item 1A.of United’s Annual Report on Form 10-K for the year 2005, as well asother risks and uncertainties set forth from time to time in the reports wefile with United States Securities and Exchange Commission.Consequently, the forward-looking statements should not be regarded asrepresentations or warranties by the Company that such matters will berealized.

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**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risk 

For informationregarding our exposure to certain market risks, see Item 7A. Quantitativeand Qualitative Disclosures About Market Risk in United’s Annual Report on Form 10-Kfor the year 2005.

InterestRate Risk—In the first quarter of 2006, the Company entered into an interestrate swap whereby it fixed the rate of interest on its credit facility. TheCompany will use interest rate swap agreements to effectively limit exposure tointerest rate movements within the parameters of our interest rate hedgingpolicy. The swap will amortize according to a pre-established schedule startingin November 2007 through its expected maturity date of February 2012.

| (In millions, except average contract rates) |   |   |   | Notional  Amount |   | Rate  Paid |   | Rate  Received  |      | Estimated  Fair Value |   |
|-----------------------------------------------------------------------|--------|--------|--------|------------------|--------|------------|--------|-----------------|-----------|----------------------------|--------|
|                                                                  |   |   |   |             |   |       |   | (Pay)/Receive** |      |
| Interest rate  swap                                                   |   |   | $      | 2,450            |   |       | 5.14   | %               | Variable* |                       |   | $ | (15 | ) |   |
|                                                                       |        |        |        |                  |        |            |        |                 |           |                            |        |  |  |  |  |  |  |

 

*                   Based on three month LIBOR rate.

**            Estimated fair values represent the amount the Companywould pay/receive on September 30, 2006 to terminate the contracts.

Commodity Price Risk (JetFuel)—When market conditions indicate risk reduction is achievable, the Companymay use fuel option contracts or other derivative instruments to reduce itsprice risk exposure to jet fuel. The derivative instruments are designed toprovide protection against increases in the price of aircraft fuel. The Companymay change its hedging program based on changes in market conditions. At September 30,2006, the fair value of the Company’s fuel-related derivative instrumentliability was $26 million.

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**Item 4.**                        Controlsand Procedures

The Company’s management, including the ChiefExecutive Officer (the “CEO”) and Chief Financial Officer (the “CFO”),performed an evaluation to conclude with reasonable assurance that the Company’sdisclosure controls and procedures were designed and operating effectively tocollect, process and report within the required time periods, the informationit is required to disclose in the reports it files with the Securities andExchange Commission. Based on that evaluation, the Company’s management,including the CEO and CFO, concluded that the Company’s disclosure controls andprocedures were effective as of September 30, 2006.

There has been no change to the Company’s internalcontrol over financial reporting that occurred during the quarter ended September 30,2006 that has materially affected or is reasonably likely to materially affectthe Company’s internal control over financial reporting, except that the Companyis continuing to implement the controls established in the first quarter of2006 to properly apply fresh-start reporting (including material changes inMileage Plus frequent flyer accounting, and the recognition of intangibleassets and goodwill) and to adopt stock-based compensation accounting underSFAS123R. The Company’s management will continue to evaluate its internalcontrol over financial reporting as it executes its plan to significantlyreduce certain salaried and management positions.

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**PART II. OTHER INFORMATION**

**Item1.**                        LegalProceedings.

**In re: UALCorporation, et. al.**

As discussed above, on the Petition Date the Debtorsfiled voluntary petitions to reorganize their businesses under Chapter 11 ofthe Bankruptcy Code. On October 20, 2005, the Debtors filed the Debtor’sFirst Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the UnitedStates Bankruptcy Code and the Disclosure Statement. The Bankruptcy Courtapproved the Disclosure Statement on October 21, 2005.

Commencing on October 27, 2005, the DisclosureStatement, ballots for voting to accept or reject the proposed plan ofreorganization and other solicitation documents were distributed to all classesof creditors eligible to vote on the proposed plan of reorganization. After ahearing on confirmation, on January 20, 2006, the Bankruptcy Courtconfirmed the Plan of Reorganization. The Plan of Reorganization becameeffective and the Debtors emerged from bankruptcy protection on the EffectiveDate.

Numerous pre-petitionclaims still await resolution in the Bankruptcy Court due to the Company’sobjections to either the existence of liability or the amount of the claim. Theprocess of determining whether liability exists and liquidating the amounts dueis likely to continue for the remainder of 2006. Additionally, certainsignificant matters remain to be resolved in the Bankruptcy Court. For detailssee Note 1, “Voluntary Reorganization Under Chapter 11—BankruptcyConsiderations” in the Notes to Condensed Consolidated Financial Statements(Unaudited).

**Air Cargo/PassengerSurcharge Investigations**

In February 2006, theEuropean Commission and the U.S. Department of Justice commenced aninternational investigation into what government officials describe as apossible price fixing conspiracy relating to certain surcharges included intariffs for carrying air cargo. In June 2006, United received a subpoenafrom the U.S. Department of Justice requesting information related to certainpassenger pricing practices and surcharges applicable to internationalpassenger routes. The Company is cooperating fully. United is considered asource of information for the investigation, not as a target. In addition tothe federal grand jury investigation, United and other air cargo carriers havebeen named as defendants in over ninety class action lawsuits alleging civildamages as a result of the purported conspiracy. Those lawsuits have beenconsolidated for pretrial activities in the United States Federal Court for theEastern District of New York. United has entered into an agreement with themajority of the private plaintiffs to dismiss the class action lawsuits inreturn for an agreement to cooperate with the plaintiffs’ factual investigation.The settlement agreement is subject to review and approval by the court. Morethan fifty additional putative class actions have been filed subsequentlyalleging violations of the antitrust laws with respect to passenger pricingpractices. Those lawsuits have been consolidated for pretrial activities in theUnited States Federal Court for the Northern District of California. United hasentered a settlement agreement with a number of the plaintiffs in the passengerpricing cases on terms and conditions similar to the agreement with the cargoplaintiffs. The passenger agreement is also subject to court approval. Penaltiesfor violating competition laws can be severe, involving both criminal and civilliability. The Company is cooperating with the grand jury investigations whilecarrying out its own internal review of its pricing practices, and is not in aposition to evaluate the potential financial impact of this litigation at thistime. However, a finding that the Company violated either U.S. antitrust lawsor the competition laws of some other jurisdiction could have a materialadverse impact on the Company.

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**Summers v. UALCorporation ESOP, et. al.**

Certain participants inthe UAL Corporation Employee Stock Ownership Plan (“ESOP”) sued the ESOP, theESOP Committee and State Street Bank and Trust Company (“State Street”) in theU.S. District Court for the Northern District of Illinois (“the District Court”)in February 2003 seeking monetary damages in a purported class action thatalleges that the ESOP Committee breached its fiduciary duty by not selling UALstock held by the ESOP commencing as of July 19, 2001. The ESOP Committeeappointed State Street in September 2002 to act as investment manager andfiduciary to manage the assets of the ESOP itself. In August 2005, aproposed settlement was reached between the plaintiffs and the ESOP Committeedefendants. The agreed upon settlement amount is to be paid out of the $5.2million in insurance proceeds remaining after deducting legal fees. StateStreet objected to the agreement during the required fairness hearing before theDistrict Court.  The Court neverthelessapproved the settlement in October 2005, but also granted State Street’smotion for summary judgment, dismissing the underlying claims. Both sidesappealed, from the District Court’s decision, and as a result, no settlementfunds have been disbursed pending a ruling on appeal. In June 2006, theUnited States Court of Appeals for the Seventh Circuit (“Court of Appeals”)affirmed the lower court’s ruling dismissing the claims against State Streetand in effect rendering State Street’s challenge to the settlement agreementmoot. Both parties have requested the United States Supreme Court (“SupremeCourt”) to review the decision of the Court of Appeals and have until December 5,2006 to file supporting briefs. Although there is no set time for a ruling onwhether the Supreme Court will review the matter, based on past experience theCompany would expect that the Supreme Court will reach a decision sometime inearly 2007 on whether or not it will hear this matter.

**Other LegalProceedings**

In addition to the legal proceedings described above,UAL and United are parties to legal proceedings described in their respective Form 10-Kfor the period ended December 31, 2005.

UAL and United areinvolved in various other claims and legal actions involving passengers,customers, suppliers, employees and government agencies arising in the ordinarycourse of business. Additionally, from time to time, we become aware ofpotential non-compliance with applicable environmental regulations, which haveeither been identified by the Company (through internal compliance programssuch as the Company’s environmental compliance audits) or through notice from agovernmental entity. In some instances, these matters could potentially becomethe subject of an administrative or judicial proceeding and could potentiallyinvolve monetary sanctions. We believe, after considering a number of factors,including (but not limited to) the views of legal counsel, the nature ofcontingencies to which we are subject and prior experience, that the ultimatedisposition of these contingencies will not materially affect our consolidatedfinancial position or results of operations.

**Item 6.**                        Exhibits.

A list of exhibits included as part of this Form 10-Qis set forth in an Exhibit Index that immediately precedes the exhibits.

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this quarterly report on Form 10-Q for the quarter endedSeptember 30, 2006 to be signed on its behalf by the undersigned thereuntoduly authorized on the 14th day of November 2006.
|        |   | UNITED AIR LINES, INC.                               |
|--------|--------|------------------------------------------------------|
|   |   | By:                                                  | /s/ FREDERIC F. BRACE |
|   |   | Frederic F. Brace                                    |
|   |   | Executive Vice President and Chief Financial Officer |
|   |   | (Principal financial officer)                        |
|   |   | By:                                                  | /s/ DAVID M. WING |
|   |   | David M. Wing                                        |
|   |   | Vice President and Controller                        |
|   |   | (Principal accounting officer)                       |

 

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**EXHIBIT INDEX**
| *10.1 |   | Amendment No. 3 dated September 29, 2006  to the Employment Agreement dated September 5, 2002, among UAL  Corporation, United Air Lines, Inc. and Glenn F. Tilton (as filed as  Exhibit 99.2 to UAL’s Form 8-K filed on September 29,  2006 and incorporated herein by reference) |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.2 |   | Employment Agreement  dated September 29, 2006, among UAL Corporation, United Air  Lines, Inc. and Peter D. McDonald (as filed as Exhibit 99.3 to  UAL’s Form 8-K filed on September 29, 2006 and incorporated  herein by reference)                                                        |
| 12.0  |   | Computation of Ratio of  Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and  Preferred Stock Dividend Requirements                                                                                                                                                                                      |
| 31.1  |   | Certification of the  Principal Executive Officer Pursuant to 15 U.S.C. 78m(a) or  78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)                                                                                                                                                                  |
| 31.2  |   | Certification of the  Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or  78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002)                                                                                                                                                                  |
| 32.1  |   | Certification of the  Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the  Sarbanes-Oxley Act of 2002)                                                                                                                                                                                            |
| 32.2  |   | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the  Sarbanes-Oxley Act of 2002)                                                                                                                                                                                            |

 

With respect to thedocuments incorporated by reference to this Form 10-Q, United’sCommission File Number is 001-11355 and UAL’s Commission File Number is001-06033.

*As Previously Filed

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