UAL

Business Context and Reporting Period

Company: United Airlines Holdings, Inc. (UAL Corporation)

Reporting Period: Fiscal year ended December 31, 2006.

Context: The Company emerged from Chapter 11 bankruptcy protection on February 1, 2006, adopting "fresh-start" reporting. Consequently, financial statements prior to February 1, 2006 (Predecessor) are not comparable to those on or after that date (Successor). The 2006 results presented in the summary combine the Predecessor period (January 1–31, 2006) and the Successor period (February 1–December 31, 2006) to allow for year-over-year comparison with 2005 and 2004.

Operations: UAL operates as a holding company with United Air Lines, Inc. as its principal subsidiary. Operations are divided into two segments: Mainline and United Express. The Company serves over 200 destinations globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The Company generated operating income of $447 million in 2006, a significant improvement from an operating loss of $219 million in 2005. Excluding reorganization items, the net loss narrowed to $58 million from $575 million in 2005.
• Revenue Growth: Total operating revenues increased 11% to $19.34 billion, driven by a 11% increase in mainline passenger revenue and a 19% increase in regional affiliate revenue. Yield (revenue per passenger mile) increased 8%.
• Fuel Costs: Mainline fuel expense rose 20% to $4.82 billion due to a 18% increase in the average price per gallon ($2.11 vs. $1.79 in 2005), despite only a 2% increase in fuel consumption.
• Debt Structure: Long-term debt increased significantly to $9.39 billion (from $1.43 billion in 2005) due to the $3.0 billion Credit Facility secured upon emergence from bankruptcy to replace Debtor-In-Possession (DIP) financing.
• United Express Performance: United Express contributed $77 million to operating income in 2006, reversing a negative contribution of $317 million in 2005, due to restructured cost agreements and network optimization.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management believes the restructuring has made United competitive with network peers. The Company is focused on continuous improvement, cost reduction, and revenue optimization. In 2006, the Company announced a program to reduce projected 2007 expenses by $400 million, with $135 million already realized in 2006. The Company plans to commence new international routes (Washington Dulles-Beijing) in March 2007.

Recent Developments: In February 2007, the Company prepaid $972 million of its Credit Facility debt and amended the facility terms, reducing interest rates and collateral requirements. This is expected to save approximately $70 million annually in net interest expense.

Risks and Contingencies:

• Fuel Volatility: Continued high fuel costs or supply disruptions remain a primary risk. The Company hedges a portion of its fuel requirements but cannot guarantee protection against all price increases.
• Bankruptcy Contingencies: Several significant matters remain unresolved in Bankruptcy Court, including the valuation of security interests in municipal bonds at SFO and LAX, and the final resolution of pilot non-qualified pension plan terminations. Unfavorable resolutions could materially impact financial results.
• Internal Controls: The Company identified a material weakness in internal control over financial reporting related to tax accounting due to high staff turnover. While remediation efforts are underway, this poses a risk of future misstatements.
• Competition: The airline industry is highly competitive, with significant pressure from low-cost carriers (LCCs) that have lower cost structures.

Key Facts for Investor Verification

• Fresh-Start Accounting: Verify that comparisons between 2006 and prior years account for the non-comparability of Predecessor (pre-Feb 1, 2006) and Successor (post-Feb 1, 2006) financial statements due to fair value adjustments and reorganization items.
• Reorganization Items: Note that the reported Net Income of $22.88 billion includes a $22.9 billion non-cash reorganization gain from the discharge of liabilities. The core operating performance is better reflected by the "Net Income excluding reorganization items" of ($58 million).
• Debt Covenants: Review the terms of the Amended Credit Facility (effective Feb 2007) regarding minimum EBITDAR ratios and unrestricted cash balance requirements ($750 million).
• Unresolved Litigation: Monitor the status of the SFO and LAX municipal bond secured interest litigation and the pilot pension plan termination appeals, as these represent potential liabilities.
• Internal Control Weakness: Confirm the status of remediation efforts regarding the material weakness in tax accounting controls identified in 2006.