UAL

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2005, for UAL Corporation (United Airlines). The Company was operating under Chapter 11 bankruptcy protection for the entire reporting period, having filed for reorganization on December 9, 2002. The Company emerged from bankruptcy on February 1, 2006, implementing "fresh start" accounting. United is a major global airline operating mainline and regional (United Express) services, with significant revenue contributions from its Mileage Plus loyalty program, United Cargo, and United Services.

Key Financial Metrics

Material Changes vs. Prior Period

• Operating Performance: Operating loss improved significantly from $854 million in 2004 to $219 million in 2005, despite a 43% increase in average fuel costs. This improvement was driven by a 4% increase in yield and a 2.2 point increase in passenger load factor.
• Net Loss: The reported net loss widened dramatically to $21.2 billion in 2005 compared to $1.7 billion in 2004. This was primarily due to $20.6 billion in non-cash reorganization expenses, including $8.9 billion in pension-related charges and $6.5 billion in employee-related charges associated with the bankruptcy plan.
• Fuel Costs: Mainline fuel expense increased by $1.09 billion (37%) to $4.032 billion, becoming the largest operating expense category, surpassing salaries and related costs.
• Liquidity: Cash and cash equivalents increased to $1.761 billion at year-end 2005 from $1.223 billion in 2004. Cash generated from operations improved to $1.079 billion.

Guidance, Outlook, Risks, and Unusual Items

• Bankruptcy Exit: The Company confirmed its Plan of Reorganization on January 20, 2006, and emerged from bankruptcy on February 1, 2006. Old equity was canceled, and new equity was issued to creditors and employees. The Company secured a $3.0 billion exit financing facility (Credit Facility).
• Outlook: Management expects system mainline capacity to increase approximately 1.0% in Q1 2006 and 2.5% to 3.0% for the full year 2006. Fuel prices are expected to average $1.95 per gallon in Q1 2006 and $1.94 for the full year.
• Unusual Items: The 2005 results include $20.6 billion in reorganization items. Significant non-cash charges included the termination of underfunded defined benefit pension plans and the settlement of claims with the Pension Benefit Guaranty Corporation (PBGC).
• Risks: Key risks include continued high fuel costs, intense competition from low-cost carriers, potential labor disputes (though contracts are not amendable until 2010), and the resolution of remaining bankruptcy court matters, including municipal bond obligations and aircraft financing disputes.

Investor Verification Checklist

• Fresh Start Accounting: Verify the impact of the February 1, 2006, adoption of fresh start accounting, which will remeasure assets and liabilities to fair value, rendering 2005 historical results non-comparable to future periods.
• Reorganization Expenses: Confirm the composition of the $20.6 billion reorganization charge, specifically the $7.2 billion PBGC settlement and $6.5 billion employee deemed claim, to understand the non-cash nature of the net loss.
• Debt Structure: Review the terms of the new $3.0 billion Credit Facility and the issuance of convertible notes and preferred stock to the PBGC and other creditors.
• Unresolved Claims: Monitor the resolution of pending bankruptcy matters, including the Pilot Plan termination dispute and municipal bond litigation, which could result in material adjustments to liabilities.
• Fuel Hedging: Assess the Company's ability to hedge fuel costs, noting that as of December 31, 2005, the Company had no fuel hedges in place.