UAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, for UAL Corporation and its principal subsidiary, United Air Lines, Inc. The airline industry faced an extremely challenging environment characterized by record-high crude oil prices (reaching approximately $140 per barrel), a weakening U.S. economy, and excess industry capacity. The Company emerged from Chapter 11 bankruptcy in February 2006 and continues to resolve related claims and litigation.

Key Financial Metrics

Note: Operating expenses include significant non-cash impairment charges. Fuel expense for the three months ended June 30, 2008, was $1,848 million, a 53% increase year-over-year.

Material Changes Versus Prior Period

• Significant Losses: The Company reported a net loss of $2.7 billion for the quarter and $3.3 billion for the six-month period, compared to net income of $274 million and $122 million, respectively, in the prior year periods.
• Asset Impairments: The Company recorded total impairment charges of approximately $2.5 billion in the second quarter of 2008. This included a full write-off of goodwill ($2.277 billion), impairments of indefinite-lived intangible assets ($80 million), and impairments of tangible assets including aircraft and pre-delivery deposits ($143 million).
• Fuel Costs: Aircraft fuel expense increased by $642 million (53%) in the quarter and $1.2 billion (52%) in the six-month period compared to the prior year, driven by a 55% increase in the average price per gallon of jet fuel.
• Revenue Growth: Despite traffic declines, operating revenues increased 3% in the quarter and 5% year-to-date, primarily due to yield increases and fuel surcharges.

Guidance, Outlook, and Management Commentary

• Operational Plan: Management is implementing a plan to address high fuel costs, including reducing mainline domestic capacity by approximately 16% year-over-year by Q4 2008. The Company plans to permanently remove 100 aircraft from its fleet by the end of 2009, including the entire B737 fleet.
• Workforce Reduction: The Company anticipates a workforce reduction of approximately 7,000 employees by the end of 2009 through attrition, furloughs, and layoffs.
• Liquidity and Financing: The Company maintains a minimum unrestricted cash balance covenant of $1.0 billion under its Amended Credit Facility. In July 2008, the Company completed a $241 million secured debt financing and reached a non-binding agreement to amend credit card processing agreements, potentially releasing $350 million in restricted cash and receiving $600 million in payments.
• Strategic Alliance: United announced a strategic partnership with Continental Airlines to link networks, create revenue enhancements, and achieve cost savings.
• Risks: Future liquidity is threatened by continued high fuel prices, potential failure to meet debt covenants, and the possibility of increased credit card holdbacks on advance ticket sales.

Investor Verification Checklist

• Impairment Finalization: Verify if the preliminary goodwill and intangible asset impairment calculations ($2.5 billion) are finalized in the Q3 2008 report, as adjustments may be required.
• Covenant Compliance: Monitor the Company's ability to maintain the $1.0 billion unrestricted cash balance and the EBITDAR to fixed charges ratio required by the Amended Credit Facility starting in Q2 2009.
• Credit Card Holdbacks: Confirm the finalization of the agreement with the largest credit card processor to reduce the $382 million holdback on advance ticket sales.
• Bankruptcy Litigation: Track the status of pending appeals regarding SFO and LAX municipal bond secured interest claims, which could impact liabilities.
• Fuel Hedging: Review the realization of the $237 million in unrealized fuel hedge gains recorded as of June 30, 2008, and their impact on future cash flows.