**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x**                  QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended March 31, 2007**

**OR**

**o**                    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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.) |
| **77 W. Wacker Drive, Chicago, Illinois**                         |   | **60601**            |
| (Address of  principal executive offices)                         |   | (Zip Code)           |
| **(312) 997-8000**                                                |
| (Registrant’s  telephone number, including area code)        |
| **1200 East Algonquin Road, Elk Grove Township,  Illinois 60007** |
| (Former address)                                                  |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x   No  o

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

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court. Yes  x   No  o

Thenumber of shares of common stock outstanding as of May 11, 2007 was 205.The registrant is a wholly-owned subsidiary of UAL Corporation, and there is nomarket for the registrant’s common stock.

 

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**UnitedAir Lines, Inc. and Subsidiary Companies Report on Form 10-Q*For the Quarter Ended March 31, 2007***
|                                     | ** ** | ** **                                                                                  | ** ** | **Page** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I.  FINANCIAL INFORMATION |       |                                                                                        |
| Item  1.                            |       | Financial  Statements                                                                       |       |     |       |   |   |
|                                |       | Condensed Statements of Consolidated Operations  (Unaudited)                                |       |     | 3          |   |   |
|                                |       | Condensed Statements of Consolidated Financial  Position (Unaudited)                        |       |     | 4          |   |   |
|                                |       | Condensed Statements of Consolidated Cash Flows  (Unaudited)                                |       |     | 6          |   |   |
|                                |       | Notes to Condensed Consolidated Financial Statements  (Unaudited)                           |       |     | 7          |   |   |
| Item 2.                             |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       |     | 22         |   |   |
| Item 3.                             |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |       |     | 35         |   |   |
| Item 4.                             |       | Controls and Procedures                                                                     |       |     | 35         |   |   |
| PART II.  OTHER INFORMATION    |       |                                                                                        |
| Item  1.                            |       | Legal  Proceedings                                                                          |       |     | 37         |   |   |
| Item1A.                             |       | Risk  Factors                                                                               |       |     | 38         |   |   |
| Item  6.                            |       | Exhibits                                                                                    |       |     | 38         |   |   |
| Signature                           |       |                                                                                        | 39         |     |       |
| Exhibit Index                  |       |                                                                                        | 40         |     |       |

 

2

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**PART I. FINANCIALINFORMATION**

**ITEM1.   FINANCIAL STATEMENTS**

**United Air Lines, Inc. and Subsidiary Companies*Condensed Statements of Consolidated Operations(Unaudited)*(In millions)**

| ** **                                                                           | ** ** | **Successor**         | ** ** | ** **                 | ** ** | **Predecessor** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                                                                           | ** ** | **Three Months** | ** ** | **Period from**       | ** ** | ** **      | ** ** | **Period from** | ** ** |
| ** **                                                                           | ** ** | **Ended**             | ** ** | **February 1**        | ** ** | ** **      | ** ** | **January 1** | ** ** |
| ** **                                                                           | ** ** | **March 31,**    | ** ** | **to March 31,** | ** ** | ** **      | ** ** | **to January 31,** | ** ** |
| ** **                                                                           | ** ** | **2007**              | ** ** | **2006**                   | ** ** | ** **      | ** ** | **2006** | ** ** |
| Operating revenues:                                                                  |       |                  |       |                       |       |            |       |   |   |   |   |   |   |   |   |
| Passenger—United  Airlines                                                      |       |                  | $          | 3,264                      |       |            |       | $ | 2,182 |   |   |   |   |   | $ | 1,074 |   |   |
| Passenger—Regional  Affiliates                                                  |       |                  | 675        |                       |       |            | 465        |   |   |   |   |   | 204 |   |   |
| Cargo                                                                                |       |                  | 168        |                       |       |            | 124        |   |   |   |   |   | 56 |   |   |
| Other operating revenues                                                             |       |                  | 270        |                       |       |            | 235        |   |   |   |   |   | 120 |   |   |
| ** **                                                                           |       |                  | 4,377      |                       |       |            | 3,006      |   |   |   |   |   | 1,454 |   |   |
| Operating expenses:                                                                  |       |                  |       |                       |       |            |       |   |   |   |   |   |   |   |   |
| Salaries and related  costs                                                          |       |                  | 1,068      |                       |       |            | 725        |   |   |   |   |   | 358 |   |   |
| Aircraft fuel                                                                        |       |                  | 1,041      |                       |       |            | 705        |   |   |   |   |   | 362 |   |   |
| Regional affiliates                                                                  |       |                  | 692        |                       |       |            | 468        |   |   |   |   |   | 228 |   |   |
| Purchased services                                                                   |       |                  | 301        |                       |       |            | 206        |   |   |   |   |   | 97 |   |   |
| Aircraft maintenance  materials and outside repairs                                  |       |                  | 281        |                       |       |            | 179        |   |   |   |   |   | 80 |   |   |
| Landing fees and other  rent                                                         |       |                  | 238        |                       |       |            | 145        |   |   |   |   |   | 75 |   |   |
| Depreciation and  amortization                                                       |       |                  | 220        |                       |       |            | 148        |   |   |   |   |   | 68 |   |   |
| Distribution expenses  (Note 1)                                                      |       |                  | 188        |                       |       |            | 141        |   |   |   |   |   | 60 |   |   |
| Aircraft rent                                                                        |       |                  | 101        |                       |       |            | 75         |   |   |   |   |   | 30 |   |   |
| Cost of third party  sales                                                           |       |                  | 92         |                       |       |            | 126        |   |   |   |   |   | 63 |   |   |
| Special operating items  (Note 2)                                                    |       |                  | (22        | )                          |       |            | —     |   |   |   |   |   | — |   |   |
| Other operating expenses                                                             |       |                  | 264        |                       |       |            | 204        |   |   |   |   |   | 85 |   |   |
| ** **                                                                           |       |                  | 4,464      |                       |       |            | 3,122      |   |   |   |   |   | 1,506 |   |   |
| Loss from operations                                                                 |       |                  | (87        | )                          |       |            | (116       | ) |   |   |   |   | (52 | ) |   |
| Other income (expense):                                                              |       |                  |       |                       |       |            |       |   |   |   |   |   |   |   |   |
| Interest expense (Note  9)                                                           |       |                  | (206       | )                          |       |            | (131       | ) |   |   |   |   | (42 | ) |   |
| Interest income                                                                      |       |                  | 60         |                       |       |            | 28         |   |   |   |   |   | 6 |   |   |
| Interest capitalized                                                                 |       |                  | 5          |                       |       |            | 3          |   |   |   |   |   | — |   |   |
| Miscellaneous, net                                                                   |       |                  | (1         | )                          |       |            | 1          |   |   |   |   |   | — |   |   |
| ** **                                                                           |       |                  | (142       | )                          |       |            | (99        | ) |   |   |   |   | (36 | ) |   |
| Loss before  reorganization items, income taxes and equity in earnings of affiliates |       |                  | (229       | )                          |       |            | (215       | ) |   |   |   |   | (88 | ) |   |
| Reorganization items,  net                                                           |       |                  | —     |                       |       |            | —     |   |   |   |   |   | 22,709 |   |   |
| Earnings (loss) before  income taxes and equity in earnings of affiliates            |       |                  | (229       | )                          |       |            | (215       | ) |   |   |   |   | 22,621 |   |   |
| Income tax benefit                                                                   |       |                  | (80        | )                          |       |            | —     |   |   |   |   |   | — |   |   |
| Earnings (loss) before  equity in earnings of affiliates                             |       |                  | (149       | )                          |       |            | (215       | ) |   |   |   |   | 22,621 |   |   |
| Equity in earnings of  affiliates, net of tax                                        |       |                  | 1          |                       |       |            | —     |   |   |   |   |   | 5 |   |   |
| Net income (loss)                                                                    |       |                  | $          | (148                       | )          |            |       | $ | (215 | ) |   |   |   |   | $ | 22,626 |   |   |

 

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

3

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**United Air Lines, Inc. and Subsidiary Companies*Condensed Statements of Consolidated FinancialPosition (Unaudited)*(In millions, except shares)**

| ** **                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| *Assets*                                                                                           |       |               |       |                  |       |   |   |   |   |
| Current assets:                                                                                    |       |               |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                          |       |               | $          | 3,123                 |       |   |   | $ | 3,779 |   |   |
| Restricted cash                                                                                    |       |               | 325        |                  |       |   | 303 |   |   |
| Short-term investments                                                                             |       |               | 190        |                  |       |   | 308 |   |   |
| Receivables, less allowance for doubtful accounts  (2007—$28; 2006—$27)                  |       |               | 1,068      |                  |       |   | 814 |   |   |
| Prepaid fuel                                                                                       |       |               | 327        |                  |       |   | 283 |   |   |
| Aircraft fuel, spare parts and supplies, less obsolescence  allowance (2007—$9; 2006—$6) |       |               | 205        |                  |       |   | 218 |   |   |
| Note receivable from affiliates                                                                    |       |               | 201        |                  |       |   | — |   |   |
| Deferred income taxes                                                                              |       |               | 67         |                  |       |   | 114 |   |   |
| Receivables from related parties                                                                   |       |               | 164        |                  |       |   | 154 |   |   |
| Prepaid expenses and other                                                                         |       |               | 361        |                  |       |   | 348 |   |   |
|                                                                                               |       |               | 6,031      |                  |       |   | 6,321 |   |   |
| Operating property and  equipment:                                                                 |       |               |       |                  |       |   |   |   |   |
| Owned—                                                                                        |       |               |       |                  |       |   |   |   |   |
| Flight equipment                                                                                   |       |               | 8,981      |                  |       |   | 8,952 |   |   |
| Advances on flight equipment                                                                       |       |               | 91         |                  |       |   | 91 |   |   |
| Other property and equipment                                                                       |       |               | 1,462      |                  |       |   | 1,441 |   |   |
|                                                                                               |       |               | 10,534     |                  |       |   | 10,484 |   |   |
| Less—accumulated depreciation and amortization                                                |       |               | (635       | )                     |       |   | (502 | ) |   |
|                                                                                               |       |               | 9,899      |                  |       |   | 9,982 |   |   |
| Capital leases:                                                                                    |       |               |       |                  |       |   |   |   |   |
| Flight equipment                                                                                   |       |               | 1,511      |                  |       |   | 1,511 |   |   |
| Other property and equipment                                                                       |       |               | 33         |                  |       |   | 34 |   |   |
|                                                                                               |       |               | 1,544      |                  |       |   | 1,545 |   |   |
| Less—accumulated amortization                                                                 |       |               | (104       | )                     |       |   | (81 | ) |   |
|                                                                                               |       |               | 1,440      |                  |       |   | 1,464 |   |   |
|                                                                                               |       |               | 11,339     |                  |       |   | 11,446 |   |   |
| Other assets:                                                                                      |       |               |       |                  |       |   |   |   |   |
| Intangibles, less accumulated amortization (2007—$208;  2006—$169)                       |       |               | 2,989      |                  |       |   | 3,028 |   |   |
| Goodwill                                                                                           |       |               | 2,690      |                  |       |   | 2,703 |   |   |
| Aircraft lease deposits                                                                            |       |               | 554        |                  |       |   | 539 |   |   |
| Restricted cash                                                                                    |       |               | 500        |                  |       |   | 506 |   |   |
| Note receivable from affiliates                                                                    |       |               | —     |                  |       |   | 201 |   |   |
| Investments                                                                                        |       |               | 115        |                  |       |   | 113 |   |   |
| Other, net                                                                                         |       |               | 756        |                  |       |   | 724 |   |   |
|                                                                                               |       |               | 7,604      |                  |       |   | 7,814 |   |   |
|                                                                                               |       |               | $          | 24,974                |       |   |   | $ | 25,581 |   |   |

 

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

4

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**United Air Lines, Inc. and Subsidiary Companies*Condensed Statements of Consolidated FinancialPosition (Unaudited)*(In millions, except shares)**

| ** **                                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| *Liabilities and Stockholder’s  Equity*                                                                                                     |       |               |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                             |       |               |       |                  |       |   |   |   |   |
| Advance ticket sales                                                                                                                             |       |               | $          | 2,367                 |       |   |   | $ | 1,669 |   |   |
| Mileage Plus deferred revenue                                                                                                                    |       |               | 1,339      |                  |       |   | 1,111 |   |   |
| Accrued salaries, wages and benefits                                                                                                             |       |               | 852        |                  |       |   | 795 |   |   |
| Accounts payable                                                                                                                                 |       |               | 736        |                  |       |   | 671 |   |   |
| Advanced purchase of miles                                                                                                                       |       |               | 694        |                  |       |   | 681 |   |   |
| Long-term debt maturing within one year (Note 9)                                                                                                 |       |               | 565        |                  |       |   | 1,687 |   |   |
| Fuel purchase commitments                                                                                                                        |       |               | 327        |                  |       |   | 283 |   |   |
| Accrued interest                                                                                                                                 |       |               | 250        |                  |       |   | 241 |   |   |
| Current obligations under capital leases                                                                                                         |       |               | 98         |                  |       |   | 110 |   |   |
| Accounts payable to affiliates                                                                                                                   |       |               | 3          |                  |       |   | 2 |   |   |
| Other                                                                                                                                            |       |               | 813        |                  |       |   | 920 |   |   |
|                                                                                                                                             |       |               | 8,044      |                  |       |   | 8,170 |   |   |
| Long-term debt  (Note 9)                                                                                                                         |       |               | 7,273      |                  |       |   | 7,449 |   |   |
| Long-term  obligations under capital leases                                                                                                      |       |               | 1,358      |                  |       |   | 1,350 |   |   |
| Other liabilities  and deferred credits:                                                                                                         |       |               |       |                  |       |   |   |   |   |
| Mileage Plus deferred revenue                                                                                                                    |       |               | 2,481      |                  |       |   | 2,569 |   |   |
| Postretirement benefit liability                                                                                                                 |       |               | 1,963      |                  |       |   | 1,955 |   |   |
| Deferred income taxes                                                                                                                            |       |               | 475        |                  |       |   | 596 |   |   |
| Deferred pension liability                                                                                                                       |       |               | 133        |                  |       |   | 130 |   |   |
| Other                                                                                                                                            |       |               | 754        |                  |       |   | 769 |   |   |
|                                                                                                                                             |       |               | 5,806      |                  |       |   | 6,019 |   |   |
| Parent company  mandatorily convertible preferred securities                                                                                     |       |               | 361        |                  |       |   | 361 |   |   |
| Commitments and  contingent liabilities (Note 11)                                                                                                |       |               |       |                  |       |   |   |   |   |
| Stockholder’s  equity (deficit):                                                                                                            |       |               |       |                  |       |   |   |   |   |
| Common stock at par, $5 par value; authorized  1,000 shares; outstanding 205 shares at both March 31, 2007 and  December 31, 2006 |       |               | —     |                  |       |   | — |   |   |
| Additional capital invested                                                                                                                      |       |               | 2,160      |                  |       |   | 2,127 |   |   |
| Retained earnings (deficit)                                                                                                                      |       |               | (118       | )                     |       |   | 23 |   |   |
| Accumulated other comprehensive income                                                                                                           |       |               | 90         |                  |       |   | 82 |   |   |
|                                                                                                                                             |       |               | 2,132      |                  |       |   | 2,232 |   |   |
|                                                                                                                                             |       |               | $          | 24,974                |       |   |   | $ | 25,581 |   |   |

 

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

5

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**United Air Lines, Inc. and Subsidiary Companies*Condensed Statements of Consolidated Cash Flows(Unaudited)*(In millions)**

| ** **                                                                          | ** ** | **Successor**                                | ** ** | ** **                                                    | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                          | ** ** | **Three Months  Ended  March 31,** | ** ** | **Period from  February 1 to  March 31,** | ** ** | ** **      | ** ** | **Period from  January 1 to   January 31,** | ** ** |
| ** **                                                                          | ** ** | **2007**                                     | ** ** | **2006**                                                      | ** ** | ** **      | ** ** | **2006** | ** ** |
| Cash flows provided  (used) by operating activities:                                |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Net loss before reorganization items                                                |       |                                         | $          | (148                                                          | )          |            |       | $ | (215 | ) |   |   |   |   | $ | (83 | ) |   |
| Adjustments to  reconcile to net cash provided (used) by operating activities— |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Increase in advance ticket sales                                                    |       |                                         | 698        |                                                          |       |            | 395        |   |   |   |   |   | 109 |   |   |
| Increase in receivables                                                             |       |                                         | (259       | )                                                             |       |            | (71        | ) |   |   |   |   | (98 | ) |   |
| Depreciation and amortization                                                       |       |                                         | 220        |                                                          |       |            | 148        |   |   |   |   |   | 68 |   |   |
| Mileage Plus deferred revenue and advanced purchase  of miles                       |       |                                         | 153        |                                                          |       |            | 44         |   |   |   |   |   | 14 |   |   |
| Other, net                                                                          |       |                                         | (44        | )                                                             |       |            | (9         | ) |   |   |   |   | 153 |   |   |
|                                                                                |       |                                         | 620        |                                                          |       |            | 292        |   |   |   |   |   | 163 |   |   |
| Cash flows provided  (used) by reorganization activities:                           |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Reorganization items, net                                                           |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | 22,709 |   |   |
| Increase in other liabilities                                                       |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | 38 |   |   |
| Increase in non-aircraft claims accrual                                             |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | 421 |   |   |
| Discharge of claims and liabilities                                                 |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | (24,389 | ) |   |
| Revaluation of Mileage Plus frequent flyer deferred  revenue                        |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | 2,399 |   |   |
| Revaluation of other assets and liabilities                                         |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | (2,111 | ) |   |
| Pension curtailment, settlement and employee claims                                 |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | 912 |   |   |
|                                                                                |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | (21 | ) |   |
| Cash flows provided  (used) by investing activities:                                |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Decrease in short-term investments                                                  |       |                                         | 118        |                                                          |       |            | 71         |   |   |   |   |   | 2 |   |   |
| Additions to property and equipment                                                 |       |                                         | (68        | )                                                             |       |            | (62        | ) |   |   |   |   | (30 | ) |   |
| (Increase) decrease in restricted cash                                              |       |                                         | (16        | )                                                             |       |            | 269        |   |   |   |   |   | (203 | ) |   |
| (Increase) decrease in segregated funds                                             |       |                                         | (1         | )                                                             |       |            | 200        |   |   |   |   |   | — |   |   |
| Other, net                                                                          |       |                                         | (7         | )                                                             |       |            | (14        | ) |   |   |   |   | (7 | ) |   |
|                                                                                |       |                                         | 26         |                                                          |       |            | 464        |   |   |   |   |   | (238 | ) |   |
| Cash flows provided  (used) by financing activities:                                |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Proceeds from Credit Facility                                                       |       |                                         | —     |                                                          |       |            | 2,961      |   |   |   |   |   | — |   |   |
| Repayment of Credit Facility                                                        |       |                                         | (986       | )                                                             |       |            | (161       | ) |   |   |   |   | — |   |   |
| Repayment of DIP Financing                                                          |       |                                         | —     |                                                          |       |            | (1,157     | ) |   |   |   |   | — |   |   |
| Repayment of other long-term debt                                                   |       |                                         | (318       | )                                                             |       |            | (338       | ) |   |   |   |   | (24 | ) |   |
| Principal payments under capital leases                                             |       |                                         | (13        | )                                                             |       |            | (3         | ) |   |   |   |   | (5 | ) |   |
| Other, net                                                                          |       |                                         | 15         |                                                          |       |            | (55        | ) |   |   |   |   | (1 | ) |   |
|                                                                                |       |                                         | (1,302     | )                                                             |       |            | 1,247      |   |   |   |   |   | (30 | ) |   |
| Increase  (decrease) in cash and cash equivalents during the period                 |       |                                         | (656       | )                                                             |       |            | 2,003      |   |   |   |   |   | (126 | ) |   |
| Cash and cash  equivalents at beginning of the period                               |       |                                         | 3,779      |                                                          |       |            | 1,596      |   |   |   |   |   | 1,722 |   |   |
| Cash and cash  equivalents at end of the period                                     |       |                                         | $          | 3,123                                                         |       |            |       | $ | 3,599 |   |   |   |   |   | $ | 1,596 |   |   |
|                                                                                |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
|                                                                                |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |

 

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

6

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**UnitedAir Lines, Inc. and Subsidiary Companies*Notes to Condensed Consolidated FinancialStatements (Unaudited)***

**(1) Basis ofPresentation**

United Air Lines, Inc. (together with itsconsolidated subsidiaries, “we,” “our,” “us,” “United” or the “Company”) is awholly-owned subsidiary of UAL Corporation (“UAL”).

***Interim FinancialStatements.******  ***TheCompany has prepared the unaudited condensed consolidated financial statementsshown here as required by the Securities and Exchange Commission (the “SEC”). Someinformation and footnote disclosu       resnormally 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 and adjustments required by fresh-startreporting and reorganization items as described below, that are considerednecessary for a fair presentation of the Company’s financial position andoperating results. These financial statements should be read together with theinformation included in United’s most recent Annual Report on Form 10-Kfor the year ended December 31, 2006.

***Mileage PlusAccounting.******  ***Thefollowing is an update to the Company’s accounting policy disclosures in its AnnualReport on Form 10-K for the year ended December 31, 2006. Forfurther information related to Mileage Plus accounting, refer to the Company’s2006 Annual Report on Form 10-K and the *CriticalAccounting Policies* section in this Form 10-Q.

The Company recognizes revenue for accounts that arecancelled after a period of inactivity as defined by the Mileage Plus program. TheCompany estimates the number of accounts that it expects to deactivate andratably recognizes revenue for these accounts over the expiration period. Inearly 2007, the Company announced a reduction in the expiration period from 36months to 18 months. Based on this program change, the Company reduced theperiod over which it recognizes revenue for deactivated accounts from 36 monthsto 18 months. The Company estimates this change provided a benefit ofapproximately $28 million in the first quarter of 2007, and is expected toprovide a benefit of approximately $170 million for the year ended December 31,2007.

***Reclassifications.******  ***In the first quarter of 2007,the Company changed its classification of certain distribution-related costs,previously included in purchased services and commissions, to classify thesecosts as distribution expenses in the *Condensed Statements ofConsolidated Operations (Unaudited)*. The distribution expenses beingreported for 2006 were adjusted for this reclassification to allow for acomparative presentation in each of the Company’s 2007 quarterly reports on Form 10-Q.Amounts previously reported as commissions and purchased services in theCompany’s 2006 quarterly reports on Form 10-Q are shown below:

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

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(a)           Commissions werepreviously reported as a separate expense item in the Company’s 2006 quarterlyreports on Form 10-Q and its 2006 Annual Report on Form 10-K.

(b)          Consists of credit cardtransaction fees and global distribution systems (“GDS”) transaction expensesthat were classified as components of purchased services in the Company’s 2006quarterly reports on 

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Form 10-Q andits 2006 Annual Report on Form 10-K. For 2007 Form 10-Qreporting purposes, the revised purchased services amounts for the 2006 periodsare the result of decreasing the amounts previously reported in the Company’s2006 quarterly reports on Form 10-Q by these same adjustments.

***Fresh-StartReporting.******  ***As aresult of the adoption of fresh-start reporting in accordance with AmericanInstitute of Certified 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. SOP 90-7 requires that the financial statements for periods after aChapter 11 filing separate transactions and events that are directly associatedwith the reorganization from the ongoing operations of the business. Bankruptcyreorganization items are classified as reorganization items, net in the *Condensed Statements of Consolidated Operations (Unaudited)*.UAL common and preferred securities outstanding at January 31, 2006 werecancelled and new securities were issued to unsecured creditors and employees. Inaddition, fresh-start reporting required that most of the Company’s tangibleand intangible assets and liabilities be recorded at fair value upon itsemergence from bankruptcy. References to “Successor Company” refer to United onor after February 1, 2006, after giving effect to the adoption offresh-start reporting. References to “Predecessor Company” refer to Unitedprior to February 1, 2006.

***Push Down Accounting.******  ***As part of fresh-startreporting, UAL debt obligations totaling $1.4 billion and mandatorilyconvertible preferred securities issued by UAL pursuant to the Debtors’ SecondAmended Joint Plan of Reorganization Pursuant to Chapter 11 of the UnitedStates Bankruptcy Code (the “Plan of Reorganization”) were pushed down toUnited and are recorded on United’s *Condensed Statements ofFinancial Position (Unaudited)*.

**(2) VoluntaryReorganization Under Chapter 11**

***Bankruptcy Considerations.***   Thefollowing discussion provides general background information regarding theCompany’s pending litigation related to its bankruptcy reorganization, and isnot intended to be an exhaustive summary. Detailed information pertaining tothe bankruptcy filings may be obtained at *www.pd-ual.com*and in United’s Annual Report on Form 10-K for the year ended December 31,2006.

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 Plan of Reorganization which becameeffective upon the Debtors emergence from bankruptcy protection on February 1,2006 (the “Effective Date”). On the Effective Date, the Company implementedfresh-start reporting.

The Plan of Reorganization generally provided for thefull payment or reinstatement of allowed administrative claims, priority claimsand secured claims, and the distribution of new equity and debt securities tothe Debtors’ creditors and employees in satisfaction of allowed unsecured anddeemed claims. UAL common and preferred securities outstanding at January 31,2006 were cancelled. The Plan of Reorganization contemplated UAL issuing up to125 million shares of new UAL common stock consisting of 115 million shares tobe issued to unsecured creditors and employees and 10 million shares to beissued pursuant to UAL’s share-based management and director compensation plans.The new UAL common stock was listed on a NASDAQ market and began trading underthe symbol “UAUA” on February 2, 2006.

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***Significant Matters Resolved Since Filing the Company’s2006 Annual Report on Form 10-K.******  ***The following materialmatters have been resolved in the Bankruptcy Court since the filing of theCompany’s 2006 Annual Report on Form 10-K:

(a)          *Pilot PlanTermination Order*. In December 2004, the Pension BenefitGuaranty Corporation (“PBGC”) filed an involuntary termination proceedingagainst United, as plan administrator for the United Airlines Pilot DefinedBenefit Pension Plan (the “Pilot Plan”), in the United States District Courtfor the Northern District of Illinois (“District Court”). In January 2005,the District Court granted a motion filed by the Company and referred theinvoluntary termination proceeding to the Bankruptcy Court. Air Line PilotsAssociation (“ALPA”) and United Retired Pilots Benefit Protection Associationand seven retired pilots (collectively, “URPBPA”) were later granted leave tointervene in the involuntary 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 consideration by the District Court. Uponremand and after the Bankruptcy Court made proposed findings of fact andconclusions of law, in June 2006 the District Court entered an orderapproving the termination of the Pilot Plan. ALPA, URPBPA and PBGC each filedan appeal with the United States Court of Appeals for the Seventh Circuit (“Courtof Appeals”). On****October 25, 2006, the Courtof Appeals affirmed the District Court’s order approving the termination of thePilot Plan effective December 30, 2004. On November 6, 2006, ALPA filed a petition for rehearing in theCourt of Appeals which motion has been denied. ALPA and URPBPA filed petitionsfor writ of certiorari from the United States Supreme Court (“Supreme Court”)on the plan termination. On April 2, 2007, the Supreme Court denied suchpetitions, effectively terminating these proceedings.

(b)         *Pilot PlanNon-Qualified Pension Benefits—October 2005 Order.*After thePBGC commenced its involuntary termination proceeding and sought a December 30,2004 termination 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 theoutcome of 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’stermination order on October 28, 2005, United ceased paying non-qualifiedbenefits. Subsequently, during the first quarter of 2006, the District Courtdismissed the Company’s appeal of the Bankruptcy Court’s October 6, 2005order in light of its earlier decision reversing the Bankruptcy Court’stermination order. The Company filed anotice of appeal of the District Court’s ruling regarding the October 6,2005 order to the Court of Appeals. On October 25, 2006, the Court of Appeals reversed the DistrictCourt’s order dismissing for lack of ripeness the Company’s appeal of theBankruptcy Court’s October 6, 2005 

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order and remanded the casewith instructions to reverse the Bankruptcy Court’s order compelling payment ofnon-qualified benefits for October 2005 or later months. On November 6,2006, ALPA filed a petition for rehearing on the Court of Appeals reversal ofthe October 6, 2005 order, which motion has been denied. ALPA andURPBPA filed petitions for writ of certiorari from the Supreme Court. On April 2,2007, the Supreme Court denied such petitions, effectively terminating theseproceedings.

***Significant Matters Remaining to be Resolved inChapter 11 Cases.******  ***Thefollowing material matters remain to be resolved in the Bankruptcy Court oranother court:

(a)**         ***SFO Municipal Bond SecuredInterest*. HSBC Bank Inc. (“HSBC”), as trustee for the 1997 municipalbonds related to San Francisco International Airport (“SFO”), filed a complaintagainst United asserting a security interest in United’s leasehold for portionsof its maintenance base at SFO. Pursuant to Section 506(a) of theBankruptcy Code, HSBC alleges that it is entitled to be paid the value of thatsecurity interest, which HSBC had claimed was as much as $257 million. HSBC andUnited went to trial in April 2006 and the Bankruptcy Court rejected as amatter of 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. United has accrued this amount as its estimated obligation as of March 31,2007. After the Bankruptcy Court denied various post-trial motions, bothparties have appealed to the District Court and those appeals are pending.

(b)         *LAX MunicipalBond Secured Interest*. There is pending litigation before theBankruptcy Court regarding the extent to which the Los Angeles InternationalAirport (“LAX”) municipal bond debt is entitled to secured status under Section 506(a) ofthe Bankruptcy Code. Trial on this matter occurred during April 2007 andthe two parties are scheduled to file post-trial briefs by the end of May 2007.The Company had recorded an obligation of $41 million and $60 million at March 31,2007 and December 31, 2006, respectively, for this matter.

(c)          *Pilot PlanNon-Qualified Pension Benefits—March 2006 Order.* In March 2006,in a separate proceeding related to the matter described in item (b) of “SignificantMatters Resolved Since Filing the Company’s 2006 Annual Report on Form 10-K,”above, the Bankruptcy Court ruled that the Company was obligated to makepayment of all non-qualified pension benefits for the months of November andDecember 2005 and January 2006. The Bankruptcy Court also ruled thatthe Company’s obligation 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, into an escrowaccount, the disputed non-qualified pension benefits for the months of November andDecember 2005 and January 2006, an aggregate amount totaling approximately$17 million. The District Court affirmed the Bankruptcy Court’s ruling in September 2006.The Company filed a notice of appeal of the District Court’s ruling to theCourt of Appeals. URPBPA and ALPA also appealed the District Court’s decision. TheCompany subsequently filed a motion to consolidate its appeal from theBankruptcy Court’s October 2005 non-qualified benefits order with thethree appeals from the Bankruptcy Court’s March 2006 non-qualifiedbenefits order. The Court of Appeals denied the Company’s motion, but issued anorder staying briefing on the March 2006 non-qualified benefits orderuntil further order of the Court of Appeals. On April 19, 2007, the Courtof Appeals reversed the March 2006 order and remanded the case withinstructions to the District Court to enter judgment for entry of an order 

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in United’s favor. ALPAand URPBPA may still file petitions for rehearing or for a writ of certiorariwith the Supreme Court.

***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 109****million shareshave been issued and distributed to holders of valid unsecured claims from February 2, 2006, the firstdistribution date established in the Plan of Reorganization, to March 31,2007. As of March 31, 2007, approximately 45,000 valid unsecured claimsaggregating to approximately $29.1 billion in claim value had received thosecommon shares to partially satisfy those claims. In April 2007, UALdistributed approximately 2 million additional shares. The approximate 4 million remaining shares are being held inreserve to satisfy all of the remaining disputed and undisputed unsecured claimvalues, once the remaining claim disputes are resolved. The final distributionsmay not occur until 2008 pending resolution of bankruptcy matters such as thosediscussed above.

The Debtors’ current estimate of the probable range ofunsecured claims to be allowed by the Bankruptcy Court is between $29.3 billionand $29.8 billion. Differences between claim amounts filed and the Debtors’estimates are being investigated and will be resolved in connection with theclaims resolution process. However, there will be no further financial impactto the Debtors associated with the settlement of such unsecured claims, as theholders of all allowed unsecured claims will receive under the Plan ofReorganization only their pro rata share of the distribution of the 115 millionshares of UAL common stock, together with the previously-agreed issuance ofcertain securities.

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. Inaddition, 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. Anestimate of these claims was accrued by the Successor Company on the EffectiveDate based upon the best available evidence of amounts to be paid. However, itshould be noted that the claims resolution process is uncertain and adjustmentsto claims estimates could result in material adjustments to the SuccessorCompany’s financial statements in future periods as a result of court rulings,the receipt of new or revised information or the finalization of these matters.The most significant items included in the adjustments made to this accrual forthe three months ended March 31, 2007 were $22 million for the LAX and SFOmunicipal bond obligation litigation that is discussed above. These adjustmentswere recorded as special items in the Company’s *CondensedStatements of Consolidated Operations (Unaudited).*In the firstquarter of 2007, the Debtors’ also conclusively settled or revised itsestimated obligations for various other matters which resulted in a net creditto income of $15 million. The amounts comprising the $15 million were recordedas credits to operating income against the various income statement expenses towhich they relate.

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Thetable below includes activity related to the administrative and priority claimsand other bankruptcy-related claim reserves including reserves related tolegal, professional and tax matters, among others, for the Successor Companyfor the three months ended March 31, 2007. These reserves are primarilyclassified in other current liabilities and other non-current liabilities inthe *Condensed Statements of Consolidated FinancialPosition (Unaudited)* based on the expected timing of resolution ofthese matters.

| ** **                         | ** ** | **(In millions)** | ** ** |
|------------------------------------|------------|------------------------|------------|
| Balance at  December 31, 2006 |       |                   | $          | 325 |   |   |
| Accruals                           |       |                   | 3          |   |   |
| Accrual adjustments                |       |                   | (40        | ) |   |
| Payments                           |       |                   | (75        | ) |   |
| Balance at  March 31, 2007    |       |                   | $          | 213 |   |   |

 

***Reorganization items, net.******  ***SOP 90-7 requires thatthe financial statements for periods after a Chapter 11 filing separatetransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the business. Accordingly, all transactions(including, but not limited to, all professional fees, realized gains andlosses and provisions for losses) directly associated with the reorganizationand restructuring of the business are reported separately in the financialstatements as reorganization items, net. For the month ended January 31,2006 the Predecessor Company recognized the following primarily non-cashreorganization income (expense) in its financial statements:

| ** **                                   | ** ** | **January** | ** ** |
|----------------------------------------------|------------|-------------|------------|
| **(In millions)**                       | ** ** | **2006**    | ** ** |
| 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        | )          | (d) |
| Contract  rejection charges                  |       | (421        | )          | (e) |
| Professional fees                            |       | (47         | )          |   |
| Pension-related  charges                     |       | (14         | )          |   |
| Other                                        |       | (12         | )          |   |
|                                         |       | $           | 22,709     |   |   |

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(a)          The discharge of claimsand liabilities primarily relates to those unsecured claims arising during thebankruptcy process, such as those arising from the termination and settlementof the Company’s U.S. defined benefit pension plans and other employee claims;aircraft-related claims, such as those arising as a result of aircraftrejections; other unsecured claims due to the rejection or modification ofexecutory contracts, unexpired leases and regional carrier contracts; andclaims associated with certain municipal bond obligations based upon theirrejection, settlement or the estimated impact of the outcome of pendinglitigation. In accordance with the Plan of Reorganization, the Companydischarged its obligations to unsecured creditors in exchange for thedistribution of 115 million new UAL common shares and the issuance of certainother securities. Accordingly, the Company recognized a non-cash reorganizationgain of $24.4 billion.

(b)         The Company revalued itsMileage Plus frequent flyer obligations at fair value as a result offresh-start reporting, which resulted in a $2.4 billion non-cash reorganizationcharge.

(c)          In accordance withfresh-start reporting, the Company revalued its assets at their estimated fairvalue and liabilities at estimated fair value or the present value of amountsto be paid. This resulted in a non-cash reorganization gain of $2.1 billion,primarily as a result of newly recognized intangible assets, offset partly byreductions in the fair value of tangible property and equipment.

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(d)         In January 2006, theCompany recorded the value of the deemed claim that the salaried and managementgroup received upon confirmation of the Plan of Reorganization. The deemedclaim was based upon the cost savings provided by this employee group duringthe bankruptcy process.

(e)          Contractrejection charges are non-cash costs that include estimated claim valuesresulting from the Company’s rejection or negotiated modification of certaincontractual obligations such as executory contracts, unexpired leases andregional carrier contracts.

**(3) NewAccounting Pronouncements**

In June 2006, the FASB issued FASB InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109* (“FIN 48”),which modifies the accounting and disclosure associated with certain aspects ofrecognition and measurement related to accounting for income taxes. Unitedadopted the provisions of FIN 48 effective January 1, 2007. See Note5, “Income Taxes” for disclosures related to the adoption of FIN 48.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements*(“SFAS 157”), which defines fair value,establishes a framework for measuring fair value, and expands disclosure aboutfair value measurements. SFAS 157 does not require any new fair valuemeasurements; rather it specifies valuation methods and disclosures to beapplied when fair value measurements are required under existing or futureaccounting pronouncements. SFAS 157 is effective for the Company for itsfiscal year beginning January 1, 2008, and interim periods within 2008.The Company has not determined the impact of SFAS 157 on its results ofoperations or financial position.

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115*(“SFAS 159”).This statement permits entities to choose to measure many financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value. The objective of SFAS 159 is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.SFAS 159 also established presentation and disclosure requirementsdesigned to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Thisstatement does not affect any existing accounting literature that requirescertain assets and liabilities to be carried at fair value. This statement iseffective for the Company as of January 1, 2008; however, early adoptionis permitted. The Company has not determined the impact, if any, that adoptionof this statement will have on its consolidated financial statements.

**(4) Share-BasedCompensation Plans**

***Predecessor Company******–***As of January 31,2006, a total of 9 million UAL stock options were outstanding. Under the Planof Reorganization, these stock options were cancelled upon the Effective Date. Nomaterial share-based compensation expense was incurred as a result of theseoutstanding options for the month of January 2006.

***Successor Company******–***As part ofthe Plan of Reorganization the Bankruptcy Court approved UAL’s share-basedcompensation plans known as the Director Equity Incentive Plan (“DEIP”) and theManagement Equity Incentive Plan (“MEIP”), which became effective on February 1,2006. A total of 952,221 and 996,536 awards were available for grant as of March 31,2007 and December 31, 2006, respectively, under the MEIP and DEIP. TheCompany recognized share-based compensation expense of $15 million and $69million during the three months ended March 31, 2007 and the two monthsended 

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March 31, 2006,respectively. Unrecognized share-based compensation expense was $69 million and$80 million as of March 31, 2007 and December 31, 2006, respectively.

Thetable below summarizes stock option activity pursuant to UAL’s MEIP stockoptions for the three months ended March 31, 2007:

| ** **                          | ** ** | **Options** | ** ** |
|-------------------------------------|------------|-------------|------------|
| Outstanding at  beginning of period |       | 5,064,672   |       |
| Granted                             |       | 93,766      |       |
| Exercised                           |       | (674,008    | )          |
| Cancelled                           |       | (75,750     | )          |
| Outstanding at  end of period       |       | 4,408,680   |       |
| Exercisable at  end of period       |       | 401,532     |       |

 

Thetable below summarizes Restricted Stock activity for the three months ended March 31,2007:

| ** **                        | ** ** | **Restricted Stock** | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| Nonvested at  beginning of period |       |                      | 2,712,787  |   |   |
| Granted                           |       |                      | 62,634     |   |   |
| Vested                            |       |                      | (721,326   | ) |   |
| Terminated                        |       |                      | (36,755    | ) |   |
| Nonvested at end of  period       |       |                      | 2,017,340  |   |   |

 

**(5) IncomeTaxes**

The Successor Company had an effective tax rate of 35%and zero percent in the three months ended March 31, 2007, and the twomonths ended March 31, 2006, respectively, based on forecasted annualincome for these periods. The most significant items impacting the effectivetax rate were non-deductible meals and entertainment expense and nondeductibleinterest on certain of UAL’s notes that have been pushed down to United. Theseincreases to the effective tax rate were partially offset by a favorable impactfrom the non-taxable Medicare Part D subsidy. The Predecessor Company hadan effective tax rate of zero percent for the month ended January 31, 2006.As of March 31, 2007, the Company had a federal net operating loss carryforward of $7.0 billion.

The Company’s management assesses the realizability ofits deferred tax assets, and records a valuation allowance for the deferred taxassets when it is more likely than not that a portion, or all of the deferredtax assets, will not be realized. The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income (including thereversals of deferred tax liabilities) during the periods in which thosetemporary differences will become deductible. As such, the Company had avaluation allowance against its deferred tax assets of $2,182 million and$2,190 million as of March 31, 2007 and December 31, 2006,respectively, to reflect management’s assessment regarding the realizability ofthe deferred tax assets. The Company expects to continue to maintain avaluation allowance on deferred tax assets until other positive evidence issufficient to justify realization. Future reductions in the valuation allowancewill be allocated to reduce goodwill and then other intangible assets.

The Company adopted the provisions of FIN 48 on January 1,2007 and recorded a $16 million decrease in the liability for uncertain incometax matters recorded under Statement of Financial Accounting Standards No. 5,*Accounting for Contingencies*(SFAS 5).In addition, the Company adjusted deferred tax assets for net operating losscarry forwards and deferred taxes for certain other temporary differences;these entries were offset by a net adjustment to the valuation allowance. As aresult of the adoption of FIN 48, the Company generated an unrecognized taxbenefit of $49 million. Unrecognized tax 

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benefits of $6 millionwill impact the Company’s effective tax rate, if recognized. Goodwill changedby $13 million during the three months ended March 31, 2007 resulting fromthe adoption of FIN 48.

The amount of unrecognized tax benefits did notmaterially change from January 1, 2007 to March 31, 2007. Any changein the amount of unrecognized tax benefits within the next twelve months is notexpected to result in a significant impact on the results of operations or thefinancial position of the Company.

The Company records interest expense associated withincome taxes as interest expense and penalties as other operating expense inthe *Condensed Statements of Operations (Unaudited).*Asof January 1, 2007, United had accrued interest of $1 million and hadaccrued no penalties. These amounts did not materially change as of March 31,2007.

United is included in UAL’s consolidated income taxreturns. UAL’s income tax returns for tax years after 2002 remain subject toexamination by the Internal Revenue Service and state taxing jurisdictions.

As a result of the Company’semergence from bankruptcy, the Company has an unrealized tax benefit of $782million at March 31, 2007 and December 31, 2006, resulting from anexcess tax deduction of $2.1 billion. The excess tax deduction represents thedifference between the total tax deduction available, which is equal to thefair value of the UAL common stock issued to certain unsecured creditors andemployees pursuant to the Plan of Reorganization, and the amount of thededuction attributable to the amount expensed, which is the value of the UALstock determined in the Plan of Reorganization. The Company has accounted forthe excess tax deduction by analogy to Statement of Financial AccountingStandards No. 123 (Revised 2004), *Share-Based Payment,*andwill recognize this deduction when it is realized as a reduction of taxespayable.

**(6) Retirementand Postretirement Plans**

The Company contributes to defined contribution planson behalf of most of its employees, particularly within the US. Internationally,the Company maintains a number of small pension plans covering much of itslocal, non-US workforce. The Company also provides certain health carebenefits, primarily in the U.S., to retirees and eligible dependents, as wellas certain life insurance benefits to certain retirees, which are reflected as “OtherBenefits” in the tables below. The Company has reserved the right, subject tocollective bargaining agreements, to modify or terminate the health care andlife insurance benefits for both current and future retirees.

Thenet periodic benefit cost included the following components:

| ** **                                                                   | ** ** | **Pension Benefits**                    | ** ** | ** **                                                | ** ** | **Other Benefits**                                              | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **Successor**                                | ** ** | **Predecessor**                                           | ** ** | ** **                                                           | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                                                   | ** ** | **Three Months  Ended  March 31,** | ** ** | **Period from  February 1  to  March 31,** | ** ** | **Period from  January 1 to   January 31,** | ** ** | ** ** | ** ** | **Three Months  Ended  March 31,** | ** ** | **Period from  February 1  to  March 31,** | ** ** | **Period from  January 1 to   January 31,** | ** ** |
| **(In millions)**                                                       | ** ** | ** **                                   | ** ** | **2007**                                                  | ** ** | **2006**                                                             | ** ** | **2006** | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2006** | ** ** |
| Service cost                                                                 |       |                                         | $          | 2                                                         |       |                                                                 |       | $ | 2 |   |   |   | $ | 1 |   |   |   |   |   | $ | 9 |   |   |   | $ | 6 |   |   |   | $ | 3 |   |   |
| Interest cost                                                                |       |                                         | 2          |                                                      |       |                                                                 | 2          |   |   |   | 1 |   |   |   |   |   | 31 |   |   |   | 21 |   |   |   | 11 |   |   |
| Expected return on plan assets                                               |       |                                         | (2         | )                                                         |       |                                                                 | (2         | ) |   |   | (1 | ) |   |   |   |   | (1 | ) |   |   | (1 | ) |   |   | (1 | ) |   |
| Amortization of prior service cost (credit) including  transition obligation |       |                                         | —     |                                                      |       |                                                                 | —     |   |   |   | — |   |   |   |   |   | — |   |   |   | — |   |   |   | (13 | ) |   |
| Amortization of unrecognized (gain) loss                                     |       |                                         | —     |                                                      |       |                                                                 | —     |   |   |   | — |   |   |   |   |   | (2 | ) |   |   | — |   |   |   | 8 |   |   |
| Net periodic  benefit costs                                                  |       |                                         | $          | 2                                                         |       |                                                                 |       | $ | 2 |   |   |   | $ | 1 |   |   |   |   |   | $ | 37 |   |   |   | $ | 26 |   |   |   | $ | 8 |   |   |
|                                                                              |            |                                              |            |                                                           |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(7) SegmentInformation**

The Company manages its business by two reportablesegments: mainline and United Express which were reported as segments in theCompany’s Annual Report on Form 10-K for the year ended December 31,2006. In 2006, in light of the Company’s bankruptcy-related restructuring andorganizational changes, management reevaluated the Company’s segment reporting.As a result, management determined that the geographic regions and UAL LoyaltyServices, LLC, which were previously reported as segments, are no longerreportable segments requiring disclosure under Statement of FinancialAccounting Standards No. 131, *Disclosures about Segmentsof an Enterprise and Related Information.*

Thetable below includes financial information for the three month period ended March 31,2007, the two month period from February 1 to March 31, 2006 and theone month period ended January 31, 2006. Amounts for the 2006 periods havebeen reclassified from prior period presentation to conform to the Company’snew mainline and United Express segments.

| ** **                                         | ** ** | **Successor**                | ** ** | ** **                                    | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|-----------------|------------|
| ** **                                         | ** ** | **Three Months  Ended** | ** ** | **Period from  February 1 to** | ** ** | ** **      | ** ** | **Period from  January 1 to** | ** ** |
| ** **                                         | ** ** | **March 31,**           | ** ** | **March 31,**                            | ** ** | ** **      | ** ** | **January 31,** | ** ** |
| **(In millions)**                             | ** ** | ** **                   | ** ** | **2007**                                      | ** ** | **2006**        | ** ** | ** ** | ** ** | **2006** | ** ** |
| Revenue:                                           |       |                         |       |                                          |       |            |       |   |   |   |   |   |   |   |   |
| Mainline                                           |       |                         | $          | 3,702                                         |       |            |       | $ | 2,541 |   |   |   |   |   | $ | 1,250 |   |   |
| United Express                                     |       |                         | 675        |                                          |       |            | 465        |   |   |   |   |   | 204 |   |   |
| Total                                              |       |                         | $          | 4,377                                         |       |            |       | $ | 3,006 |   |   |   |   |   | $ | 1,454 |   |   |
| Segment earnings (loss) and reconciliation to      |       |                         |       |                                          |       |            |       |   |   |   |   |   |   |   |   |
| *Condensed Statements of Consolidated Operations:* |       |                         |       |                                          |       |            |       |   |   |   |   |   |   |   |   |
| Mainline                                           |       |                         | $          | (233                                          | )          |            |       | $ | (212 | ) |   |   |   |   | $ | (59 | ) |   |
| United Express                                     |       |                         | (17        | )                                             |       |            | (3         | ) |   |   |   |   | (24 | ) |   |
| Reorganization items, net                          |       |                         | —     |                                          |       |            | —     |   |   |   |   |   | 22,709 |   |   |
| Special operating items                            |       |                         | 22         |                                          |       |            | —     |   |   |   |   |   | — |   |   |
| Consolidated  earnings (loss) before income taxes  |       |                         | $          | (228                                          | )          |            |       | $ | (215 | ) |   |   |   |   | $ | 22,626 |   |   |
|                                                    |            |                              |            |                                               |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(8) ComprehensiveIncome (Loss)**

For the three month periodended March 31, 2007, the two month period ended March 31, 2006, andthe one month period ended January 31, 2006, total comprehensive income(loss) was $(140) million, $(207) million, and $22.6 billion, respectively. Thedifferences between net income (loss) and total comprehensive income (loss) aredue to changes in the fair value of an interest rate swap that was accountedfor a cash flow hedge as discussed in Note 10, “Financial Instruments and RiskManagement.”  In addition, comprehensiveloss for the three months ended March 31, 2007, includes amortization ofdeferred net periodic pension costs that were initially recorded as a componentof accumulated other comprehensive income upon adoption of Statement ofFinancial Accounting Standard No. 158, *Employers’ Accounting forPensions and Other Postretirement Plans*, *an amendmentof FASB Statements No. 87, 88, 106 and 132R,*for the year endedDecember 31, 2006.

**(9) DebtObligations**

See the Company’s 2006 Annual Report on Form 10-Kfor a detailed discussion of its debt obligations. The following is adiscussion of the Company’s prepayment and amendment of its $3.0 billionrevolving credit, term loan and guarantee agreement dated February 1, 2006(the “Credit Facility”) during February 2007.

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On February 2, 2007, the Company prepaid $972million of its Credit Facility debt and entered into an amended and restatedrevolving credit, term loan and guaranty agreement (the “Amended CreditFacility”) that, among other things, reduced the size of the facility from $3.0billion to $2.055 billion, reduced the applicable interest rates, and providedfor a more limited collateral package and a relaxation of certain restrictivecovenants. There were no prepayment penalties associated with this debt retirement.In the first quarter of 2007, the Company expensed $17 million of deferredfinancing costs which were related to the portion of the Credit Facilityprepaid in 2007 and were included in other assets in the December 31, 2006*Statements of Consolidated Financial Position.*Inconnection with the amendment of the Credit Facility in 2007, the Companyincurred financing costs of $10 million, of which $6 million was expensed and$4 million was capitalized in accordance with applicable GAAP. The financingcosts associated with the Credit Facility prepayment and amendment, which wereexpensed in the first quarter of 2007, are classified as a component ofinterest expense in our *Condensed Statements ofConsolidated Operations (Unaudited).*

The Amended Credit Facility was provided by asyndicate of banks and other financial institutions led by J.P. MorganSecurities Inc. and Citicorp Global Markets, Inc. (“CITI”), as joint leadarrangers and joint bookrunners: JPMorgan Chase Bank, N.A. (“JPMCB”) and CITI,as co-administrative agents and co-collateral agents, Credit Suisse Securities(USA) LLC, as syndication agent, and JPMCB, as paying agent. The Amended CreditFacility provides for a total commitment of up to $2.055 billion, comprised oftwo separate tranches: (i) a Tranche A consisting of $255 millionrevolving commitment available for Tranche A loans and standby letters ofcredit and (ii) a Tranche B consisting of a term loan commitment of $1.8billion. The Tranche A loans mature on February 1, 2012, and the Tranche Bloans mature on February 1, 2014.

Borrowings under the Amended Credit Facility bearinterest at a floating rate, which, at the Company’s option, can be either abase rate or a LIBOR rate, plus an applicable margin of 1.0% in the case ofbase rate loans, and 2.0% in the case of LIBOR loans. The Tranche B term loanrequires regularly scheduled semi-annual payments of principal equal to $9million. Interest is payable at least every three months. The Company mayprepay some or all of the Tranche B loans from time to time, at a price equalto 100% of the principal amount prepaid plus accrued and unpaid interest, ifany, to the date of prepayment, but without penalty or premium.

United’s obligations under the Amended Credit Facilityare unconditionally guaranteed by UAL Corporation and certain of its direct andindirect domestic subsidiaries, other than certain immaterial subsidiaries(“Guarantors”). On the closing date for the Amended Credit Facility, theobligations are secured by a security interest in the following tangible andintangible assets of United and the Guarantors: (i) the Pacific (Narita,China and Hong Kong) and Atlantic (Heathrow) routes (the “Primary Routes”),(ii) primary foreign slots, primary domestic slots, certain gate interestsin domestic airport terminals and certain supporting route facilities,(iii) certain spare engines, (iv) certain quick engine change kits,(v) certain owned real property and related fixtures, and(vi) certain flight simulators (the “Collateral”). After the closing date,and subject to certain conditions, United and the Guarantors may grant asecurity interest in the following assets, in substitution for certainCollateral (which may be released from the lien in support of the AmendedCredit Facility upon the satisfaction of certain conditions): (a) certainaircraft, (b) certain spare parts, (c) certain ground handlingequipment, and (d) accounts receivable.

The Amended CreditFacility contains covenants that will limit the ability of United and theGuarantors to, among other things, incur or guarantee additional indebtedness,create liens, pay dividends on or repurchase stock, make certain types ofinvestments, enter into transactions with affiliates, sell assets or merge withother companies, modify corporate documents or change lines of business. TheAmended Credit Facility also requires compliance with the following financialcovenants: (i) a minimum ratio of EBITDAR to the sum of cash interestexpense, aircraft rent and scheduled debt payments, (ii) a minimum unrestrictedcash balance of $750 million, and (iii) a minimum ratio of market value ofcollateral to the 

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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 such letters of credit and (d) the terminationvalue of certain interest rate protection and hedging agreements with theAmended Credit Facility lenders and their affiliates, of 150% at any time, or200% at any time following the release of Primary Routes having an appraisedvalue in excess of $1 billion (unless the Primary Routes are the onlycollateral then pledged). Failure to comply with the Amended Credit Facilitycovenants could result in a default under the Amended Credit Facility unlessthe Company were to obtain a waiver of, or otherwise mitigate or cure, thedefault. Additionally, the Amended Credit Facility contains a cross-defaultprovision with respect to any other agreement for indebtedness that exceeds $50million. A default under such other indebtedness arrangement could result in atermination of the Amended Credit Facility and a requirement to acceleraterepayment of all outstanding facility borrowings.

**(10) FinancialInstruments and Risk Management**

Instruments designated as cash flow hedges receivefavorable accounting treatment under Statement of Financial AccountingStandards No. 133, *Accounting for DerivativeInstruments and Hedging Activities* (“SFAS 133”), as long as thehedge is highly effective and the underlying transaction is probable. If bothfactors are present, the effective portion of the changes in fair value ofthese contracts is recorded in accumulated other comprehensive income (loss)until earnings are affected by the cash flows being hedged. Instruments classifiedas economic hedges do not qualify for hedge accounting under SFAS 133. Underthis classification all changes in the fair value of these contracts arerecorded currently in operating income, with the offset to either currentassets or liabilities each reporting period.

***Aircraft FuelHedges.***   The Company has a risk managementstrategy to hedge a portion of its price risk related to projected jet fuelrequirements primarily through collar options. The collars involve the purchaseof fuel call options with the simultaneous sale of fuel put options withidentical expiration dates.

For the one month period ended January 31, 2006,the Predecessor Company had no fuel hedges in place. In the three month periodended March 31, 2007 and the two month period ended March 31, 2006,the Successor Company entered into and settled various derivative positionsthat were classified as economic hedges.

In the three months ended March 31, 2007 and thetwo months ended March 31, 2006, mainline fuel expense included income of$21 million and $9 million, respectively, from gains on economic hedges. Forthe three months ended March 31, 2007, the gain of $21 million included $3million of realized loss on settled contracts and $24 million of unrealizedmark-to-market gains for contracts settling after March 31, 2007.

As of March 31, 2007, the Company had hedged 23%of forecasted second quarter of 2007 fuel consumption through crude oil collarsand swaps. On a weighted-average basis, hedge protection begins if crudeexceeds $59 per barrel and is capped at $69 per barrel. Conversely,payment obligations begin if crude, on a weighted-average basis, drops below$55 per barrel.

***Interest Rate Swap.***   Fromtime to time, the Company may use interest rate swap agreements to limit itsexposure to interest rate movements within the parameters of the Company’sinterest rate hedging policy. In February 2006, the Company entered intoan interest rate swap with an initial notional amount of $2.45 billionthat would have decreased to $1.8 billion over the term of the swap. Theswap would have expired in February 2012 and required that the Company paya fixed rate of 5.14% and receive a floating rate based on the three-monthLIBOR rate. In January 2007, as a result of the Company’s reevaluation ofthe mix of fixed-rate and floating-rate debt in its debt portfolio, the Companyterminated the swap for a payment of $4 million.

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

***General Guaranteesand Indemnifications.******  ***Inthe normal course of business, the Company enters into numerous real estateleasing and aircraft financing arrangements that have various guaranteesincluded in the contracts. These guarantees are primarily in the form ofindemnities. In both leasing and financing transactions, the Company typicallyindemnifies the lessors, and any tax/financing parties, against tortliabilities that arise out of the use, occupancy, operation or maintenance ofthe leased premises or financed aircraft. Currently, the Company believes thatany future payments required under these guarantees or indemnities would beimmaterial, as most tort liabilities and related indemnities are covered byinsurance (subject to deductibles). Additionally, certain leased premises suchas fueling stations or storage facilities include indemnities of such partiesfor any environmental liability that may arise out of or relate to the use ofthe leased premises.

***Bankruptcy Matters.******  ***See Note 2, “VoluntaryReorganization Under Chapter 11—Significant Matters Remaining to be Resolved inChapter 11 Cases,” for a discussion of contingencies arising from the Company’sbankruptcy proceedings.

***Legal andEnvironmental 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 the Company issubject and prior experience, that the ultimate disposition of thesecontingencies will not materially affect the Company’s consolidated financialposition or results of operations. The Company records liabilities for legaland environmental claims when a loss is probable and reasonably estimable.These amounts are recorded based on the Company’s assessments of the likelihoodof their eventual disposition. The amounts of these liabilities could increase ordecrease in the near term, based on revisions to estimates relating to thevarious claims.

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.

***Commitments.******  ***At March 31, 2007,future commitments for the purchase of property and equipment, principallyaircraft, approximated $2.5 billion, after deducting advance payments. TheCompany’s current commitments are primarily for the purchase of, in theaggregate, 42 A319 and A320 aircraft. However, the Company has the rightto cancel these orders. Such action could cause the forfeiture of $91 millionof advance payments if United does not take delivery of these aircraft. TheCompany’s current commitments would require the payment of an estimated$0.2 billion in 2007, $0.1 billion for the combined years of 2008 and2009, $0.7 billion for the combined years of 2010 and 2011 and$1.5 billion thereafter.

***Municipal BondGuarantees.*****  **The Company has entered into long-term agreements tolease certain airport and maintenance facilities that are financed through tax-exemptmunicipal bonds. These bonds were issued by various local municipalities tobuild or improve airport and maintenance facilities. Under these leaseagreements, United is required to make rental payments in amounts sufficient topay the maturing principal and interest payments on the bonds. As a result ofthe bankruptcy proceedings, many of the agreements were considered unsecuredpre-petition debt. In 2006, as a result of the final Bankruptcy Courtdecisions, certain leases were considered to be financings resulting in theCompany’s guarantees being discharged in bankruptcy. The Company’s lease ofcertain assets at the Denver International Airport was not rejected; therefore,the Company still has a guarantee under this lease. The Company has guaranteedinterest and principal payments on $261 million of the City and County ofDenver, Colorado 6-7/8% Special Facilities Airport Revenue Bonds (UnitedAir Lines Project) Series 1992A (the “Denver Bonds”), which were issued in1992 and are due in 2032 unless the Company elects not to extend its lease inwhich case the bonds are due in 2023. These bonds are callable by the Company.The outstanding bonds 

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and related guarantee arenot recorded in the Company’s *Condensed Statements ofConsolidated Financial Position* at March 31, 2007 or December 31,2006. The Company is in discussions with the City and County of Denver,Colorado, to consider the possibility of refinancing the Denver Bonds. Anydecision to proceed with the refinancing will be conditioned on receiving thenecessary public approvals and on favorable market conditions.

***Tax Contingencies.******  ***The Company has recorded reserves fortaxes and associated interest that may become payable in future years as aresult of audits by tax authorities. Certain of these reserves are foruncertain income tax positions taken on income tax returns which are accountedfor in accordance with FIN 48, effective January 1, 2007. Contingenciesfor taxes which are not based on income (i.e., gross receipts, revenues, salestaxes, etc.) are accounted for in accordance with SFAS 5*.*Although it believes that the positions taken onpreviously filed tax returns are reasonable, the Company nevertheless hasestablished tax and interest reserves in recognition that various taxingauthorities may challenge certain of the positions taken by the Company,potentially resulting in additional liabilities for taxes and interest. TheCompany’s tax contingency reserves are reviewed periodically and are adjustedas events occur that affect its estimates, such as the availability of newinformation, the lapsing of applicable statutes of limitations, the conclusionof tax audits, the measurement of additional estimated liability based oncurrent calculations, the identification of new tax contingencies, the releaseof administrative tax guidance affecting its estimates of tax liabilities, orthe rendering of relevant court decisions. See Note 5, “Income Taxes,” forfurther information related to uncertain income tax positions and the adoptionof FIN 48.

**(12) Open SkiesAgreement**

On April 30, 2007, the U.S. government and theEuropean Union (“EU”) signed a transatlantic aviation agreement to replace theexisting bilateral arrangements between the U.S. Government and the 27 EUmember states. The agreement will become effective at the end of March 2008.

The agreement is based on the U.S. open skies modeland authorizes U.S. airlines to operate between the United States and any pointin the EU and beyond, free from government restrictions on capacity,frequencies and scheduling and provides EU carriers with reciprocal rights inthese U.S./EU markets. The agreement also authorizes all U.S. and EU carriersto operate services between the United States and London Heathrow, therebypotentially adding new competition to United’s Heathrow operation, althoughHeathrow is currently subject to both slot and facility constraints which maypractically limit the extent of new competition in the near term. Thisagreement does not provide for a reallocation of existing slots among carriers.

As of March 31, 2007and December 31, 2006, the Company had recorded indefinite-livedintangible assets of $255 million for its rights associated with certainHeathrow slots. The Company’s annual impairment test for these assets wasperformed as of October 1, 2006 and no impairment was indicated at thattime. The implementation of open skies may result in a future determinationthat these assets are impaired in whole or in part, or in a futuredetermination that they should be reclassified as definite-lived assets withamortization expense recognized thereon. Such future determinations couldresult in material charges to earnings in those future periods. The Companywill continue to closely monitor developments associated with the open skies agreementand assess the potential impacts of these developments on the Company’srecorded intangible assets in accordance with GAAP.

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**(13) Statement ofConsolidated Cash Flows—Supplemental Disclosures**

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

| ** **                                             | ** ** | **Successor**                                | ** ** | ** **                                                    | ** ** | **Predecessor** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Three Months  Ended  March 31,** | ** ** | **Period from  February 1  to March 31,** | ** ** | ** **      | ** ** | **Period from  January 1 to 31,** | ** ** |
| **(In millions)**                                 | ** ** | ** **                                   | ** ** | **2007**                                                      | ** ** | **2006**        | ** ** | ** ** | ** ** | **2006** | ** ** |
| Cash paid during  the period for:                      |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Interest (net of amounts capitalized)                  |       |                                         | $          | 210                                                           |       |            |       | $ | 102 |   |   |   |   |   | $ | 35 |   |   |
| Income taxes                                           |       |                                         | —     |                                                          |       |            | —     |   |   |   |   |   | — |   |   |
| Non-cash investing and financing activities:           |       |                                         |       |                                                          |       |            |       |   |   |   |   |   |   |   |   |
| Long-term debt  incurred for additions to other assets |       |                                         | $          | —                                                        |       |            |       | $ | 137 |   |   |   |   |   | $ | — |   |   |
|                                                        |            |                                              |            |                                                               |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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**ITEM2.**                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 the Company refers to as its “mainline” operations), as well as smalleraircraft in its regional operations conducted under contract by “United Express®” carriers.

United is one of the largest passenger airlines in theworld with more than 3,600 flights a day to more than 200 destinations throughits mainline and United Express services. United offers more than 1,550 averagedaily mainline (including Ted(SM)) departures to more than 120 destinations in 30countries and two U.S. territories. United provides regional service,connecting primarily via United’s domestic hubs, through marketingrelationships with United Express carriers, which provide more than 2,050average daily departures to approximately 160 destinations. United servesvirtually every major market around the world, either directly or through itsparticipation in the Star Alliance®,the world’s largest 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 of Reorganization became effective and theDebtors emerged from bankruptcy protection on February 1, 2006 (the “EffectiveDate”). On the Effective Date, United implemented fresh-start reporting, whichresulted in significant changes as compared to the historical financialstatements. See Note 2, “Voluntary Reorganization Under Chapter 11” in *Notes to Condensed Consolidated Financial Statements (Unaudited)*for further information regarding bankruptcy matters.

***Recent Developments.******  ***The Company believes itsrestructuring has made the Company competitive with its network airline peers. However,the Company seeks to continuously improve the delivery of its products andservices to its customers, reduce its costs, and increase its revenues. Some ofthese initiatives and other 2007 developments include the following:

·       InFebruary 2007, the Company prepaid $972 million of Credit Facility debtand amended certain terms of the Credit Facility. The Amended Credit Facilityrequires significantly less collateral as compared to the Credit Facility andis expected to provide net interest expense savings of approximately $70million annually. This amount represents the net impact of reduced interestexpense and interest income as a result of lower cash and debt balances, aswell as a more favorable interest rate on the Amended Credit Facility. See the *Liquidity and Capital Resources* section, below, and Note 9, “DebtObligations,” in *Notes to Condensed Consolidated FinancialStatements (Unaudited)*for further information related to this newfacility.

·       In2006, the Company announced a program to reduce projected 2007 expenses by $400million. United has identified some specific programs to realize a portion ofthese savings, and continues to identify and evaluate other savingsopportunities. For example, the Company expects to reduce costs byapproximately $200 million through savings in such areas as telecommunications,airport services, catering, maintenance materials, aircraft ground handling andregional affiliates. United also expects to reduce advertising and marketingcosts by as much as $60 million. The implementation of a new flight planningsystem, and reduced block time opportunities, are expected 

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to generate approximately$40 million in savings. In addition, the Company estimates a $100 millionreduction in general and administrative expense, which includes a reduction ofsalaried and management positions. The Company realized approximately $135million of these cost reductions in 2006 and is on track to achieve theremaining $265 million in 2007.

·       Unitedreceived final U.S. Department of Transportation (“DOT”) approval for itsnonstop service between Washington Dulles International Airport (“Dulles”) andBeijing in February of 2007. This new service commenced on March 28,2007. In addition, United’s new nonstop service between Dulles and Romecommenced on April 1, 2007.

·       InApril 2007, the Company announced it has signed a long-term contract withthe U.S. Postal Service (USPS) for the carriage of domestic mail beginning in April 2007.The Company could generate revenues up to $400 million over the term of theagreement, which terminates in September 2011. United has continued tocarry international mail for the USPS after its former domestic mail contractended in June 2006.

·       TheU.S. government and the European Union (“EU”) recently signed a transatlanticaviation agreement to replace the existing bilateral arrangements between theU.S. Government and the 27 EU member states. The agreement will becomeeffective at the end of March 2008. The future benefits of this agreementcannot be predicted due to potential increased competition; however, we havealready taken actions to capitalize on opportunities with the new agreement,including United’s recent application to complete its antitrust immunity withbmi that would allow the two airlines to integrate their operations at London’sHeathrow airport.

·       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 the Company’s emergencefrom Chapter 11 bankruptcy protection, it 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 before February 1, 2006reflect 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. References to “Successor Company” refer to the Company on or after February 1,2006, after giving effect to the adoption of fresh-start reporting. Referencesto “Predecessor Company” refer to the Company before its exit from bankruptcyon February 1, 2006.

For purposes of preparing year-over-year discussionsof the results of operations, management has compared the Successor Company’sresults for the three months ending March 31, 2007, to the combinedresults for the one month period ended January 31, 2006 and two monthperiod ended March 31, 2006. The presentation of results for the combinedthree month period of 2006 is a non-GAAP measure. However, management believesthat use of a combined 2006 period provides a better basis of comparison to thethree month period of 2007.

The air travel business is subject to seasonalfluctuations and historically, the Company’s results of operations are betterin the second and third quarters as compared to the first and fourth quartersof the 

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year. The Company’soperations can be impacted by adverse weather in any period and our first andfourth quarter results normally reflect reduced travel demand.

The table below presentscertain financial statement items to provide an overview of our financialperformance in the first quarter of 2007 as compared to the same period in2006:

| ** **                                                                           | ** ** | **Successor**      | ** ** | **Combined**       | ** ** | **Successor**               | ** ** | **Predecessor**            | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **Three**          | ** ** | **Three**          | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| ** **                                                                           | ** ** | **Months**         | ** ** | **Months**         | ** ** | **Period from**        | ** ** | **Period from**       | ** ** |
| ** **                                                                           | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **February 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                                                           | ** ** | **March 31,** | ** ** | **March 31,** | ** ** | **March 31,**          | ** ** | **January 31,**       | ** ** |
| **(In millions)**                                                               | ** ** | ** **         | ** ** | **2007**           | ** ** | **2006(a)**                 | ** ** | **2006**                   | ** ** | **2006** | ** ** |
| Loss before  reorganization items, income taxes and equity in earnings of affiliates |       |               | $          | (229               | )          |                        |       | $                          | (303       | ) |   |   | $ | (215 | ) |   |   | $ | (88 | ) |   |
| Reorganization  items, net                                                           |       |               | —     |               |       |                        | 22,709     |                       |       |   | — |   |   |   | 22,709 |   |   |
| Income tax  benefit                                                                  |       |               | (80        | )                  |       |                        | —     |                       |       |   | — |   |   |   | — |   |   |
| Equity in  earnings of affiliates, net of tax                                        |       |               | 1          |               |       |                        | 5          |                       |       |   | — |   |   |   | 5 |   |   |
| Net income (loss)                                                                    |       |               | $          | (148               | )          |                        |       | $                          | 22,411     |   |   |   | $ | (215 | ) |   |   | $ | 22,626 |   |   |
|                                                                                      |            |                    |            |                    |            |                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           The combined period includes the results for the onemonth period ended January 31, 2006 (Predecessor Company) and the twomonth period ended March 31, 2006 (Successor Company).

The Company’s lossbefore reorganization items, income taxes and equity in earnings of affiliatesin the first quarter of 2007 improved by $74 million, or 24%, as compared tothe first quarter of 2006. The following items highlight some of the moresignificant variances in the 2007 period as compared to the 2006 period. For amore detailed discussion of these items and additional factors impacting ourfinancial performance see the *Results of Operations*section below.

·       Passengerrevenues were flat, increasing by less than 1% in the first quarter of 2007 ascompared to the year-ago period. However, our revenue passenger miles (RPMs)increased by 1.4% year over year. The passenger revenues were negativelyimpacted by deferred revenue associated with the Mileage Plus program, whichprimarily resulted from a net increase in outstanding miles.

·       Wereduced our accrual for bankruptcy litigation associated with potentialsecurity interests in our San Francisco International Airport (“SFO”) and LosAngeles International Airport (“LAX”) facility leases by a total of $22 millionbased on an updated analysis of our potential obligations. This benefit toincome is classified as a special item in the *Condensed Statementsof Consolidated Operations (Unaudited)*.

·       Werecognized an income tax benefit of $80 million in the first quarter of 2007. Anincome tax benefit was not recorded in the year-ago period.

***Liquidity.******  ***Despite the $972 million debtprepayment of the Credit Facility in the first quarter of 2007, the Company hadtotal cash, including restricted cash and short-term investments, of $4.1billion as of March 31, 2007. The Company’s strong cash position resultedfrom its recapitalization upon exiting bankruptcy and strong operating cashflows since emerging from bankruptcy. Cash from operations was $620 millionduring the three month period ended March 31, 2007, as compared tooperating cash flow of $455 million in the combined three month period of 2006.See the *Liquidity and Capital Resources* sectionbelow for further information related to the debt prepayment and creditfacility amendment.

***Capital Commitments.******  ***At March 31, 2007,future commitments for the purchase of property and equipment, principallyaircraft, approximated $2.5 billion, after deducting advance payments. Ourcurrent commitments are primarily for the purchase of A319 and A320 aircraft. TheCompany has the right to cancel these orders. Such action could cause theforfeiture of $91 million of advance payments if United 

24

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does not take futuredelivery of these aircraft. For further details, see Note 11, “Commitments,Contingent Liabilities and Uncertainties” in *Notes toCondensed 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 2, “Voluntary Reorganization Under Chapter 11—BankruptcyConsiderations” and Note 11, “Commitments, Contingent Liabilities andUncertainties” in *Notes to Condensed Consolidated FinancialStatements (Unaudited).*

*MunicipalBond Obligations & Off-Balance Sheet Financing.*   TheCompany is a party to numerous long-term agreements to lease certain airportand maintenance facilities that are financed through tax-exempt municipal bondsissued by various local municipalities to build or improve airport andmaintenance facilities. The Company had been advised that these municipal bondsmay have been unsecured (or in certain instances, partially secured)pre-petition debt. In 2006, certain of the Company’s municipal bond obligationsrelating to LAX and SFO were conclusively adjudicated through the BankruptcyCourt as financings and not true leases; however, there remains pendinglitigation to determine the value of the security interests, if any, that thebondholders at LAX and SFO have in the Company’s underlying leaseholds.

The bonds relating to Denver International Airportwere conclusively adjudicated as a true lease. The Company has guaranteed $261million of the City andCounty of Denver, Colorado 6-7/8% Special Facilities Airport RevenueBonds (United Air Lines Project) Series 1992A (the “Denver Bonds”).These bonds are callable by the Company. The outstanding bonds and relatedguarantee are not recorded in the Company’s *Condensed ConsolidatedStatements of Consolidated Financial Position*. The Company is in discussions with the Cityand County of Denver, Colorado, to consider the possibility of refinancing theDenver Bonds. Any decision to proceed with the refinancing will be conditionedon receiving the necessary public approvals and on favorable market conditions.

*PensionBenefit Terminations.*   In June 2006, theDistrict Court entered an order approving the termination of the UnitedAirlines Pilot Defined Benefit Pension Plan (“Pilot Plan”). The Air Line PilotsAssociation (“ALPA”), United Retired Pilots Benefit Protection Association (“URPBPA”)and the Pension Benefit Guaranty Corporation each filed appeals with the Courtof Appeals. On October 25, 2006, the Court of Appeals affirmed theDistrict Court’s order approving the termination of the Pilot Plan effective December 30,2004. Both ALPA and URPBPA filed petitions for writ of certiorari from theSupreme Court. On April 2, 2007, the Supreme Court denied such petitionseffectively terminating those proceedings.

There was 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. During the firstquarter 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. On October 25, 2006,the Court of Appeals reversed the District Court’s order dismissing for lack ofripeness the Company’s appeal of the Bankruptcy Court’s October 6, 2005order and remanded the case with instructions to reverse the Bankruptcy Court’sorder compelling payment of non-qualified benefits for October 2005. On November 6, 2006, ALPA filed apetition for rehearing on the Court of Appeals reversal of the October 6,2005 order. Both ALPA and URPBPA filed petitions for writ of certiorarifrom the Supreme Court on this issue. On April 2, 2007, the Supreme Courtdenied such petitions, effectively terminating those proceedings.

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In March 2006, the Bankruptcy Court ruled thatthe Company was obligated to make payment of all pilot non-qualified pensionbenefits for the months of November and December 2005 and January 2006.The Bankruptcy Court also ruled that the Company’s obligation to pay pilotnon-qualified pension benefits ceased as of January 31, 2006. The Companyfiled a notice of appeal of the Bankruptcy Court’s ruling to the District Court.URPBPA and ALPA also filed notices of appeal with respect to the BankruptcyCourt’s order, which were subsequently consolidated with the Company’s appeal. Unitedagreed with URPBPA and ALPA to pay into an escrow account the disputednon-qualified pension benefits for the months of November and December 2005and January 2006, an aggregate amount totaling approximately $17 million. 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 District Court’s decision. TheCompany subsequently filed a motion to consolidate its appeal from theBankruptcy Court’s October 2005 non-qualified benefits order with the threeappeals from the Bankruptcy Court’s March 2006 non-qualified benefitsorder. The Court of Appeals denied the Company’s motion, but issued an orderstaying briefing on the March 2006 non-qualified benefits order untilfurther order of the Court of Appeals. On April 19, 2007, the Court ofAppeals reversed the March 2006 order and remanded the case withinstructions to the District Court to enter judgment for entry of an order inUnited’s favor. ALPA and URPBPA may still file petitions for rehearing or for awrit of certiorari with the Supreme Court.

*Legaland Environmental.**  *TheCompany has certain contingencies resulting from litigation and claims(including environmental 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 the Company issubject and prior experience, that the ultimate disposition of thesecontingencies will not materially affect the Company’s consolidated financialposition or results of operations. When appropriate, the Company accrues forthese matters based on its assessments of the likely outcomes of their eventualdisposition. The amounts of these liabilities could increase or decrease in thenear term, based on revisions to estimates relating to the various claims.

New regulations surrounding the emission of greenhousegases (such as carbon dioxide) are being considered for promulgation bothinternationally and within the United States. The Company will be carefullyevaluating the potential impact of such proposed regulations.

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.

**Results ofOperations**

As described in the *Overview*section above, presentation of the combined three month period ended March 31,2006 is a non-GAAP measure; however, management believes it is useful forcomparison with the three months ended March 31, 2007.

The Company’s loss from operations of $87 million inthe three months ended March 31, 2007 improved by $81 million as comparedto the operating loss of $168 million in the combined three months ended March 31,2006. The Company’s net loss was $148 million in the three month period ended March 31,2007 as compared to net income of $22.4 billion in the combined three monthperiod ended March 31, 2006. The difference of approximately $22.6 billionwas due to reorganization income of $22.7 billion in the 2006 period partiallyoffset by an income tax benefit of $0.1 billion in the 2007 period. SeeNote 2, “Voluntary Reorganization Under Chapter 11—Reorganizationitems” in *Notes to Condensed Consolidated FinancialStatements (Unaudited)* for further information on reorganizationitems.

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*Operating Revenues.**  *The following table illustrates theyear-over-year percentage change in revenues on a consolidated basis:

| ** **                         | ** ** | **Successor**      | ** ** | **Combined**       | ** ** | **Successor**               | ** ** | **Predecessor**            | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Three**          | ** ** | **Three**          | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Months**         | ** ** | **Months**         | ** ** | **Period from**        | ** ** | **Period from**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **February 1 to** | ** ** | **January 1 to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **March 31,** | ** ** | **March 31,** | ** ** | **March 31,**          | ** ** | **January 31,**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| **(In millions)**             | ** ** | ** **         | ** ** | **2007**           | ** ** | **2006(a)**                 | ** ** | **2006**                   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| Operating  revenues:               |       |               |       |               |       |                        |       |                       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Passenger—United Airlines     |       |               | $          | 3,264              |       |                        |       | $                          | 3,256      |       |       |       | $          | 2,182 |   |   |   | $ | 1,074 |   |   |   | $ | 8 |   |   |   | — |   |   |
| Passenger—Regional Affiliates |       |               | 675        |               |       |                        | 669        |                       |       |       | 465        |       |       |   | 204 |   |   |   | 6 |   |   |   | 1 |   |   |
| Cargo                              |       |               | 168        |               |       |                        | 180        |                       |       |       | 124        |       |       |   | 56 |   |   |   | (12 | ) |   |   | (7 | ) |   |
| Other operating revenues           |       |               | 270        |               |       |                        | 355        |                       |       |       | 235        |       |       |   | 120 |   |   |   | (85 | ) |   |   | (24 | ) |   |
|                               |       |               | $          | 4,377              |       |                        |       | $                          | 4,460      |       |       |       | $          | 3,006 |   |   |   | $ | 1,454 |   |   |   | $ | (83 | ) |   |   | (2 | ) |   |
|                                    |            |                    |            |                    |            |                             |            |                            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           The combined period includes the results for the onemonth period ended January 31, 2006 (Predecessor Company) and the twomonth period ended March 31, 2006 (Successor Company).

Mainline and United Express passenger revenues, whichwere relatively flat in first quarter of 2007 as compared to the first quarterof 2006, are discussed below.

Cargo revenues decreased by approximately $12 million,or 7%, in the three month period ended March 31, 2007 as compared to thesame period in 2006. This decrease was partly due to the termination of ourformer contract to carry U.S. domestic mail for the USPS as of June 30,2006. However, since this contract termination we have continued to carryinternational mail for the USPS, and recently entered into a new contract tocarry domestic mail as discussed above. Decreased traffic and yield for thePacific region also contributed to the decrease in cargo revenues. The trafficand yield decreases were due to increased competition in the region, primarilyfrom capacity added by foreign carriers.

Other operating revenues decreased by $85 million, or24%, in the three month period ended March 31, 2007 as compared to thesame period in 2006. Lower jet fuel sales to third parties by our subsidiary,United Aviation Fuel Corporation (“UAFC”) accounted for $81 million of theother revenue decrease. This decrease was due to several factors, includingdecreased UAFC sales to our regional affiliates; decreased sales due to ourdecision not to renew various supply agreements to other carriers; and,decreased sales of excess inventory. The decrease in UAFC sales had virtuallyno impact on our operating margin, because UAFC cost of sales decreased by $82million in the first quarter of 2007 as compared to the year-ago period. Otherrevenues were also negatively impacted by approximately $18 million in thefirst quarter of 2007 as compared to the first quarter of 2006 due to areduction in low-margin third-party maintenance work.

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Thetable below presents selected passenger revenues and operating data bygeographic region and the Company’s mainline and United Express segmentsexpressed as period-to-period changes:

| **2007**                            | ** ** | **North  America** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** | **Latin**  | ** ** | **Mainline** | ** ** | **United  Express** | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------|------------|--------------|------------|------------|------------|--------------|------------|---------------------|------------|------------------|------------|
| Increase (decrease) from  2006 (a): |       |
| Passenger revenues (in millions)    |       |               | $          | (85         | )          |         |       | $          | 32         |         |       |                | $          | 62               |       |   | $ | (1 | ) |   | $ | 8 |   |   |   | $ | 6 |   |   |   | $ | 14 |   |   |
| Passenger revenues                  |       |               | (4.1       | )%          |       |         | 4.9        | %          |       |         | 15.9       | %                   |       | (1.0             | )%         |   | 0.2 | % |   |   | 0.9 | % |   |   | 0.4 | % |   |
| Available seat miles (ASMs)         |       |               | —     | %           |       |         | 0.8        | %          |       |         | 5.8        | %                   |       | (14.9            | )%         |   | 0.1 | % |   |   | 5.2 | % |   |   | 0.6 | % |   |
| Revenue passenger miles (RPMs)      |       |               | 0.7        | %           |       |         | 1.1        | %          |       |         | 7.3        | %                   |       | (11.4            | )%         |   | 1.0 |  % |   |   | 5.4 | % |   |   | 1.4 | % |   |
| Load factor (points)                |       |               | 0.6        |  pts.  |       |         | 0.3        |  pts. |       |         | 1.2        |  pts.          |       | 3.1              |  pts. |   | 0.7 |  pts. |   |   | 0.2 |  pts. |   |   | 0.6 |  pts. |   |
| Yield (b)                           |       |               | (4.7       | )%          |       |         | 3.9        | %          |       |         | 8.7        | %                   |       | 10.0             |  %    |   | (0.7 | )% |   |   | (4.3 | )% |   |   | (1.0 | )% |   |
|                                     |            |                    |            |             |            |              |            |            |            |              |            |                     |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Variances are from the combined 2006period that includes the results for the one month period ended January 31,2006 (Predecessor Company) and the two month period ended March 31,2006 (Successor Company).

(b)           Yield is a measure of average price paid per passengermile, which is calculated by dividing passenger revenues by RPMs. Yieldsfor geographic regions exclude charter revenue and RPMs.

Mainline passenger and United Express revenues wererelatively unchanged, increasing by only $8 million and $6 million,respectively, in the 2007 period as compared to the same period in 2006. In thefirst quarter of 2007, mainline revenues benefited from a 0.7 point increase inload factor as compared to the first quarter of 2006; this benefit was offsetby a 0.7% decrease in yield. In the same periods, United Express revenuesbenefited from a 0.2 point increase in load factor, which was offset by a 4.3%decrease in yield. Revenues and yields for both segments were negativelyimpacted by the accounting for deferred revenue under our Mileage Plus programand to a lesser extent, severe storms in first quarter of 2007 that decreasedtotal passenger revenue by an estimated $32 million. Mileage Plus revenue wasapproximately $94 million lower in the 2007 period due to an increase inoutstanding mileage credits due to various promotional programs and oneadditional month of the application of this new method of accounting in 2007 asthis accounting policy was initially applied as of February 1, 2006.Partially offsetting these negative Mileage Plus impacts was a benefit due to achange in the Mileage Plus expiration period policy from 36 months to 18 monthsas discussed in the *Critical AccountingPolicies* section below. Mileage Plus customer accounts are nowdeactivated after 18 months of inactivity, effective December 31, 2007.The Company estimates the number of accounts that will eventually becomedeactivated and ratably reduces its deferred revenue balance for estimateddeactivated accounts over the expiration period.

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*Operating Expenses.**  *The table below includes the year-over-year dollarand percentage changes in operating expenses. Significant fluctuations arediscussed below.

| ** **                                         | ** ** | **Successor**      | ** ** | **Combined**       | ** ** | **Successor**               | ** ** | **Predecessor**            | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | **Three**          | ** ** | **Three**          | ** ** | **Period**                  | ** ** | **Period**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Months**         | ** ** | **Months**         | ** ** | **from**                    | ** ** | **from**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **February 1 to** | ** ** | **January 1 to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **March 31,** | ** ** | **March 31,** | ** ** | **March 31,**          | ** ** | **January 31,**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| **(In millions)**                             | ** ** | ** **         | ** ** | **2007**           | ** ** | **2006(a)**                 | ** ** | **2006**                   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| Operating  expenses:                               |       |               |       |               |       |                        |       |                       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related costs                         |       |               | $          | 1,068              |       |                        |       | $                          | 1,083      |       |       |       | $          | 725 |   |   |   | $ | 358 |   |   |   | $ | (15 | ) |   |   | (1 | ) |   |
| Aircraft fuel                                      |       |               | 1,041      |               |       |                        | 1,067      |                       |       |       | 705        |       |       |   | 362 |   |   |   | (26 | ) |   |   | (2 | ) |   |
| Regional affiliates                                |       |               | 692        |               |       |                        | 696        |                       |       |       | 468        |       |       |   | 228 |   |   |   | (4 | ) |   |   | (1 | ) |   |
| Purchased services                                 |       |               | 301        |               |       |                        | 303        |                       |       |       | 206        |       |       |   | 97 |   |   |   | (2 | ) |   |   | (1 | ) |   |
| Aircraft maintenance materials and outside repairs |       |               | 281        |               |       |                        | 259        |                       |       |       | 179        |       |       |   | 80 |   |   |   | 22 |   |   |   | 8 |   |   |
| Landing fees and other rent                        |       |               | 238        |               |       |                        | 220        |                       |       |       | 145        |       |       |   | 75 |   |   |   | 18 |   |   |   | 8 |   |   |
| Depreciation and amortization                      |       |               | 220        |               |       |                        | 216        |                       |       |       | 148        |       |       |   | 68 |   |   |   | 4 |   |   |   | 2 |   |   |
| Distribution expenses                              |       |               | 188        |               |       |                        | 201        |                       |       |       | 141        |       |       |   | 60 |   |   |   | (13 | ) |   |   | (6 | ) |   |
| Aircraft rent                                      |       |               | 101        |               |       |                        | 105        |                       |       |       | 75         |       |       |   | 30 |   |   |   | (4 | ) |   |   | (4 | ) |   |
| Cost of third party sales                          |       |               | 92         |               |       |                        | 189        |                       |       |       | 126        |       |       |   | 63 |   |   |   | (97 | ) |   |   | (51 | ) |   |
| Special operating items                            |       |               | (22        | )                  |       |                        | —     |                       |       |       | —     |       |       |   | — |   |   |   | (22 | ) |   |   | — |   |   |
| Other operating expenses                           |       |               | 264        |               |       |                        | 289        |                       |       |       | 204        |       |       |   | 85 |   |   |   | (25 | ) |   |   | (9 | ) |   |
|                                               |       |               | $          | 4,464              |       |                        |       | $                          | 4,628      |       |       |       | $          | 3,122 |   |   |   | $ | 1,506 |   |   |   | $ | (164 | ) |   |   | (4 | ) |   |
|                                                    |            |                    |            |                    |            |                             |            |                            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           The combined period includes the results for the onemonth ended January 31, 2006 (Predecessor Company) and the twomonths ended March 31, 2006 (Successor Company).

As discussed in Note 1, “Basis of Presentation,” in *Notes to Condensed Consolidated Financial Statements (Unaudited),*distributionexpenses include commissions, global distribution systems (“GDS”) and creditcard transaction fees. Prior period information has been reclassified toconform to the current period presentation. Previously, GDS and credit cardtransaction fees were classified as components of purchased services andcommissions were reported as a separate expense item in the Company’sForm 10-Q for the quarterly period ended March 31, 2006.

Salaries and related costs were relatively unchanged,decreasing $15 million, or 1%, in the first quarter of 2007 as compared tothe year-ago period. This benefit was largely due to a reduction in share-basedcompensation expense which was $69 million in the 2006 period, but only $15million in the 2007 period. Less compensation expense was recognized in the2007 period as compared to the 2006 period for awards that were granted in2006. Immediate recognition of 100% of the cost of awards granted toretirement-eligible employees accounts for a significant amount of thisdecrease. In addition, to properly expense the proportional cost of awards byeach vesting date within these awards, we expensed the proportionate cost ofthe awards that vested in 2006 and a portion of the cost of the awardsscheduled to vest in future periods. There were not any significant grants inthe 2007 period as compared to the 2006 period, which included a large numberof grants associated with our emergence from bankruptcy.  Offsetting the benefit of decreasedshare-based compensation expense, was a slight increase in salaries and healthcare benefits as a result of inflationary pressures and a $49 million increasein profit sharing expense. This increase in profit sharing expense is thecombined impact of both components of the Company’s success sharing program,the performance incentive component and the profit sharing component. Payoutsunder the performance incentive component are separately determined based onthe Company’s performance against each of three goals:  operational reliability, customersatisfaction and financial performance. The profit sharing component of thesuccess sharing program will payout 15% of the Company’s 2007 adjusted pre-taxearnings, an increase from the 2006 payout formula of 7.5%.

29

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Aircraft fuel decreased $26 million, or 2%, in thethree month period ended March 31, 2007 as compared to the same period in2006. This net fuel benefit was due to a 3% decrease in the average price pergallon of jet fuel from $1.95 per gallon in the first quarter of 2006 to $1.89per gallon in the first quarter of 2007, resulting from favorable marketconditions, and a $12 million increase in net hedge gains that were $21 millionin the 2007 period as compared to $9 million in the 2006 period. Partiallyoffsetting the price and hedging benefits was a 1% increase in fuel consumptionin the first quarter of 2007 as compared to the year-ago period.

Regional affiliate expense decreased $4 million,or 1%, during the first three months of 2007 as compared to the same periodlast year, despite the $6 million, or 1%, increase in revenue from regionalaffiliate operations. Our regional affiliate operating margin was a loss of $17million in the 2007 period as compared to a loss of $27 million in the 2006period. This improvement is due to the restructuring of lower-cost regionalcarrier capacity agreements, the replacement of some 50-seat regionaljets with 70-seat regional jets and regional carrier networkoptimization. All of these improvements were put in place throughout 2006;however, we are still realizing some year-over-year benefits in 2007 as theimprovements have been in place for the full period in 2007, but for only partof the 2006 period. The average price of regional affiliates fuel decreased by2%, which decreased fuel cost by $1 million in the 2007 period as compared tothe 2006 period.

For the first three months ended March 31, 2007,aircraft maintenance materials and outside repairs expense increased$22 million, or 8%, year-over-year primarily due to higher rates includedin certain of our power by the hour contracts in the first quarter of 2007 ascompared to the first quarter of 2006.

Landing fees and other rent increased $18 million, or8%, in the first quarter of 2006 as compared to the year-ago period due toinflationary pressures at certain of our key airports in the 2007 period ascompared to the year-ago period. In addition, in 2006 we received an $8 millioncredit from one of our airports upon completion of an audit of expenses formultiple years. These year-over-year negative impacts were partially offset bya reduction in the amount of facilities rented based upon our ongoing effortsto optimize our rented facilities with our operational needs.

Distribution expenses, which include commissions, GDSfees and credit card fees decreased 6% from the 2006 period to $188 million forthe quarter ended March 31, 2007. This decrease was due to cost savingsrealized from the renegotiation of certain of our GDS vendor agreements. ThisGDS benefit was partially offset by slightly higher credit card discount feesdue to a combination of increased volume and increased rates.

The decrease in cost of sales of $97 million in the2007 period as compared to the 2006 period was primarily due to lower UAFCthird party fuel sales and third-party maintenance work as described in thediscussion of revenue variances above. The decrease in cost of sales is relativelyconsistent with the $85 million decrease in other revenues for the sameperiods.

Special items of $22 million include the benefit of areduction in recorded accruals for pending bankruptcy litigation related to ourSFO and LAX municipal bond obligations. See Note 2, “Voluntary ReorganizationUnder Chapter 11” in *Notes to the CondensedConsolidated Financial Statements (Unaudited)*for furtherinformation on these pending matters.

Other operating expense decreased $25 million, or 9%,in the first three months of 2007, as compared to the first three months of2006. This decrease was primarily due to a $19 million reduction in advertisingexpenditures.

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*Non-operating expenses.*   Thefollowing table illustrates the year-over-year dollar and percentage changes inother income (expense).

| ** **              | ** ** | **Successor**      | ** ** | **Combined**       | ** ** | **Successor**               | ** ** | **Predecessor**            | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | **Three**          | ** ** | **Three**          | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Months**         | ** ** | **Months**         | ** ** | **Period from**        | ** ** | ** Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **February 1 to** | ** ** | **January 1 to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **March 31,** | ** ** | **March 31,** | ** ** | **March 31,**          | ** ** | **January 31,**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| **(In millions)**  | ** ** | ** **         | ** ** | **2007**           | ** ** | **2006(a)**                 | ** ** | **2006**                   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| Other income (expense): |       |               |       |               |       |                        |       |                       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense        |       |               | $          | (206               | )          |                        |       | $                          | (173       | )          |       |       | $          | (131 | ) |   |   | $ | (42 | ) |   |   | $ | (33 | ) |   |   | 19 |   |   |
| Interest income         |       |               | 60         |               |       |                        | 34         |                       |       |       | 28         |       |       |   | 6 |   |   |   | 26 |   |   |   | 76 |   |   |
| Interest capitalized    |       |               | 5          |               |       |                        | 3          |                       |       |       | 3          |       |       |   | — |   |   |   | 2 |   |   |   | 67 |   |   |
| Miscellaneous, net      |       |               | (1         | )                  |       |                        | 1          |                       |       |       | 1          |       |       |   | — |   |   |   | (2 | ) |   |   | — |   |   |
|                    |       |               | $          | (142               | )          |                        |       | $                          | (135       | )          |       |       | $          | (99 | ) |   |   | $ | (36 | ) |   |   | $ | (7 | ) |   |   | 5 |   |   |
|                         |            |                    |            |                    |            |                             |            |                            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           The combined period includes the results for the onemonth period ended January 31, 2006 (Predecessor Company) and the twomonth period ended March 31, 2006 (Successor Company).

Interest expense increased $33 million, or 19%,in the quarter ended March 31, 2007 as compared to the year-ago period. Thisincrease was primarily due to expense of $17 million for previously capitalizeddebt issuance costs that were associated with the prepaid portion of the CreditFacility and $6 million for financing costs in connection with the February amendmentof the Credit Facility. The 2007 period was also favorably impacted by theamendment of the Credit Facility, which lowered the Company’s interest rate onthese obligations.

Interest income increased $26 million year overyear reflecting a higher average cash balance in 2007, as well as higher ratesof return on certain investments; interest income also increased due to theclassification of $6 million of interest income as reorganization items in the January 2006predecessor period in accordance with SOP 90-7.

*Income Taxes.**  *The Company recorded income taxes for the three monthperiod ended March 31, 2007 based on its estimated effective tax rate of35%. Income taxes were not recorded in the same period of 2006.

***Liquidity and Capital Resources***

***Liquidity.****  *The Company’s combined cash, cashequivalents and short-term investments, including restricted cash, was $4.1billion at March 31, 2007 compared to $4.9 billion at December 31,2006. As of March 31, 2007, the Company had $825 million in restrictedcash, as compared to $809 million as of December 31, 2006. Restricted cashprimarily represents cash collateral to secure workers’ compensationobligations, security deposits for airport leases and reserves withinstitutions that process our credit card ticket sales. We may be required topost significant additional cash collateral to meet such obligations in thefuture.

*OperatingActivities.**  *TheCompany generated cash from operations of $620 million in the quarter ended March 31,2007 as compared to cash from operations of $455 million in the year-ago period.Net loss before reorganization items improved by $150 million in the firstquarter of 2007, as compared to the first quarter of 2006. This $150 millionimprovement includes non-cash tax benefits of $80 million. In addition, cashgenerated from operations increased due to changes in working capital. Significantyear-over-year changes in working capital items included  deferred revenue and advance ticket sales of$95 million and $194 million, respectively, which increased primarily due toincreased ticket sales in advance of the spring and summer travel seasons.

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*InvestingActivities.**  *Significantvariances in investing activities include the following. In the three monthsended March 31, 2007, cash of $17 million was used to increase segregatedand restricted funds as compared to cash of $266 million that was provided by adecrease in the segregated and restricted accounts in the three month periodended March 31, 2006. The significant cash generated from restrictedaccounts in the 2006 period was due to our improved financial position upon ouremergence from bankruptcy. Net sales of short-term investments provided $118million of cash in the 2007 period as compared to $73 million in the year-agoperiod. This change was due to normal cash management activities as ourshort-term investments are part of our overall cash management policy. Capitalexpenditures were $68 million and $92 million in the 2007 and 2006 periods,respectively.

During the three months ended March 31, 2007 and March 31,2006 the Company did not sell or acquire any aircraft.

*FinancingActivities.**  *Cashused by financing activities was $1.3 billion in the three month period ended March 31,2007, as compared to $1.2 billion of cash provided by financing activitiesduring the first three months of 2006. In 2007, the Company used cash ofapproximately $1.3 billion to prepay approximately $1.0 billion of its CreditFacility debt and make other scheduled long-term debt and capital leasepayments. A combination of the Company’s initial Credit Facility upon exitingbankruptcy and significant cash generated from operations in 2006 provided uswith a larger than optimal cash balance. The Credit Facility prepaymentadjusted our cash balance to a level we believe is more optimal. During thecombined three months of 2006, the Company generated proceeds of $3.0 billionfrom its new credit facility but used approximately $1.7 billion of theseproceeds to repay the $1.2 billion debtor-in-possession credit facility andmake other scheduled and revolving payments under long-term debt and capitallease agreements.

In February 2007 the Company amended certainterms of its Credit Facility, resulting in a reduction in the amount of theCredit Facility from $3.0 billion to $2.055 billion, consisting of a $1.8billion term loan commitment and a $255 million revolving commitment. At theCompany’s option, interest payments are based on either a base rate, as definedin the Amended Credit Facility, or LIBOR plus 2%. This applicable margin onLIBOR rate loans is a significant reduction of 1.75% from the original terms ofthe Credit Facility. The Amended Credit Facility frees up a significant amountof assets that had been pledged as collateral under the original CreditFacility. At March 31, 2007, $191 million was available for loans orstandby letters of credit under the Amended Credit Facility. See Note 9, “DebtObligations” in *Notes to Condensed Consolidated FinancialStatements (Unaudited)* for further information related to theAmended Credit Facility.

In January 2007, theCompany paid $4 million to terminate the interest rate swap that had been used tohedge a portion of the future interest payments under the original CreditFacility term loan of $2.45 billion. See Note 10, “Financial Instruments andRisk Management” in *Notes to CondensedConsolidated Financial Statements (Unaudited)* for further informationrelated to this swap agreement.

***Critical Accounting Policies***

For complete information regarding the Company’scritical accounting policies, see “Critical Accounting Policies” in *Management’s Discussion and Analysis of Financial Condition and Resultsof Operation*s in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006.

*FrequentFlyer Accounting.*   Management’s estimate of theexpected breakage of miles as of the fresh-start date, and for recognition ofbreakage post-emergence, requires significant management judgment. In 2006,United’s policy for the cancellation of miles was to deactivate Mileage Pluscustomer accounts for which there was no activity for 36 months. Accordingly,the Company recognized revenue from breakage of miles by amortizing suchestimated breakage over the 36 month expiration period. In early 2007, theCompany announced a reduction in the expiration period from 36 months to 18months effective 

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December 31, 2007. Accordingly,in 2007 the Company began to recognize revenue from breakage of miles byamortizing such estimated breakage over the 18 month expiration period.Management considers historical patterns of account breakage to be a usefulindicator when estimating future breakage. Future program redemptionopportunities can significantly alter customer behavior from historicalpatterns with respect to inactive accounts. Such changes may result in materialchanges to the deferred revenue balance, as well as recognized revenues fromthe program. A hypothetical 1% change in the Company’s estimated breakage rate,estimated at 15% annually as of March 31, 2007, has an effect ofapproximately $19 million on the liability. At December 31, a hypothetical1% change in the Company’s estimated breakage rate, which was estimated at 14%annually, would have had an impact of approximately $18 million effect on theliability. The change in the expiration period provided a benefit ofapproximately $28 million in the first quarter of 2007 and is expected toprovide a benefit of approximately $170 million for the full year of 2007.

At March 31, 2007, our outstanding number ofmiles was approximately 515 billion. The Company currently estimates thatapproximately 439 billion of these miles will ultimately be redeemed and,accordingly, has recorded deferred revenue of $3.8 billion. A hypothetical 1%change in the weighted-average ticket value or the outstanding number of mileswould have approximately a $44 million effect on the liability.

*Goodwilland Intangible Assets.**  *Inaccordance with Statement of FinancialAccounting Standards No. 142, *Goodwill and OtherIntangible Assets,* the Company applies a fair value-basedimpairment test to the book value of goodwill and indefinite-lived intangibleassets on an annual basis and, if certain events or circumstances indicate thatan impairment 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.

The Company performed its annual impairment test forits goodwill and other indefinite-lived intangible assets as of October 1,2006. The Company did not identify any impairment in these assets as a resultof this test. Subsequently, on April 30, 2007, the U.S. government and theEuropean Union (“EU”) signed a transatlantic aviation agreement to replace theexisting bilateral arrangements between the U.S. Government and the 27 EUmember states. The agreement will become effective at the end of March 2008.The agreement will authorize all U.S. and EU carriers to operate servicesbetween the United States and London Heathrow, thereby potentially adding newcompetition to United’s Heathrow operation, although Heathrow is currentlysubject to both slot and facility constraints which may practically limit theextent of new competition in the near term. This agreement does not provide fora reallocation of existing slots among carriers.

At March 31, 2007 andDecember 31, 2006, the Company had recorded indefinite-lived intangibleassets of $255 million for its rights associated with certain Heathrow slots.The implementation of open skies may result in a future determination thatthese assets are impaired in whole or in part, or in a future determination thatthey should be reclassified as definite-lived assets with amortization expenserecognized thereon. Such future determinations could result in material chargesto earnings in those future periods. The Company will continue to closelymonitor developments associated with the open skies agreement and assess thepotential impacts of these developments on the Company’s recorded intangibleassets in accordance with GAAP.

***Forward-Looking Information***

Certain statements throughout *Management’sDiscussion and Analysis of Financial Condition and Results of Operations*and 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 future 

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results expressed orimplied in such forward-looking statements. Words such as “expects,” “will,” “plans,”“anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook” andsimilar expressions are intended to identify forward-looking statements.

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 could differ materially from theseforward-looking statements due to numerous factors including, withoutlimitation, the following: our ability to comply with the terms of our AmendedCredit Facility and other financing arrangements; the costs and availability offinancing; our ability to execute our business plan; our ability to realizebenefits from our resource optimization efforts and cost reduction initiativeprograms; our ability to utilize our net operating losses; our ability toattract, motivate and/or retain key employees; our ability to attract andretain customers; demand for transportation in the markets in which we operate;general economic conditions (including interest rates, foreign currencyexchange rates, crude oil prices, costs of aviation fuel and refining capacityin relevant markets); our ability to cost-effectively hedge against increasesin the price of aviation fuel; the effects of any hostilities, act of war orterrorist attack; the ability of other air carriers with whom we have alliancesor partnerships to provide the services contemplated by the respectivearrangements with such carriers; the costs and availability of aircraft insurance;the costs associated with security measures and practices; labor costs;competitive pressures on pricing and on demand; capacity decisions of ourcompetitors; U.S. or foreign governmental legislation, regulation and otheractions; our ability to maintain satisfactory labor relations; any disruptions to operations due to any potential actions byour labor groups; weather conditions; and other risks and uncertainties setforth under the caption “Risk Factors” in Item 1A. of United’s Annual Report onForm 10-K for the year ended December 31, 2006, as well asother risks and uncertainties set forth from time to time in the reports wefile with United States Securities and Exchange Commission.Consequently, forward-looking statements should not be regarded as representationsor warranties by the Company that such matters will be realized.

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**ITEM 3.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The discussion below provides changes in our marketrisks since December 31, 2006. For additional information regarding ourexposure to certain market risks, see *Item 7A. Quantitative andQualitative Disclosures About Market Risk*in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006.

*InterestRate Risk–*In the first quarter of 2006, United enteredinto an interest rate swap whereby it fixed the rate of interest on $2.45billion notional value of floating-rate debt at 5.14% plus a fixed creditmargin. The swap had a fair value of negative $12 million at December 31,2006. In January 2007, United terminated the swap. The termination valueof the swap was negative $4 million. As discussed in Note 11, “Debt Obligations”in *Notes to Condensed Consolidated FinancialStatements (Unaudited),* the Company prepaid $972 million of its debtobligations in February 2007 which reduced the amount of the Company’scash and short-term investments and debt obligations that are sensitive tointerest rate fluctuations.

*Commodity Price Risk (JetFuel)–*When market conditions indicate risk reductionis achievable, the Company may use fuel option contracts or other derivativeinstruments to reduce its price risk exposure to jet fuel. The derivativeinstruments are designed to provide protection against increases in the priceof aircraft fuel. The Company may change its hedging program based on changesin market conditions. At March 31, 2007, the fair value of the Company’sfuel-related derivatives was $22 million as compared to a negative $2 millionat December 31, 2006.

**ITEM 4.   CONTROLSAND PROCEDURES**

This section should be read in conjunction with *Item 9A, Controls and Procedures* included in the Company’sAnnual Report on Form 10-K for the year ended December 31,2006.

The Company maintains controls and procedures that aredesigned to ensure that information required to be disclosed in the reportsfiled or submitted by the Company to the Securities and Exchange Commission (“SEC”)is recorded, processed, summarized, and reported, within the time periodsspecified by the SEC’s rules and forms, and is accumulated andcommunicated to management including the Chief Executive Officer and ChiefFinancial Officer as appropriate to allow timely decisions regarding requireddisclosure. The Company’s management, including the Chief Executive Officer andChief Financial Officer, performed an evaluation to conclude with reasonableassurance that the Company’s disclosure controls and procedures were designedand operating effectively to report the information it is required to disclosein the reports it files with the SEC on a timely basis. Based on thatevaluation, our Chief Executive Officer and our Chief Financial Officer haveconcluded that as of March 31, 2007, our disclosure controls andprocedures were not effective due to a material weakness related to theoperation of our internal control over financial reporting with respect to theaccounting and disclosure for income taxes, as previously disclosed in *Item 9A, Controls and Procedures* in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006.Additional review, evaluation and oversight have been undertaken to ensure ourunaudited condensed consolidated financial statements were prepared inaccordance with generally accepted accounting principles and, as a result, wehave concluded that the consolidated financial statements in this Form 10-Qfairly present, in all material respects, our financial position, results ofoperations and cash flows for the periods presented.

The only changes to theCompany’s internal control over financial reporting that occurred during thequarter ended March 31, 2007 that have materially affected or arereasonably likely to materially affect the Company’s internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) are newcontrols for the implementation of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109.*

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*Internal ControlsSurrounding Income Taxes*

As discussed in the Company’s 2006 Annual Report on Form 10-K,management concluded that while we had appropriately designed controlprocedures for income tax accounting and disclosures, high staff turnovercaused the Company to poorly execute the controls for evaluating and recordingits current and deferred income tax provision and related deferred tax balances.Management has developed and is implementing a remediation plan to address itsmaterial weakness in internal controls surrounding accounting for income taxes.Key aspects of the remediation plan include enhancing staff resources and skillsets, upgrading the tax technology infrastructure and optimizing workflow andprocesses.

While the Company concluded its internal controlssurrounding income taxes were not effective as of March 31, 2007, theCompany is remediating the material weakness and will continue to implement itsremediation plan and track its performance against the plan.

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**PART II. OTHERINFORMATION**

**ITEM 1.   LEGALPROCEEDINGS.**

In addition to the legalproceedings described below, UAL and United are parties to legal proceedingsdescribed in their respective Annual Reports on Form 10-K for theyear ended December 31, 2006.

***In re: UAL Corporation, 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 through 2007. Additionally, certain significant mattersremain to be resolved in the Bankruptcy Court. For details see Note 2, “VoluntaryReorganization Under Chapter 11,” in *Notes to CondensedConsolidated Financial Statements (Unaudited).*

***Air Cargo/Passenger Surcharge 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 a target. Separately, in April 2007, Unitedreceived two information requests from the competition authorities of theEuropean Union regarding these cargo pricing matters. ** **Inaddition to the U.S. federal grand jury investigation, United and other aircargo carriers have been named as defendants in over ninety class actionlawsuits alleging civil damages as a result of the purported air cargo pricingconspiracy. Those lawsuits have been consolidated for pretrial activities inthe United States Federal Court for the Eastern District of New York. Unitedhas entered into an agreement with the majority of the private plaintiffs todismiss United from the class action lawsuits in return for an agreement tocooperate with the plaintiffs’ factual investigation. More than fiftyadditional putative class actions have also been filed alleging violations ofthe antitrust laws with respect to passenger pricing practices. Those lawsuitshave been consolidated for pretrial activities in the United States FederalCourt for the Northern District of California (“Federal Court”). United hasentered a settlement agreement with a number of the plaintiffs in the passengerpricing cases to dismiss United from the class action lawsuits in return for anagreement to cooperate with the plaintiffs’ factual investigation. Thesettlement agreement is subject to review and approval by the Federal Court. 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 

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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.

***Summers v. UAL Corporation 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 beforethe District Court.  The Courtnevertheless approved the settlement in October 2005, but also grantedState Street’s motion for summary judgment, dismissing the underlying claims. Bothsides appealed from the District Court’s decision, and as a result, nosettlement funds have been disbursed pending a ruling on appeal. In June 2006,the United 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 requested the United States Supreme Court (“Supreme Court”)to review the decision of the Court of Appeals. On February 20, 2007, theSupreme Court declined both parties’ requests to review the Court of Appealsdecision, bringing this dispute to a final conclusion and foreclosing anypotential claim for indemnity against the Company.

**EnvironmentalProceedings**

As disclosed in theCompany’s Form 10-K for the fiscal year ended December 31,2006, United completed negotiations with the Bay Area Air Quality ManagementDistrict regarding notices of violations received at its San Franciscomaintenance center and payment of associated penalties in the first quarter of2007. Payment of associated penalties, which were not material, was made in March 2007.

**ITEM 1A.    RISKFACTORS.**

See the Company’s 2006Annual Report on Form 10-K for a detailed discussion of its riskfactors.  There have been no materialchanges to the risk factors set forth therein.

**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 report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                         | UNITED AIR LINES, INC. |                           |
|-------------------------|------------------------|--------------------------------|
| Date: May 15, 2007 | By:                    | /s/ Frederic F. Brace          |   |
|                    |                   | Frederic F. Brace              |   |
|                    |                   | Executive Vice President and   |   |
|                    |                   | Chief Financial Officer        |   |
|                    |                   | (principal financial officer)  |   |
| Date: May 15, 2007 | By:                    | /s/ David  M. Wing             |   |
|                    |                   | David M. Wing                  |   |
|                    |                   | Vice President and Controller  |   |
|                    |                   | (principal accounting officer) |   |

 

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***EXHIBITINDEX***
| *†10.1 |   | UAL Corporation and United Air Lines, Inc.  Executive Severance Plan, effective as of April 1, 2007 (as filed as  Exhibit 10.1 to UAL’s Form 8-K filed on March 26, 2007,  Commission file number 001-6033, 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)                                                                                                                                                  |

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*                    PreviouslyFiled

†                    Indicates managementcontract or compensatory plan or arrangement

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