Edgar Filing: CONTINENTAL AIRLINES INC /DE/

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


Commission File Number	Exact Name of Registrant as Specified in its Charter, Principal Office Address and Telephone Number	State of Incorporation	I.R.S. Employer Identification No
001-06033	United Continental Holdings, Inc.	Delaware	36-2675207
	77 W. Wacker Drive, Chicago, Illinois 60601
	(312) 997-8000

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


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

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


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

The number of shares outstanding of each of the issuer’s classes of common stock as of July 15, 2011 is shown below:


United Continental Holdings, Inc.		330,773,503 shares of common stock ($0.01 par value)
United Air Lines, Inc.		205 (100% owned by United Continental Holdings, Inc.) There is no market for United Air Lines, Inc. common stock.
Continental Airlines, Inc.		1,000 (100% owned by United Continental Holdings, Inc.) There is no market for Continental Airlines, Inc. common stock.

OMISSION OF CERTAIN INFORMATION

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

United Continental Holdings, Inc.

United Air Lines, Inc.

Continental Airlines, Inc.

Report on Form 10-Q

For the Quarter Ended June 30, 2011


	Page

PART I. FINANCIAL INFORMATION

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

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

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

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 3. Quantitative and Qualitative Disclosures About Market Risk		53
Item 4. Controls and Procedures		53

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		55
Item 1A. Risk Factors		55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 6. Exhibits		57
Signatures		58
Exhibit Index		59

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Operating revenue:
Passenger:
Mainline	$	6,864		$	3,532			12,627		$	6,401
Regional		1,742			962			3,166			1,750

Total passenger revenue		8,606			4,494			15,793			8,151
Cargo		316			190			599			347
Special revenue item (Note 1)		107			—			107			—
Other operating revenue		780			477			1,512			904

		9,809			5,161			18,011			9,402

Operating expenses:
Aircraft fuel		3,227			1,486			5,899			2,693
Salaries and related costs		1,916			1,061			3,722			2,051
Regional capacity purchase		615			405			1,188			793
Landing fees and other rent		502			271			975			528
Aircraft maintenance materials and outside repairs		444			245			883			467
Depreciation and amortization		385			223			773			444
Distribution expenses		375			198			725			370
Aircraft rent		252			81			505			162
Special charges (Note 10)		146			106			223			124
Other operating expenses		1,139			644			2,276			1,253

		9,001			4,720			17,169			8,885

Operating income		808			441			842			517

Nonoperating income (expense):
Interest expense		(250	)		(178	)		(504	)		(363	)
Interest income		5			2			9			3
Interest capitalized		8			3			14			5
Miscellaneous, net		(29	)		3			(30	)		28

		(266	)		(170	)		(511	)		(327	)

Income before income taxes		542			271			331			190
Income tax expense (benefit)		4			(2	)		6			(1	)

Net income	$	538		$	273		$	325		$	191


Earnings per share, basic	$	1.63		$	1.62		$	0.98		$	1.14

Earnings per share, diluted	$	1.39		$	1.29		$	0.88		$	0.96

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	7,519		$	8,069
Short-term investments		1,060			611

Total unrestricted cash, cash equivalents and short-term investments		8,579			8,680
Restricted cash		46			37
Receivables, less allowance for doubtful accounts (2011 — $6; 2010 — $6)		1,863			1,613
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $74; 2010 — $64)		508			466
Deferred income taxes		622			591
Prepaid expenses and other		773			658

		12,391			12,045

Operating property and equipment:
Owned—
Flight equipment		15,618			15,181
Other property and equipment		2,993			2,890

		18,611			18,071
Less — accumulated depreciation and amortization		(3,421	)		(2,858	)

		15,190			15,213

Purchase deposits for flight equipment		304			230
Capital leases—
Flight equipment		1,474			1,741
Other property and equipment		221			217

		1,695			1,958
Less — accumulated amortization		(499	)		(456	)

		1,196			1,502

		16,690			16,945

Other assets:
Goodwill		4,523			4,523
Intangibles, less accumulated amortization (2011 — $587; 2010 — $504)		4,815			4,917
Restricted cash, cash equivalents and investments		358			350
Investments		101			103
Other, net		816			715

		10,613			10,608

	$	39,694		$	39,598

(continued on next page)

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	June 30, 2011			December 31, 2010
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Advance ticket sales	$	4,497		$	2,998
Frequent flyer deferred revenue		2,491			2,582
Accounts payable		1,999			1,805
Accrued salaries and benefits		1,229			1,470
Current maturities of long-term debt		1,389			2,411
Current maturities of capital leases		138			252
Other		1,019			1,127

		12,762			12,645


Long-term debt		11,101			11,434
Long-term obligations under capital leases		970			1,036

Other liabilities and deferred credits:
Frequent flyer deferred revenue		3,355			3,491
Postretirement benefit liability		2,383			2,344
Pension liability		1,458			1,473
Advanced purchase of miles		1,545			1,159
Deferred income taxes		1,618			1,585
Lease fair value adjustment, net		1,246			1,371
Other		1,314			1,333

		12,919			12,756

Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 330,766,357 and 327,922,565 shares at June 30, 2011 and December 31, 2010, respectively		3			3
Additional capital invested		7,106			7,071
Accumulated deficit		(5,378	)		(5,703	)
Stock held in treasury, at cost		(31	)		(31	)
Accumulated other comprehensive income		242			387

		1,942			1,727

	$	39,694		$	39,598

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Six Months Ended June 30,
	2011			2010
Cash Flows from Operating Activities:
Net income	$	325		$	191
Adjustments to reconcile net income to net cash provided (used) by operating activities —
Depreciation and amortization		773			444
Amortization of debt and lease fair value adjustment		(119	)		8
Special items, non-cash portion (Notes 1 and 10)		(48	)		90
Increase in advance ticket sales		1,499			808
Decrease in frequent flyer deferred revenue and advanced purchase of miles		(89	)		(60	)
Increase in receivables		(387	)		(324	)
Increase in accounts payable		202			123
Increase in other current assets		(251	)		(83	)
Increase (decrease) in other accrued liabilities		(224	)		90
Net change in fuel hedge cash collateral		(29	)		4
Other, net		106			65

Net cash provided by operating activities		1,758			1,356


Cash Flows from Investing Activities:
Capital expenditures		(350	)		(124	)
Aircraft purchase deposits paid, net		(70	)		(42	)
(Increase) decrease in restricted cash		(20	)		43
Proceeds from sale of property and equipment		54			25
Purchases of short-term investments, net		(443	)		—
Other, net		—			3

Net cash used in investing activities		(829	)		(95	)


Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		142			1,995
Payments of long-term debt		(1,477	)		(1,274	)
Principal payments under capital leases		(176	)		(93	)
Other, net		32			(25	)

Net cash provided by (used in) financing activities		(1,479	)		603

Increase (decrease) in cash and cash equivalents during the period		(550	)		1,864
Cash and cash equivalents at beginning of the period		8,069			3,042

Cash and cash equivalents at end of the period	$	7,519		$	4,906


Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through the issuance of debt	$	97		$	—
Reclassification of debt to advanced purchases of miles		(270	)		—
Reclassification of debt discount to other assets		60			—
8% Contingent Senior Unsecured Notes, net of discount		49			—
Interest paid in kind on UAL 6% Senior Notes		18			17

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED AIR LINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Operating revenue:
Passenger:
Mainline	$	3,745		$	3,532		$	6,884		$	6,401
Regional		1,046			962			1,937			1,750

Total passenger revenue		4,791			4,494			8,821			8,151
Cargo		191			190			358			347
Special revenue item (Note 1)		88			—			88			—
Other operating revenue		500			479			979			908

		5,570			5,163			10,246			9,406

Operating expenses:
Aircraft fuel		1,833			1,486			3,345			2,693
Salaries and related costs		1,038			1,061			2,025			2,051
Regional capacity purchase		401			405			783			793
Landing fees and other rent		275			271			527			528
Aircraft maintenance materials and outside repairs		290			245			582			467
Depreciation and amortization		229			223			456			444
Distribution expenses		199			198			386			370
Aircraft rent		80			81			161			162
Special charges (Note 10)		90			106			164			124
Other operating expenses		698			644			1,372			1,252

		5,133			4,720			9,801			8,884

Operating income		437			443			445			522

Nonoperating income (expense):
Interest expense		(159	)		(173	)		(327	)		(353	)
Interest income		3			2			5			3
Interest capitalized		3			3			6			5
Miscellaneous, net		(3	)		4			(8	)		29

		(156	)		(164	)		(324	)		(316	)

Income before income taxes		281			279			121			206
Income tax benefit		—			(2	)		—			(1	)

Net income	$	281		$	281		$	121		$	207

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	4,107		$	4,665
Short-term investments		155			—

Total unrestricted cash, cash equivalents and short-term investments		4,262			4,665
Restricted cash		46			37
Receivables, net of allowance for doubtful accounts (2011 — $5; 2010 — $5)		1,103			1,004
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $67; 2010 — $61)		243			321
Receivables from related parties		193			135
Deferred income taxes		350			373
Prepaid expenses and other		513			366

		6,710			6,901

Operating property and equipment:
Owned—
Flight equipment		9,021			8,718
Other property and equipment		2,161			2,086

		11,182			10,804
Less — accumulated depreciation and amortization		(3,032	)		(2,717	)

		8,150			8,087

Purchase deposits for flight equipment		54			51
Capital leases—
Flight equipment		1,474			1,741
Other property and equipment		52			49

		1,526			1,790
Less — accumulated amortization		(489	)		(453	)

		1,037			1,337

		9,241			9,475

Other assets:
Intangibles, less accumulated amortization (2011 — $503; 2010 — $473)		2,313			2,343
Restricted cash		198			190
Investments		96			97
Other, net		602			622

		3,209			3,252

	$	19,160		$	19,628

(continued on next page)

UNITED AIR LINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	(Unaudited)
	June 30, 2011			December 31, 2010
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Advance ticket sales	$	2,451		$	1,536
Frequent flyer deferred revenue		1,540			1,703
Accounts payable		1,161			907
Accrued salaries and benefits		772			938
Current maturities of long-term debt		635			1,546
Current maturities of capital leases		135			249
Related party payables		61			63
Other		751			950

		7,506			7,892


Long-term debt		5,468			5,480
Long-term obligations under capital leases		792			858

Other liabilities and deferred credits:
Frequent flyer deferred revenue		2,184			2,321
Postretirement benefit liability		2,121			2,091
Pension liability		100			101
Advanced purchase of miles		1,275			1,159
Deferred income taxes		708			731
Other		956			972

		7,344			7,375

Commitments and contingencies
Stockholder’s deficit:
Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 shares at both June 30, 2011 and December 31, 2010		—			—
Additional capital invested		3,428			3,421
Accumulated deficit		(5,368	)		(5,489	)
Accumulated other comprehensive income (loss)		(10	)		91

		(1,950	)		(1,977	)

	$	19,160		$	19,628

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED AIR LINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Six Months Ended June 30,
	2011			2010
Cash Flows from Operating Activities:
Net income	$	121		$	207
Adjustments to reconcile net income to net cash provided (used) by operating activities—
Depreciation and amortization		456			444
Amortization of debt and lease fair value adjustment		8			8
Special items, non-cash portion (Notes 1 and 10)		(28	)		90
Increase in advance ticket sales		915			808
Decrease in frequent flyer deferred revenue and advanced purchase of miles		(180	)		(60	)
Increase in receivables		(257	)		(324	)
Increase in accounts payable		251			123
Increase in other current assets		(77	)		(100	)
Increase (decrease) in other accrued liabilities		(231	)		88
Net change in fuel hedge cash collateral		(29	)		4
Other, net		93			64

Net cash provided by operating activities		1,042			1,352


Cash Flows from Investing Activities:
Capital expenditures		(222	)		(124	)
Purchases of short-term investments, net		(153	)		—
Aircraft purchase deposits paid, net		(3	)		(42	)
(Increase) decrease in restricted cash		(20	)		43
Proceeds from sale of property and equipment		1			25
Other, net		—			3

Net cash used in investing activities		(397	)		(95	)


Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		—			1,995
Payments of long-term debt		(1,037	)		(1,273	)
Principal payments under capital leases		(175	)		(93	)
Other, net		9			(22	)

Net cash provided by (used in) financing activities		(1,203	)		607

Increase (decrease) in cash and cash equivalents during the period		(558	)		1,864
Cash and cash equivalents at beginning of the period		4,665			3,036

Cash and cash equivalents at end of the period	$	4,107		$	4,900


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

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

CONTINENTAL AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010
Operating revenue:
Passenger:
Mainline	$	3,118		$	2,635		$	5,741		$	4,892
Regional		696			616			1,229			1,117

Total passenger revenue		3,814			3,251			6,970			6,009
Cargo		126			111			241			213
Special revenue item (Note 1)		19			—			19			—
Other operating revenue		325			329			612			632

		4,284			3,691			7,842			6,854

Operating expenses:
Aircraft fuel		1,394			992			2,554			1,865
Salaries and related costs		864			822			1,669			1,618
Regional capacity purchase		214			205			406			402
Landing fees and other rent		228			215			448			428
Aircraft maintenance materials and outside repairs		154			131			303			273
Depreciation and amortization		156			122			317			256
Distribution expenses		177			161			340			306
Aircraft rent		173			230			345			459
Special charges (Note 10)		56			24			59			34
Other operating expenses		494			460			998			934

		3,910			3,362			7,439			6,575

Operating income		374			329			403			279

Nonoperating income (expense):
Interest expense		(88	)		(92	)		(171	)		(187	)
Interest income		2			2			4			4
Interest capitalized		4			6			8			13
Miscellaneous, net		(28	)		(12	)		(35	)		(21	)

		(110	)		(96	)		(194	)		(191	)


Income before income taxes		264			233			209			88
Income taxes		2			—			4			1

Net income	$	262		$	233		$	205		$	87


Earnings per share, basic				$	1.67					$	0.62

Earnings per share, diluted				$	1.46					$	0.60

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	Successor
	(Unaudited)
	June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	3,406		$	3,398
Short-term investments		904			611

Total unrestricted cash, cash equivalents and short-term investments		4,310			4,009
Receivables, net of allowance for doubtful accounts (2011 — $1; 2010 — $1)		760			609
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2011 — $7; 2010 — $3)		265			246
Deferred income taxes		273			225
Receivables from related parties		—			3
Prepaid expenses and other		262			185

		5,870			5,277

Operating property and equipment:
Owned—
Flight equipment		6,597			6,463
Other property and equipment		832			804

		7,429			7,267
Less — accumulated depreciation and amortization		(389	)		(141	)

		7,040			7,126
Purchase deposits for flight equipment		250			178

Capital leases — other property and equipment		168			168
Less — accumulated amortization		(10	)		(3	)

		158			165

		7,448			7,469

Other assets:
Goodwill		4,523			4,523
Intangibles, less accumulated amortization (2011 — $84; 2010 — $31)		2,504			2,575
Restricted cash, cash equivalents and investments		160			160
Other, net		413			375

		7,600			7,633

	$	20,918		$	20,379

(continued on next page)

CONTINENTAL AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)


	Successor
	(Unaudited)
	June 30, 2011		December 31, 2010
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Advance ticket sales	$	2,046	$	1,463
Frequent flyer deferred revenue		951		879
Accounts payable		840		902
Accrued salaries and benefits		457		532
Current maturities of long-term debt		754		865
Related party payables		42		—
Current maturities of capital leases		3		3
Other		285		236

		5,378		4,880


Long-term debt		5,219		5,536
Long-term obligations under capital leases		178		178

Other liabilities and deferred credits:
Frequent flyer deferred revenue		1,170		1,170
Postretirement benefit liability		262		253
Pension liability		1,357		1,372
Lease fair value adjustment, net		1,250		1,374
Advanced purchase of miles		270		—
Deferred income taxes		834		784
Other		500		522

		5,643		5,475

Commitments and contingencies
Stockholder’s equity:
Common stock at par, $0.01 par value; authorized and outstanding 1,000 shares at both June 30, 2011 and December 31, 2010		—		—
Additional capital invested		4,144		4,115
Retained earnings (accumulated deficit)		110		(95	)
Accumulated other comprehensive income		246		290

		4,500		4,310

	$	20,918	$	20,379

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

CONTINENTAL AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)


	Successor			Predecessor
	Six Months Ended June 30, 2011			Six Months Ended June 30, 2010
Cash Flows from Operating Activities:
Net income	$	205		$	87
Adjustments to reconcile net income to net cash provided (used) by operating activities—
Depreciation and amortization		317			256
Special items, non-cash portion (Notes 1 and 10)		(20	)		16
Amortization of debt and lease fair value adjustment		(127	)		—
Increase in advance ticket sales		583			654
Increase in frequent flyer deferred revenue and advanced purchase of miles		91			98
Increase in receivables		(185	)		(180	)
Increase (decrease) in accounts payable		(11	)		116
Increase in other current assets		(133	)		(184	)
Increase (decrease) in other accrued liabilities		(34	)		118
Other, net		30			20

Net cash provided by operating activities		716			1,001

Cash Flows from Investing Activities:
Capital expenditures		(127	)		(148	)
Aircraft purchase deposits paid, net		(67	)		(84	)
Proceeds from sale of property and equipment		52			25
Purchases of short-term investments, net		(291	)		(124	)
Other, net		1			(3	)

Net cash used in investing activities		(432	)		(334	)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		142			225
Payments of long-term debt		(440	)		(411	)
Other, net		22			20

Net cash used in financing activities		(276	)		(166	)

Increase in cash and cash equivalents during the period		8			501
Cash and cash equivalents at beginning of the period		3,398			2,546

Cash and cash equivalents at end of the period	$	3,406		$	3,047


Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through the issuance of debt	$	97		$	—
Reclassification of debt to advanced purchases of miles		(270	)		—
Reclassification of debt discount to other assets		60			—

See accompanying Combined Notes to Condensed Consolidated Financial Statements.

UNITED CONTINENTAL HOLDINGS, INC.,

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

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

Interim Financial Statements. The UAL, United and Continental unaudited condensed consolidated financial statements shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The significant reclassifications are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). These reclassifications were made to conform the financial statement presentation of United and Continental. These financial statements should be read together with the information included in the 2010 Annual Report.

NOTE 1 - NEW ACCOUNTING PRONOUNCEMENTS

Multiple-Deliverable Revenue Arrangements

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

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

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

Passenger Tickets

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

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

As a result of the prospective adoption, the new accounting policy was only applied to new sales of air transportation in 2011. Generally, as compared to the historical accounting policy, for passenger tickets sold with miles earned, the new accounting policy decreases the value of miles that the Company records as deferred revenue and increases the passenger revenue recorded at the time air transportation is provided. Due to the average period from purchase of air transportation to the provision of air transportation, the new accounting policy was only applicable to a portion of the Company’s multiple element ticket transactions recorded during the three and six months ended June 30, 2011. The application of the new accounting method resulted in the following increases to revenue (in millions, except per share amounts):


	Three Months Ended June 30, 2011						Six Months Ended June 30, 2011
	UAL		United		Continental		UAL		United		Continental
Revenue	$	106	$	66	$	40	$	161	$	104	$	57

Per basic share	$	0.32					$	0.49

Per diluted share	$	0.27					$	0.42

We estimate that application of the new accounting method in the remaining half of 2011 will increase UAL’s revenue as compared to revenue that would have been recorded under the historical method of accounting. The Company cannot reliably estimate the impact of ASU 2009-13 on its future revenue, because the impact depends on many factors, including the volume of air transportation sales with mileage credit components.

Co-branded Credit Card Partner Mileage Sales

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

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

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

The application of the new accounting standard decreases the value of the air transportation deliverables related to the Co-Brand Agreement that the Company records as deferred revenue (and ultimately passenger revenue when redeemed awards are flown) and increases the value primarily of the marketing-related deliverables recorded in other revenue at the time these marketing-related deliverables are provided. Other than the effects disclosed in the “Special Revenue Item” section below, the impact of adoption of ASU 2009-13 did not have a significant impact on revenue during the second quarter of 2011 as compared to revenue that would have been recognized under the Company’s historical accounting method.

While revenue recognition is subject to fluctuation based on credit card sale volumes and frequent flyer redemption patterns, the Company expects, as a result of the Co-Brand Agreement, that other revenue will increase by approximately $70 million per quarter, with passenger revenue reduced by approximately $20 million per quarter for the remainder of the year. These estimates are subject to variability primarily depending on the volume of future transactions.

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

Special Revenue Item

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


	Three Months Ended June 30, 2011						Six Months Ended June 30, 2011
	UAL		United		Continental		UAL		United		Continental
Special revenue item	$	107	$	88	$	19	$	107	$	88	$	19

Per basic share	$	0.32					$	0.33

Per diluted share	$	0.27					$	0.28

NOTE 2 - EARNINGS PER SHARE

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
UAL basic earnings per share:
Net income	$	538		$	273	$	325		$	191
Less: Income allocable to participating securities		(2	)		—		(1	)		—

Earnings available to common stockholders	$	536		$	273	$	324		$	191

Basic weighted average shares outstanding		330			168		329			168

Earnings per share, basic	$	1.63		$	1.62	$	0.98		$	1.14


UAL diluted earnings per share:
Earnings available to common stockholders	$	536		$	273		324		$	191
Effect of UAL 4.5% Senior Limited-Subordination Convertible Notes		11			21		—			—
Effect of Continental 4.5% Convertible Notes		2			—		4			—
Effect of UAL 5% Senior Convertible Notes		—			4		—			—
Effect of Continental 6% Convertible Junior Subordinated Debentures		4			—		—			—
Effect of UAL 6% Senior Convertible Notes		5			5		9			10

Earnings available to common stockholders including the effect of dilutive securities	$	558		$	303	$	337		$	201


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

Diluted weighted average shares outstanding		400			235		383			209

Earnings per share, diluted	$	1.39		$	1.29	$	0.88		$	0.96


UAL potentially dilutive shares excluded from diluted per share amounts:
Restricted stock and stock options		7			5		6			6
UAL 4.5% Senior Limited-Subordination Convertible Notes		—			—		18			22
Continental 6% Convertible Junior Subordinated Debentures		—			—		4			—
UAL 5% Senior Convertible Notes (Note 9)		—			—		—			3

UAL’s 6% Senior Notes due 2031, with a principal amount of $633 million as of June 30, 2011, are callable at any time at 100% of par value and can be redeemed with either cash or shares of UAL common stock, or a combination thereof, at UAL’s option. These notes are not included in the diluted earnings per share calculation as it is UAL’s intent to redeem these notes with cash, if UAL were to redeem the notes. During the second quarter of 2011, UAL repurchased at par value approximately $570 million of the $726 million outstanding principal amount of its 4.5% Senior Limited-Subordination Convertible Notes due 2021 with cash after the notes were put to UAL by the noteholders. The dilutive effect of the 4.5% Senior Limited-Subordination Convertible Notes due 2021 was excluded in the diluted earnings per share calculations for the three and six months ended June 30, 2011 from the date notice was given of the Company’s intent to pay the notes put to it in cash up to the repurchase date.

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


	Three Months Ended June 30,		Six Months Ended June 30,
	2010		2010
Continental Predecessor basic earnings per share:
Earnings available to common stockholders	$	233	$	87

Basic weighted average shares outstanding		140		139

Earnings per share, basic	$	1.67	$	0.62


Continental Predecessor diluted earnings per share:
Earnings available to common stockholders	$	233	$	87
Effect of 5% Convertible Notes		4		—
Effect of 6% Convertible Junior Subordinated Debentures		3		—
Effect of 4.5% Convertible Notes		3		5

Earnings available to common stockholders including the effect of dilutive securities	$	243	$	92


Continental Predecessor diluted shares outstanding:
Basic weighted average shares outstanding		140		139
5% Convertible Notes		9		—
6% Convertible Junior Subordinated Debentures		4		—
4.5% Convertible Notes		12		12
Employee stock options		2		2

Diluted weighted average shares outstanding		167		153

Earnings per share, diluted	$	1.46	$	0.60


Continental Predecessor potentially dilutive shares excluded from diluted per share amounts:
5% Convertible Notes		—		9
6% Convertible Junior Subordinated Debentures		—		4
Employee stock options		1		1

NOTE 3 - INCOME TAXES

Our effective tax rates differ from the federal statutory rate of 35% primarily due to the following: changes in the valuation allowance, expenses that are not deductible for federal income tax purposes, and foreign and state income taxes. We are required to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets will ultimately not be realized.

NOTE 4 - EMPLOYEE BENEFIT PLANS

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


	Pension Benefits Three Months Ended June 30,						Other Postretirement Benefits Three Months Ended June 30,
	2011			2010			2011			2010
UAL
Service cost	$	23		$	2		$	12		$	8
Interest cost		45			3			32			29
Expected return on plan assets		(35	)		(3	)		—			(1	)
Amortization of unrecognized gain and prior service cost		(7	)		(1	)		(1	)		(3	)

Net periodic benefit costs	$	26		$	1		$	43		$	33


United
Service cost	$	2		$	2		$	8		$	8
Interest cost		3			3			28			29
Expected return on plan assets		(3	)		(3	)		—			(1	)
Amortization of unrecognized gain and prior service cost		(1	)		(1	)		—			(3	)

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


Continental (a)
Service cost	$	21		$	16		$	4		$	3
Interest cost		42			40			4			3
Expected return on plan assets		(32	)		(28	)		—			—
Amortization of unrecognized (gain) loss and prior service cost		(6	)		25			(1	)		4

Net periodic benefit costs	$	25		$	53		$	7		$	10

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


	Pension Benefits Six Months Ended June 30,						Other Postretirement Benefits Six Months Ended June 30,
	2011			2010			2011			2010
UAL
Service cost	$	44		$	3		$	24		$	15
Interest cost		89			5			63			58
Expected return on plan assets		(69	)		(5	)		(1	)		(1	)
Amortization of unrecognized gain and prior service cost		(12	)		(1	)		(1	)		(6	)

Net periodic benefit costs	$	52		$	2		$	85		$	66


United
Service cost	$	3		$	3		$	17		$	15
Interest cost		5			5			56			58
Expected return on plan assets		(5	)		(5	)		(1	)		(1	)
Amortization of unrecognized gain and prior service cost		(1	)		(1	)		—			(6	)

Net periodic benefit costs	$	2		$	2		$	72		$	66


Continental (a)
Service cost	$	41		$	33		$	7		$	5
Interest cost		84			79			7			7
Expected return on plan assets		(64	)		(55	)		—			—
Amortization of unrecognized (gain) loss and prior service cost		(11	)		49			(1	)		8

Net periodic benefit costs	$	50		$	106		$	13		$	20

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

During the six months ended June 30, 2011, Continental contributed $71 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $33 million to its tax-qualified defined benefit pension plans in July 2011.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Share-based compensation expense	$	14	$	8	$	27	$	21



	June 30, 2011		December 31, 2010
Unrecognized share-based compensation expense	$	63	$	43

Profit Sharing Plans. Effective for 2011, substantially all employees participate in profit sharing plans, which pay 15% of total pre-tax earnings, excluding special items and stock compensation expense, to eligible employees when pre-tax profit excluding special items, profit sharing expense and stock-based compensation program expense exceeds $10 million. Eligible U.S. co-workers in each participating work group will receive a profit sharing payout using a formula based on the ratio of each qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic workgroups. The international profit sharing plan utilizes the same profit sharing payout percentage that is paid out to eligible U.S. co-workers. UAL recorded profit sharing and related payroll tax expense of $90 million in the three and six months ended June 30, 2011. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations.

During 2010, United and Continental maintained separate employee profit sharing plans for the employees of each respective subsidiary. During the three and six months ended June 30, 2010, United and Continental Predecessor recorded profit sharing and related payroll tax expense of $63 million and $19 million, respectively.

NOTE 5 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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


	June 30, 2011											December 31, 2010
	Total			Level 1		Level 2			Level 3			Total			Level 1		Level 2			Level 3
	UAL
Cash and cash equivalents	$	7,519		$	7,519	$	—		$	—		$	8,069		$	8,069	$	—		$	—
Short-term investments:
Auction rate securities		121			—		—			121			119			—		—			119
CDARS		196			196		—			—			45			45		—			—
Asset-backed securities		224			224		—			—			258			258		—			—
Corporate debt		397			397		—			—			135			135		—			—
U.S. government and agency notes		47			47		—			—			39			39		—			—
Other fixed income securities		75			75		—			—			15			15		—			—
EETC		65			—		—			65			66			—		—			66
Fuel derivatives, net		191			—		191			—			375			—		375			—
Foreign currency derivatives		(3	)		—		(3	)		—			(7	)		—		(7	)		—
Restricted cash (a)		160			160		—			—			160			160		—			—

	United (a)
Cash and cash equivalents	$	4,107		$	4,107	$	—		$	—		$	4,665		$	4,665	$	—		$	—
Short-term investments:
Asset-backed securities		23			23		—			—			—			—		—			—
Corporate debt		124			124		—			—			—
U.S. government and agency notes		5			5		—			—			—			—		—			—
Other fixed income securities		3			3		—			—
EETC		65			—		—			65			66			—		—			66
Fuel derivatives, net		138			—		138			—			277			—		277			—

	Continental Successor
Cash and cash equivalents	$	3,406		$	3,406	$	—		$	—		$	3,398		$	3,398	$	—		$	—
Short-term investments:
Auction rate securities		121			—		—			121			119			—		—			119
CDARS		196			196		—			—			45			45		—			—
Asset-backed securities		201			201		—			—			258			258		—			—
Corporate debt		273			273		—			—			135			135		—			—
U.S. government and agency notes		41			41		—			—			39			39		—			—
Other fixed income securities		72			72		—			—			15			15		—			—
Fuel derivatives, net		53			—		53			—			98			—		98			—
Foreign currency derivatives		(3	)		—		(3	)		—			(7	)		—		(7	)		—
Restricted cash		160			160		—			—			160			160		—			—
Convertible debt derivative asset		251			—		—			251			286			—		—			286
Convertible debt option liability		(143	)		—		—			(143	)		(164	)		—		—			(164	)

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

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


	Three Months Ended June 30,
	2011				2010
UAL (a)	Auction Rate Securities		EETC		EETC
Balance at March 31	$	120	$	63	$	58
Settlements		—		—		—
Reported in earnings - unrealized		1		—		—
Reported in other comprehensive income		—		2		3

Balance at June 30	$	121	$	65	$	61

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


	Six Months Ended June 30,
	2011					2010
UAL (a)	Auction Rate Securities		EETC			EETC
Balance at January 1	$	119	$	66		$	51
Settlements		—		(2	)		(2	)
Reported in earnings - unrealized		1		—			—
Reported in other comprehensive income		1		1			12

Balance at June 30	$	121	$	65		$	61

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


Continental	Successor - 2011								Predecessor - 2010
	Auction Rate Securities		Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)			Auction Rate Securities			Auction Rate Securities Put Right
Balance at March 31	$	120	$	262		$	(152	)	$	164		$	16
Sales		—		—			—			(64	)		—
Gains (losses):
Reported in earnings:
Realized		—		—			—			17			(16	)
Unrealized		1		(11	)		9			—			—
Reported in other comprehensive income		—		—			—			—			—

Balance at June 30	$	121	$	251		$	(143	)	$	117		$	—

(a)

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


Continental	Successor - 2011								Predecessor - 2010
	Auction Rate Securities		Convertible Debt Supplemental Derivative Asset (a)			Convertible Debt Conversion Option Liability (a)			Auction Rate Securities			Auction Rate Securities Put Right
Balance at January 1	$	119	$	286		$	(164	)	$	201		$	20
Sales		—		—			—			(106	)		—
Gains (losses):
Reported in earnings:
Realized		—		—			—			23			(21	)
Unrealized		1		(35	)		21			—			1
Reported in other comprehensive income (loss)		1		—			—			(1	)		—

Balance at June 30	$	121	$	251		$	(143	)	$	117		$	—

(a)

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

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

As of June 30, 2011, United’s enhanced equipment trust certificate (“EETC”) securities, which were repurchased in open market transactions in 2007, have an amortized cost basis of $68 million and unrealized losses of $3 million. As of June 30, 2011, these securities have been in an unrealized loss position for a period of over twelve months. However, United has not recognized an impairment loss in earnings related to these securities because it does not intend or expect to be required to sell the securities and expects to recover the entire amortized cost basis. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

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

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


	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
UAL debt	$	12,490	$	13,304	$	13,845	$	14,995
United debt		6,103		6,216		7,026		7,350
Continental Successor debt		5,973		6,133		6,401		6,663

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


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

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

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

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

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

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

NOTE 6 - HEDGING ACTIVITIES

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

For fuel derivative instruments designated as cash flow hedges, the Company records the effective portion of periodic changes in the fair value of the derivatives in accumulated other comprehensive income (loss) (“AOCI”) until the underlying fuel is consumed and recorded in fuel expense. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to miscellaneous nonoperating income (expense) in the statements of consolidated operations. Nonoperating income (expense) for the three and six months ended June 30, 2011 includes $34 million and $31 million, respectively, of expense resulting from ineffectiveness caused by a decrease in fuel hedge values in excess of the decrease in aircraft fuel prices during the quarter. The impact is concentrated in the fuel hedges entered into by Continental as a result of the redesignation of Continental’s fuel hedge portfolio under cash flow hedge accounting as of April 1, 2011 when the portfolio was fully integrated with United’s fuel hedge portfolio. This redesignation deferred certain gains on these contracts that will be recognized as part of fuel expense as these positions settle in the future, and therefore any impact is expected to be neutral to earnings over the full term of each contract, assuming current fuel prices.

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

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


	Maximum Price					Minimum Price
	% of Expected Consumption			Weighted Average Price (per gallon)		% of Expected Consumption			Weighted Average Price (per gallon)

UAL
Heating oil collars		15	%	$	3.32		15	%	$	2.65
Heating oil call options		4			2.41		N/A			N/A
Heating oil swaps		3			2.24		3			2.24
West Texas Intermediate (“WTI”) crude oil call options		13			2.32		N/A			N/A
WTI crude oil swaps		11			2.17		11			2.17
Aircraft fuel call options		4			3.15		N/A			N/A
Aircraft fuel swaps		1			3.14		1			3.14

Total		51	%				30	%

As of June 30, 2011, United and Continental had hedged projected fuel requirements for the remainder of 2011 of 54% and 44%, respectively, consistent with the hedged instruments and underlyings presented in the table above for UAL. As of June 30, 2011, UAL, United and Continental had also hedged 13%, 16% and 8%, respectively, of projected first half 2012 fuel consumption.

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


Derivatives designated as hedges		June 30, 2011						December 31, 2010
	Balance Sheet Location	UAL		United		Continental Successor		UAL		United		Continental Successor

Assets:
Fuel contracts due within one year	Receivables	$	194	$	141	$	53	$	375	$	277	$	98


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


Fuel contracts	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)						Gain (Loss) Reclassified from AOCI into Income (Fuel Expense) (Effective Portion)					Amount of Gain (Loss) Recognized in Income (Nonoperating Expense) (Ineffective Portion)
	Three Months Ended June 30,						Three Months Ended June 30,					Three Months Ended June 30,
	2011			2010			2011		2010			2011			2010
UAL	$	(231	)	$	(146	)	$	278	$	—		$	(34	)	$	(3	)
United		(149	)		(146	)		213		—			(7	)		(3	)
Continental (a)		(82	)		(53	)		65		(9	)		(27	)		(2	)

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


Fuel contracts	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)					Gain (Loss) Reclassified from AOCI into Income (Fuel Expense) (Effective Portion)					Amount of Gain (Loss) Recognized in Income (Nonoperating Expense) (Ineffective Portion)
	Six Months Ended June 30,					Six Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010			2011			2010
UAL	$	293	$	(146	)	$	432	$	—		$	(31	)	$	(3	)
United		236		(146	)		338		—			(5	)		(3	)
Continental (a)		57		(37	)		94		(6	)		(26	)		(2	)

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

Derivative Credit Risk and Fair Value

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


	UAL			United			Continental
Net derivative asset with counterparties	$	191		$	138		$	53
Collateral held by the Company (a)		(31	)		(31	)		—
Collateral posted by the Company		—			—			—
Potential loss related to the failure of the Company’s counterparties to perform (b)		160			107			53

(a)	Classified as an other current liability.

(b)	Based on fair value at June 30, 2011 and collateral held.

NOTE 7 - COMPREHENSIVE INCOME (LOSS)

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


	UAL						United						Continental Successor (a)			Continental Predecessor (a)
Three Months Ended June 30,	2011			2010			2011			2010			2011			2010

Net income	$	538		$	273		$	281		$	281		$	262		$	233
Other comprehensive income (loss) adjustments, before tax:
Investments		2			3			2			3			—			—
Fuel derivative financial instruments:
Reclassification into earnings		(278	)		—			(213	)		—			(65	)		9
Change in fair value		(231	)		(146	)		(149	)		(146	)		(82	)		(53	)
Employee benefit plans:
Amortization of net actuarial (gains) losses		(8	)		(3	)		(1	)		(3	)		(7	)		21
Amortization of prior service cost		—			—			—			—			—			8
Other		1			(3	)		—			(4	)		1			(3	)

Comprehensive loss adjustments, before tax		(514	)		(149	)		(361	)		(150	)		(153	)		(18	)


Total comprehensive income (loss) (a)	$	24		$	124		$	(80	)	$	131		$	109		$	215

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


	UAL						United						Continental Successor (a)			Continental Predecessor (a)
Six Months Ended June 30,	2011			2010			2011			2010			2011			2010

Net income	$	325		$	191		$	121		$	207		$	205		$	87
Other comprehensive income (loss) adjustments, before tax:
Investments		3			12			1			12			2			—
Fuel derivative financial instruments:
Reclassification into earnings		(432	)		—			(338	)		—			(94	)		6
Change in fair value		293			(146	)		236			(146	)		57			(37	)
Employee benefit plans:
Amortization of net actuarial (gains) losses		(13	)		(6	)		(1	)		(6	)		(12	)		41
Amortization of prior service cost		—			—			—			—			—			16
Other		4			(4	)		1			(4	)		3			(3	)

Comprehensive income (loss) adjustments, before tax		(145	)		(144	)		(101	)		(144	)		(44	)		23


Total comprehensive income (a)	$	180		$	47		$	20		$	63		$	161		$	110

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

NOTE 8 - COMMITMENTS AND CONTINGENCIES

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

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

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

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

Trans-Atlantic Joint Venture. Under the revenue-sharing joint venture agreement covering trans-Atlantic routes, payments among participants are based on a formula that compares current period unit revenue performance on trans-Atlantic routes to a historic period or “baseline,” which is reset annually. The payments are calculated on a quarterly basis and are subject to a cap. UAL recorded a decrease in passenger revenue of $44 million related to its estimated revenue sharing obligations through the six months ended June 30, 2011.

Contingent Senior Unsecured Notes. UAL would be obligated under an indenture to issue to the Pension Benefit Guaranty Corporation (“PBGC”) up to $500 million aggregate principal amount of 8% Contingent Senior Notes (the “8% Notes”) in up to eight equal tranches of $62.5 million if certain financial triggering events occur (with each tranche issued no later than 45 days following the end of any applicable fiscal year). A triggering event occurs when UAL’s EBITDAR, as defined in the 8% Notes indenture, exceeds $3.5 billion over the prior 12 months ending June 30 or December 31 of any applicable fiscal year. The twelve month measurement periods began with the fiscal year ended December 31, 2009 and will end with the fiscal year ending December 31, 2017. As of June 30, 2011, a triggering event under the 8% Notes indenture occurred and, as a result, UAL is obligated to issue one tranche of $62.5 million of the 8% Notes no later than February 14, 2012. This tranche will mature June 30, 2026, with interest accruing from the triggering event measurement date at a rate of 8% per annum that is payable in cash in semi-annual installments starting June 30, 2012. The tranche of 8% Notes will be callable, at UAL’s option, at any time at par, plus accrued and unpaid interest. UAL recorded a liability for the fair value of the $62.5 million tranche in the second quarter of 2011, which totaled $49 million. This $49 million charge is being classified as an integration cost as the financial results of UAL, excluding Continental’s results, would not have resulted in a triggering event under the indenture (see Note 10). The amount recorded is net of a discount applied to the future principal and interest payments using market interest rates for similar structured notes. This is the first such occurrence of UAL’s obligation to issue a tranche of 8% Notes.

Commitments. The table below summarizes the Company’s commitments as of June 30, 2011, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and include other commitments primarily to acquire information technology services and assets (in millions):


	UAL		United		Continental Successor
Last Six Months of 2011	$	517	$	178	$	339
2012		1,451		145		1,306
2013		925		59

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