****UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C.  20549**
**FORM 10-Q**
**(**Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
            SECURITIESEXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-11355
**UNITED AIR LINES, INC.****(Exact name of registrant as specified in its charter)****Delaware****36-2675206**(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.)  **Location:  1200 East AlgonquinRoad, Elk Grove Township, Illinois           60007****Mailing Address:  P. O.Box 66919, Chicago, Illinois                                     60666**(Address of principal executiveoffices)                                                           (Zip Code)   **(847) 700-4000****(Registrant's telephone number, including areacode)**
     Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes    X      No
     Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of "accelerated filer and large acceleratedfiler" in Rule 12b-2 of the Exchange Act.
      Large accelerated filer [   ]                      Accelerated filer  [ ]                    Non-accelerated filer  [X]
     Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes [   ]     No [X]
     Indicate by check mark whetherthe registrant has filed all documents and reports required to be filedby Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequentto the distribution of securities under a plan confirmed by a court. Yes [X]     No  [   ]
  Indicate the number of shares outstanding of eachof the issuer's classes of common stock, as of the latest practicable date.   Outstanding atClassAugust 4, 2006Common Stock ($5 par value)205 
United Air Lines, Inc. and Subsidiary Companies Report on Form 10-QFor the Quarter Ended June 30, 2006
Index PART I.FINANCIAL INFORMATIONPage No.  Item 1. Financial Statements  Statements of Consolidated FinancialPosition (Unaudited)3  Statements of Consolidated Operations(Unaudited) 5  Statements of Consolidated CashFlows (Unaudited) 7    Statements of Consolidated Stockholder'sEquity (Deficit) (Unaudited)8  Notes to Consolidated FinancialStatements (Unaudited)9 Item 2. Management's Discussionand Analysis of Financial Condition and Results of Operations48  Item 3. Quantitative and QualitativeDisclosures About Market Risk70    Item 4. Controls and Procedures71PART II.OTHER INFORMATION  Item 1. Legal Proceedings72    Item 6. Exhibits73 Signature74 Exhibit Index75 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
United Air Lines, Inc. and Subsidiary CompaniesStatements of Consolidated Financial Position (Unaudited)(In Millions) SuccessorPredecessor June 30,December 31, 20062005Assets  Current assets:  Cash and cash equivalents$ 4,026 $ 1,722 Restricted cash366 643 Short-term investments59 77 Receivables, less allowance fordoubtful   accounts (2006 - $28; 2005 - $22)1,065 822 Prepaid fuel321 258 Aircraft fuel, spare parts andsupplies, less  obsolescence allowance (2006 -$2; 2005 - $66)191 193 Deferred income taxes 138 - Receivables from related parties125 201 Prepaid expenses and other475486 6,7664,402Operating property and equipment:  Owned -   Flight equipment8,632 13,443 Advances on flight equipment91 116 Other property and equipment   1,346   3,833 10,069 17,392 Less - accumulated depreciationand amortization(229)(6,104) 9,84011,288Capital leases:  Flight equipment1,574 2,581 Other property and equipment      15      84 1,589 2,665 Less - accumulated amortization(38)(739) 1,5511,926 11,39113,214Other assets:  Intangibles, less accumulatedamortization  (2006 - $77; 2005 - $207)3,090 370 Goodwill2,803 2 Aircraft lease deposits518 477 Restricted cash509285 Long-term related party note receivable201 - Investments111 20 Prepaid rent8 67 Other, net806559 8,0461,780 $ 26,203$ 19,396
See accompanying Notes to Consolidated Financial Statements(Unaudited).
United Air Lines, Inc. and Subsidiary CompaniesStatements of Consolidated Financial Position (Unaudited)(In Millions) SuccessorPredecessor June 30,December 31, 20062005Liabilities and Stockholder'sEquity  Current liabilities:  Advance ticket sales$ 2,362 $ 1,575 Mileage Plus deferred revenue1,057 681 Accrued salaries, wages and benefits768 842 Accounts payable754595 Advanced purchase of miles (Note15)710 679 Long-term debt maturing withinone year (Note 9)   587    13 Fuel purchase commitments321 258 Payables to related parties249 463 Accrued interest238 32 Current obligations under capitalleases136 20 Other920479 8,1025,637   Long-term debt (Note 9)  8,509  1,298Long-term obligations under capitalleases  1,371     102   Other liabilities and deferredcredits:  Mileage Plus deferred revenue2,435 242 Postretirement benefit liability(Note 5)2,011 1,932Deferred income taxes 620 354 Deferred pension liability (Note5)132 95 Other668545 5,8663,168   Liabilities subject to compromise-35,060Mandatorily convertible preferredsecurities (Note 10)356-Commitments and contingent liabilities(Note 12)     Stockholder's equity (deficit):  Predecessor Company common stockat par, $5 par      value; authorized 1,000 shares;issued 205 shares at December 31, 2005- - Successor Company common stockat par, $5 par      value; authorized 1,000 shares;issued 205 shares at June 30, 2006 -  - Additional capital invested2,061 4,213 Retained deficit(104)(28,809)Accumulated other comprehensiveincome (loss)      42       (36)Receivables from affiliates      -  (1,237) 1,999(25,869) $ 26,203$ 19,396
See accompanying Notes to Consolidated Financial Statements(Unaudited). 
United Air Lines, Inc. and Subsidiary CompaniesStatements of Consolidated Operations (Unaudited)(In Millions) SuccessorPredecessor Three Months Ended June 30, 20062005Operating revenues:  Passenger - United Airlines$ 3,806  $ 3,301  Passenger - Regional Affiliates761  632  Cargo194  180  Other operating revenues350 261  5,111 4,374 Operating expenses:    Aircraft fuel 1,250  955  Salaries and related costs1,070  1,050  Regional affiliates715  685  Purchased services447  382  Aircraft maintenance materialsand outside repairs257  227  Landing fees and other rent226  225  Depreciation and amortization218  201  Cost of sales188  141  Aircraft rent110  110  Commissions82  76  Special operating items (Note17)-  5  Other operating expenses  285   293 4,848 4,350      Earnings from operations263 24      Other income (expense):    Interest expense(222) (114) Interest income65 5  Interest capitalized4  -  Miscellaneous, net  (2)    8  (155) (101)      Earnings (loss) before reorganizationitems, income taxes and          equityin earnings of affiliates108  (77) Reorganization items, net- (1,398)      Earnings (loss) before incometaxes and equity in earnings          of affiliates108  (1,475) Income taxes- -      Earnings (loss) before equityin earnings of affiliates108  (1,475) Equity in earnings of affiliates3 4 Net income (loss)$ 111 $ (1,471)      
See accompanying Notes to Consolidated Financial Statements(Unaudited). 
United Air Lines, Inc. and Subsidiary CompaniesStatements of Consolidated Operations (Unaudited)(In Millions) Successor Predecessor Period from February 1 to June 30,Period from January 1 to January 31,Six Months Ended June 30, 200620062005Operating revenues:   Passenger - United Airlines$ 5,988  $ 1,074  $ 6,217  Passenger - Regional Affiliates1,226  204  1,156  Cargo318  56  352  Other operating revenues585 120 565  8,117 1,454 8,290 Operating expenses:      Aircraft fuel 1,955  362  1,760  Salaries and related costs1,795  358  2,081  Regional affiliates1,183  228  1,330  Purchased services743  133  742  Aircraft maintenance materialsand outside repairs436  80  446  Landing fees and other rent370  75  458  Depreciation and amortization366  68  413  Cost of sales314  63  277  Aircraft rent185  30  231  Commissions133  24  153  Special operating items (Note17)-  -  5  Other operating expenses  490       85   609  7,970 1,506 8,505        Earnings (loss) from operations147   (52) (215)        Other income (expense):      Interest expense(353) (42) (226) Interest income93  6  9  Interest capitalized7  -  (5) Miscellaneous, net(1) - 66  (254) (36) (156)        Loss before reorganization items,income taxes and equity            in earningsof affiliates(107) (88) (371) Reorganization items, net- 22,709 (2,116)        Earnings (loss) before incometaxes and equity in earnings            of affiliates(107) 22,621  (2,487) Income taxes- - -        Earnings (loss) before equityin earnings of affiliates(107) 22,621  (2,487) Equity in earnings of affiliates3 5 4 Net income (loss)$ (104) $22,626 $ (2,483)        
See accompanying Notes to Consolidated Financial Statements(Unaudited). 
United Air Lines, Inc. and Subsidiary CompaniesStatements of Consolidated Cash Flows (Unaudited)(In Millions) SuccessorPredecessor Period from February 1 to June 30,Period from January 1 to January 31,Six Months Ended June 30, 200620062005Cash flows provided (used) byoperating activities:   Net loss before reorganizationitems $ (104) $ (83) $ (367) Adjustments to reconcile to netcash provided (used) by operating      activities -      Increase in advance ticket sales 697   109   724  Depreciation and amortization 366   68   419  Increase (decrease) in accruedliabilities(185) 146  (30) Increase in other current assets(134) (26) (109) Increase in accounts payable  126   25   39  Increase in receivables(121) (98) (128) Mileage Plus deferred revenue  119   14   48        Stock-based compensation109  -  -  Increase in related party receivablesand payables, net26  -  34  Postretirement benefits8  (9) (27) Increase in accrued aircraft rent 5   6   28  Pension expense2  8  167  Amortization of deferred gains-   (6)  (42)  Other,net82 9     66  996 163 822 Cash flows provided (used) byreorganization activities:      Reorganization items, net -  22,709  (2,116)      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, settlementand employee claims-  912  1,045  Increase in non-aircraft claimsaccrual-  421  509  Increase in other liabilities-  38  147  Increase in aircraft rejectionliability- - 350  - (21) (65) Cash flows provided (used) byinvesting activities:      Decrease (increase) in restrictedcash256  (203) (91)      Decrease in segregated funds200  -  -  Additions to property and equipment(129) (30) (97) Proceeds on disposition of propertyand equipment19  (1) 35  Decrease in short-term investments16  2  61  Other, net (19) (6) (26) 343(238)(118)Cash flows provided (used) byfinancing activities:      Proceeds from Credit Facility2,961  -  -  Repayment of Credit Facility(161) -  -       Repayment of DIP Financing(1,157) -  (10) Repayment of other long-term debt(459) (24) (113)      Increase in deferred financing costs(58) (1) (9) Principalpayments under capital leases(35) (5) (55)      Decrease in advances/loans with affiliates- - (11)  1,091 (30) (198) Increase (decrease) in cash andcash equivalents during the period2,430  (126) 441  Cash and cash equivalents at beginningof the period1,596 1,722 1,203 Cash and cash equivalents at endof the period$ 4,026 $ 1,596 $ 1,644 
See accompanying Notes to Consolidated Financial Statements (Unaudited). 
United Air Lines, Inc. and Subsidiary CompaniesStatements of Consolidated Stockholder's Equity (Deficit) (Unaudited)(In Millions)      Accumulated  Receivable Additional Other  fromCommonCapitalRetainedComprehensive  AffiliatesStockInvested(Deficit)Income (Loss)TotalBalance at December31, 2005, (Predecessor Company)$(1,237) $ -  $ 4,213  $(28,809) $ (36) $(25,869)  Net loss before reorganizationitems -January 2006-  -  -  (83) -  (83)Reorganization items - January2006- - - (1,392) - (1,392)Subtotal(1,237) -  4,213  (30,284) (36) (27,344)  Debt discharge-  -  -  24,389 -  24,389  Valuation adjustments,net- - - (288) - (288)Balance at January 31, 2006, (PredecessorCompany)(1,237) -  4,213  (6,183) (36) (3,243)Fresh start adjustments:           Elimination of Predecessor  accumulated deficit and   accumulated other comprehensive  loss-  -  -  6,183  36 6,219 Cancellation of receivable fromaffiliates, additional capital invested 1,237  -  (4,213) -  -  (2,976)Allocation of United's reorganization value in connection with emergence   from Chapter 11- - 1,952 - - 1,952Balance at February 1, 2006, (SuccessorCompany)-  -  1,952  -  -  1,952   Net loss from February1 to June 30, 2006-  -  -  (104) -  (104)  Unrealized gain on derivatives,net-  -  -  -  42  42   Stock-based compensation- - 109 - - 109Balance at June 30, 2006, (SuccessorCompany)$ - $ - $ 2,061 $ (104) $ 42 $ 1,999
See accompanying Notes to Consolidated Financial Statements (Unaudited). 
United Air Lines, Inc. and Subsidiary CompaniesNotes to Consolidated Financial Statements (Unaudited)
The Company
United Air Lines, Inc. (together with its consolidated subsidiaries,"we," "our," "us," "United" or the "Company") is a wholly owned subsidiaryof UAL Corporation ("UAL").
Interim Financial Statements
The Company has prepared the unaudited consolidated financial statementsshown here as required by the Securities and Exchange Commission (the "SEC").Some information and footnote disclosures normally included in financialstatements that meet generally accepted accounting principles ("GAAP")have been condensed or omitted as permitted by the SEC. The Company believesthat the disclosures presented here are not misleading. The financial statementsinclude all adjustments (which include only normal recurring adjustments,adjustments required by fresh-start reporting and reorganization itemsdescribed below) that are considered necessary for a fair presentationof its financial position and operating results. These financial statementsshould be read together with the information included in United's mostrecent Annual Report on Form 10-K for the year 2005.
As a result of the application of fresh-start reporting in accordancewith American Institute of Certified Public Accountants' Statement of Position90-7 "*Financial Reporting by Entities in Reorganization under the BankruptcyCode*" ("SOP 90-7"), the financial statements prior to February 1, 2006are not comparable with the financial statements for periods on or afterFebruary 1, 2006. References to "Successor Company" refer to United onor after February 1, 2006, after giving effect to the application of fresh-startreporting. References to "Predecessor Company" refer to United prior toFebruary 1, 2006. See Note 1, "Voluntary Reorganization Under Chapter 11- Fresh-Start Reporting" for further details.
**(1) Voluntary Reorganization Under Chapter 11**
***Bankruptcy Considerations.  ***The following discussionprovides general background information regarding the Company's Chapter11 cases, and is not intended to be an exhaustive summary. Detailed informationpertaining to the bankruptcy filings may be obtained at www.pd-ual.com.
On December 9, 2002 (the "Petition Date"), UAL, United and 26 directand indirect wholly-owned subsidiaries (collectively, the "Debtors") filedvoluntary petitions to reorganize their businesses under Chapter 11 ofthe United States Bankruptcy Code in the United States Bankruptcy Courtfor the Northern District of Illinois, Eastern Division (the "BankruptcyCourt"). On January 20, 2006, the Bankruptcy Court confirmed the Debtors'Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of theUnited States Bankruptcy Code (the "Plan of Reorganization"). The Planof Reorganization became effective and the Debtors emerged from bankruptcyprotection on February 1, 2006 (the "Effective Date"). On the EffectiveDate, United implemented fresh-start reporting.
The Plan of Reorganization generally provided for the full payment orreinstatement of allowed administrative claims, priority claims, and securedclaims, and the distribution of new equity securities of UAL to the Debtors'creditors and employees in satisfaction of allowed unsecured and deemedclaims. The Plan of Reorganization contemplated UAL issuing up to 125 millionshares of common stock (out of the one billion shares of new common stockauthorized under UAL's certificate of incorporation). The new UAL commonstock was listed on the NASDAQ National Market and began trading underthe symbol "UAUA" on February 2, 2006. The distributions of common stock,subject to certain holdbacks as described in the Plan of Reorganization,will be as follows:- Approximately 115 million shares of UAL common stock to unsecured creditorsand employees;
- Up to 9.825 million shares of UAL common stock (or options or other rightsto acquire shares) under the management equity incentive plan ("MEIP")approved by the Bankruptcy Court; and
- Up to 175,000 shares of UAL common stock (or options or other rights toacquire shares) under the director equity incentive plan ("DEIP") approvedby the Bankruptcy Court.
The Plan of Reorganization also provided for the issuance of the followingsecurities by UAL:- 5 million shares of 2% mandatorily convertible preferred stock, which wereissued to the Pension Benefit Guaranty Corporation ("PBGC") shortly afterthe Effective Date;
- Approximately $150 million in aggregate principal amount of 5% senior convertiblenotes, which were issued to holders of certain municipal bonds shortlyafter the Effective Date;
- $726 million in aggregate principal amount of 4.5% senior limited-subordinationconvertible notes, which were issued in July 2006 to certain irrevocabletrusts established for the benefit of certain employees (the "employeeconvertible notes");
- $500 million in aggregate principal amount of 6% senior notes, which wereissued to the PBCG shortly  after the Effective Date; and
- $500 million in aggregate principal amount of 8% senior contingent notes(in up to eight equal tranches of $62.5 million) issuable to the PBGC uponthe satisfaction of certain contingencies.
Pursuant to the Plan of Reorganization, the employee convertible noteswere to be issued with a conversion price equal to 125% of the averageclosing price of UAL common stock for the 60 consecutive trading days followingFebruary 1, 2006.  In addition, the Plan of Reorganization requiredthat the interest rate on the employee convertible notes be set so thatthey trade at par upon issuance which, in the absence of the modificationdescribed in the next sentence, would have required an interest rate significantlyhigher than 4.5% because the conversion price would have been based ona trading price for UAL common stock that was significantly higher thanthat prevailing at the time of issuance.  In July 2006, UAL reachedagreement with five of the seven eligible employee groups to modify theconversion price to instead be based upon the volume-weighted average priceof UAL common stock over the two trading days ending on July 25, 2006,the date the notes were issued to the trusts. UAL reached agreement withthe two other employee groups to pay them cash totaling approximately $0.4million rather than issuing additional notes of similar value.
Pursuant to the Plan of Reorganization, UAL common stock, preferredstock and Trust Originated Preferred Securities issued prior to the PetitionDate were canceled on the Effective Date, and no distribution was madeto holders of those securities.
On the Effective Date, the Company secured access to $3.0 billion insecured exit financing (the "Credit Facility") which consists of a $2.45billion term loan, a $350 million delayed draw term loan and a $200 millionrevolving credit line. On the Effective Date, the $2.45 billion term loanand the entire revolving credit line were drawn and used to repay the Debtor-In-Possessioncredit facility (the "DIP Financing") and to make other payments requiredupon exit from bankruptcy, as well as to provide ongoing liquidity to conductpost-reorganization operations. Subsequently, during the first quarterof 2006, the Company repaid $161 million on the revolving credit line andaccessed the $350 million delayed draw term loan.
***Significant**Matters Resolved Since Emergence from Bankruptcy*.**Duringthe course of the Chapter 11 proceedings, the Debtors successfully reachedsettlements with most of its creditor constituencies and resolved mostpending claims. The following material matters have been resolved in theBankruptcy Court since the Effective Date: (a)    The Company had an ongoing dispute withrespect to a group of mostly-public financiers (the "Public Debt Group")involving 14 aircraft financed under the Series 1997-1 Enhanced EquipmentTrust Certificates ("1997-1 EETC").  During the first quarter of 2006,the Company resolved the dispute and entered into a settlement agreementthat was approved by the Bankruptcy Court. The settlement agreement resolvedall pending litigation in connection with the 1997-1 EETC transaction andaircraft and provided for a permanent mutual release of all related claims.The Company remitted $281 million to the 1997-1 EETC trustee as final paymentto the holders of the Tranche A certificates. The Company previously acquiredthe 1997-1 EETC Tranche B and Tranche C certificates as a precursor toutilizing the transaction par buyout mechanism to purchase the TrancheA certificates. Following shortly thereafter in the first quarter of 2006,the Company refinanced the 14 aircraft with the $350 million delayed drawterm loan provided under the Credit Facility. The Company recorded the1997-1 EETC debt at fair market value upon its emergence from bankruptcyin accordance with fresh-start reporting. As a result, no gain or losswas realized on the extinguishment of debt. See "Fresh-Start Reporting"below for further details.
(b)    Wells Fargo Bank Northwest, N.A., not individuallybut in its capacity as a trustee, filed a notice of appeal of the confirmationorder to the United States District Court for the Northern District ofIllinois ("District Court"). The parties subsequently filed a stipulationagreeing to voluntarily dismiss the appeal, and the appeal has been dismissed.
(c)    In August 2005, United entered into term sheetsto restructure the three post-1997 Enhanced Equipment Trust Certificate("EETC") transactions, financing 80 aircraft in United's fleet that werecontrolled by the Public Debt Group.  In May 2006, the Company reacheda settlement with the Public Debt Group with respect to these financingtransactions.  In conjunction with the settlement, the Company andthe EETC trustees agreed to cooperate and to use reasonable efforts tocomplete definitive documentation.  The settlement was approved bythe Bankruptcy Court in June 2006. The Company completed definitive documentationon the three post-1997 EETC transactions in July 2006 and met its obligationsto have the transactions rated by both Standard and Poor's and Moody's.
In addition, in August 2005, United entered into term sheets to restructurethe pre-1997 transactions financing 19 aircraft that are controlled bythe Public Debt Group. United has subsequently closed transactions covering18 of the 19 associated aircraft.  The Company has reached agreementon all business terms associated with the last aircraft and anticipatesclosing shortly after other technical documentation has been executed.***Significant**Matters Remaining to be Resolved in Chapter 11Cases.***The following material matters remain to be resolved inthe Bankruptcy Court or another court: (a)    United is a party to numerous long-termagreements to lease certain airport and maintenance facilities that arefinanced through tax-exempt municipal bonds that are issued by variouslocal municipalities to build or improve airport and maintenance facilities.During 2003, the Company filed four complaints for declaratory judgmentand corresponding motions for temporary restraining orders concerning United'smunicipal bond obligations for facilities at Denver International Airport("DEN"), John F. Kennedy International Airport ("JFK"), San Francisco InternationalAirport ("SFO"), and Los Angeles International Airport ("LAX"). In eachcase, United sought clarification of its obligations to pay principal andinterest under the applicable municipal bonds, and the protection of itsrights concerning related airport lease agreements at the applicable airports.With respect to SFO, LAX and JFK, the Bankruptcy Court ruled in United'sfavor. With respect to DEN, the Bankruptcy Court ruled against United.The Bankruptcy Court's rulings with respect to each of the four matterswere subsequently appealed to the District Court. The District Court reversedthe Bankruptcy Court's rulings with respect to SFO and LAX but upheld theBankruptcy Court's rulings with respect to JFK and DEN. All four of theDistrict Court's rulings in turn were appealed to the United States Courtof Appeals for the Seventh Circuit ("Court of Appeals"). The Court of Appealsreversed the District Court's ruling against the Company with respect tothe SFO adversary proceeding and the SFO defendants' petition for a rehearingwas denied. The defendants in the SFO matter petitioned the United StatesSupreme Court ("Supreme Court") for a writ of certiorari, which was deniedin March 2006. As a result of this final non-appealable order in favorof United, approximately $24 million in interim payments made by Unitedinto an escrow account, plus interest, were returned to United in April2006. In addition, see item (c) below for details on the security interestclaim filed by the trustee of the SFO municipal bonds as a result of United'ssuccess in this matter. In May 2006, the Court of Appeals also reversedthe District Court's ruling against the Company with respect to the LAXmatter. The defendants might still file a petition of writ of certiorariwith the Supreme Court. Even if the LAX obligations are determined to befinancings and not true leases, there is likely to remain an issue regardingthe extent to which those financings would be considered to have a securityinterest in the underlying leasehold or the value thereof, as discussedin paragraph (d) below. The Court of Appeals affirmed the District Court'sruling with respect to the JFK adversary proceeding. The defendants inthe JFK matter filed a petition for rehearing with the Court of Appeals,which was denied. The time for filing a petition for writ of certiorariin the JFK matter has expired. In July 2006, the Court of Appeals alsoaffirmed the District Court's ruling against the Company with respect tothe DEN matter. The Company has accepted the ruling and will not pursueany further legal action in regard to this matter.
(b)    Similarly, in 2003, United filed a complaint fordeclaratory judgment for all seven municipal bond issues (which representapproximately $601 million in principal) relating to its facilities atO'Hare International Airport ("O'Hare"), seeking, among other things, adeclaration that a certain cross-default provision in the O'Hare airportlease is unenforceable. In 2005, the Bankruptcy Court approved an agreement("O'Hare Settlement Agreement") resolving the disputes between United,the trustees and the bondholders. The City of Chicago, a party to theseadversary proceedings, is not a party to the O'Hare Settlement Agreement.Subsequently, the Company announced that it had reached an agreement inprinciple with the City of Chicago, with respect to all unresolved disputesrelating to our facilities at O'Hare. However, the parties were unableto finalize the terms of this settlement. The City of Chicago maintainedthat it could revoke United's exclusive rights to terminals in place of"preferential" rights if United did not meet the terms of the cross-defaultprovision (the O'Hare Airport Use Agreement ("AUA") did not define or providefor any usage rights, other than exclusive rights). United responded thatthe cross-default provision was unenforceable against a debtor in bankruptcyas provided under Section 365 of the Bankruptcy Code, and thus United shouldretain its exclusive rights at O'Hare. The Bankruptcy Court held a oneday trial to determine certain evidentiary issues underlying a determinationof whether the cross-default provision was enforceable. After the partiescompleted post-trial briefing, the Bankruptcy Court issued an opinion andorder, in July 2006, in favor of United that the cross-default provisionwas unenforceable against United pursuant to Section 365 of the BankruptcyCode. Specifically, the Bankruptcy Court held that the AUA is a self-containedagreement, governing United's use of O'Hare and providing the full considerationfor that use. To realize the full value of United's estate, Section 365(a)of the Bankruptcy Code allows United to assume the AUA free from obligationsimposed under the separate bond payment agreements, notwithstanding thecross-default provisions. The City of Chicago's time to appeal has notyet expired, and therefore, the matter cannot be deemed resolved.
(c)    HSBC Bank Inc. ("HSBC"), as trustee for the 1997municipal bonds related to SFO, filed a complaint against United assertinga security interest in United's leasehold for portions of its maintenancebase at SFO. Pursuant to Section 506(a) of the Bankruptcy Code, HSBC allegesthat it is entitled to be paid the value of that security interest, whichHSBC had claimed was as much as $257 million. HSBC and United went to trialin April 2006 and the Bankruptcy Court rejected as a matter of law HSBC's$257 million claim. HSBC subsequently alleged that it was entitled to $154million, or at a minimum, approximately $93 million. The parties triedthe case and filed post-trial briefs which were heard by the BankruptcyCourt. The Bankruptcy Court subsequently set a status conference for September2006. The Company is currently unable to predict the outcome of this litigation.
(d)    In addition, there is pending litigation beforethe Bankruptcy Court regarding the extent to which the LAX municipal bonddebt is entitled to secured status under Section 506(a) of the BankruptcyCode. In July 2006, the Bankruptcy Court entered an order setting discoverydeadlines and scheduling a trial for January 2007. The Company is currentlyunable to predict the outcome of this litigation.
(e)    In December 2004, the PBGC filed an involuntarytermination proceeding against United, as plan administrator for the UnitedAirlines Pilot Defined Benefit Pension Plan (the "Pilot Plan"), in theDistrict Court. In January 2005, the District Court granted a motion filedby the Company and referred the involuntary termination proceeding to theBankruptcy Court. The Air Line Pilots Association ("ALPA") and the UnitedRetired Pilots Benefit Protection Association and seven retired pilots(collectively, "URPBPA") were later granted leave to intervene in the involuntarytermination proceeding.
After several months, the Bankruptcy Court conducted a trial and determinedthat the Pilot Plan should be involuntarily terminated under the EmployeeRetirement Income Security Act ("ERISA") Section 4042 with a terminationdate of December 30, 2004. Subsequently, the Bankruptcy Court entered anorder authorizing termination of the Pilot Plan.
The PBGC, ALPA and URPBPA filed notices of appeal with the DistrictCourt. In February 2006, the District Court reversed and remanded the BankruptcyCourt's termination order on the grounds that the matter was not a coreproceeding in which it could issue a final order, but rather, could onlyissue proposed findings of fact and conclusions of law for considerationby the District Court. Upon remand and after the Bankruptcy Court madeproposed findings of fact and conclusions of law, in June 2006, the DistrictCourt entered an order approving the termination of the Pilot Plan. ALPAand URPBPA filed an appeal with the Court of Appeals. In July 2006, theCourt of Appeals granted United's motion to consolidate this terminationappeal with URPBPA's appeal of the District Court's dismissal of URPBPA'sappeal of the Plan of Reorganization confirmation order, as discussed in(h) below. Briefing on both appeals will be completed in August 2006 andoral argument is scheduled to occur on September 26, 2006 with respectto the termination appeal (though oral arguments have not yet been scheduledwith respect to the confirmation appeal). If the termination order wasultimately reversed on appeal, it could have a materially adverse effecton the Company's financial performance, should such determination resultin the reversal of the termination of one or more defined benefit pensionplans.
(f)    After the PBGC commenced its involuntary terminationproceeding and sought a December 30, 2004 termination date, the Companysuspended payment of ALPA non-qualified pension benefits pending the settingof such a termination date. In the first quarter of 2005, the BankruptcyCourt required the Company to continue paying non-qualified pension benefitsto retired pilots pending a termination in the involuntary terminationproceeding, notwithstanding the possibility that the Pilot Plan might beterminated retroactively to December 30, 2004. Then, on October 6, 2005,the Bankruptcy Court entered an order requiring the Company to continuepaying non-qualified pension benefits until entry of an order terminatingthe Pilot Plan. However, United appealed that order and placed the fundsnecessary to pay non-qualified benefits for the month of October 2005 ina segregated account. Following the entry of the Bankruptcy Court's terminationorder on October 28, 2005, United ceased paying non-qualified benefits.Subsequently, during the first quarter of 2006, the District Court dismissedthe Company's appeal of the Bankruptcy Court's October 6, 2005 order inlight of its earlier decision reversing the Bankruptcy Court's terminationorder. The Company filed a notice of appeal of the District Court's rulingto the Court of Appeals. In accordance with the Court of Appeals' rules,the Court of Appeals set deadlines for the briefing to be completed inAugust 2006. The Court of Appeals has not yet scheduled oral argument.
In March 2006, the Bankruptcy Court ruled that the Company was obligatedto make payment of all non-qualified pension benefits for the months ofNovember and December 2005 and January 2006. The Bankruptcy Court alsoruled that the Company's obligation to pay non-qualified pension benefitsceased as of January 31, 2006. The Company filed a notice of appeal ofthe Bankruptcy Court's ruling to the District Court. URPBPA and ALPA alsofiled notices of appeal with respect to the Bankruptcy Court's order, whichwere subsequently consolidated with the Company's appeal. United agreedwith URPBPA and ALPA to pay the disputed non-qualified pension benefitsfor the months of November and December 2005 and January 2006, an aggregateamount totaling approximately $17 million, into an escrow account. Briefingon this issue was completed in July 2006 and a status hearing in the DistrictCourt is scheduled for September 2006.
(g)    In January 2005, United filed a motion seekingapproval of an agreement to restructure ALPA's collective bargaining agreementpursuant to Section 363(b) of the Bankruptcy Code. The Bankruptcy Courtapproved the ALPA agreement over the objections of various parties. Theactive pilots ratified the agreement, and the Bankruptcy Court enteredan order approving the ALPA agreement (the "ALPA Order"). In February 2005,URPBPA filed its notice of appeal of the ALPA Order based principally onthe allegation that the ALPA Order unfairly failed to provide for the distributionof unsecured notes to the retired pilots as provided to the active pilotspursuant to the ALPA agreement. The ALPA Order was approved by the DistrictCourt and, in March 2006, by the Court of Appeals. In June 2006, URPBPAfiled a petition for a writ of certiorari from the Supreme Court to reviewthe Court of Appeals' ruling with respect to this matter. No decision hasbeen made by the Supreme Court whether to grant the writ of certiorari.
(h)    In January 2006, URPBPA filed a notice and briefsupporting an appeal of the order confirming the Plan of Reorganization.In February 2006, the Debtors filed a motion to dismiss the appeal basedon the substantial consummation of the Plan of Reorganization. In June2006, the District Court dismissed URPBPA's appeal. Subsequently, URPBPAfiled a notice of appeal of the decision to the Court of Appeals. In July2006, the Court of Appeals granted the Debtors' motion to consolidate URPBPA'sappeal with URPBPA and ALPA's Pilot Plan termination appeal, as discussedin (e) above. Briefing on both appeals will be completed in August 2006.The Court of Appeals has set oral argument to occur on September 26, 2006with respect to the termination appeal (though oral arguments have notyet been scheduled with respect to the confirmation appeal). If the confirmationorder was ultimately reversed on appeal, it could have a materially adverseeffect on the Company's financial performance.***Claims Resolution Process.***As permitted under the bankruptcyprocess, the Debtors' creditors filed proofs of claim with the BankruptcyCourt. Through the claims resolution process, the Debtors identified manyclaims which were disallowed by the Bankruptcy Court for a number of reasons,such as claims that were duplicative, amended or superseded by later filedclaims, were without merit, or were otherwise overstated. Throughout theChapter 11 proceedings, the Debtors resolved many claims through settlementor objections ordered by the Bankruptcy Court. The Debtors will continueto settle claims and file additional objections with the Bankruptcy Court.
With respect to unsecured claims, once a claim is deemed to be valid,either through the Bankruptcy Court process or through other means, theclaimant is entitled to a distribution of UAL common stock. Pursuant tothe terms of the Plan of Reorganization, 115 million shares of UAL commonstock have been authorized to satisfy valid unsecured claims. The BankruptcyCourt confirmed the Plan of Reorganization and established January 20,2006 as the record date for purposes of establishing the persons that areclaimholders of record to receive distributions. Approximately 98 millionshares have been issued and distributed to holders of valid unsecured claimsbetween February 2, 2006, the first distribution date established in thePlan of Reorganization, and June 30, 2006. As of June 30, 2006, approximately42,000 valid unsecured claims aggregating to approximately $28 billionin claim value had received those common shares to partially satisfy thoseclaims. The approximate 17 million remaining shares are being held in reserveto satisfy all of the remaining disputed and undisputed unsecured claimvalues, once the remaining claim disputes are resolved.
The Debtors' current estimate of the probable range of unsecured claimsto be allowed by the Bankruptcy Court is between $28 and $31 billion. Differencesbetween claim amounts filed and the Debtors' estimates are being investigatedand will be resolved in connection with the claims resolution process.However, there will be no further financial impact to the Company associatedwith the settlement of such unsecured claims, as the holders of all allowedunsecured claims will receive under the Plan of Reorganization only theirpro rata share of the distribution of the 115 million shares of UAL commonstock, together with the previously-agreed issuance of certain securities.
With respect to valid administrative and priority claims, pursuant tothe terms of the Plan of Reorganization these claims will be satisfiedwith cash. Many asserted administrative and priority claims still remainunpaid, and the Debtors will continue to settle claims and file objectionswith the Bankruptcy Court to eliminate or reduce such claims. An estimateof these claims has been accrued by the Successor Company based upon thebest available estimates of amounts to be paid. However, it should be notedthat the claims resolution process is uncertain and adjustments to claimsestimates could result in material adjustments to the Successor Company'sfinancial statements in future periods.
Additionally, secured claims were deemed unimpaired under the Plan ofReorganization. Pursuant to the Plan of Reorganization those claims weresatisfied upon either reinstatement of the obligations in the SuccessorCompany, surrendering the collateral to the secured party, or by makingfull payment in cash. However, certain disputes still remain with respectto the valuation of some security interests that may result in materialfuture adjustments to the Company's financial statements.
Financial Statement Presentation. We have prepared the accompanyingconsolidated financial statements in accordance with SOP 90-7 and on agoing-concern basis, which assumes continuity of operations, realizationof assets and satisfaction of liabilities in the ordinary course of business.
SOP 90-7 requires that the financial statements for periods subsequentto a Chapter 11 filing separate transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.Accordingly, all transactions (including, but not limited to, all professionalfees, realized gains and losses and provisions for losses) directly associatedwith the reorganization and restructuring of the business are reportedseparately in the financial statements as reorganization items, net. Forthe month ended January 31, 2006 and the three and six months ended June30, 2005, the Predecessor Company recognized the following primarily non-cashreorganization income (expense) in its financial statements:   Period fromJanuary 1 to 31,Three Months Ended June 30,Six Months Ended June 30,(In millions)200620052005Discharge of claims and liabilities$ 24,389  $ -  $ -  [a]Revaluation of frequent flyerobligations (2,399) -  -  [b]Revaluation of other assets andliabilities2,111  -  -  [c]Employee-related charges(898) (6) (13) [d]Contract rejection charges(421) (509) (509) [e]Professional fees  (47) (49) (92)  Pension-related charges(14) (612) (1,045) [f]Aircraft claim charges-  (224) (468) [g]Other(12) 2 11   $ 22,709 $(1,398) $(2,116)  (a)    The discharge of claims and liabilitiesprimarily relates to those unsecured claims arising during the bankruptcyprocess, such as the termination and settlement of the Company's U.S. definedbenefit pension plans and other employee claims; aircraft-related claims,such as those arising as a result of aircraft rejections; other unsecuredclaims due to the rejection or modification of executory contracts, unexpiredleases and regional carrier contracts; and claims associated with certainmunicipal bond obligations based upon their rejection, settlement or theestimated impact of the outcome of pending litigation. In accordance withthe Plan of Reorganization, the Company discharged its obligations to unsecuredcreditors in exchange for the distribution of 115 million new UAL commonshares and the issuance of certain other securities. Accordingly, the Companyrecognized a non-cash reorganization gain of $24.4 billion.
(b)    The Company revalued its Mileage Plus frequentflyer obligations at fair value as a result of fresh-start reporting, whichresulted in a $2.4 billion non-cash reorganization charge.
(c)    In accordance with fresh-start reporting, theCompany revalued its assets at their estimated fair value and liabilitiesat estimated fair value or the present value of amounts to be paid. Thisresulted in a non-cash reorganization gain of $2.1 billion, primarily asa result of newly recognized intangible assets, offset partly by reductionsin the fair value of tangible property and equipment.
(d)    In January 2006, the Company recorded the valueof the deemed claim that the salaried and management group received uponconfirmation of the Plan of Reorganization. The deemed claim was basedupon the cost savings provided by this employee group during the bankruptcyprocess.
(e)    Contract rejection charges are non-cash coststhat include estimated claim values resulting from the Company's rejectionor negotiated modification of certain contractual obligations such as executorycontracts, unexpired leases and regional carrier contracts.
(f)    In the first and second quarters of 2005, theCompany recognized non-cash pension curtailment charges of $433 millionand $207 million, respectively, associated with actions taken by the PBGCto involuntarily terminate United Air Lines, Inc. Ground Employees' RetirementPlan (the "Ground Employees Plan"), United Airlines Flight Attendant DefinedBenefit Pension Plan (the "Flight Attendant Plan") and United AirlinesManagement, Administrative and Public Contact Defined Benefit Pension Plan("MAPC Plan"). The PBGC was appointed trustee for the Ground EmployeesPlan effective May 23, 2005 and the MAPC Plan and the Flight AttendantPlan effective June 30, 2005, assuming all rights and powers over the pensionassets and obligations of each plan. Upon termination and settlement ofthese plans in the second quarter of 2005, the Company recognized a non-cashnet settlement loss of approximately $395 million in accordance with SFASNo. 88, "*Employer's Accountingfor Settlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits" ("*SFAS 88"). In addition, the Companyrecognized a non-cash settlement loss in the amount of $10 million forthe termination of the non-qualified supplemental retirement plan for managementemployees who have benefits under the tax-qualified pension plan that cannotbe paid due to Internal Revenue Code limits on compensation or benefits.
(g)    Aircraft claim charges include the Company's estimateof claims incurred as a result of the rejection of certain aircraft leasesand return of aircraft as part of the bankruptcy process, together withcertain claims resulting from the modification of other aircraft financingsin bankruptcy.The Statements of Consolidated Financial Position (Unaudited) distinguishpre-petition liabilities subject to compromise from both those pre-petitionliabilities that are not subject to compromise and from post-petition liabilities.Liabilities subject to compromise were reported at the amounts expectedto be allowed by the Bankruptcy Court, even if they were settled for lesseramounts.
At December 31, 2005, we had liabilities subject to compromise consistingof the following:(In millions)  Employee claims and deemed claims$18,007Long-term debt, including accruedinterest6,528Aircraft-related obligations anddeferred gains6,031Capital lease obligations, includingaccrued interest1,631Municipal bond obligations andclaims1,344Accounts payable260Intercompany accounts payableand loans214Early termination fees162Other 883 $35,060
***DIP Financing.***At January 31, 2006, the Company's outstandingbalance of its DIP Financing was $1.2 billion.    On theEffective Date, the proceeds from the Credit Facility were drawn and usedto repay the DIP Financing. For further details on the Credit Facility,see Note 9, "Debt Obligations".
***Fresh-Start Reporting.***Upon emergence from its Chapter11 proceedings on February 1, 2006, the Company adopted fresh-start reportingin accordance with SOP 90-7. The Company's emergence from Chapter 11 resultedin a new reporting entity with no retained earnings or accumulated deficit.Accordingly, the Company's consolidated financial statements for periodsprior to February 1, 2006 are not comparable to consolidated financialstatements presented on or after February 1, 2006.
Fresh-start reporting reflects the value of the Company as determinedin the confirmed Plan of Reorganization. Under fresh-start reporting, theCompany's asset values are remeasured using fair value, and are allocatedin conformity with Statement of Financial Accounting Standards No. 141,"*Business Combinations*" ("SFAS 141"). The excess of reorganizationvalue over the fair value of tangible and identifiable intangible assetsis recorded as goodwill in the accompanying Statements of ConsolidatedFinancial Position (Unaudited). In addition, fresh-start reportingalso requires that all liabilities, other than deferred taxes, should bestated at fair value or at the present value of the amounts to be paidusing appropriate market interest rates. Deferred taxes are determinedin conformity with Statement of Financial Accounting Standards No. 109"*Accounting for Income Taxes*" ("SFAS 109").
Estimates of fair value represent the Company's best estimates basedon independent appraisals and valuations and, where the foregoing havenot yet been completed or are not available, industry data and trends andby reference to relevant market rates and transactions. The foregoing estimatesand assumptions are inherently subject to significant uncertainties andcontingencies beyond the control of the Company. Accordingly, we cannotprovide assurance that the estimates, assumptions, and values reflectedin the valuations will be realized, and actual results could vary materially.In accordance with SFAS 141, the preliminary allocation of the reorganizationvalue is subject to additional adjustment within one year after emergencefrom bankruptcy when additional or improved information on asset and liabilityvaluations becomes available. The Company expects that adjustments to recordedfairvalues may include those relating to:- Completion of valuation reports associated with long-lived tangible andnewly identified intangible assets, and certain liabilities, such as theMileage Plus frequent flyer liability, and debt discounts which may changebased on the consideration of new or improved information by the Companyand its valuation consultants;
- Deferred tax assets and liabilities, which may be adjusted based upon additionalinformation, including adjustments to fair value estimates of underlyingassets or liabilities and the determination of cancellation of indebtednessincome; and
- Adjustments to recorded fair values and deferred tax assets and liabilitieswhich could change the amount of recorded goodwill, as well as the allocationof such goodwill to reportable segments.
To facilitate the calculation of the enterprise value of the SuccessorCompany, the Company developed a set of financial projections. Based onthese financial projections and with the assistance of financial advisors,the equity value was determined by the Company, using various valuationmethods, including (i) a comparison of the Company and its projected performanceto the market values of comparable companies; (ii) a review and analysisof several recent transactions of companies in similar industries to theCompany; and (iii) a calculation of the present value of the future cashflows of the Company under its projections.
The estimated enterprise value, and corresponding equity value, is highlydependent upon achieving the future financial results set forth in theprojections as well as the realization of certain other assumptions. Theestimated equity value of UAL was calculated to be approximately $1.9 billion.After including certain adjustments to reflect the fair value of the assetsand liabilities of United and certain related party transactions, the equityvalue of the Company was calculated to be approximately $2.0 billion. Theestimates and assumptions made in this valuation are inherently subjectto significant uncertainties and the resolution of contingencies beyondthe reasonable control of the Company. Accordingly, there can be no assurancethat the estimates, assumptions, and amounts reflected in the valuationswill be realized, and actual results could vary materially.
Pursuant to the Plan of Reorganization, UAL issued debt and equity instrumentsto certain unsecured creditors and employees of United. At the EffectiveDate, United pushed down the fair value of these instruments. These newly-issuedinstruments consist of 4.5% senior limited-subordination convertible notes,5% senior convertible notes, 6% senior notes and 2% mandatorily convertiblepreferred stock.
In accordance with SOP 90-7, we were required to adopt on February 1,2006 all accounting guidance that was going to become effective withinthe subsequent twelve-month period. See Note 2(m), "Summary of SignificantAccounting Policies - New Accounting Pronouncements."
The following fresh-start balance sheet illustrates the financial effectsof the implementation of the Plan of Reorganization and the adoption offresh-start reporting. In addition, it reflects the effect of the consummationof the transactions contemplated in the Plan of Reorganization, includingsettlement of various liabilities, issuance of certain UAL securities,incurrence of new indebtedness, repayment of old indebtedness, and othercash payments.
As a result of the adoption of fresh-start reporting, the Company'sfinancial statements on or after February 1, 2006 are not comparable withits pre-emergence financial statements because they are, in effect, thoseof a new entity. The effects of the Plan of Reorganization and fresh-startreporting on the Company's Statements of Consolidated Financial Position(Unaudited) are as follows (in millions):  Fresh-Start Adjustments  Predecessor( a )Settlement of Unsecured Claims( b )Reinstatement of Liabilities( c )Revaluation of Assets and LiabilitiesSuccessor**Assets**     **Current assets:**     Cash and cash equivalents$ 1,596 $ - $ - $ - $ 1,596 Restricted cash818 - - 1 819 Short-term investments75 - - - 75 Receivables, net      928        -        -        10       938 Prepaid fuel   280        -        -         -    280 Receivables from related parties204 - - (57)147 Aircraft fuel, spare parts andsupplies, net195        -        -        (24)171 Deferred income taxes- - - 112 112 Prepaid expenses and other      498       -       -      107      605    4,594       -       -     149   4,743**Operating property and equipment:**     Owned -      Flight equipment13,446        -        -      (4,823)8,623 Advances on flight equipment116      (25)       -         - 91 Other property and equipment    3,840       -       -  (2,547)    1,293   17,402      (25)       -   (7,370)  10,007 Less - Accumulated depreciationand         amortization   (6,156)       -       -   6,156        -   11,246    (25)       -  (1,214)  10,007Capital leases     Flight equipment2,581        -        -      (1,145)1,436 Other property and equipment      84       -       -   (69)      15 2,665        -        -   (1,214)1,451 Less - Accumulated amortization(747)      -       -747        -     1,918      -       -   (467)   1,451   13,164    (25)       - (1,681) 11,458**Other assets:**     Restricted cash315        -        -        - 315 Investments25        -        -        87 112 Goodwill       2        14        - 2,787 2,803 Intangibles, net361        -        - 2,801 3,162 Pension assets10 -- (9)1 Aircraft lease deposits492 - - - 492 Prepaid rent66 - - (58)8 Long-term related party note receivable- - - 201 201 Other, net554       -       -      168722**Total other assets**1,825      14       -    5,9777,816      **Total assets **$ 19,583$   (11)$      - $   4,445$ 24,017    Fresh-Start Adjustments  Predecessor( a )Settlement of Unsecured Claims( b )Reinstatement of Liabilities( c )Revaluation of Assets and LiabilitiesSuccessor      **Liabilities & Stockholder'sEquity**     Current liabilities:   Long-term debt maturing withinone year$ 13 $ - $ 519 $ - $ 532 Advanced purchase of miles686 - - - 686 Current obligations under capitalleases20 - 77 - 97 Advance ticket sales1,679        -       -       (14)1,665 Accounts payable    618        -        -      10   628 Accrued salaries, wages and benefits927 37        -        - 964 Payables to related parties464 - - (216)248 Fuel purchase commitments280 - - - 280 Mileage Plus deferred revenue709 - -   350 1,059 Other    566      93      546   3   1,208    5,962   130   1,142    133   7,367      Long-term debt :     DIP Financing   1,157 - - -     1,157 Other     141    1,130    5,115     (140)   6,246   1,298    1,130    5,115     (140)7,403Long-term obligations under capitalleases      101      -    1,209    (35)   1,275      **Other liabilities and deferredcredits:**     Deferred pension liability95 - - 29 124 Postretirement benefit liability 1,918 - - 66 1,984 Deferred income taxes369 - - 228 597 Mileage Plus deferred revenue276 - - 2,061 2,337 Other      529    -      79   18    626   3,187    -      79 2,402  5,668      Liabilities subject to compromise 36,379(27,964)(7,545)(870)      -Mandatorily convertible preferredstock______-     352      -      -      352      **Stockholder's equity:**     Serial preferred stock - - - - - ESOP preferred stock - - - - - Common stock at par- - - - - Additional capital invested4,213 1,952 - (4,213)1,952 Retained deficit(30,284)24,389 - 5,895 - Receivables from affiliates(1,237)- - 1,237 - Accumulated other comprehensiveloss      (36)--36      - (27,344)26,341-2,9551,952      **Total liabilities & stockholders'equity**$ 19,583$   (11) $   4,445$ 24,017(a)  *  Settlement of Unsecured Claims.*This column reflects a discharge of $28.0 billion of liabilities subjectto compromise pursuant to the terms of the Plan of Reorganization. Alongwith other creditor and employee claims incurred through the bankruptcyproceedings (i.e. by the rejection of aircraft, executory contracts, etc.),discharged liabilities include claims related to termination of the Debtors'defined benefit pension plans. Pursuant to the Plan of Reorganization,the unsecured creditors will receive 115 million new UAL common sharesin satisfaction of such claims, together with certain debt securities andUAL preferred stock. The Company recorded a $24.4 billion non-cash reorganizationgain on the discharge of unsecured claims net of newly-issued UAL securities.See above "Voluntary Reorganization Under Chapter 11 - Financial StatementPresentation" and Note 9, "Debt Obligations" for further details.
(b)    *Reinstatement of Liabilities.* This columnreflects the reinstatement of certain secured liabilities pursuant to theterms of the Plan of Reorganization. As a result of the reinstatement ofliabilities, the Company reclassified $7.5 billion of liabilities subjectto compromise. $7.1 billion represents the reinstatement of secured debt plus accruedinterest.
- $0.4 billion represents accruals for administrative and priority payments,reinstatement of certain municipal bond obligations, and other accrualsof payments required under the Plan of Reorganization.
 
     
(c)*    Revaluation of Assets and Liabilities*.Fresh-start adjustments are made to reflect asset values at their estimatedfair value and liabilities at estimated fair value or the present valueof amounts to be paid, including: Recognition of additional estimated fair value of $2.8 billion for internationalroute authorities, slots and other separately-identifiable intangible assets,
- Recognition of additional estimated fair value of $2.4 billion for theMileage Plus frequent flyer liability,
- $1.3 billion to reduce the values of operating property and equipment totheir estimated fair market value,
- The elimination of the Predecessor Company's equity accounts, and establishmentof opening equity of the Successor Company,
- $0.4 billion to reduce flight equipment as a result of refinancing certainaircraft from mortgage and capital lease financing to operating lease financing,and
- Net changes in deferred tax assets and liabilities, together with othermiscellaneous adjustments.
Additionally, goodwill of $2.8 billion was recorded to reflect the excessof the Successor Company's reorganization value over the estimated fairvalue of tangible and identifiable intangible assets. During the secondquarter of 2006, goodwill was increased by $47 million as a result of netadjustments in the fair values of certain assets and liabilities. Additionalchanges in the fair values of these assets and liabilities from the currentestimated values, as well as changes in other assumptions could significantlyimpact the reported value of goodwill. Accordingly, there can be no assurancethat the estimates, assumptions, and values reflected in the valuationswill be realized, and actual results could vary materially.
***Post-Emergence Items.*** Certain additional Successor Companymaterial transactions occurred on February 2, 2006 and have been reflectedin the accompanying Statements of Consolidated Financial Position (Unaudited)as of June 30, 2006.
*Release of Segregated Funds*. The Company reclassified $271 millionfor the release of cash previously restricted by a certain credit cardprocessor. Additionally, $200 million of cash segregated for the paymentof certain tax liabilities and recorded as other current assets prior tothe Effective Date, was released and reclassified to unrestricted cash.
*Credit Facility Financing Transactions*. On the Effective Date,the Company received $1.4 billion in net proceeds from the Credit Facility,consisting of borrowings of $2.65 billion under the Credit Facility whichincludes $200 million of revolving credit, and the simultaneous repaymentof the Company's $1.2 billion DIP Financing. For further details, see Note9, "Debt Obligations".
**(2) Summary of Significant Accounting Policies**
Described below are the Successor Company's significant accounting policieswhich may materially differ from the policies that existed in United'smost recent Annual Report filed on Form 10-K for the year of 2005. Thesechanges are a result of fresh-start reporting in accordance with SOP 90-7.(a)
*    Basis of Presentation* -
 United is awholly owned subsidiary of UAL. The consolidated financial statements includethe accounts of United and all of our majority-owned affiliates. All significantintercompany transactions are eliminated. Certain prior year amounts havebeen reclassified to conform to the current year's presentation.

Upon emergence from its Chapter 11 proceedings, the Company adopted fresh-startreporting in accordance with SOP 90-7 as of February 1, 2006. The Company'semergence from reorganization resulted in a new reporting entity with noretained earnings or accumulated deficit as of February 1, 2006. Accordingly,the Company's consolidated financial statements for periods prior to February1, 2006 are not comparable to consolidated financial statements presentedon or after February 1, 2006.
 
(b)    ***Use of Estimates*** - The preparationof financial statements in conformity with GAAP requires management tomake estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differfrom those estimates.
Under fresh-start reporting, the Company's asset values are remeasuredusing fair value, which is allocated using the purchase method of accountingin conformity with SFAS 141. In addition, fresh-start reporting also requiresthat all liabilities, other than deferred taxes, should be stated at fairvalue, or at the present values of the amounts to be paid using appropriatemarket interest rates. Deferred taxes are determined in conformity withSFAS 109.
Estimates of fair value represent the Company's best estimates basedon appraisals and valuations and, where the foregoing have not yet beencompleted or are not available, industry data and trends and by referenceto relevant market rates and transactions. The foregoing estimates andassumptions are inherently subject to significant uncertainties and contingenciesbeyond the control of the Company. Accordingly, we cannot provide assurancethat the estimates, assumptions, and values reflected in the valuationswill be realized, and actual results could vary materially. In accordancewith SFAS 141, the preliminary allocation of the fair value of assets andliabilities is subject to additional adjustment within one year after emergencefrom bankruptcy.
(c)    ***Airline Revenues*** - The value ofunused passenger tickets is included in current liabilities as advanceticket sales.  We record passenger ticket sales as operating revenueswhen the transportation is provided or when the ticket expires.  Non-refundabletickets generally expire on the date of the intended flight, unless thedate is extended by notification from the customer on or before the intendedflight date.  Refundable tickets expire after one year. Due to complexindustry pricing structures, refund and exchange policies, and interlineagreements with other airlines, certain amounts are recognized as revenueusing estimates regarding both the timing of the recognition and the amountof revenue to be recognized.  These estimates are based on the evaluationof actual historical results. We also recognize cargo and mail as revenuewhen transportation is provided.
(d)    ***Cash and Cash Equivalents and Short-TermInvestments* -** Cash in excess of operating requirements is investedin short-term, highly liquid, income-producing investments. Investmentswith a maturity of three months or less on their acquisition date are classifiedas cash and cash equivalents. Other investments are classified as short-terminvestments.At June 30, 2006, the Successor Company did not have any investmentsin debt securities that were classified as available-for-sale. The PredecessorCompany had $77 million of debt securities that were classified as available-for-saleas of December 31, 2005. The Successor Company had investments in debtsecurities classified as held-to-maturity of $4.2 billion at June 30, 2006,and the Predecessor Company had $1.6 billion at December 31, 2005. Investmentsin debt securities classified as available-for-sale are stated at fairvalue. Investments classified as held-to-maturity are stated at cost, whichapproximates market due to their short-term maturities. The gains or lossesfrom sales of available-for-sale securities are included in interest incomefor each respective year.
The Successor Company had $366 million classified as short-term restrictedcash at June 30, 2006 while the Predecessor Company had $643 million inshort-term restricted cash at December 31, 2005, representing securityfor worker compensation obligations, security deposits for airport leasesand reserves with institutions that process our credit card ticket sales.In addition, the Successor Company had $509 million and the PredecessorCompany had $285 million in long-term restricted cash at June 30, 2006and December 31, 2005, respectively.
(e)    ***Aircraft Fuel, Spare Parts and Supplies*-** In accordance with fresh-start reporting, aircraft fuel, maintenanceand operating supplies were revalued to estimated fair values on February1, 2006. Flight equipment spare parts were also stated at estimated fairvalue at the Effective Date. The Successor Company records fuel, maintenance,and operating supplies, as well as flight equipment spare parts, at costwhen acquired, and provides an obsolescence allowance for aircraft spareparts.
(f)    ***Operating Property and Equipment* -**Owned operating property and equipment, and equipment under capital leases,were stated at fair value as of February 1, 2006. The Successor Companyrecords additions to owned operating property and equipment at cost whenacquired. Property under capital leases, and the related obligation forfuture lease payments, is recorded at an amount equal to the initial presentvalue of those lease payments.Depreciation and amortization of owned depreciable assets is basedon the straight-line method over the assets' estimated service lives. Leaseholdimprovements are amortized over the remaining term of the lease, includingestimated renewal options when renewal is reasonably assured at key airports,or the estimated service life of the related asset, whichever is less.Aircraft are depreciated to estimated salvage values, generally over livesof 27 to 30 years; buildings are depreciated over lives of 25 to 45 years;and other property and equipment are depreciated over lives of 4 to 15years.
Properties under capital leases are amortized on the straight-linemethod over the life of the lease or, in the case of certain aircraft,over their estimated service lives. Lease terms are 9 to 18 years for aircraftand 40 years for buildings. Amortization of capital leases is includedin depreciation and amortization expense.
Maintenance and repairs, including the cost of minor replacements,are charged to maintenance expense as incurred, except for costs incurredunder our power by the hour engine maintenance agreements, which are expensedbased upon the number of hours flown. Costs of additions to and renewalsof units of property are capitalized as property and equipment additions.
(g)    ***Mileage Plus Awards* -** As a resultof the application of fresh-start reporting, the Mileage Plus frequentflyer obligation was revalued at the Effective Date to reflect the estimatedfair value of miles to be redeemed in the future. Outstanding miles earnedby flying United or its partner carriers were revalued using a weightedaverage per-mile equivalent ticket value, taking into account such factorsas differing classes of service and domestic and international ticket itineraries,which can be reflected in awards chosen by Mileage Plus members.The Successor Company also elected to change its accounting policyfrom an incremental cost basis to a deferred revenue model, as of the EffectiveDate, to measure its obligation for miles to be redeemed based upon theequivalent ticket value of similar fares or amounts paid to other StarAlliance partners. United's policy for the cancellation of miles is todeactivate Mileage Plus customer accounts for which there has been no activityfor three consecutive years. The Company recognizes revenue from the breakageof miles by amortizing such breakage over the 36-month validity period.
At June 30, 2006, the Company had recorded deferred revenue for itsfrequent flyer program consisting of $710 million for the advanced purchaseof miles and $3.5 billion related to award travel, of which $1.1 billionwas current. At December 31, 2005, the Company had recorded a liabilityand deferred revenue for its frequent flyer program totaling $1.6 billion(consisting of $679 million for advanced purchase of miles and $923 million,of which $681 million was current, related to award travel).
(h)    ***United Express*** - United has capacityand prorate agreements under which independent regional carriers, flyingunder the United Express name, connect passengers to other United Expressand/or United flights (the latter of whom we also refer to as "mainline"operations, to distinguish them from United Express regional operations.)United Express operating expenses include both allocated and directcosts. Direct costs represent expenses that are specifically and exclusivelyrelated to United Express flying activities, such as commissions, bookingfees, fuel expenses and dedicated staffing. Allocated costs represent UnitedExpress' portion of shared expenses and include charges for items suchas airport operating costs, reservation-related costs, credit card discountfees and facility rents. For each of these expense categories, we estimateUnited Express' portion of total expense and allocate the applicable portionof expense to the United Express carrier.
Additionally, contractual payments made to United Express regionalcarriers include payments for aircraft operated by them as part of theUnited Express agreements. United has the right to exclusively operateand direct the operations of these aircraft, and accordingly the minimumfuture lease payments for these United Express-operated aircraft are includedin our lease obligations as described in Note 13, "Lease Obligations."
The Company recognizes revenue on a net basis for the prorate carriers.
United has call options on 152 regional jet aircraft currently beingoperated by certain United Express carriers. These options are intendedto allow United to secure control over regional jets used for United Expressflying in certain circumstances. The conditions under which United canexercise these call options vary by contract, but include operational performancemetrics and in some cases the financial standing of one or both of theparties. At this time, none of the call options are exercisable.
(i)    ***Advertising* -** Advertising costs,which are included in other operating expenses, are expensed as incurred.Upon adoption of fresh-start reporting, the Company changed its accountingpolicy to record earned Mileage Plus mileage on the deferred revenue basis.Prior to emergence from bankruptcy, the Predecessor Company recorded advertisingexpense related to outstanding flight miles that were eligible for a mileageaward on an incremental cost basis.
(j)    ***Intangibles*** - Goodwill representsthe excess of the reorganization value of the Successor Company over thefair value of tangible assets and identifiable intangible assets resultingfrom the application of SOP 90-7. Identifiable intangible assets consistprimarily of international route authorities, trade-names, the MileagePlus customer database, airport slots and gates, certain favorable contracts,hubs, patents, and other items. Most airport slots and gates, internationalroute authorities and trade-names are indefinite-lived and, as such, arenot amortized. Instead, these indefinite-lived intangible assets are reviewedfor impairment annually or more frequently if events or circumstances indicatethat the asset may be impaired. Definite lived intangible assets are amortizedon a straight-line basis over the estimated lives of the related assets,which span periods of 1 to 20 years, except for the Mileage Plus customerdatabase. The Mileage Plus customer database is amortized on an acceleratedbasis utilizing cash flows correlating to the expected attrition rate ofmembers from the database.
In accordance with Statement of Financial Accounting Standards No. 142,"*Goodwill and Other Intangible Assets*" ("SFAS 142"), we will applya fair value-based impairment test to the net book value of goodwill andindefinite-lived intangible assets on an annual basis or on an interimbasis when a triggering event occurs. The annual impairment test date forour goodwill and indefinite-lived intangible assets is October 1. We havenot performed impairment testing on amounts of goodwill or indefinite-livedintangible assets subsequent to February 1, 2006, as there have been noevents or changes that would indicate that such assets are impaired.
As discussed in Note 7, "Segment Information", we have five reportablesegments that reflect the management of our business: North America, thePacific, the Atlantic, Latin America and UAL Loyalty Services, LLC ("ULS").We allocated goodwill to three of these reportable segments, the Pacific,the Atlantic and ULS. SFAS 142 requires that a two-step impairment testbe performed on goodwill. In the first step, the Company compares the fairvalue of each reportable segment to its carrying value. If the fair valueof a reportable segment exceeds the carrying value of the net assets ofthe reportable segment, goodwill is not impaired and the Company is notrequired to perform further testing. If the carrying value of the net assetsof a reportable segment exceeds the fair value of the reportable segment,then the Company must perform the second step in order to determine theimplied fair value of the goodwill and compare it to the carrying valueof the goodwill. If the carrying value of goodwill exceeds its impliedfair value, then the Company must record an impairment charge equal tosuch difference.
We expect to assess the fair value of our reportable segments consideringboth the market and income approaches. Under the market approach, the fairvalue of the reportable segment is based on a comparison of similar publiclytraded companies. Under the income approach, the fair value of the reportablesegment is based on the present value of estimated future cash flows. Theincome approach is dependent on a number of factors including estimatesof future capacity, passenger yield, traffic, operating costs, appropriatediscount rates and other relevant factors.
The following table presents information about our intangible assets,including goodwill, at June 30, 2006 and December 31, 2005:  SuccessorPredecessor  June 30, 2006December 31, 2005 AssetGross CarryingAccumulatedGross CarryingAccumulated(In millions)LifeAmountAmortizationAmountAmortizationAmortized intangible assets     Airport slots andgates1 to 9 yrs$ 72 $ 6 $ 32 $ 19 Hubs16 to 20 yrs145 3 - -Patents3 yrs70 10 - - Mileage Plus database7 yrs521 35 - - Contracts2 to 9 yrs211 22-- Other7 to 8 yrs18 1 36 23   $ 1,037 $ 77 $ 68 $ 42           Unamortized intangibleassets         Goodwill $ 2,803   $ 2   Airport slots andgates 255   -   Route authorities 1,132   344   Trade-name 743   -     $ 4,933   $ 346   
During the second quarter of 2006, goodwill was increased $47 millionas a result of net adjustments in the fair values of certain assets andliabilities in accordance with SFAS 141. Total amortization expense recognizedwas approximately $46 million and $1 million for the three month periodsended June 30, 2006 and 2005, respectively, $1 million for the one monthperiod ended January 31, 2006, $77 million for the five month period endedJune 30, 2006 and $3 million for the six month period ended June 30, 2005.We expect to record amortization expense of $91 million for remaining sixmonths ended December 31, 2006, and $151 million, $92 million, $70 millionand $63 million for 2007, 2008, 2009 and 2010, respectively.
(k)    ***Measurement of Impairments***-TheCompany may recognize impairment charges on its long-lived assets and intangibleassets that are subject to amortization when the asset's carrying valueexceeds its net undiscounted future cash flows and its fair market value.The amount of the charge is the difference between the asset's carryingvalue and fair market value.
(l)    ***Stock Option Accounting*** - The Companyadopted the Financial Accounting Standards Board's ("FASB") Statement ofFinancial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment"("SFAS 123R") effective January 1, 2006. This pronouncement requires companiesto measure the cost of employee services received in exchange for an awardof equity instruments (typically stock options) based on the grant-datefair value of the award. The fair value is estimated using option-pricingmodels. The resulting cost is recognized over the period during which anemployee is required to provide service in exchange for the award, usuallythe vesting period.
(m)    ***New Accounting Pronouncements***-In February 2006, the FASB issued Statement of Financial Accounting StandardsNo. 155, "*Accounting for Certain Hybrid Financial Instruments*" ("SFAS155"), which amends Statement of Financial Accounting Standards No. 133,"*Accounting for Derivative Instruments and Hedging Activities*" ("SFAS133") and Statement of Financial Accounting Standards No. 140, "*Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*."  SFAS 155 simplifies the accounting for certainderivatives embedded in other financial instruments by allowing them tobe accounted for as a whole if the holder elects to account for the wholeinstrument on a fair value basis.  We are currently evaluating thenew statement to determine the potential impact, if any, that this wouldhave on our financial statements. SFAS 155 is effective for fiscal yearsbeginning after September 15, 2006.
In July 2006, the FASB issued FASB Interpretation No. 48, "*Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No.109*" ("FIN 48"), which clarifies the accounting and disclosure associatedwith certain aspects of recognition and measurement related to accountingfor income taxes.  We have not yet determined the impact, if any,that FIN 48 will have on our financial statements. FIN 48 is effectivefor fiscal years beginning after December 15, 2006.
(n)    ***Tax Contingencies*** - We have recordedreserves for taxes and associated interest in accordance with SFAS No.5, "*Accounting for Contingencies",* that may become payable in futureyears as a result of audits by tax authorities. Although we believe thatthe positions taken by the Company on previously filed tax returns arereasonable, we nevertheless have established tax and interest reservesin recognition that various taxing authorities may challenge certain ofthe positions taken by the Company, potentially resulting in additionalliabilities for taxes and interest. Our tax contingency reserves are reviewedperiodically and are adjusted as events occur that affect our estimatedliability for additional taxes, such as the lapsing of applicable statutesof limitations, the conclusion of tax audits, the measurement of additionalestimated liability based on current calculations, the identification ofnew tax contingencies, the release of administrative tax guidance affectingour estimates of tax liabilities, or the rendering of court decisions affectingour estimates of tax liabilities.**(3) Stock Option Accounting**
The Company adopted SFAS 123R effective January 1, 2006. This pronouncementrequires companies to measure the cost of employee services received inexchange for an award of equity instruments (typically stock options) basedon the grant-date fair value of the award. The fair value is estimatedusing option-pricing models. The resulting cost is recognized over theperiod during which an employee is required to provide service in exchangefor the award, usually the vesting period. Prior to the adoption of SFAS123R, this accounting treatment was optional with pro forma disclosuresrequired.
***Predecessor Company*** - As of January 31, 2006, a totalof 9 million UAL stock options were outstanding. UAL did not issue anystock options or restricted shares during 2005. Under the Company's confirmedPlan of Reorganization, these UAL stock options were canceled upon theEffective Date. No material stock-based compensation expense was incurredfor these options for the month of January 2006.
***Successor Company*** - As part of the Plan of Reorganization,the Bankruptcy Court approved the DEIP and MEIP share-based compensationplans.
*Director Equity Incentive Plan*. The Nominating/GovernanceCommittee of the UAL Board (the "Governance Committee") is authorized togrant equity-based awards to non-employee directors of UAL under the DEIP.The DEIP authorizes the Governance Committee to grant any of a varietyof incentive awards to participants, including the following:- non-qualified UAL stock options,
- UAL stock appreciation rights, which provide the participant the rightto receive the excess (if any) of the fair market value of a specifiednumber of shares of UAL common stock at the time of exercise over the grantprice of the stock appreciation right,
- stock awards to be granted at no cost to the participant, including grantsin the form of (i) an immediate transfer of UAL shares which are subjectto forfeiture and certain transfer restrictions ("Restricted Stock") and(ii) an immediate transfer of UAL shares which are not subject to forfeitureor a deferred transfer of UAL shares if and when the conditions specifiedby the HR Subcommittee are met ("Unrestricted Stock"),
- annual compensation in the form of credits to a participant's share accountestablished under the DEIP, and
- shares of UAL common stock in lieu of receipt of all or any portion ofcash amounts payable by the Company to a participant including retainerfees, board attendance fees and committee fees (but excluding expense reimbursementsand similar items).
The shares may be issued from authorized and unissued shares of UAL commonstock or from UAL's treasury stock. The exercise price for each underlyingshare of UAL common stock under all options and stock appreciation rightsawarded under the DEIP will not be less than the fair market value of ashare of UAL common stock on the date of grant. Each option granted underthe DEIP will generally expire 10 years after its date of grant.
As of June 30, 2006, a total of 90,000 shares of UAL common stock weregranted to non-employee UAL directors and accordingly, $3 million of relatedexpense was recognized for the five month period ended June 30, 2006. Therewas no related expense incurred during the quarter ended June 30, 2006.The number of shares of UAL common stock available for future grants atJune 30, 2006 was 85,000.
*Management Equity Incentive Plan*. The Human ResourcesSubcommittee of the UAL Board (the "HR Subcommittee") is authorized underthe MEIP to grant equity-based and other performance-based awards ("Awards")to executive officers and other key management employees of the Companyand its subsidiaries.
All executive officers and other key management employees of the Companyand its subsidiaries are eligible to become participants in the MEIP. TheHR Subcommittee will select from time to time, from among all eligibleindividuals, the persons who will be granted an Award. The MEIP authorizesthe HR Subcommittee to grant any of a variety of incentive Awards to participants,including the following:- UAL stock options, including both tax qualified and non-qualified options,
- UAL stock appreciation rights, which provide the participant the rightto receive the excess (if any) of the fair market value of a specifiednumber of shares of UAL common stock at the time of exercise over the grantprice of the UAL stock appreciation right,
- UAL stock awards to be granted at no cost to the participant, includinggrants in the form of UAL Restricted Stock and Unrestricted Stock, and
- performance-based awards, in which the HR Subcommittee may grant a UALstock award that will entitle the holder to receive a specified numberof shares of UAL common stock, or the cash value thereof, if certain performancegoals are met.
The shares may be issued from authorized and unissued shares of UAL commonstock or from UAL's treasury stock. The exercise price for each underlyingshare of UAL common stock under all options and stock appreciation rightsawarded under the MEIP will not be less than the fair market value of ashare of UAL common stock on the date of grant.
As of June 30, 2006, a total of 3.7 million UAL restricted shares wereawarded to plan participants. Under SFAS 123R, the fair value of thesegrants was based upon the volume weighted average share price on the dateof grant. Total compensation expense of $23 million and $57 million wasrecognized during the three and five month periods ending June 30, 2006,respectively.
In addition, as of June 30, 2006, UAL stock options to purchase 5.4million shares of UAL common stock were awarded to plan participants. Compensationexpense of $17 million and $49 million was recognized for these awardsduring the three and five month periods ended June 30, 2006, respectively.The number of UAL restricted shares and stock options to purchase sharesof UAL common stock available for future grants at June 30, 2006 was lessthan 1 million.
The Company initially estimated the forfeiture rate at 7.5% and hassince modified the rate to 15% based upon actual attrition primarily drivenby the salaried and management reduction in workforce initiative announcedduring second quarter of 2006. As a result, the stock-based compensationexpense was reduced by approximately $7 million during the second quarterof 2006.
The fair value of options is determined at the grant date using a Black-Scholesoption pricing model, which requires us to make several assumptions. Therisk-free interest rate is based on the U.S. Treasury yield curve in effectfor the expected term of the option at the time of grant. The dividendyield on UAL common stock is assumed to be zero since UAL does not paydividends and has no current plans to do so in the future.
The volatility assumptions were based upon historical volatilities ofcomparable airlines whose shares are traded using daily stock price returnsequivalent to the contractual term of the option. Due to its emergencefrom nearly 3 years in bankruptcy, historical volatility data for UAL wasnot considered in determining expected volatility. The Company also consideredimplied volatility data for both UAL and comparable airlines, using currentexchange traded options.
The expected life of the options was determined based upon a simplifiedassumption that the option will be exercised evenly from vesting to expirationunder the transitional guidance of Staff Accounting Bulletin No. 107, Topic14, "Share-Based Payments".
The table below summarizes stock option activity pursuant to our MEIPfor the period February 1 through June 30, 2006:     
Options    
Weighted-Average Exercise Price  
Weighted-Average Remaining Contractual Life (in years)  
Aggregate IntrinsicValue(in millions)Outstandingat beginning of period- - - -          Granted 5,821,945  $35.26      Exercised -  -      Canceled  (385,074) $35.25      Outstandingat end of period 5,436,871 $35.26  9.5  $-           Exercisableat end of period -  -  -  -   
The weighted-average fair value of options granted for the period February1, 2006 to June 30, 2006 was determined to be $20.05 based on the followingweighted-average assumptions:  Risk-freeinterest rate 4.7%Dividendyield 0%Expectedmarket price volatility of UAL common stock 57%Expectedlife of options (years) 5.8    
The following tables summarize the range of exercise prices and theweighted average remaining contractual life of the options outstandingat June 30, 2006: 
Exercise prices 
OutstandingWeighted-Average Remaining Contractual Life$34.18 1,790,643 9.6 $35.91  1,790,836 9.6 $35.65  1,790,892 9.6 $39.45  45,000 9.8 $29.82  19,500 9.9      Totaloutstanding5,436,871 9.5 
There were no UAL stock optionsexercisable as of June 30, 2006.
The table below summarizes UAL restricted stock activity for the periodFebruary 1 through June 30, 2006:  Weighted- UALAverage Restricted StockGrant PriceOutstandingat beginning of period-  -       Granted 3,861,705  $36.95 Exercised (65,640) $36.95 Terminated   (198,997) $36.95 Outstandingat end of period 3,597,068  $36.95 
**(4) Income Taxes**
For the three and six months ended June 30, 2006 and 2005, United incurredboth a regular and an alternative minimum tax ("AMT") loss. The primarydifferences between our regular tax loss and AMT loss are certain depreciationadjustments and preferences.
In assessing the realizability of our deferred tax assets, managementconsiders whether it is more likely than not that some portion of the deferredtax asset will be realized. For periods 2005 through 2006, we recordeda valuation allowance against our deferred tax assets.
Temporary differences and carry forwards that give rise to a significantportion of deferred tax assets and liabilities at June 30, 2006 and December31, 2005 are as follows:  SuccessorPredecessor(In millions)June 30, 2006December 31, 2005 Deferred TaxDeferred TaxDeferred TaxDeferred Tax AssetsLiabilitiesAssetsLiabilitiesEmployee benefits, including    postretirement, medical and ESOP$ 1,510  $ -  $   5,470  $ 28  Depreciation, capitalized interest        and transfers of tax benefits-  2,657  -  3,445  Federal and state net operatingloss        carry forwards2,992  -  2,688  -  Mileage Plus deferred revenue949  -  50  -  Gains on sale and leasebacks-  1  69  -  Rent expense-  1  525  -  AMT credit carry forwards291  -  294  -  Intangibles-  1,058  18  -  Restructuring charges290  -  4,457  -  Other1,655  1,617 1,517  1,489  Less: Valuation allowance(2,835) - (10,494) -  $ 4,852 $ 5,334 $ 4,594 $ 4,962 
As a result of the Company's emergence from bankruptcy, at June 30,2006, the Company has an excess tax deduction of $676 million that hasnot been realized. The excess tax deduction results from the Company receivinga tax deduction for the fair value of the UAL common stock issued to certainunsecured creditors pursuant to the Plan of Reorganization. The Companywill recognize this excess tax deduction when it is realized pursuant toSFAS 123R.
At June 30, 2006, United and its subsidiaries had $291 million of federalAMT credits, $2.7 billion of federal tax benefits and $0.3 billion of statetax benefits, resulting from $7.7 billion of net operating losses whichmay be carried forward to reduce the tax liabilities of future years. Ifnot utilized, the federal tax benefits of $0.2 billion expire in 2022,$1.2 billion expire in 2023, $0.4 billion expire in 2024, $0.5 billionexpire in 2025, $0.1 billion expire in 2026 and $0.3 billion expire in2027. In addition, the state tax benefit, if not utilized, expires overa five to twenty year period.
We have determined that it is more likely than not that our net deferredtax asset at June 30, 2006, will be realized through the reversals of existingdeferred tax credits.
At June 30, 2006, the federal and state net operating loss carryforwards("NOLs") were reduced by discharge of indebtedness income of $1.1 billionthat resulted from the bankruptcy proceedings. At this time, the Companydoes not believe that the limitations imposed by the Internal Revenue Codeon the usage of NOLs following an ownership change will apply to the Company.Therefore, the Company does not believe its exit from bankruptcy has hadany material impact on the utilization of its remaining NOLs.
**(5) Retirement and Postretirement Plans**
The net periodic benefit cost included the following components: Pension BenefitsOther Benefits Successor Predecessor Successor Predecessor Three Months Ended June 30,Three Months Ended June 30,(In millions)2006200520062005Service cost$ 2  $ 23  $ 9  $ 10  Interest cost 2   174   32   30  Expected return on plan assets(2) (146) (2) (3) Amortization of prior servicecost (credit)           including transitionobligation-  6  -  (34) Curtailment charge-  207  -  -  Settlement losses, net-  405  -  -  Recognized actuarial loss-  38  -  22  Revaluation of liability- - - - Net periodic benefit costs$ 2 $ 707 $ 39 $ 25  Pension BenefitsOther Benefits SuccessorPredecessorSuccessorPredecessor Period from February 1 to June 30,Period from January 1 toJanuary 31,Six Months Ended June 30,Period from February 1 to June 30,Period from January 1 toJanuary 31,Six Months Ended June 30,(In millions)200620062005200620062005Service cost$ 4  $ 1  $ 61  $ 15  $ 3  $ 22  Interest cost 4   1   395  53   11  65  Expected return on plan assets(4) (1) (328) (3) (1) (5) Amortization of prior service    cost (credit) including             transition obligation-  -  14  -  (13) (72) Curtailment charge- - 640 - - - Settlement losses, net-  -  390  -  -  -  Recognized actuarial loss-  -  85  -  8  48  Revaluation of liability- 43 - - 73 - Net periodic benefit costs$ 4 $ 44 $ 1,257 $ 65 $ 81 $ 58 
Upon emergence from bankruptcy on February 1, 2006, the Company completeda revaluation of the post-retirement liabilities using census data as ofJanuary 1, 2006, and updating the assumed discount rate from a weightedaverage of 5.68% (as of December 31, 2005) to 5.84% (as of February 1,2006), resulting in a reduction of the net accumulated benefit obligationby approximately $28 million. In accordance with SOP 90-7, we also acceleratedthe recognition of $73 million in net unrecognized actuarial and priorservice gains and losses upon emergence as reorganization expense. We alsoaccelerated the recognition of all net unrecognized actuarial and priorservice gains and losses pertaining to our foreign pension plans upon emergence,and recorded a reorganization expense of $43 million thereon.
With the termination of the Company's defined benefit retirement plans(see Note 1, "Voluntary Reorganization Under Chapter 11 - Significant MattersRemaining to be Resolved in Chapter 11 Cases" items (e) through (h) forfurther details on pending matters), the Company has reached agreementswith all of its employee groups to implement replacement plans, largelydefined contribution plans. Contributions under the Company's defined contributionplans are based on matching percentage, years of service and/or employeeeligible earnings.  The International Association of Machinists ("IAM")replacement plan is a multi-employer plan whereby the assets contributedby the Company (based on hours worked) may be used to provide benefitsto employees of other participating companies, since assets contributedby all participating companies are not segregated or restricted to providebenefits specifically to employees of that company. The IAM replacementplan took effect as of March 1, 2006, while all others were in effect forthe entire quarter ended March 31, 2006. The Predecessor Company recordedexpense of $16 million for the month of January 2006, while the SuccessorCompany recognized $57 million and $93 million of expense for the secondquarter of 2006 and for the five months ended June 30, 2006, respectively,for all of the Company's defined contribution employee retirement plans.
In the first and second quarter of 2005, the Company recognized pensioncurtailment charges of $433 million and $207 million, respectively, associatedwith actions taken by the PBGC to involuntarily terminate the Company'sdefined benefit pension plans for the Ground Employees Plan as of March11, 2005 and for the MAPC Plan and the Flight Attendant Plan as of June30, 2005. These pension plans were projected to have benefit obligationsand plan assets aggregating approximately $8.0 billion and $4.2 billion,respectively, as of December 31, 2004. In May 2005, the PBGC was appointedtrustee for the Ground Employees Plan and in June 2005, the PBGC was appointedtrustee for the MAPC Plan and the Flight Attendant Plan, assuming all rightsand powers over the pension assets and obligations. Upon termination andsettlement of these plans, the Company recognized a net settlement lossof approximately $395 million in accordance with SFAS 88.
A $1.9 billion allowable claim for the PBGC from the terminations ofthe Ground Employee Plan, MAPC Plan or the Flight Attendant Plan was recordedin the second quarter of 2005 in accordance with SFAS No. 5, "Accountingfor Contingencies", and FASB Interpretation No. 14, "Reasonable Estimationof the Amount of Loss" and classified as Liabilities Subject to Compromiseon the Statements of Consolidated Financial Position (Unaudited).
**(6) Restricted Cash**
At June 30, 2006, United had $875 million in restricted cash (of which$366 million is classified as current), primarily representing securityfor workers' compensation obligations, security deposits for airport leasesand reserves with institutions that process our credit card ticket sales.There can be no assurance that these institutions will not require additionallevels of security deposits or reserve holdbacks.
**(7) Segment Information**
We have five reportable segments that reflect the management of ourbusiness: North America, the Pacific, the Atlantic, Latin America and UALLoyalty Services, LLC ("ULS"). For internal management and decision-makingpurposes, we have allocated expenses and revenues (as incorporated in ourconsolidated financial statements) to these segments for the three monthperiods ending June 30, 2006 and 2005, as well as the one month periodended January 31, 2006, the five month period ending June 30, 2006 andthe six month period ending June 30, 2005 as follows:  Three Months Ended June 30, 2006 (Successor)(In millions) Inter-United North  Latin SegmentConsolidated AmericaPacificAtlanticAmericaULSEliminationTotalRevenue$  3,309  $ 836  $ 573  $ 134  $ 259  $ -  $ 5,111 Intersegment revenue83  27  18  4  20  (152) -  Net income (loss)57  (49) 19  (13) 97  -  111                Goodwill$ -  $ 664  $ 667  $ -  $1,472  $ -  $ 2,803  Three Months Ended June 30, 2005 (Predecessor)(In millions) Inter-United North  Latin SegmentConsolidated AmericaPacificAtlanticAmericaULSEliminationTotalRevenue$2,739  $765  $ 532  $ 114  $ 224  $ -  $ 4,374  Intersegment revenue86  31  21  5  16  (159) -  Net income (loss) before              reorganization and                 special items$ (117) $ (28) $ 7  $ (17)  $   87  $ -  $ (68)  Period January 1 to January 31, 2006 (Predecessor)(In millions) Inter-United North  Latin segmentConsolidated AmericaPacificAtlanticAmericaULSEliminationTotalRevenue$   905  $ 265  $  158  $   51  $    75  $ -  $ 1,454  Intersegment revenue29  11  6  2  7  (55) -  Net income (loss) before              reorganization items$   (81) $   (5) $ (13) $ (10) $  26  $ -  $ (83)  Period February 1 to June 30, 2006 (Successor)(In millions) Inter-United North  Latin SegmentConsolidated AmericaPacificAtlanticAmericaULSEliminationTotalRevenue$ 5,266  $1,332  $  869  $ 235  $  415  $ -  $ 8,117  Intersegment revenue137  45  28  8  33  (251) -  Net income (loss) (79) (124) (9) (37)  145  -  (104)                Goodwill$ -  $ 664  $ 667  $ -  $1,472  $ -  $ 2,803    Six Months Ended June 30, 2005 (Predecessor)(In millions) Inter-United North  Latin segmentConsolidated AmericaPacificAtlanticAmericaULSEliminationTotalRevenue$ 5,142  $1,462  $  996  $ 241  $  449  $ -  $ 8,290  Intersegment revenue149  55  34  9  33  (280) -  Net income (loss) before              reorganization and              special items$ (415) $ (61) $ (31) $ (36) $  181  $ -  $ (362) 
A reconciliation of the total amounts reported by reportable segmentsto the applicable amounts in the consolidated financial statements follows: Successor Predecessor Three Months Ended June 30,(In millions)20062005Total income (loss) for reportablesegments$111  $ (68) Reorganization items, net-  (1,398)   Special items- (5) Net income (loss) $111 $ (1,471)   SuccessorPredecessor Period from February 1 to June 30,Period from January 1 to January 31,Six Months Ended June 30,(In millions)200620062005Total loss for reportable segments$(104) $ (83) $ (362) Reorganization items, net-  22,709  (2,116)  Special items- - (5) Net income (loss) $(104) $22,626 $ (2,483) 
United's operations involve an insignificant level of dedicated revenue-producingassets by reportable segment as the overwhelming majority of the Company'srevenue producing assets (primarily U. S. registered aircraft) generallycan be deployed in any of its reportable segments, as any given aircraftmay be used in multiple segments on any given day. ULS had $2.0 billionin total assets as of June 30, 2006.
In accordance with SFAS 142, on the Effective Date the Company allocatedgoodwill upon adoption of fresh-start reporting in a manner similar tohow the amount of goodwill recognized in a business combination is determined.This required the determination of the fair value of each reportable segmentto calculate an estimated purchase price for such segment. This purchaseprice was then allocated to the individual assets and liabilities assumedto be related to that segment. Any excess purchase price is the amountof goodwill assigned to that reporting unit. As stated above, the overwhelmingmajority of the Company's revenue producing assets and the related liabilitiesrelate to aircraft that may be used in multiple segments on any given day.As a result, the Company allocated such asset values and the related liabilitieson the basis of available seat miles flown in each segment. To the extentthat individual assets and liabilities could be assigned directly to specificsegments, those assets and liabilities were assigned to such segments.In accordance with SFAS 141, any adjustments to the preliminary allocationof reorganization value could change the amount of recorded goodwill andthe allocation of such goodwill to the reportable segments. During thesecond quarter of 2006, goodwill increased by $47 million as a result ofnet adjustments to certain assets and liabilities.
**(8) Comprehensive Income (Loss)**
We include in other comprehensive income (loss) changes in minimum pensionliabilities and changes in the fair value of derivative financial instrumentsthat qualify for hedge accounting. For the three months ended June 30,2006 and 2005, total comprehensive income (loss) amounted to $145 millionand $402 million, respectively. For the one month period ended January31, 2006, five month period ended June 30, 2006 and six month period endedJune 30, 2005, total comprehensive income (loss) amounted to $22.6 billion,$(62) million and $(575) million, respectively. Total comprehensive incomefor the six months ended June 30, 2005 included a $1.9 billion net adjustmentrelating to the termination of various pension plans, as discussed in Note5, "Retirement and Postretirement Plans".
**(9) Debt Obligations**
In accordance with the Plan of Reorganization, the Company issued newdebt, entered into the Credit Facility, reinstated certain secured aircraftdebt and entered into other debt agreements negotiated during the bankruptcyprocess (including aircraft financings), which consist of the following:(in millions)June 30, 2006Secured notes, 4.50%to 9.52%, due 2014$ 5,181 Credit Facility, 8.7%,due 20122,800 Employee convertiblenotes, due 2021726 6% senior notes, due2031 500 5% senior convertiblenotes, due 2021 150Total debt9,357 Less: unamortizeddebt discount(261)Less: current portion(587)Long-term debt, lesscurrent portion$8,509
*Secured Notes.*As of June 30, 2006, the Company identified andcorrected $186 million of certain omissions previously reported in theAnnual Report on Form 10-K for the year of 2005. Specifically, Form 10-KNote 8, "Long-Term Debt", understated the amount of 2007 anticipated principalpayments under long-term debt agreements by $186 million. In addition,the Company identified and corrected $186 million of certain misclassificationspreviously reported in the Quarterly Report on Form 10-Q within the Statementsof Consolidated Financial Position (Unaudited) for the first quarterof 2006. Form 10-Q inaccurately classified $186 million between the currentand the long-term portions of debt thereby understating current debt andoverstating the long-term portion.
*Credit Facility.*On the Effective Date, United entered into theCredit Facility provided by a syndicate of banks and other financial institutionsled by J.P. Morgan Securities Inc. and Citicorp Global Markets Inc., asjoint lead arrangers and joint book runners; JPMorgan Chase Bank, N.A.("JPMCB") and Citicorp USA, Inc. ("CITI"), as co-administrative agentsand co-collateral agents; General Electric Capital Corporation, as syndicationagent; and JPMCB as paying agent. The Credit Facility provides for a totalcommitment of up to $3.0 billion, comprised of two separate tranches: (i)Tranche A consisting of up to $200 million revolving commitment availablefor Tranche A loans and for standby letters of credit to be issued in theordinary course of business of United or one of its subsidiary guarantors,and (ii) Tranche B consisting of a term loan commitment of up to $2.45billion available at the time of closing and additional term loan commitmentsof up to $350 million available upon, among other things, United's acquiringunencumbered title to some or all of the 14 airframes and related enginesthat were subject to United's 1997-1 EETC financing. The Credit Facilitymatures on February 1, 2012.
Borrowings under the Credit Facility bear interest at a floating rate,which can be either a base rate, or at our option, a LIBOR rate, plus anapplicable margin of 2.75% in the case of the base rate loans and 3.75%in the case of the LIBOR loans. The Tranche B term loan requires regularlyscheduled semi-annual payments of principal equal to 0.5% of the originalprincipal amount of the Tranche B term loan. Interest is payable on thelast day of the applicable interest period but in no event less than quarterly.The Company has since entered into an interest rate swap whereby it fixedthe rate of interest for the term loan to 5.14% (which includes a smallcredit related charge) plus the fixed credit margin on the underlying financingfacility. For further details, see Note 11, "Financial Instruments andRisk Management". At any time prior to February 1, 2007, United may usethe proceeds from any lower-cost refinancing to redeem some or all of theterm loans at a price equal to 101% of the principal amount plus accruedand unpaid interest, if any, to the date of redemption.
The obligations under the Credit Facility are unconditionally guaranteedby UAL and certain of the direct and indirect domestic subsidiaries ofUAL (other than United) (the "Guarantors"), and are secured by a securityinterest in substantially all of the tangible and intangible assets ofthe Guarantors. The obligations under the Credit Facility are also securedby a pledge of the capital stock of United and the direct and indirectsubsidiaries of UAL and United, except that a pledge of any first-tierforeign subsidiary is limited to 65% of the stock of such subsidiary andsuch foreign subsidiaries are not required to pledge the stock of theirsubsidiaries.
The Credit Facility contains covenants that will limit the ability ofUnited and the Guarantors to, among other things, incur or guarantee additionalindebtedness, create liens, pay dividends on or repurchase UAL stock, makecertain types of investments, pay dividends or other payments from United'sdirect or indirect subsidiaries, enter into transactions with affiliates,sell assets or merge with other companies, modify corporate documents orchange lines of business. The Credit Facility also requires compliancewith several financial covenants, including (i) a minimum ratio of EBITDARto the sum of cash interest expense, cash aircraft rent (other than capitalizedleases) and scheduled debt payments, (ii) a minimum unrestricted cash balanceof $1.2 billion, to be reduced to $1.0 billion after December 31, 2006assuming United is in compliance with the ratio calculated under (i) above,and (iii) the market value of the collateral must be greater than 150%of the sum of (a) the aggregate outstanding amount of the loans plus (b)the undrawn amount of outstanding letters of credit, plus (c) the unreimbursedamount of drawings under any letters of credit, and (d) the terminationvalue of certain interest rate protection and hedging agreements with theexit lenders and their affiliates. The Credit Facility received a ratingof B+ from Standard & Poor's and B1 from Moody's Investment Services.
United used $2.65 billion of the borrowings under the Credit Facilityat the Effective Date to finance working capital needs and for other generalcorporate purposes, including repayment of the borrowings outstanding underthe DIP Financing. Subsequently, the Company repaid $161 million on therevolving credit line and accessed the remaining $350 million of the delayeddraw term loan. We expect to be in compliance with Credit Facility covenants,but there are no assurances we will be able to do so. Failure to complywith our Credit Facility covenants could result in a default under theCredit Facility unless we obtain a waiver of, or otherwise mitigate, thedefault. Additionally, the Credit Facility contains a cross-default provisionwith respect to defaults on our other credit arrangements that exceed $40million. A default could result in a termination of the Credit Facilityand a requirement to accelerate repayment of all outstanding borrowings.
As of June 30, 2006, the Company had outstanding borrowings of $2.8billion at an interest rate of 8.7%. In addition, letters of credit wereissued under the Credit Facility in an aggregate amount of $62 million.The Company is in compliance with the Credit Facility covenants.
***Push Down of UAL Securities*.**Pursuant to the Plan of Reorganization,UAL issued debt and equity instruments to certain unsecured creditors andemployees of United. The following instruments have been pushed down toUnited and are reflected as debt of United as part of fresh-start reporting:
*Obligation to Issue Employee Convertible Notes.*As discussedin Note 1, "Voluntary Reorganization Under Chapter 11", UAL reached anagreement with five of the seven eligible employee groups to modify certainterms of the employee convertible notes.
In July 2006, UAL issued 4.5% senior limited-subordination convertiblenotes to irrevocable trusts established for the benefit of certain of itsemployees, including employee under collective bargaining agreements. Theemployee convertible notes are unsecured, have a term of 15 years fromthe date of issuance and do not require any payment of principal priorto maturity. Interest is to be payable semi-annually, in arrears. Interestfor the first year may be paid in shares of UAL common stock, at the optionof UAL. These employee convertible notes may be converted into UAL commonstock, at any time, at an initial per share price of $34.84. This conversionprice will be subject to adjustment for certain dilutive items and events.These employee convertible notes are junior in right of payment upon liquidationto UAL's obligations under the 5% senior convertible notes and 6% seniornotes discussed below in "Newly-issued Debt." These employee convertiblenotes are callable in cash or UAL common stock, under certain conditions,beginning approximately five years after the issuance date, except thatUAL may only elect to pay in UAL common stock if the common stock has tradedat not less than 125% of the conversion price for the 60 consecutive tradingdays immediately prior to the redemption date. In addition, on each ofJune 30, 2011 and June 30, 2016, UAL may be required by a holder to repurchasethese notes, which UAL may elect to do through the payment of cash or UALcommon stock, or a combination of both.
*Newly-issued Debt.* In addition to the UAL mandatorily convertiblepreferred securities discussed in Note 10, "Mandatorily Convertible PreferredStock", UAL issued the following debt on the Effective Date:- 5% senior convertible notes were issued on the Effective Date to certainholders of the O'Hare municipal bonds. The notes are unsecured, have aterm of 15 years from the date of issuance and do not require any paymentof principal prior to maturity. Interest is payable semi-annually, in arrears.Interest for the first year may be paid in kind, at the option of UAL,in UAL common stock. These 5% senior convertible notes may be convertedinto UAL common stock, at any time, at a per share price of $46.86. Thisconversion price is subject to adjustment for certain dilutive items andevents. These notes are callable in cash or UAL common stock, under certainconditions, 5 years after the issuance date. In addition, UAL has the optionto repurchase these notes on the 5 th  and 10 th  anniversaryof the date of issuance, payable in cash or UAL common stock.
- 6% senior notes were issued to the PBGC on the Effective Date. These notesare unsecured, mature 25 years from issuance date and do not require anypayment of principal prior to maturity. Interest is payable semi-annually,in arrears. Interest may be paid with cash, in kind notes or UAL commonstock through 2011 and thereafter in cash. These notes are callable atany time at 100% of par value.
*Contingent Senior Unsecured Notes. *In addition to the newly-issueddebt as noted above, UAL is obligated to issue to the PBGC 8% senior unsecurednotes with an aggregate $500 million principal amount in up to eight equaltranches of $62.5 million (with no more than two tranches issued on a singledate) upon the occurrence of certain financial trigger events.  Anyrequired tranche will be issued no later than 45 days following the endof any fiscal year in which there is an issuance trigger date***,***startingwith the fiscal year 2009 and ending with the fiscal year 2017. An issuancetrigger date occurs when, among other things, UAL's EBITDAR exceeds $3.5billion over the prior twelve months ending June 30 or December 31 of anyapplicable fiscal year, beginning with the fiscal year 2009. However, ifthe issuance of a tranche would cause a default under any other securitiesthen existing, UAL may satisfy its obligations with respect to such trancheby issuing UAL common stock having a market value equal to $62.5 million.Each issued tranche will mature 15 years from its respective issuance date;with interest payable in cash in semi-annual installments; and will becallable at any time at 100% of par value, plus accrued and unpaid interest**.**
**(10) Mandatorily Convertible Preferred Stock**
The following instrument has been pushed down to United and is reflectedon United's books as part of fresh-start reporting:
The 2% convertible UAL preferred stock was issued by UAL to the PBGCon the Effective Date. The shares were issued at a liquidation value of$100 per share, convertible at any time following the second anniversaryof the issuance date into new UAL common stock at a conversion price of$46.86 per common share; with dividends payable by increasing the aggregateliquidation value of the preferred stock on each June 30 and December 31;the UAL preferred stock will rank pari passu with all current and futureUAL or United preferred stock; and will be redeemable at any time at thethen-current liquidation value (plus accrued and unpaid dividends)at theoption of the issuer. The UAL preferred stock is mandatorily convertible15 years from the date of issuance. This preferred stock is also redeemableupon a fundamental change or a change in ownership as defined for transactionsin which UAL is not the surviving entity. At June 30, 2006, $356 millionwas outstanding, including $4 million in dividends that were paid in-kindin June 2006.
**(11) Financial Instruments and Risk Management**
In the three months ended June 30, 2006, the Successor Company enteredinto cash flow hedges and economic hedges. Instruments designated as cashflow hedges receive favorable accounting treatment under SFAS 133, as longas the hedge is effective and the underlying transaction is probable. Ifboth factors are present, the effective portion of the changes in fairvalue of these contracts is recorded in accumulated other comprehensiveincome (loss) until earnings are affected by the cash flows being hedged.
Instruments classified as economic hedges do not qualify for hedge accountingunder SFAS 133. Under this classification all changes in the fair valueof these contracts are recorded in operating income with the offset toeither current assets or liabilities each reporting period.
*Aircraft Fuel Hedges*. In the one month ended January 31, 2006,the Predecessor Company had no fuel hedges in place. In the five monthsended June 30, 2006, the Successor Company entered into and exercised aircraftfuel hedges for its mainline and regional affiliate operations that wereclassified as economic hedges. The Successor Company used call optionsto hedge a portion of its price risk related to projected fuel requirements.Each call option was entered into and exercised within the same month.
In the five months ended June 30, 2006, the Successor Company recognizedincome of $7 million that was classified as a reduction of mainline fuelexpense in the Statements of Consolidated Operations (Unaudited).In the six months ended June 30, 2005, the Predecessor Company recognizedincome of $40 million (which included income of $5 million relating tothe options' time-value and hedge ineffectiveness being immaterial) innon-operating income.
The Successor Company recognized a loss of $2 million for the threemonths ended June 30, 2006 that was classified as mainline fuel expensein the Statements of Consolidated Operations (Unaudited). In thethree months ended June 30, 2005, the Predecessor Company recognized aloss of $1 million (which included income of $1.2 million relating to theoptions' time-value and a loss of $2.5 million as a result of ineffectivehedges) in non-operating income mainly due to non-designated fuel hedges.
At June 30, 2006, the Company had purchased derivatives which were notdesignated as fuel hedges. These derivatives covered 57% of the Company'sfuel requirements for July and 23% of its fuel requirements for August.As of July 24, 2006, the Company had 28 percent of its mainline fuel consumptionhedged for the third quarter of 2006 at an average price of $69.84 perbarrel, excluding taxes, using crude oil swaps.
*Interest Rate Swap.* In March 2006, the Successor Company enteredinto an interest rate swap whereby it fixed the interest rate on $2.45billion of floating-rate debt.  As a result, the Company will payon an ongoing basis the LIBOR swap rate of 5.14% (which includes a smallcredit-related charge) plus the fixed credit margin on the underlying financingfacility.  The swap will amortize according to a pre-established schedulestarting in November 2007 through its expected maturity date of February2012.
The Company will use interest rate swap agreements to effectively limitexposure to interest rate movements within the parameters of the Company'sinterest rate hedging policy. These instruments are designated as cashflow hedges under SFAS 133. Per SFAS 133, as long as the hedge is effectiveand the underlying transaction is probable, the effective portion of thechanges in fair value of these contracts is recorded in accumulated othercomprehensive income (loss) until earnings are affected by the cash flowsbeing hedged. Assuming prevailing interest rates, the fair value of ourinterest rate derivative agreements is the estimated amount that we wouldpay or receive to terminate the agreements. The Company recognized $34million and $42 million in accumulated other comprehensive income for thethree and five months ended June 30, 2006, respectively.
**(12) Commitments and Contingencies**
***Legal and Environmental Contingencies.***United has certaincontingencies resulting from litigation and claims (including environmentalissues) incident to the ordinary course of business. Management believes,after considering a number of factors, including (but not limited to) theviews of legal counsel, the nature of contingencies to which we are subjectand prior experience, that the ultimate disposition of these contingencieswill not materially affect the Company's consolidated financial positionor results of operations.
We record liabilities for legal and environmental claims when a lossis probable and reasonably estimatable. These amounts are recorded basedon our assessments of the likelihood of their eventual disposition. Theamounts of these liabilities could increase or decrease in the near term,based on revisions to estimates relating to the various claims.
The Company anticipates that if ultimately found liable, its damagesfrom claims arising from the events of September 11, 2001 could be significant;however, we believe that, under the Air Transportation Safety and SystemStabilization Act of 2001, our liability will be limited to our insurancecoverage.
We have not incurred any material environmental obligations relatingto the events of September 11, 2001.
***Commitments.***At June 30, 2006, future commitments forthe purchase of property and equipment, principally aircraft, approximated$2.5 billion, after deducting advance payments.  Our current commitmentswould require the payment of an estimated $0.1 billion in 2006, $0.1 billionfor the combined years of 2007 and 2008, $0.1 billion for the combinedyears of 2009 and 2010 and $2.2 billion thereafter primarily for the purchaseof A319 and A320 aircraft.  However, the Company has the right tocancel these orders. Such action could cause the forfeiture of $91 millionof advance payments if United does not take future delivery of these aircraft.
**(13) Lease Obligations**
United leases aircraft, airport passenger terminal space, aircraft hangarsand related maintenance facilities, cargo terminals, other airport facilities,other commercial real estate, office and computer equipment and vehicles.As allowed under Section 365 of the Bankruptcy Code, during our reorganizationwe assumed, assumed and assigned, or rejected certain executory contractsand unexpired leases, including leases of real property, aircraft and aircraftengines, subject to the approval of the Bankruptcy Court and certain otherconditions. During bankruptcy, the Company also entered into numerous aircraftfinancing term sheets with financiers, some of which were implemented priorto the Effective Date, and others which were implemented on the EffectiveDate. These term sheets required the Company to apply lease modificationtesting as of fresh-start, which resulted in the reclassification of somefinancings as capital leases or operating leases for the Successor Company,which were different from classifications for the Predecessor Company.
In connection with fresh-start reporting, aircraft operating leaseswere adjusted to fair value and a net deferred asset of $263 million wasestablished in the Statements of Consolidated Financial Position (Unaudited)on the Effective Date, representing the net present value of the differencesbetween stated lease rates and the fair market rates.  These deferredamounts are amortized on a straight-line basis as an increase to aircraftrent expense over the applicable remaining lease periods, generally oneto 18 years.
At June 30, 2006, scheduled future minimum lease payments under capitalleases (substantially all of which are for aircraft) and operating leaseshaving initial or remaining noncancelable lease terms of more than oneyear were as follows: (In millions)Operating LeasesCapital AircraftNon-aircraftLeasesPayable during -   2006$    394 $    239 $      99  2007814 459 247  2008798 445 311  2009771 434 173  2010742 420 428  After 2010 3,076  3,413     863 Total minimum lease payments$ 6,595 $ 5,410 $ 2,121  Imputed interest (at rates of1.3% to 10.0%)    (614) Present value of minimum leasepayments    1,507  Current portion    (136) Long-term obligations under capitalleases    $1,371 
In May 2006, United entered into an agreement with DEN to vacate certainleased gates over a twelve-month transition period. In exchange, DEN agreedto build a regional jet facility and reduce United's annual rental expenseby $5 million in 2006 and no more than $10 million per year thereafter,through year 2024.
At June 30, 2006, we leased 225 mainline aircraft, 50 of which wereunder capital leases. These leases have initial terms of 5 to 26 years,and expiration dates ranging from 2007 through 2024. Under the terms ofmost leases, we have the right to purchase the aircraft at the end of thelease term, in some cases at fair market value and in others at fair marketvalue or a percentage of cost. Additionally, the above amounts includelease payments related to our United Express contracts for 28 aircraftunder capital leases and 261 aircraft under operating leases as describedin Note 2(h), "Summary of Significant Accounting Policies - United Express."
Certain of our aircraft lease transactions contain provisions such asput options giving the lessor the right to require us to purchase the aircraftat lease termination for a certain amount resulting in residual value guarantees.Leases containing this or similar provisions are recorded as capital leaseson the balance sheet and, accordingly, any and all residual value guaranteeamounts contained in an aircraft lease are fully reflected as capital leaseobligations on the Statements of Consolidated Financial Position (Unaudited).
In connection with the financing of certain euro-denominated aircraftfinancings accounted for as capital leases, United had on deposit in certainbanks at June 30, 2006 an aggregate 393 million euros ($502 million) and$17 million in U.S. denominated deposits, and had pledged an irrevocablesecurity interest in such deposits to certain of the aircraft lessors.These deposits will be used to repay an equivalent amount of recorded capitallease obligations, and are classified as aircraft lease deposits in theaccompanying Statements of Consolidated Financial Position (Unaudited).
**(14) Statement of Consolidated Cash Flows - Supplemental Disclosures**
Supplemental disclosures of cash flow information and non-cash investingand financing activities were as follows:  Successor Predecessor (In millions)Period from February 1to June 30,Period from January 1 to 31,Six Months Ended June 30, 200620062005Cash paid during the period for:   Interest (net of amounts capitalized)$  311  $  35  $  192  Income taxes -   -   -         Non-cash transactions:      Long-term debt incurred for additionsto other assets$  137  $  -  $  21  Decrease in pension intangibleassets -  (4) 657  Net unrealized gain on derivatives42  24  17  
In addition to the above non-cash transactions, see Note 1, "VoluntaryReorganization Under Chapter 11", Note 9, "Debt Obligations" and Note 10,"Mandatorily Convertible Preferred Stock" for further post-emergence transactions.
**(15) Advanced Purchase of Miles**
In October 2005, we entered into an amendment to our agreement withChase Bank USA N.A. ("Chase") regarding the Mileage Plus Visa card underwhich Chase pays for frequent flyer miles earned by Mileage Plus membersfor making purchases using the Mileage Plus Visa card. The existing agreementincludes an annual guaranteed payment for the purchase of frequent flyermiles.
In addition to extending the agreement until 2012 and making certainother adjustments in the relationship, the agreement provided for an advancepurchase of miles of $200 million. This advanced purchase of miles willreduce the annual guaranteed payment for 2006 through 2009 by $75 millionper year. In addition, the Company provided a junior lien upon, and securityinterest in, all collateral pledged or in which security interest is granted,as security in connection with the Credit Facility. The security interestis junior to other Credit Facility debt, and will apply to no more than$850 million in total advance purchases at any time. As of June 30, 2006,the total advance purchase of miles was $710 million.
**(16) Related Party Transactions**
Air Wis Services, Inc., a wholly owned subsidiary of UAL, owns Air Wisconsin,Inc. At January 31, 2006 and December 31, 2005, United had outstandingloans to Air Wisconsin, Inc. in the amount of $115 million and $114 million,respectively. As a result of the bankruptcy filing, these loans were classifiedas liabilities subject to compromise and were subsequently eliminated uponexit. Air Wisconsin, Inc. and Air Wis Services, Inc. have no relationshipto Air Wisconsin Airlines Corporation, which is an independent regionalcarrier.
As of result of the bankruptcy filing in the predecessor period, wereclassified all intercompany accounts receivable to equity and all intercompanyaccounts payable to liabilities subject to compromise. At exit, certainintercompany balances were eliminated and the remainder was reclassifiedto their pre-bankruptcy categories.
**(17) Special Items**
*Aircraft Impairment.*During the second quarter of 2005, the Companyrecognized a charge of $5 million for aircraft impairments related to theplanned accelerated retirement of certain aircraft operated by Air WisconsinAirlines Corporation.
**(18) Severance Accrual**
The Company has implemented several cost saving initiatives that haveresulted in a reduction in workforce such as the outsourcing of administrativefunctions, the closing of certain call centers and its most recent announcementon the elimination of approximately 1,000 salaried and management positionsthrough attrition and layoffs by the end of 2006. The Company's severancepolicy provides the affected employees salary continuation as well as certaininsurance benefits for a specified period of time. Accordingly, the Companyestimated its severance obligation in accordance with Statement of FinancialAccounting Standards No. 112 (As Amended) - "Employers' Accounting forPostemployment Benefits" to be $26 million as of June 30, 2006.
The following is a reconciliation of activity related to the severanceaccrual for the six months ended June 30, 2006:(In millions)   Balance at December 31, 2005$  7  Accruals29  Payments  (10) Balance at June 30, 2006$ 26 
**Item 2.  Management's Discussion and Analysis of FinancialCondition and Results of Operations**
**Overview**
United Air Lines, Inc. (together with its consolidated subsidiaries,"we," "our," "us," "United" or the "Company") is a wholly owned subsidiaryof UAL Corporation ("UAL"). United's operations consist primarily of thetransportation of persons, property, and mail throughout the U.S. and abroad. United provides these services through full-sized jet aircraft (which werefer to as our "mainline" operations), as well as smaller aircraft inits regional operations conducted under contract by "United Express®"carriers.
United is one of the largest passenger airlines in the world with morethan 3,700 flights a day to more than 210 destinations through its mainlineand United Express services. United offers 1,600 average daily mainline(including Ted(SM)) departures to morethan 120 destinations in 28 countries and two U.S. territories.  Unitedprovides regional service connecting primarily with United's domestic hubsthrough marketing relationships with United Express carriers, which providemore than 2,000 average daily departures to more than 150 destinations. United serves virtually every major market around the world, either directlyor through its participation in the Star Alliance®, theworld's largest airline network.
On December 9, 2002 (the "Petition Date"), UAL, United and 26 directand indirect wholly-owned subsidiaries (collectively, the "Debtors") filedvoluntary petitions to reorganize their businesses under Chapter 11 ofthe United States Bankruptcy Code in the United States Bankruptcy Courtfor the Northern District of Illinois, Eastern Division (the "BankruptcyCourt"). On January 20, 2006, the Bankruptcy Court confirmed the Debtors'Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of theUnited States Bankruptcy Code (the "Plan of Reorganization"). The Planof Reorganization became effective and the Debtors emerged from bankruptcyprotection on February 1, 2006 (the "Effective Date").
In connection with emergence from Chapter 11 bankruptcy protection,the Company adopted fresh-start reporting in accordance with American Instituteof Certified Public Accountants' Statement of Position 90-7 "*FinancialReporting by Entities in Reorganization under the Bankruptcy Code*"("SOP 90-7"). Thus, the consolidated financial statements prior to February1, 2006 reflect results based upon the historical cost basis of the Companywhile the post-emergence consolidated financial statements reflect thenew basis of accounting incorporating the fair value adjustments made inrecording the effects of fresh-start reporting. Therefore, the post-emergenceperiods are not comparable to the pre-emergence periods. However, for year-over-yeardiscussions on the results of operations, the Company has compared theSuccessor Company's results for the three months ending June 30, 2006 tothe Predecessor Company's results for the three months ending June 30,2005 as well as combined the results for the one month ended January 31,2006 and five months ended June 30, 2006. The combined periods have beencompared to the Predecessor Company's six months ended June 30, 2005. TheCompany believes that these year-over-year discussions on the results ofoperations provide management and investors a better perspective of theCompany's core business and ongoing operational financial performance andtrends for comparative purposes. References to "Successor Company" referto United on or after February 1, 2006, after giving the effect to theapplication of fresh-start reporting. References to "Predecessor Company"refer to United prior to February 1, 2006.
The Company believes its restructuring has made United competitive withnetwork airline peers. In every year of the restructuring, beginning in2003, the Company has improved its financial performance. The Company'sfinancial results clearly demonstrate this progress - despite continuedincreases in fuel price. While the cost of mainline fuel has increasedmore than $2.0 billion since 2002, the Company has reduced operating lossesby approximately $2.6 billion through year-end 2005 and current year resultsreflect a continuation of this positive trend.
During the second quarter of 2006, the Company announced a program toreduce projected 2007 expenses by $400 million. The Company has identifiedsome specific programs to realize a portion of these savings, while itcontinues to identify and evaluate other savings opportunities. For example,the Company expects to reduce purchased services costs by approximately$200 million through savings in such areas as telecommunications, airportservices, catering, maintenance materials, and aircraft ground handling.The Company also expects to reduce advertising and marketing costs by asmuch as $60 million. The implementation of a new flight planning system,and block time opportunities, are expected to generate approximately $40million in savings.
Also during the second quarter of 2006, and as part of the $400 millioncost reduction program, the Company announced its intention to reduce generaland administrative expense by $100 million. As part of this initiative,the Company also announced its plans to reduce its workforce by approximately1,000 salaried and management positions by the end of 2006.
For the second quarter of 2006, the Company reported operating earningsof $263 million, an improvement of $239 million, as compared to the sameperiod in 2005. In addition, for the six month period ending June 30, 2006,the Company reported operating earnings of $95 million, an increase of$310 million, as compared to the same period in 2005.
Consolidated revenues for the second quarter were $5.1 billion, an increaseof $737 million, or 17%, between the three month periods ending June 30,2006 and 2005. Strong revenue improvement was experienced by both mainlineand regional affiliate passenger operations between quarters. The Companyalso reported significant improvements in year-to-date revenue performance,generating $9.6 billion in operating revenues for the six months endingJune 30, 2006, an increase of $1.3 billion as compared to the same periodof 2005.
During the second quarter of 2006, the General Services Administration("GSA") awarded its annual U.S. government employee travel contracts forits upcoming fiscal year beginning October 1, 2006. The GSA selected Unitedfor certain contracts and estimated the associated revenue at approximately$540 million, or 27.4% of the total estimated GSA employee travel award.This award level represents a 6.7 point increase over the prior fiscalyear.
Consolidated operating expenses were $4.8 billion, an increase of $498million, or 11%, between the three month periods ending June 30, 2006 and2005. For the first six months of 2006, operating expenses amounted to$9.5 billion, an increase of $971 million, or 11%, compared to the sameperiod of 2005. Fuel expense (mainline and regional affiliates) accountedfor $344 million and $658 million of total operating expense growth betweenthe three and six month periods ending June 30, 2006 and 2005, respectively.Jet fuel expense growth was primarily due to fuel price increases betweenperiods.
United announced that, effective September 2006, the Company will begincharging travel agents within North America a $3.50 per passenger segmentfee if low cost booking channels are not used.  Over the last fewmonths, the Company has renegotiated agreements with the four major globaldistributions system ("GDS") providers to allow access to low cost bookingoptions for travel agencies.  The Company expects that most travelagencies will elect to use these low cost options rather than pay the unitcharge, and if they do, this would result in reduced GDS fees.
Non-operating expenses increased by $54 million, from $101 million inthe second quarter of 2005 to $155 million in the second quarter of 2006.In addition, non-operating expenses for the six month period ended June30, 2006 compared to the same period in 2005 increased by $134 millionto $290 million. The increase in non-operating expense resulted primarilyfrom higher interest expense, which was partially offset by higher interestincome. Interest expense accounted for $108 million and $169 million ofnon-operating expense increases over the quarterly and six month periods,respectively. Interest income increased by $60 million and $90 millionin the quarter and six month periods ending June 30, 2006, respectively,as compared to the same periods of 2005.
The Company completed its bankruptcy reorganization during the firstquarter of 2006. Non-operating reorganization gains (charges) for the secondquarter of 2005 and for the six months ended June 30, 2006 and 2005 were$(1.4) billion, $22.7 billion and $(2.1) billion, respectively.
Net income for the second quarter of 2006 was $111 million comparedwith a loss of $1.5 billion in the comparable 2005 quarter. For the sixmonths ending June 30, 2006, the Company reported net income of $22.5 billionversus a net loss of $2.5 billion in the comparable 2005 period.
The Company ended the second quarter of 2006 with total cash, includingrestricted cash and short-term investments, of $5.0 billion. Operatingcash flows during the combined six month period of 2006 were $1.2 billion,and total available cash was significantly increased by the replacementof the DIP Financing with the Credit Facility on February 2, 2006.
The Company believes that it is important to evaluate its cash flowby understanding non-cash charges which reduced reported earnings for the2006 second quarter and year-to-date results. The Company recorded non-cashstock compensation expense of $40 million for the second quarter of 2006and $109 million for the six months ended June 30, 2006, as well as non-cashexit-related and fresh-start reporting charges of $42 million and $72 millionfor the quarter and six month ended June 30, 2006, respectively.
**Commitments and Contingencies**
***Capital Commitments.***At June 30, 2006, future commitmentsfor the purchase of property and equipment, principally aircraft, approximated$2.5 billion, after deducting advance payments.  Our current commitmentsare primarily for the purchase of A319 and A320 aircraft.  The Companyhas the right to cancel these orders. Such action could cause the forfeitureof $91 million of advance payments if United does not take future deliveryof these aircraft.  For further details, see Note 12, "Commitmentsand Contingencies" in the Notes to Consolidated Financial Statements(Unaudited).
***Contingencies.***During the course of our Chapter 11 proceedings,the Company successfully reached settlements with most of its creditorsand resolved most pending claims against the Debtors. However, the followingmaterial matters remain to be resolved in the Bankruptcy Court. For furtherdetails, see Note 1, "Voluntary Reorganization Under Chapter 11 - BankruptcyConsiderations" in the Notes to Consolidated Financial Statements (Unaudited).
*Municipal Bond Obligations*. The Company is a party tonumerous long-term agreements to lease certain airport and maintenancefacilities that are financed through tax-exempt municipal bonds that areissued by various local municipalities to build or improve airport andmaintenance facilities. As a result of the Company's bankruptcy filing,we were not permitted to make payments on unsecured pre-petition debt.The Company had been advised that these municipal bonds may be unsecured(or in certain instances, partially secured) pre-petition debt. Therefore,through the bankruptcy process, the Company had either settled or rejectedcertain pre-petition debt associated with the municipal bonds. The ultimatedisposition of a portion of the outstanding municipal bond obligationsremains subject to the uncertain outcome of pending litigation. Even ifa portion of the obligations are determined to be financings and not trueleases, there is likely to remain an issue regarding the extent to whichthose financings would be considered secured by an interest in the valueof the underlying leasehold, if any.
*Pension Terminations*. In June 2006, the United StatesDistrict Court for the Northern District of Illinois ("District Court")entered an order approving the termination of the United Airlines PilotDefined Benefit Pension Plan ("Pilot Plan"). Air Line Pilots Association("ALPA") and United Retired Pilots Benefit Protection Association ("URPBPA")filed an appeal with the United States Court of Appeals for the SeventhCircuit ("Court of Appeals"). In July 2006, the Court of Appeals grantedUnited's motion to consolidate this appeal with URPBPA's confirmation orderappeal. Briefing on both appeals will be completed in August 2006 and oralargument is scheduled to occur on September 26, 2006 with respect to thetermination appeal (though oral arguments have not yet been scheduled withrespect to the confirmation appeal). If the termination order was ultimatelyreversed on appeal, it could have a materially adverse effect on the Company'sfinancial performance, should such determination result in the reversalof the termination of one or more defined benefit pension plans.
There is also a dispute with respect to the continuing obligation ofUnited to pay non-qualified pension benefits to retired pilots pendingsettlement of the involuntary termination proceeding. The Bankruptcy Courthad previously required the Company to continue paying these benefits untilentry of the Bankruptcy Court's order terminating the Pilot Plan. Thiswas appealed by the Company and the funds necessary to pay non-qualifiedbenefits for the month of October were placed in a segregated account.During the first quarter of 2006, the District Court dismissed the Company'sappeal. The Company filed a notice of appeal of the District Court's rulingto the Court of Appeals. In accordance with the Court of Appeal's rules,the Court of Appeals scheduled briefing to conclude by August 2006. TheCourt of Appeals has not yet scheduled oral argument.
In addition, in March 2006, the Bankruptcy Court ruled that the Companywas obligated to make payment of all non-qualified pension benefits throughJanuary 31, 2006. The Company has appealed this ruling to the DistrictCourt. Briefing on this matter was completed in July 2006 and a statusconference is scheduled for September 2006.
*Objection to the Plan of Reorganization Confirmation*.URPBPA filed a notice of appeal to the Court of Appeals challenging theDistrict Court's approval of the Bankruptcy Court's Plan of Reorganizationconfirmation order. In February of 2006, United filed a motion to dismissthe appeal based on the substantial consummation of the Plan of Reorganization.In June 2006, the District Court dismissed URPBPA's appeal. Subsequently,URPBPA filed a notice of appeal of the decision to the Court of Appeals.In July 2006, the Court of Appeals granted United's motion to consolidateURPBPA's appeal with URPBPA and ALPA's Pilot Plan termination appeal. Briefingon both appeals will be completed in August 2006. The Court of Appealshas set oral argument to occur on September 26, 2006 with respect to thetermination appeal (though oral arguments have not yet been scheduled withrespect to the confirmation****appeal).****If the confirmationorder was ultimately reversed on appeal, it could have a materially adverseeffect on the Company's financial performance.
*Legal and Environmental.* United has certain contingenciesresulting from litigation and claims (including environmental issues) incidentto the ordinary course of business. Management believes, after consideringa number of factors, including (but not limited to) the views of legalcounsel, the nature of contingencies to which we are subject and priorexperience, that the ultimate disposition of these contingencies will notmaterially affect the Company's consolidated financial position or resultsof operations.
We record liabilities for legal and environmental claims against usin accordance with GAAP. These amounts are recorded based on our assessmentsof the likelihood of their eventual disposition. The amounts of these liabilitiescould increase or decrease in the near term, based on revisions to estimatesrelating to the various claims.
The Company anticipates that if ultimately found liable, its damagesfrom claims arising from the events of September 11, 2001 could be significant;however, we believe that, under the Air Transportation Safety and SystemStabilization Act of 2001, our liability will be limited to our insurancecoverage.
We have not incurred any material environmental obligations relatingto the events of September 11, 2001.
**Results of Operations**
The air travel business is subject to seasonal fluctuations and historically,results of operations are better in the second and third quarters. Ouroperations can be impacted by adverse weather and our first- and fourth-quarterresults normally reflect reduced travel demand.
On the Effective Date, United implemented fresh-start reporting in accordancewith SOP 90-7. As a result of the application of fresh-start reporting,the financial statements prior to February 1, 2006 are not comparable withthe financial statements for the period February 1, 2006 to June 30, 2006.However, for management's discussion and analysis of the results of operations,the three months ended June 30, 2006 have been compared to the three monthsended June 30, 2005, and the combined six month period ended June 30, 2006was compared to the six months ended June 30, 2005. The Company believesthat the reported non-GAAP financial results provide management and investorsa better perspective of the Company's ongoing financial and operationalperformance and trends by combining the periods for this purpose. Referencesto "Successor Company" refer to United on or after February 1, 2006, aftergiving the effect to the application of fresh-start reporting. Referencesto "Predecessor Company" refer to United prior to February 1, 2006. Fordetailed information concerning the effects of the adoption of fresh-startreporting on the balance sheet of the Successor Company, see Note 1, "VoluntaryReorganization Under Chapter 11 - Fresh-Start Reporting" in the Notesto Consolidated Financial Statements (Unaudited).
**Summary of Results**
*Second Quarter 2006 Compared with Second Quarter 2005*
For the three month periods ended June 30, 2006 and 2005, the Companyreported earnings from operations of $263 million and $24 million, respectively,and net income (loss) of $111 million and $(1.5) billion for the same respectiveperiods. For the three months ended June 30, 2005, the Predecessor Companyrecognized net reorganization expense of $1.4 billion recorded in connectionwith our bankruptcy proceedings as well as $5 million in special items.For further details, see Note 1, "Voluntary Reorganization Under Chapter11 - Financial Statement Presentation"****and Note 17, "Special Items"in the Notes to Consolidated Financial Statements (Unaudited).
The $239 million improvement in the Company's operating results forthe three month period ending June 30, 2006, as compared to the same periodin 2005, is primarily a result of increased adjusted passenger revenueper revenue passenger mile ("Yield") and traffic, partially offset by higherfuel costs.
Operating Revenues. Compared to the same quarter last year, totaloperating revenue increased $737 million, or 17%, to $5.1 billion.(in millions)Three Months Ended June 30,Increase/(Decrease)% 2006 2005 ChangeOperating revenues:        Passenger - United Airlines$ 3,806  $ 3,301  $ 505 15.3 Passenger - Regional Affiliates761  632  129 20.4 Cargo194  180  14 7.8 Other operating revenues350 261 89 34.1  $ 5,111 $ 4,374 $ 737 16.8 
Strong demand, industry capacity restraint and yield improvements allcontributed to a $634 million increase in consolidated passenger revenue.Cargo revenue increased $14 million or 8% year-over-year due primarilyto improved yield. Other revenue increased $89 million compared to thesame quarter last year, primarily due to an increase in United AviationFuels Corporation ("UAFC") third-party fuel trading revenue.
Mainline operating revenue per available seat mile ("RASM") increased12% during the quarter. Mainline traffic increased 5% on a 3% increasein capacity, resulting in a 1.5 point increase in load factor to 84.9%.The higher load factor along with a 10% increase in yield produced a 12%year-over-year increase in mainline passenger revenue per available seatmile ("PRASM"). Regional affiliate PRASM was 15% higher than last yeardriven by a 9% increase in yield and a 4.3 point increase in load factoras compared to the second quarter of 2005.
The table below sets forth selected operating data by reportable segmentand regional affiliates for United consolidated operations:  (a)
North AmericaPacificAtlanticLatinMainline(a)
Regional AffiliatesConsolidatedThree Months Ended June 30, 2006:               ASM (in millions)22,051 8,025 4,7971,318 36,191 3,888 40,079 RPM (in millions)18,699 6,754 4,178 1,112 30,743 3,148 33,891 Passenger revenues (in millions)$ 2,445 $ 728 $ 510 $ 123 $ 3,806 $ 761 $ 4,567 PRASM (cents)11.09 9.07 10.63 9.30 10.51 19.57 11.39 Yield (cents) (b)13.02 10.75 12.18 10.82 12.34 24.17 13.44 Load factor (percent)84.8 84.2 87.1 84.4 84.9 81.0 84.6         Three Months Ended June 30, 2005:               ASM (in millions)21,001 7,955 4,882 1,294 35,132 3,712 38,844 RPM (in millions)17,600 6,487 4,218 996 29,301 2,846 32,147 Passenger revenues (in millions)$ 2,042 $ 671 $ 482 $ 106 $ 3,301 $ 632 $ 3,933 PRASM (cents)9.72 8.44 9.88 8.17 9.40 17.02 10.13 Yield (cents) (b)11.55 10.31 11.32 10.38 11.22 22.21 12.19 Load factor (percent)83.8 81.5 86.4 77.0 83.4 76.7 82.8         (a)    The Company aggregatesRegional Affiliates results within the North America segment for segmentreporting purposes in accordance with Statement of Financial AccountingStandards No. 131, "*Disclosures about Segments of an Enterprise andRelated Information*"("SFAS 131") in Note 7 -"Segment Information" of the Notes to Consolidated Financial Statements(Unaudited).
(b)    Segment yields exclude charter revenueand revenue passenger miles.All of our entities posted positive results due to strong customer demandand an improved pricing environment. Strong domestic demand and significantcapacity reductions in the domestic market led to a 14% increase in NorthAmerica PRASM. North America posted a 20% increase in revenue on 5% highercapacity due to 13% higher yield and 1.0 point higher load factor. Pacificrevenue was up 8% on 1% higher capacity due to 4% higher yield and a 2.7point increase in load factor. Atlantic revenue was up 6% on 2% lower capacitydue to 8% higher yield and 0.7 point higher load factor. Latin Americarevenue was up 16% on 2% higher capacity due to 4% higher yield and a 7.4point increase in load factor.
On a consolidated basis, PRASM increased 12% year-over-year driven bya 10% increase in yield and 1.8 point higher load factor.
Operating Expenses. The Company reported 2006 second quartertotal operating expenses of $4.8 billion, an increase of $498 million,or 11%, as compared to the same period in 2005.(in millions)Three Months Ended June 30,Increase/(Decrease)% 2006 2005 ChangeOperating expenses:        Aircraft fuel $ 1,250  $    955  $ 295  30.9  Salaries and related costs1,070  1,050  20  1.9  Regional affiliates715  685 30  4.4  Purchased services447  382  65  17.0  Aircraft maintenance materialsand outside repairs257  227  30  13.2  Landing fees and other rent226  225  1  0.4  Depreciation and amortization218  201  17  8.5  Cost of sales188  141  47  33.3  Aircraft rent110  110  -  -  Commissions82  76  6  7.9  Special operating items-  5  (5) -  Other operating expenses  285   293 (8) (2.7) $ 4,848 $ 4,350 $ 498 11.4  
In spite of significant accomplishments in restructuring our operatingexpenses, including significant contributions from employees and creditorsthrough the bankruptcy process, higher fuel costs have had a significantadverse affect on operating expenses. For the second quarter, mainlinefuel expense increased 31% from $955 million in 2005 to $1.3 billion in2006. Mainline fuel price increased 27% from $1.71 per gallon to $2.16per gallon, while fuel consumption increased 4% year-over-year due to increasedcapacity. The Company also recognized a fuel hedge loss of $2 million inthe second quarter of 2006.
Salaries and related costs increased by $20 million in the second quarterof 2006, as compared to the same quarter a year ago. The Company recorded$40 million of expense for stock-based compensation resulting from theadoption SFAS 123R effective January 1, 2006. The Company recognized nosuch stock-based compensation expense in second quarter 2005. Stock-basedcompensation expense will continue to impact the Company's salaries andrelated costs during the remainder of 2006, with $27 million expected tobe recorded in the third quarter, $20 million in the fourth quarter, and$156 million for the full year of 2006.
Also, during the second quarter of 2006, and as part of the $400 millioncost reduction program, the Company announced its intention to reduce generaland administrative expense by $100 million. As part of this initiative,the Company announced its intention to reduce its workforce by approximately1,000 salaried and management positions by the end of 2006. The Companyalso announced the closing of a satellite Mileage Plus domestic award travelcall center and other domestic call center facilities. As a result, theCompany recorded severance-related charges of approximately $22 millionin the second quarter of 2006 in accordance with Statement of FinancialAccounting Standards No. 112 (As Amended) - "Employers' Accounting forPostemployment Benefits" ("SFAS 112").
Offsetting these cost increases is the improvement of labor productivitydue to the Company's continuous improvement efforts across its operationsand the outsourcing of certain non-core functions. Productivity improved7% during the second quarter of 2006, as compared to the second quarterof 2005, since full-time equivalent employees decreased by 4% while mainlinecapacity increased by 3% between periods.
Regional affiliate expense increased $30 million, or 4%, during thesecond quarter of 2006 compared to the same period of 2005 due to a 5%increase in capacity and a 24% increase in fuel price. The cost of fuelcost rose to $219 million in the second quarter of 2006 from $170 millionin the same period of 2005. Regional affiliate operating cost per availableseat mile ("CASM") was relatively flat despite the fuel price increaseyear-over-year. The Company had completed its transition from the Air WisconsinAviation Corporation ("AWAC") capacity agreement to new regional carriers,and was receiving the benefit of the restructured lower-cost regional carriercapacity agreements during the second quarter of 2006. The improvementsfrom the Company's overall network optimization, together with the replacementof some 50-seat regional jets with 70-seat regional jets, have also contributedto an 8% reduction of regional affiliate CASM excluding fuel.
Purchased services increased $65 million, or 17%, for the second quarterof 2006, as compared to the same period in 2005, driven by a $35 millionincrease in outsourcing costs, a $10 million increase in post-bankruptcyprofessional fees which were classified as reorganization expenses by thePredecessor Company and a $6 million increase in credit card fees due tohigher revenue. The Company recently outsourced certain categories of itstechnology operations, and has further increased the outsourcing of callcenters, aircraft maintenance and certain airport functions. The offsettingbenefits of higher outsourcing costs are reflected in a 4% reduction inmanpower noted for salaries and related costs. The Company expects to continueto increase outsourcing of various functions in future periods whereverthis produces economic and operational benefits.
Aircraft maintenance materials and outside repairs increased $30 million,or 13%, year-over-year primarily due to engine-related maintenance costincreases. We began outsourcing a portion of the repair of our PW4000 engines,which resulted in higher costs for the quarter. Part of the increase isrelated to the one-time costs associated with transition of the work, whichwill end in the third quarter. We also experienced a rate increase in thepower-by-the-hour contract for our Airbus V2500 engines.
As discussed in Note 1 - "Voluntary Reorganization Under Chapter 11- Fresh Start Reporting" in the Notes to Consolidated Financial Statements(Unaudited), the Company revalued its assets and liabilities to estimatedfair values. This resulted in increased intangible asset values which drovethe $17 million increase in the Company's depreciation and amortizationexpense in the second quarter of 2006, compared with the second quarterof 2005. The magnitude of the impact to this expense was tempered by thefact that some of the newly-recognized intangible assets were determinedto have indefinite lives under the provisions of SFAS 142.
Cost of sales increased $47 million year-over-year as a result of higherUAFC third-party fuel sales of $28 million, which is consistent with therelated increase in third-party fuel revenues noted above.
In the second quarter of 2005, the Company recognized a charge of $5million for aircraft impairments related to the planned accelerated retirementof certain aircraft currently operated by AWAC.
The Company's consolidated CASM increased by 8% from 11.26 cents forthe three months ending June 30, 2005 to 12.11 cents for the same periodin 2006. Mainline CASM increased 9 percent while regional affiliates CASMremained relatively flat year-over-year. Excluding fuel and UAFC, mainlineCASM was 7.70 cents for the quarter ended June 30, 2006, an increase of2% over the previous comparable period. Excluding fuel and UAFC, consolidatedCASM essentially remained unchanged from the second quarter of 2005.
Non-operating expenses. Compared to the second quarter of 2005,non-operating expenses increased by $54 million, from $101 million in thesecond quarter of 2005 to $155 million in the second quarter of 2006.(in millions) Three Months Ended June 30,Better/(Worse)%Change 2006 2005  Other income (expense):       Interest expense$ (222) $ (114) $ (108) (94.7)Interest income65  5  60  - Interest capitalized4  -  4  - Miscellaneous, net   (2) 8 (10) - $ (155) $ (101) $ (54) (53.5)
The increase in non-operating expense was primarily driven by additionalinterest expense, partially offset by increased interest income. Interestexpense increased $108 million year-over-year. Interest cost on the CreditFacility in the second quarter was higher than interest cost for the DIPFinancing in the prior year, primarily due to a significantly higher outstandingprincipal balance between periods. The Company also recorded non-cash interestcosts in the second quarter associated with the amortization of variousmark-to-market discounts which were recorded on all debt and capital leasesin accordance with fresh-start reporting. Increases in interest incomeof $60 million were driven by a higher cash balance and improved ratesof return on short-term investments.
*First Six Months of 2006 Compared with First Six Months of 2005*
For the first six months ended June 30, 2006, the Company reported earningsfrom operations of $95 million as compared to a loss from operations of$215 million for the same period in 2005. In addition, the Company reportednet income (loss) of $22.5 billion and $(2.5) billion for the first sixmonths of 2006 and 2005, respectively. For the one month ended January31, 2006, the Predecessor Company recognized a non-cash gain of $24.4 billionon the discharge of claims and liabilities pursuant to the terms of theconfirmed Plan of Reorganization. During the first six months of 2005,the Predecessor Company recognized net reorganization expense of $2.1 billionrecorded in connection with our bankruptcy proceedings as well as $5 millionin special items. For further details, see Note 1, "Voluntary ReorganizationUnder Chapter 11 - Financial Statement Presentation and Fresh-Start Reporting"and Note 17, "Special Items" in the Notes to Consolidated FinancialStatements (Unaudited).
The $310 million year-over-year improvement in the Company's operatingresults was achieved despite increased fuel costs and was driven by continuedstrong revenue performance reflecting strong customer demand and a morefavorable pricing environment.
Operating Revenues. Compared to the same six month period lastyear, total operating revenue increased $1.3 billion, or 16%, to $9.6 billion. PredecessorSuccessor Predecessor     Period fromPeriod fromCombinedSix Months    (in millions)January 1 toJanuary  31,February 1to June  30,Periods Ended June 30,EndedJune 30, Increase/% 200620062006 (a)2005DecreaseChangeOperating revenues:          Passenger - United Airlines$ 1,074  $ 5,988  $ 7,062  $ 6,217  $ 845 13.6  Passenger - Regional Affiliates204  1,226  1,430  1,156  274 23.7  Cargo56  318  374  352  22 6.3  Other operating revenues    120     585     705 565 140 24.8  $ 1,454 $ 8,117 $ 9,571 $ 8,290 $ 1,281 15.5               (a)    The combined period includesthe results for one month ended January 31, 2006 (Predecessor Company)and five months ended June 30, 2006 (Successor Company).Similar to the second quarter of 2006, strong demand, industry capacityrestraint and yield improvements all contributed to a $1.1 billion, or15%, increase in total passenger revenue to $8.5 billion for the six monthsended June 30, 2006 on only a 2.5% increase in the Company's consolidatedcapacity. Cargo revenue increased $22 million or 6% year-over-year dueprimarily to improved yield and higher fuel surcharge revenues. Other revenueincreased $140 million compared to the same six month period last year,primarily due to an $82 million increase in UAFC third-party fuel tradingrevenue.
Mainline yield increased 10% while mainline traffic increased 4% ona 2% increase in capacity (load factor up 1.6 points), resulting in a 12%year-over-year increase in mainline PRASM. Regional affiliate PRASM was14% higher than last year driven by a 9% increase in yield and a 3.6 pointincrease in load factor. Consolidated PRASM increased 12% year-over-year,as did consolidated RASM.  
The table below presents selected operating data by reportable segmentand regional affiliates for United consolidated operations:  (c)North AmericaPacificAtlanticLatinMainline(c)Regional AffiliatesConsolidatedSix Months Ended June 30, 2006(a):               ASM (in millions)42,870 15,661 9,114 3,034 70,679 7,622 78,301 RPM (in millions)35,270 13,018 7,468 2,449 58,205 5,972 64,177 Passenger revenues (in millions)$ 4,515 $ 1,385 $ 902 $ 260 $ 7,062 $ 1,430 $ 8,492 PRASM (cents)10.53 8.84 9.89 8.56 9.99 18.77 10.85 Yield (cents) (b)12.75 10.61 12.01 10.40 12.09 23.95 13.20 Load factor (percent)82.3 83.1 81.9 80.7 82.4 78.4 82.0         Six Months Ended June 30, 2005:               ASM (in millions)41,211 15,612 9,794 2,774 69,391 7,023 76,414 RPM (in millions)33,373 12,615 7,950 2,147 56,085 5,250 61,335 Passenger revenues (in millions)$ 3,831 $ 1,275 $ 889 $ 222$ 6,217 $ 1,156 $ 7,373 PRASM (cents)9.29 8.17 9.08 8.01 8.96 16.45 9.65 Yield (cents) (b)11.43 10.06 10.91 10.01 11.03 22.01 11.97 Load factor (percent)81.0 80.8 81.2 77.4 80.8 74.8 80.3         (a)    The combined period includesthe results for one month ended January 31, 2006 (Predecessor Company)and five months ended June 30, 2006 (Successor Company).(b)    Segment yields exclude charterrevenue and revenue passenger miles.(c)    The Company aggregates RegionalAffiliates results within the North America segment for segment reportingpurposes in accordance with SFAS 131 in Note 7 - "Segment Information"of the Notes to Consolidated Financial Statements (Unaudited).Mainline and regional affiliates showed strong revenue performance in thefirst six months of 2006 due to increased demand and competitive capacityrestraint. Consolidated PRASM increased 12% year-over-year driven by a10% increase in yield and a 1.7 point higher load factor.
For the six months ended June 30, 2006, mainline passenger revenue increased14% year-over-year on 2% higher capacity due to 10% higher yield and a1.6 point increase in load factor. The North America segment posted an18% increase in passenger revenue on 4% higher capacity due to 12% higheryield and a 1.3 point increase in load factor. Pacific posted a 9% increasein passenger revenue on flat capacity due to 5% higher yield and a 2.3point increase in load factor. Atlantic posted a 1% increase in passengerrevenue on 7% lower capacity due to 10% higher yield and a 0.7 point increasein load factor. Latin posted a 17% increase in passenger revenue on 9%higher capacity due to 4% higher yield and a 3.3 point increase in loadfactor.
Regional Affiliates passenger revenue increased 24% on 9% higher capacitydue to 9% higher yield and a 3.6 point increase in load factor. Consolidatedpassenger revenue increased 15% on 2.5% higher capacity due to 10% higheryield and a 1.7 point increase in load factor.
Operating Expenses. The Company reported total operating expensesof $9.5 billion in the first six months of 2006, an increase of $971 million,or 11%, as compared to the same period in 2005. Excluding the cost of mainlineand regional affiliate fuel and UAFC third-party fuel sales, operatingexpenses for the six months ended June 30, 2006 increased 4% compared with2005. Consolidated traffic volumes were up 5% for the same period on a2.5% increase in combined mainline and regional affiliate capacity. Duringthe second quarter of 2006, the Company announced a cost reduction programthat is expected to reduce projected 2007 expenses by $400 million, asdiscussed in "Overview" above. PredecessorSuccessor Predecessor     Period fromPeriod fromCombinedSix Months    (in millions)January 1 toJanuary  31,February 1to June  30,Periods Ended June 30,EndedJune 30, Increase/% 200620062006 (a)2005(Decrease)ChangeOperating expenses:          Aircraft fuel $ 362  $ 1,955  $2,317  $ 1,760 $557  31.6  Salaries and related costs358  1,795  2,153  2,081 72  3.5  Regional affiliates228  1,183  1,411  1,330 81  6.1  Purchased services133  743  876  742 134  18.1  Aircraft maintenance materialsand outside repairs 80   436   516   446  70  15.7  Landing fees and other rent75  370 445  458 (13) (2.8) Depreciation and amortization68  366  434  413 21  5.1  Cost of sales63  314  377  277 100  36.1  Aircraft rent30  185  215  231 (16)   (6.9) Commissions24  133  157  153 4  2.6  Special operating items-  -  -  5 (5) - Other operating expenses      85   490     575 609 (34)   (5.6)  $ 1,506 $7,970 $ 9,476 $ 8,505 $ 971 11.4
               (a)    The combined period includesthe results for one month ended January 31, 2006 (Predecessor Company)and five months ended June 30, 2006 (Successor Company).Salaries and related costs increased $72 million, or 4%, year-over-yeardriven by $109 million of expense recorded for the Company's stock-basedcompensation plans in the first six months of 2006 in accordance with theadoption of SFAS 123R, effective January 1, 2006. No such stock-based compensationexpense was recognized in the same period of 2005. Stock-based compensationexpense will continue to impact the Company's salaries and related costsduring the remainder of 2006, with $27 million expected to be recordedin the third quarter, $20 million in the fourth quarter, and $156 millionfor the full year of 2006.
The Company also recorded severance-related charges of approximately$22 million in the second quarter of 2006 in accordance with SFAS 112.These cost increases were tempered by a 6% year-over-year improvement inlabor productivity resulting from the Company's continuous improvementefforts and selective outsourcing of certain non-core functions.
For the first six months ended June 30, 2006, mainline aircraft fuelexpense increased 32% from $1.8 billion in 2005 to $2.3 billion in 2006.Mainline fuel price increased from $1.59 per gallon to $2.06 per gallon,while fuel consumption increased 1.6% on a 2% increase in mainline capacity.The Company also recognized a fuel hedge gain of $7 million in aircraftfuel expense in the first six months of 2006. Although the PredecessorCompany also had fuel hedges in place in the first six months of 2005,the related gain of $40 million was recognized as non-operating incomesince these hedges were non-designated.
Regional affiliate expense increased $81 million, or 6% during the firstsix months of 2006 compared to the same period last year, due to a 9% increasein capacity and a 25% increase in fuel price. Regional affiliate CASM declined2% despite the fuel price increase year-over-year reflecting the benefitof the restructured lower-cost regional carrier capacity agreements duringthe first six months of 2006 along with network optimization and the replacementof some 50-seat regional jets with 70-seat regional jets. Excluding thecost of fuel, regional affiliate CASM declined 10% year-over-year.
Purchased services increased $134 million, or 18%, during the firstsix months of 2006, compared to the same period in 2005, driven by a $59million increase in outsourcing costs reflecting increased outsourcingof various non-core work activities, a $19 million increase in post-bankruptcyprofessional fees, which were classified as reorganization expenses bythe Predecessor Company along with a $10 million increase in credit cardfees due to higher revenue. The offsetting benefits of higher outsourcingcosts are reflected in a 4% reduction in manpower associated with the 6%labor productivity improvement noted for salaries and related costs.
For the first six months ended June 30, 2006, aircraft maintenance materialsand outside repairs increased $70 million, or 16%, year-over-year primarilydue to engine-related maintenance cost increases as noted in the discussionof second quarter aircraft maintenance costs, above. The outsourcing ofcertain maintenance work, such as the repair of PW4000 engines, resultsin a favorable impact on United manpower and related compensation costs.
As discussed in Note 1 - "Voluntary Reorganization Under Chapter 11- Fresh Start Reporting" in the Notes to Consolidated Financial Statements(Unaudited), the Company revalued its assets and liabilities to estimatedfair values. The $2.8 billion increase in intangible assets drove the increasein the Company's depreciation and amortization expense in the six monthsended June 30, 2006, compared with the six months ended June 30, 2005.The magnitude of this increase was tempered by the fact that some of thenewly-recognized intangible assets were determined to have indefinite livesunder the provisions of SFAS 142.
Cost of sales increased $100 million year-over-year primarily as a resultof higher UAFC third-party fuel sales of $79 million, consistent with therelated increase in UAFC third-party fuel revenues noted above.
Aircraft rent decreased $16 million year-over-year due to restructuredand rejected aircraft financings pursuant to Section 1110 of the BankruptcyCode, as well as due to changes in the accounting classification of financingsfor certain of the Company's operating aircraft and engines as of the adoptionof fresh-start reporting.
Other operating expense decreased $34 million in the first six monthperiod of 2006, as compared to the first six months of 2005. Upon adoptionof fresh-start reporting, the Company revalued its frequent flyer accrualto estimated fair value and changed its accounting policy to a deferredrevenue model for the Successor Company. For periods on or after February1, 2006, adjustments to the frequent flyer accrual are recorded to passengerand other operating revenues, whereas periodic adjustments under the incrementalcost basis were recognized in other operating expense. See "Critical AccountingPolicies" below for further details.
During the second quarter of 2005, the Company recognized a charge of$5 million for aircraft impairments related to the planned acceleratedretirement of certain aircraft currently operated by AWAC.
Higher fuel costs have had a significant adverse affect on the Company'soperating expenses and resulted in an 8% increase in the Company's consolidatedCASM during the first six months of 2006, compared to the same period of2005. Excluding fuel and UAFC, consolidated CASM for the six months endedJune 30, 2006 was 0.8% higher than in 2005.
Non-operating expenses. Compared to the first six months of 2005,non-operating expenses increased $134 million.(in millions)Six Months Ended June 30,Better/(Worse)% 2006 (a) 2005 ChangeOther income (expense):        Interest expense$ (395) $ (226) $ (169) (74.8) Interest income99  9  90  -  Interest capitalized7  (5) 12  -  Miscellaneous, net(1) 66 (67) -  $ (290) $ (156) $ (134) (85.9)          (a)    The combined period includesthe results for one month ended January 31, 2006 (Predecessor Company)and five months ended June 30, 2006 (Successor Company).The overall increase in non-operating expenses was driven by a $169 millionincrease in interest expense, which was partly due to the higher outstandingprincipal balance of the Credit Facility for the Successor Company, ascompared to the lower DIP Financing balance for the Predecessor Company.Interest expense in the combined six month period of 2006 was also unfavorablyimpacted by the associated amortization of various mark-to-market discountswhich were recorded on all debt and capital leases in accordance with fresh-startreporting. Interest income increased $90 million year-over-year reflectinga higher cash balance in 2006, as well as higher rates of return on certaininvestments. In the first six months of 2005, the Company recorded $40million of fuel hedge gains which were non-designated into other operatingincome, while in the combined six month period of 2006 the $7 million gainfrom economic fuel hedges was recognized in aircraft fuel expense.
**Liquidity and Capital Resources**
***Liquidity*.** United's total of cash, cash equivalents andshort-term investments, including restricted cash, was $5.0 billion atJune 30, 2006 compared to $2.7 billion at December 31, 2005.
As of June 30, 2006, the Company had $875 million in restricted cash,a decrease of $53 million as compared to December 31, 2005. Restrictedcash primarily represents cash collateral to secure workers' compensationobligations, security deposits for airport leases and reserves with institutionsthat process our credit card ticket sales. We may be required to post significantadditional cash collateral to meet such obligations in the future.
In October 2005, the Company entered into a new processing agreementfor MasterCard and Visa credit card transactions with JPMorgan Chase Bank,N.A. and Paymentech, L.P. The agreement replaces our former processingagreement with National Processing Company (which expired on January 15,2006) and provides credit card processing services for transactions onand after January 16, 2006. The processing agreement required us to initiallyestablish a restricted cash reserve to secure the potential obligationsto customers using a credit card form of payment in the event the Companydoes not provide the ticketed transportation services. The amount of thisreserve is determined by applying a reserve percentage to the Company'saggregate then-outstanding bank card air traffic liability. The reservepercentage will vary between zero and 100% based upon our credit ratingand our ability to comply with the fixed charge ratio and unrestrictedcash covenants under the Credit Facility. The processing agreement expireson December 31, 2012. At June 30, 2006 the amount of the reserve increasedto $354 million, consistent with the second quarter seasonal increase inadvance bookings. This reserve was calculated using a reserve percentageless than the maximum requirement. Any significant future increase in theactual reserve percentage required under the processing agreement couldhave a material adverse effect on the Company's liquidity.
Concurrently with entering into the processing agreement, we enteredinto an amendment to our agreement with Chase regarding the Mileage PlusVisa card under which Chase pays for frequent flyer miles earned by MileagePlus members for making purchases using the Mileage Plus Visa card. Theamended agreement includes an annual guaranteed payment for the purchaseof frequent flyer miles. In addition to extending the agreement until 2012and making certain other adjustments in the relationship, the amended agreementprovides for an advance purchase of miles of $200 million. This advancedpurchase of miles will reduce the annual guaranteed payment for 2006 through2009 by $75 million per year. In addition, the Company provided a juniorlien upon, and security interest in, all collateral pledged or in whichsecurity interest is granted, as security in connection with the CreditFacility. The security interest is junior to other Credit Facility debt,and will apply to no more than $850 million in total advance purchasesat any time.
*Operating Activities.* We generated cash from operationsof $1.2 billion in the combined six month period ended June 30, 2006. Cashgenerated from operations was $822 million for the six months ended June30, 2005. The higher operating cash flow generated in 2006 was due to improvedresults of operations and higher growth in advanced ticket sales, amongother smaller changes.
The Company made a cash contribution of $154 million related to itsdefined contribution plans during the combined six month period of 2006.Detailed information regarding the Company's defined benefit and definedcontribution plans is included in Note 5, "Retirement and PostretirementPlans" in the Notes to Consolidated Financial Statements (Unaudited).
*Investing Activities.* Cash provided by investing activitieswas $105 million in the combined six month period ended June 30, 2006,compared to cash used of $118 million in the six month period ended June30, 2005. Cash released from segregated funds in the combined six monthperiod of 2006 provided $200 million in proceeds. Cash proceeds from short-terminvestments decreased by $43 million in the combined six months ended June30, 2006, as compared to the first six months of 2005. The reduction inrestricted cash balances provided $53 million of cash proceeds in the combinedsix month period of 2006, as compared to cash used to increase restrictedcash of $91 million in the six months ended June 30, 2005.
During the six months ended June 30, 2006, the Company did not rejector return any aircraft under Section 1110 of the Bankruptcy Code, althoughthe sale of eight non-operating B767-200 aircraft drove the $18 millionin proceeds from the disposition of property and equipment.
*Financing Activities.* Cash generated through financingactivities was $1.1 billion in the combined six month period ended June30, 2006, compared to cash used of $198 million during the first six monthsof 2005. During the combined six months of 2006, we made principal paymentsunder long-term debt and capital lease obligations of $1.6 billion and$40 million, respectively, including the repayment of the DIP facility.
The Company secured access to up to $3.0 billion in secured exit financingwhich consists of a $2.45 billion term loan, $350 million additional drawterm loan and a $200 million revolving credit line. On the Effective Date,$2.45 billion of the $2.8 billion term loan and the entire revolving creditline was drawn and used to repay the DIP Financing as noted below and tomake other payments required upon exit from bankruptcy, as well as to provideongoing liquidity to conduct post-reorganization operations. Subsequently,the Company repaid $161 million on the revolving credit line and accessedthe remaining $350 million on the delayed draw term loan. For further detailson the Credit Facility, see Note 9, "Debt Obligations" in the Notesto Consolidated Financial Statements (Unaudited).
At June 30, 2006, we had a total of $2.8 billion in debt outstandingunder the Credit Facility and $62 million in letters of credit. The DIPFinancing was repaid on the Effective Date with the proceeds from the CreditFacility. For further details, see Note 1, "Voluntary Reorganization UnderChapter 11 - DIP Financing" in the Notes to Consolidated Financial Statements(Unaudited).
During the combined six months of 2006, the Company secured controlof 14 aircraft that were included in the 1997-1 EETC transaction by remitting$281 million to the 1997-1 EETC trustee on behalf of the holders of theTranche A certificates.  The Company subsequently refinanced the 14aircraft on March 28, 2006 with the $350 million delayed draw term loanprovided under the Credit Facility. The 14 aircraft are comprised of fourB737 aircraft, two B747 aircraft, four B777 aircraft and four A320 aircraft.In addition, the Company completed definitive documentation in July 2006,as discussed in Note 1 - "Voluntary Reorganization Under Chapter 11", withregard to the three post-1997 EETC financing transactions. This resultedin six B757 aircraft and one B747 aircraft converting from leased to owned.
At June 30, 2006, future commitments for the purchase of property andequipment, principally aircraft, approximated $2.5 billion, after deductingadvance payments.  Our current commitments are primarily for the purchaseof A319 and A320 aircraft.  The Company has the right to cancel theseorders. Such action could cause the forfeiture of $91 million of advancepayments if United does not take future delivery of these aircraft. For further details, see Note 12, "Commitments and Contingencies" in theNotesto Consolidated Financial Statements (Unaudited).
In May 2006, United entered into an agreement with the Denver InternationalAirport ("DEN") to vacate certain leased gates over a twelve-month transitionperiod.  In exchange, DEN agreed to build a regional jet facilityand reduce United's annual rental expense by $5 million in 2006 and nomore than $10 million per year thereafter, through year 2024. 
**Critical Accounting Policies**
For complete information regarding the Company's critical accountingpolicies, see "Critical Accounting Policies" in Management's Discussionand Analysis of Financial Condition and Results of Operations in United'sAnnual Report on Form 10-K for the year 2005. The following informationdetails significant changes to the Company's critical accounting policiessince year-end.
*Fresh-Start Reporting*.   In connection withthe emergence from Chapter 11 protection as of February 1, 2006, the Companyadopted fresh-start reporting in accordance with SOP 90-7. Accordingly,United's assets, liabilities and equity were valued at their respectivefair values. The excess reorganization value over the fair value of tangibleand identifiable intangible assets has been reflected as goodwill in theaccompanying Statements of Consolidated Financial Position (Unaudited).
Fair value of assets and liabilities represents the Company's best estimatebased on independent appraisals and valuations and, where the foregoinghave not yet been completed or are not available, industry data and trendsand by reference to relevant market rates and transactions. Accordingly,we cannot provide assurance that the estimates, assumptions, and valuesreflected in the asset and liability valuations will be realized, and actualresults could vary materially from those estimates. In accordance withSFAS 141, the preliminary allocation of the equity values is subject toadditional adjustment within one year after emergence from bankruptcy asadditional or improved information on asset and liability valuations becomesavailable.
To facilitate the calculation of the enterprise value of the SuccessorCompany, we developed a set of financial projections. Based on these financialprojections, and with the assistance of financial advisors, the equityvalue was determined by the Company, using various valuation methods, including(i) a comparison of the Company and its projected performance to the marketvalues of comparable companies, (ii) a review and analysis of several recenttransactions of companies in similar industries to the Company, and (iii)a calculation of the present value of the future cash flows using the Company'sfinancial projections.
The estimated enterprise value, and corresponding equity value, is highlydependent upon achieving the future financial results set forth in theprojections as well as the realization of certain other assumptions thatcannot be guaranteed. The estimated equity value of the Company was calculatedto be approximately $2.0 billion. The foregoing estimates and assumptionsare inherently subject to significant uncertainties and contingencies beyondthe reasonable control of the Company.
See Note 1, "Voluntary Reorganization Under Chapter 11 - Fresh-StartReporting" in the Notes to the Consolidated Financial Statements (Unaudited)for further details related to the fresh-start fair value adjustments.
*Frequent Flyer Accounting.* In accordance with fresh-startreporting, the Company revalued its frequent flyer award liability to estimatedfair value at the Effective Date. The Successor Company also has electedto change its accounting policy for its Mileage Plus Frequent Flyer Programto a deferred revenue model. The Company believes that accounting for frequentflyer miles using a deferred revenue model is preferable, as it establishesa consistent valuation methodology for both miles earned by frequent flyersand miles sold to non-airline business partners.
Prior to the Effective Date, the Predecessor Company had used the currentindustry practice of accounting for frequent flyer miles earned on Unitedflights on an incremental cost basis as an accrued liability and as advertisingexpense, while miles sold to non-airline business partners were accountedfor on a deferred revenue basis. As of the Effective Date, the deferredrevenue value of all frequent flyer miles will be measured using equivalentticket value as described below, and all associated adjustments will bemade to operating revenues.
The deferred revenue measurement method used to record fair value ofthe frequent flyer award liability on the Effective Date was to allocatean equivalent per mile weighted-average ticket value to each outstandingmile, based upon projected redemption patterns for available award choiceswhen such miles are consumed. Such value was estimated assuming redemptionson both United and other participating carriers in the Mileage Plus program,and by estimating the relative proportions of awards to be redeemed byclass of service within broad geographic segments of the Company's operations,including North America, Atlantic, Pacific and Latin America.
The fresh-start valuation adjustment at the Effective Date resultedin a $2.4 billion increase to the frequent flyer award liability.
Under the previous method of accounting for this program, the Companyestimates that for the 11-month period ending December 31, 2006 it wouldhave recognized approximately $18 million in advertising expense, and wouldhave reduced earned revenues by approximately $136 million, in order toaccount for the effects of the program on its financial statements forthat hypothetical period. Such estimated adjustments would have been requiredto recognize the effect of an assumed 2.8% growth in outstanding milesearned, among other assumptions such as projected miles to be earned andredeemed, the rate of breakage of miles, and the ongoing award redemptionpatterns of members.
Under the new method of accounting for this program, the Company estimatesthat for the 11-month period ending December 31, 2006 it will reduce earnedrevenue by approximately $190 million in order to account for the effectsof the program on its financial statements for that hypothetical period.This estimated adjustment would be required using the same assumed 2.8%annual growth rate in outstanding miles, among other key assumptions suchas projected miles to be earned and redeemed and ongoing award redemptionpatterns by Mileage Plus members. The projected hypothetical accountingimpact under this new policy would be to earned revenues only, since theCompany's new accounting policy does not continue the use of the formerincremental cost method, which was adjusted to advertising expense underthat prior policy.
The estimation of deferred revenue to value each award mile requiresthe use of several significant assumptions, for which significant managementjudgment is required. For example, management must estimate how many milesare projected to be redeemed on United, versus on other airline partners.Since the equivalent ticket value of miles redeemed on United and on othercarriers can vary, this assumption can significantly affect the calculationof the weighted average ticket value from period to period.
Management must also estimate the expected redemption patterns of MileagePlus customers, who have a number of different award choices when redeemingtheir miles, each of which can have materially different values. Such choicesinclude different classes of service (first, business and several coachaward levels), as well as different flight itineraries, such as domesticand international routings, and different itineraries within domestic andinternational regions of United's and other participating carriers' flightnetworks. Customer redemption patterns may also be influenced by programchanges which occur from time to time and which introduce new award choices,or make material changes to the terms of existing award choices; managementmust often assess the probable impact of such program changes on futurecustomer behavior using limited data, which requires the use of significantjudgment. Management uses historical customer redemption patterns as thebest single indicator of future redemption behavior in making its estimates,but changes in customer mileage redemption behavior to patterns which arenot consistent with historical behavior can result in material changesto deferred revenue balances, and to recognized revenue as well.
Management's estimate of the expected breakage of miles as of the fresh-startdate, and for recognition of breakage post-emergence, also requires significantmanagement judgment. United's policy for the cancellation of miles is todeactivate Mileage Plus customer accounts for which there has been no activityfor three consecutive years; however, deactivated accounts can be reactivatedupon customer request. Management considers historical patterns of accountbreakage to be a useful indicator when estimating future breakage. Underits new deferred revenue accounting policy, the Company recognizes revenuefrom breakage of miles by amortizing such estimated breakage over the 36-monthvalidity period. However, current and future changes to program rules andprogram redemption opportunities can significantly alter customer behaviorfrom historical patterns with respect to inactive accounts. Such changesmay result in material changes to the deferred revenue balance, as wellas recognized revenues from the program. A hypothetical 1% change in ourestimated breakage rate, currently estimated at 15% annually, has approximatelya $17 million effect on the liability.
At June 30, 2006, our outstanding number of miles was approximately487.6 billion. The Company currently estimates that approximately 416.1billion of these miles will ultimately be redeemed and, accordingly, hasrecorded deferred revenue of $3.5 billion. A hypothetical 1% change inour outstanding number of miles or the weighted average ticket value hasapproximately a $39 million effect on the liability.
*Goodwill and Intangible Assets.*In accordance with SFAS142, the Company applies a fair value-based impairment test to the bookvalue of goodwill and indefinite-lived intangible assets on an annual basisand, if certain events or circumstances indicate that an impairment lossmay have been incurred, on an interim basis. Goodwill and indefinite-livedintangible assets are significant assets and an impairment charge couldhave a material adverse effect on the Statements of Consolidated FinancialPosition (Unaudited), as well as the Statements of ConsolidatedOperations (Unaudited).
Upon the implementation of fresh-start reporting (see Note 1, "VoluntaryReorganization Under Chapter 11 - Fresh-Start Reporting" in the Notesto Consolidated Financial Statements (Unaudited)) the Company's assets,liabilities and equity were valued at their respective fair value. Theexcess of reorganization value over the fair value of tangible and identifiableintangible assets has been reflected as goodwill in the accompanying Statementsof Consolidated Financial Position (Unaudited) on the Effective Date.As discussed in Note 7, "Segment Information" in the Notes to ConsolidatedFinancial Statements (Unaudited), there are three reportable segmentswith assigned goodwill aggregating $2.8 billion at June 30, 2006. In addition,the adoption of fresh-start reporting resulted in the recognition of $2.1billion of indefinite-lived intangible assets.
SFAS 142 requires that a two-step impairment test be performed on goodwill.In the first step, the Company compares the fair value of the reportablesegment to its carrying value. If the fair value of the reportable segmentexceeds the carrying value of the net assets of the reportable segment,goodwill is not impaired and the Company is not required to perform furthertesting. If the carrying value of the net assets of the reportable segmentexceeds the fair value of the reportable segment, then the Company mustperform the second step in order to determine the implied fair value ofthe goodwill and compare it to the carrying value of the goodwill. If thecarrying value of goodwill exceeds its implied fair value, then the Companymust record an impairment charge equal to such difference.
We expect to assess the fair value of our reportable segments consideringboth the market and income approaches. Under the market approach, the fairvalue of the reportable segment is based on quoted market prices and recenttransaction values of peer companies. Under the income approach, the fairvalue of the reportable segment is based on the present value of estimatedfuture cash flows. The income approach is dependent on a number of factorsincludingestimates of future capacity, passenger yield, traffic, operating costs,appropriate discount rates and other relevant factors.
We will perform the impairment test for our indefinite-lived intangibleassets by comparing the asset's fair value to its carrying value. We expectto determine the estimated fair value based upon projected discounted futurecash flows. We will recognize an impairment charge if the asset's carryingvalue exceeds its estimated fair value.
We have not performed impairment testing on amounts of goodwill or indefinite-livedintangible assets subsequent to February 1, 2006, as there have been noevents or changes that would indicate that such assets are impaired. Wewill perform annual impairment testing on goodwill and indefinite-livedintangible assets in the fourth quarter of 2006. 
**Outlook**
As a result of improvement initiatives already underway, the Companyexpects to achieve a portion of the planned 2007 savings ahead of schedulein 2006. United has issued the following capacity guidance for the thirdquarter and full-year 2006:Capacity (ASMs)        ThirdQuarter          Full Year
Mainline                    +2.5 to 3.0 percent     +2.0 to 2.5 percent
Regional Affiliates      +6.0 to 7.0 percent    +9.0 to 10.0 percent
Consolidated +3.0 to 3.5 percent                +2.5 to 3.0 percentCapacity increases are driven by higher aircraft utilization as a resultof the Company's resource optimization efforts.
As of July 24, 2006, the Company had 28 percent of its mainline fuelconsumption hedged for the third quarter of 2006 at an average price of$69.84 per barrel, excluding taxes, using crude oil swaps.
**Forward-Looking Information**
Certain statements throughout Management's Discussion and Analysisof Financial Condition and Results of Operations and elsewhere in thisreport are forward-looking and thus reflect our current expectations andbeliefs with respect to certain current and future events and financialperformance. Such forward-looking statements are and will be subject tomany risks and uncertainties relating to our operations and business environmentthat may cause actual results to differ materially from any future resultsexpressed or implied in such forward-looking statements. Words such as"expects," "will," "plans," "anticipates," "indicates," "believes," "forecast,""guidance," "outlook" and similar expressions are intended to identifyforward-looking statements.
Additionally, forward-looking statements include statements which donot relate solely to historical facts, such as statements which identifyuncertainties or trends, discuss the possible future effects of currentknown trends or uncertainties, or which indicate that the future effectsof known trends or uncertainties cannot be predicted, guaranteed or assured.All forward-looking statements in this report are based upon informationavailable to us on the date of this report. We undertake no obligationto publicly update or revise any forward-looking statement, whether asa result of new information, future events, changed circumstances or otherwise.
Our actual results could differ materially from these forward-lookingstatements due to numerous factors including, without limitation, the following:our ability to comply with the terms of our senior secured revolving creditfacility and term loan, as well as other financing arrangements; the costsand availability of financing; our ability to execute our business plan;our ability to utilize our net operating losses; our ability to attract,motivate and/or retain key employees; our ability to attract and retaincustomers; 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 waror terrorist attack; the ability of other air carriers with whom we havealliances or partnerships to provide the services contemplated by the respectivearrangements with such carriers; the costs and availability of aircraftinsurance; the costs associated with security measures and practices; laborcosts; competitive pressures on pricing (particularly from lower-cost competitors)and on demand; capacity decisions of our competitors; U.S. or foreign governmentallegislation, regulation and other actions; our ability to maintain satisfactorylabor relations;any disruptionsto operations due to any potential actions by our labor groups; weatherconditions; and other risks and uncertainties set forth under the caption"Risk Factors" in Item 1A. of United's Annual Report on Form 10-K for theyear 2005, as well as other risks and uncertainties set forth from timeto time in the reports we file with United States Securities and ExchangeCommission. Consequently, the forward-looking statements should not beregarded as representations or warranties by the Company that such matterswill be realized.  
**Item 3.Quantitative and Qualitative Disclosures AboutMarket Risk**
For information regarding our exposure to certain market risks, seeItem7A. Quantitative and Qualitative Disclosures About Market Risk in United'sAnnual Report on Form 10-K for the year 2005.
Interest Rate Risk - In the first quarter of 2006, the Company enteredinto an interest rate swap whereby it fixed the rate of interest on itscredit facility. The Company will use interest rate swap agreements toeffectively limit exposure to interest rate movements within the parametersof our interest rate hedging policy. The swap will amortize according toa pre-established schedule starting in November 2007 through its expectedmaturity date of February 2012.(In millions, except averagecontract rates)NotionalAverageEstimated AmountContract RateFair Value   (Pay)/Receive**Interest rate swap$   2,4505.14% *$ 42
* Includes a small credit related charge plus the fixedcredit margin on the underlying financing facility.
**Estimated fair values represent the amount the Companywould pay/receive on June 30, 2006 to terminate the contracts.
Commodity Price Risk (Jet Fuel) - When market conditions indicate riskreduction is achievable, the Company enters into fuel option contractsto reduce its price risk exposure to jet fuel. The option contracts aredesigned to provide protection against increases in the price of aircraftfuel. As market conditions change, so may the Company's hedging program.
**Item 4.  Controls and Procedures**
The Company's management, including the Chief Executive Officer (the"CEO") and Chief Financial Officer (the "CFO"), performed an evaluationto ensure with reasonable assurance that the Company's disclosure controlsand procedures were designed and operating effectively to collect, processand report within the required time periods, the information it is requiredto disclose in the reports it files with the Securities and Exchange Commission. Based on that evaluation, the Company's management, including the CEO andCFO, concluded that the Company's disclosure controls and procedures wereeffective as of June 30, 2006.
There has been no change to the Company's internal control over financialreporting that occurred during the quarter ended June 30, 2006 that hasmaterially affected or is reasonably likely to materially affect the Company'sinternal control over financial reporting, except that the Company is continuingto implement the controls established in the first quarter of 2006 to properlyapply fresh start reporting (including material changes in Mileage Plusfrequent flyer accounting, and the recognition of intangible assets andgoodwill) and to adopt stock-based compensation accounting under SFAS123R. The Company's management will continue to evaluate its internal controlover financial reporting as it executes the plan to eliminate 1,000 salariedand management positions in 2006.  
**PART II.  OTHER INFORMATION**
**Item 1.  Legal Proceedings.**
**In re: UAL Corporation, et. al.**
As discussed above, on the Petition Date the Debtors filed voluntarypetitions to reorganize their businesses under Chapter 11 of the BankruptcyCode. On October 20, 2005, the Debtors filed the Debtor's First AmendedJoint Plan of Reorganization Pursuant to Chapter 11 of the United StatesBankruptcy Code and the Disclosure Statement. The Bankruptcy Court approvedthe Disclosure Statement on October 21, 2005.
Commencing on October 27, 2005, the Disclosure Statement, ballots forvoting to accept or reject the proposed plan of reorganization and othersolicitation documents were distributed to all classes of creditors eligibleto vote on the proposed plan of reorganization. After a hearing on confirmation,on January 20, 2006, the Bankruptcy Court confirmed the Plan of Reorganization.The Plan of Reorganization became effective and the Debtors emerged frombankruptcy protection on the Effective Date.
Numerous pre-petition claims still await resolution in the BankruptcyCourt due to the Company's objections to either the existence of liabilityor the amount of the claim. The process of determining whether liabilityexists and liquidating the amounts due is likely to continue for the remainderof 2006. Additionally, certain significant matters remain to be resolvedin the Bankruptcy Court. For details see Note 1, "Voluntary ReorganizationUnder Chapter 11 - Bankruptcy Considerations" in the Notes to ConsolidatedFinancial Statements (Unaudited).
**Air Cargo/Passenger Surcharge Investigations**
In February 2006, the European Commission and the U.S. Department ofJustice commenced an international investigation into what government officialsdescribe as a possible price fixing conspiracy relating to certain surchargesincluded in tariffs for carrying air cargo. In June 2006, United receiveda subpoena from the U.S. Department of Justice requesting information relatedto certain passenger pricing practices and surcharges applicable to internationalpassenger routes. The Company is cooperating fully. United is considereda source of information for the investigation, not as a target. In additionto the federal grand jury investigation, United and other air cargo carriershave been named as defendants in over ninety class action lawsuits allegingcivil damages as a result of the purported conspiracy. Those lawsuits havebeen consolidated for pretrial activities in the United States FederalCourt for the Eastern District of New York. More than twenty additionalputative class actions have been filed subsequently alleging violationsof the antitrust laws with respect to passenger pricing practices. Penaltiesfor violating competition laws can be severe, involving both criminal andcivil liability. The Company is cooperating with the investigation whilecarrying out its own internal review of cargo pricing practices, and isnot in a position to evaluate the potential financial impact of this litigationat this time. However, a finding that the Company violated either U.S.antitrust laws or the competition laws of some other jurisdiction couldhave a material adverse impact on the Company.
**Summers v. UAL Corporation ESOP, et. al.**
Certain participants in the UAL Corporation Employee Stock OwnershipPlan ("ESOP") sued the ESOP, the ESOP Committee and State Street Bank andTrust Company ("State Street") in the U.S. District Court for the NorthernDistrict of Illinois ("the District Court") in February 2003 seeking monetarydamages in a purported class action that alleges that the ESOP Committeebreached its fiduciary duty by not selling UAL stock held by the ESOP commencingas of July 19, 2001. The ESOP Committee appointed State Street in September2002 to act as investment manager and fiduciary to manage the assets ofthe ESOP itself. In August 2005, a proposed settlement was reached betweenthe plaintiffs and the ESOP Committee defendants. The agreed upon settlementamount is to be paid out of the $5.2 million in insurance proceeds remainingafter deducting legal fees. State Street objected to the agreement duringthe required fairness hearing before the District Court.   TheCourt nevertheless approved the settlement in October 2005, but also grantedState Street's motion for summary judgment, dismissing the underlying claims.Both sides appealed, from the District Court's decision, and as a result,no settlement funds have been disbursed pending a ruling on appeal. InJune 2006, the United States Court of Appeals for the Seventh Circuit affirmedthe lower court's ruling dismissing the claims against State Street andin effect rendering State Street's challenge to the settlement agreementmoot. The Plaintiffs have until September 25, 2006 to request review bythe Supreme Court.
**Other Legal Proceedings**
In addition to the legal proceedings described above, UAL and Unitedare parties to legal proceedings described in their respective Form 10-Kfor the period ended December 31, 2005.
UAL and United are involved in various other claims and legal actionsarising in the ordinary course of business. Additionally, from time totime, we become aware of potential non-compliance with environmental regulations,which have either been identified by the Company (through our internalenvironmental compliance auditing program) or through notice from a governmentalentity. In some instances, these matters could potentially become the subjectof an administrative or judicial proceeding and could potentially involvemonetary sanctions. We believe, after considering a number of factors,including (but not limited to) the views of legal counsel, the nature ofcontingencies to which we are subject and prior experience, that the ultimatedisposition of these contingencies will not materially affect our consolidatedfinancial position or results of operations.
**Item 6.  Exhibits.**
A list of exhibits included as part of this Form 10-Q is set forth inan Exhibit Index that immediately precedes the exhibits.  
**SIGNATURE**
Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this quarterly report on Form 10-Q for thequarter ended June 30, 2006 to be signed on its behalf by the undersignedthereunto duly authorized on the 11th day of August 2006.     United Air Lines, Inc. By:  /s/ Frederic F. BraceFrederic F. BraceExecutive Vice President andChief Financial Officer (principal financial and accounting officer) 
**EXHIBIT INDEX**
* 4.1Indenture dated as of July 25, 2006 among UALCorporation as Issuer, United Air Lines, Inc. as Guarantor and The Bankof New York Trust Company, N.A., as Trustee, providing for issuance of4.50% Senior Limited-Subordination Convertible Notes due 2021 (filed asExhibit 4.1 to UAL's Form 8-K filed July 27, 2006 and incorporated hereinby reference)  12.1Computation of Ratio of Earnings to Fixed Charges  31.1Certification of the Principal Executive OfficerPursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-OxleyAct of 2002)  31.2Certification of the Principal Financial OfficerPursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-OxleyAct of 2002)  32.1Certification of the Chief Executive OfficerPursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)  32.2Certification of the Chief Financial OfficerPursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
With respect to the documents incorporated by reference to this Form10-Q, United's Commission File Number is 001-11355 and UAL's CommissionFile Number is 001-06033.
* As Previously Filed

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