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[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to____

Commission File No. 1-6033

Securities registered pursuant to Section 12(b) of the Act: None
 

Securities registered pursuant to Section 12 (g) of the Act:

        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.  Yes    X                   No ____

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

        Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
 Yes   X               No ___

        The aggregate market value of voting stock held by non-affiliates of the Registrant was $159,222,577 as of June 30, 2004.  The number of shares of common stock outstanding as of February 28, 2005 was 116,220,959.
 
 

ITEM 1.  BUSINESS.

        UAL Corporation (together with its consolidated subsidiaries, "we," "our," "us," "UAL" or the "Company") was incorporated under the laws of the State of Delaware on December 30, 1968. Our world headquarters is located at 1200 East Algonquin Road, Elk Grove Township, Illinois 60007. Our mailing address is P.O. Box 66919, Chicago, Illinois 60666 (telephone number (847) 700-4000).

        UAL is a holding company and its principal, wholly owned subsidiary is United Air Lines, Inc., a Delaware corporation ("United"). United's operations, which consist primarily of the transportation of persons, property and mail throughout the U.S. and abroad, accounted for most of UAL's revenues and expenses in 2004. United is one of the largest scheduled passenger airlines in the world with over 1,500 daily departures to more than 120 destinations in 26 countries and two U.S. territories. Through United's unsurpassed global route network, we serve virtually every major market around the world, either directly or through the Star AllianceÔ, which is the world's largest airline network. In addition to the Star Alliance, we provide regional service into our domestic hubs through marketing relationships with United Express regional carriers. In 2004, we launched a new low-fare service, called Ted, designed to serve select leisure markets in a way that allows us to be more competitive with other low-fare carriers.

        Our web address is www.united.com. Through our website, our filings with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are accessible (free of charge) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

This Form 10-K contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to us on the date of the filing of this Form 10-K, and are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from those referenced in the forward-looking statements are listed in the last paragraph of "Outlook" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. We disclaim any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.

Bankruptcy Considerations

        The following discussion provides general background information regarding our Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information pertaining to our bankruptcy filings may be obtained through the website www.pd-ual.com.

        On December 9, 2002 ("Petition Date"), UAL, United and 26 direct and indirect wholly owned subsidiaries filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"). The Bankruptcy Court is jointly administering these cases as "In re UAL Corporation, et al., Case No. 02-B-48191."

        As required by the Bankruptcy Code, the United States Trustee for the Northern District of Illinois appointed on December 13, 2002 an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court concerning our reorganization. There can be no assurance that the Creditors' Committee will support our positions or our plan of reorganization, and any disagreements between the Creditors' Committee and us could protract the Chapter 11 process, hinder our ability to operate during the Chapter 11 process, and delay our emergence from Chapter 11.

        With the exception of our non-filing subsidiaries, we continue to operate our businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. In general, as debtors-in-possession, we are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

        All vendors are being paid for all goods furnished and services provided after the Petition Date in the ordinary course of business. However, under Section 362 of the Bankruptcy Code, actions to collect most of our pre-petition liabilities are automatically stayed, among other things, except for liabilities relating to certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract. Under Section 1110 of the Bankruptcy Code, actions to collect such aircraft-related pre-petition liabilities are automatically stayed for 60 days after the Petition Date (the stay of such actions in our case ended on February 7, 2003), except under two conditions: (a) the debtor may extend the 60-day period by agreement with the relevant financier and with court approval; or (b) the debtor may agree to perform all of the obligations under the applicable lease or financing and cure any defaults as required under the Bankruptcy Code. If neither of these conditions is met, the lessor or financier may demand the return of the aircraft and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such property.

        We have negotiated with our aircraft lessors and lenders to restructure existing financings to reduce aircraft ownership costs to better reflect current market rates, and we have reached agreements in principle to restructure transactions with respect to a majority of our financed aircraft. However, the need for further cost reductions due to difficult changes in the airline industry, substantially higher fuel prices and the continuing weak revenue environment, has required us to re-examine these agreements and to seek to renegotiate certain of those financings. To the extent we are unable to restructure any financings that we believe are unaffordable under our revised business plan, we may face the possibility that one or more lessors or lenders may seek to repossess aircraft. We also will need to finalize those agreements in principle, and to the extent we are unable to do so, we may likewise face the possibility of repossessions. In either case, the loss of a significant number of aircraft could result in a material adverse effect on our financial and operational performance.

        We are currently in discussions with a large group of mostly public-market financiers to renegotiate an agreement in principle for a group of aircraft reached in the summer of 2004 from which we subsequently withdrew due to the need for further cost reductions. While we believe we can ultimately reach a mutually acceptable restructuring for the continued use of these aircraft at affordable rates, the financiers have demanded the return of certain aircraft and there can be no assurance that these aircraft will be available for our continued use. To date, repossession of these aircraft has been enjoined by the Bankruptcy Court, but to the extent the Bankruptcy Court, or another court of competent jurisdiction, permits the repossession of these or other aircraft, our financial and operational performance could be adversely affected.

        We have also rejected or abandoned certain surplus aircraft to adjust our fleet size and composition to more closely match market demand. In addition, as part of ongoing negotiations with financiers, we have converted many long-term financing arrangements into short-term operating leases and, in several instances, re-acquired previously rejected aircraft as circumstances warranted.

        Under Section 365 of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. By order of the Bankruptcy Court, our Section 365 rights to assume, assume and assign, or reject unexpired leases of non-residential real estate expire on the earlier of the date of termination of our exclusive period to file a plan of reorganization (currently, April 30, 2005) or the date of the conclusion of a disclosure statement hearing in connection with a proposed plan of reorganization.

        In general, if we reject an executory contract or unexpired lease, it is treated as a pre-petition breach of the lease or contract in question and, subject to certain exceptions, relieves us of performing any future obligations. However, such a rejection entitles the lessor or contract counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach and accordingly, the counterparty may file a claim against us for such damages. As a result, liabilities subject to compromise are likely to change in the future as a result of damage claims created by our rejection of various aircraft, executory contracts and unexpired leases. Generally, if we assume an aircraft financing agreement, executory contract or unexpired lease we are required to cure existing defaults under such contract or lease. We expect that the future assumption of certain executory contracts and unexpired leases may convert liabilities currently shown as subject to compromise to liabilities not subject to compromise.

        Since the Petition Date, we have focused on transforming the Company to compete effectively in a fundamentally changed and difficult industry. For the first nineteen months of the restructuring, we worked to emerge from Chapter 11 protection with exit financing guaranteed by the Air Transportation Stabilization Board (the "ATSB"). During this time, we achieved average annual cash savings from all stakeholders of $5 billion annually, including savings from aircraft financiers, employees and retirees. In addition, we made substantial progress in restructuring United by not only achieving a lower labor and non-labor cost structure, but also by delivering superior levels of operating performance and customer satisfaction. Despite these accomplishments and the concessions made by United's stakeholders, in June 2004 the ATSB denied our application for a federal loan guarantee.

        Following the ATSB's final denial, it became clear that the additional time needed to restructure further and obtain non-guaranteed exit financing would require us to remain in Chapter 11 longer than originally anticipated. In an effort to attract non-guaranteed exit financing, we undertook a comprehensive reevaluation of our business plan in order to identify all opportunities for further cost savings and revenue improvement. As part of this process, we worked in conjunction with certain members of, and advisors to, the Creditors' Committee to analyze key aspects of our business plan and reorganization. Given the continued harsh business realities currently facing the airline industry, we identified approximately $2 billion in additional annual labor and non-labor cash savings that we believed would be needed to obtain non-guaranteed exit financing. The Company expects to realize the full $2 billion in cash savings in fiscal year 2007.

        During the fourth quarter 2004, we advised the Bankruptcy Court that the systemic changes in the industry and the continued harsh financial environment made termination and replacement of our defined benefit pension plans necessary, and that in addition to pension relief, our updated business plan would require further average annual labor savings from our union and non-union employees. In November 2004, we commenced the process available to us under Section 1113 of the Bankruptcy Code to modify our collective bargaining agreements ("CBAs") in an effort to achieve $725 million in average annual labor savings of the $2 billion target and to eliminate any requirement in our CBAs to maintain a defined benefit pension plan. For information on labor savings, see "Labor Restructuring" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

        To successfully emerge from Chapter 11, in addition to obtaining non-guaranteed exit financing, the Bankruptcy Court must confirm a plan of reorganization, the filing of which will depend on the timing and outcome of numerous ongoing matters in the Chapter 11 process. We expect to file a plan of reorganization that provides for UAL's emergence from bankruptcy later in 2005, but there can be no assurance that the Bankruptcy Court will confirm a plan of reorganization or that any such plan will be implemented successfully.

        The reorganization plan will determine the rights and claims of various creditors and security holders. At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on our business, nor can we make any predictions concerning how each of these claims will be valued in the bankruptcy proceedings. We believe that UAL's presently outstanding equity securities will have no value and will be canceled under any plan of reorganization that we propose. For this reason, we urge that caution be exercised with respect to existing and future investments in any UAL security.

Operations

        Segments.  We operate our businesses through five reporting segments:  North America, the Pacific, the Atlantic, and Latin America (each of which is operated by United) and UAL Loyalty Services, Inc. ("ULS"). Financial information on UAL's operating segments can be found in Note 18, "Segment Information" in the Notes to Consolidated Financial Statements.

        During 2004, United carried approximately 71 million mainline revenue passengers and flew approximately 115 billion mainline revenue passenger miles. (UAL operating statistics do not include the operations of United Express regional carriers, since these entities are independent carriers.) United's network provides comprehensive transportation service within its North American segment and to international destinations within its Pacific, Atlantic and Latin American segments.

        Operating revenues attributed to United's North America segment were $10.5 billion in 2004, $10.0 billion in 2003 and $10.4 billion in 2002. Operating revenues attributed to United's international segments were $5.1 billion in 2004, $4.2 billion in 2003 and $4.7 billion in 2002.

        North America.  As of December 31, 2004, United mainline operations served 86 destinationsthroughout North America and operated hubs in Chicago, Denver, Los Angeles, San Francisco and Washington, D.C. In 2004, United's North America operations, including United Express, accounted for 64% of UAL's operating revenues.

        In 2004, we added two additional United Express partners, Chautauqua Airlines and Shuttle America, to our regional carrier network which includes Skywest Airlines, Air Wisconsin Airlines Corporation, Trans States Airlines and Mesa Airlines. In August 2004, we terminated our partnership with Atlantic Coast Airlines.

        In February 2004, United launched the first phase of Ted in Denver with service to Reno, Las Vegas, Phoenix, New Orleans, Fort Lauderdale, Tampa Bay, Orlando and Ontario (California). Today, Ted provides service from United's hubs covering 13 destinations in the U.S. and 2 in Mexico. Ted operates over 200 daily departures with a fleet of 47 Airbus A320 aircraft. On March 3, 2005, the Company announced that it plans to expand its Ted fleet of aircraft from 47 to 56 aircraft by converting nine mainline Airbus A320 aircraft to the Ted configuration. The new Ted aircraft will provide additional service out of Ted's hubs in Denver, Washington Dulles and Chicago to markets in Florida, Mexico and the Caribbean. Beginning April 3, 2005, Ted will start service from Chicago's Midway airport with flights to both Denver and Washington Dulles.

        Pacific.  United serves the Pacific from its U.S. gateway cities of Chicago, Honolulu, Los Angeles, New York, San Francisco and Seattle. United provides nonstop service to Beijing, Hong Kong, Osaka, Seoul, Shanghai, Sydney and Tokyo. United also provides direct service to Bangkok, Ho Chi Minh City, Melbourne (Australia), Singapore and Taipei. Effective March 26, 2005, we plan to provide daily nonstop service between San Francisco and Nagoya, Japan. In 2004, United's Pacific operations accounted for 16% of UAL's operating revenues.

        Atlantic.  Washington, D.C. is United's primary gateway to Europe, serving Amsterdam, Brussels, Frankfurt, London, Munich, Zurich and Paris. Chicago is United's secondary gateway to Europe, with nonstop service to and from Amsterdam, Frankfurt, London and Paris. United also provides nonstop service between San Francisco and each of Paris, London and Frankfurt; and between London and each of Los Angeles and New York. United provides seasonal service between Chicago and Bermuda. Beginning in June 2005, United also plans to begin service between Chicago and Munich. In 2004, United's Atlantic operations accounted for 12% of UAL's operating revenues.

        Latin America.  United serves Latin America from its five hubs and provides nonstop service to Aruba, Buenos Aires, Cancun, Cozumel, Guatemala City, Mexico City, Montego Bay, Puerto Vallarta, Punta Cana, San Jose (Costa Rica), San Jose del Cabo, San Juan (Puerto Rico), San Salvador, Sao Paulo, St. Maarten, St. Thomas (U.S Virgin Islands) and Zihuatanejo/Ixtapa. United also provides direct service to Rio de Janeiro (via Sao Paulo) and Montevideo (via Buenos Aires). In 2004, United's Latin America operations accounted for almost 3% of UAL's operating revenues.

        UAL Loyalty Services, Inc.  ULS accounted for 5% of UAL's 2004 operating revenues. ULS focuses on expanding the non-core marketing businesses of UAL and building customer loyalty for United. ULS operates in four areas: loyalty programs, e-commerce, travel clubs and media assets.

        ULS operates substantially all United-branded travel distribution and customer loyalty e-commerce activities, such as united.com. In addition, ULS owns and operates the Mileage Plus frequent flyer program, and is responsible for certain aspects of the program, including member relationships, communications and account management, while United continues to be responsible for other aspects of the program, including the Elite Premier, Premier Executive and Premier Executive 1K loyalty programs, as well as establishment of award mileage redemption requirements and airline-related loyalty recognition policies. United retains responsibility for managing relationships with Mileage Plus' airline partners, while ULS manages relationships with non-airline business partners, such as the Mileage Plus Visa Card, hotels, car rental companies and dining programs. ULS also owns and operates certain other United-branded customer programs as well as the MyPoints.com online loyalty program, under which registered consumers earn points for goods and services purchased from participating vendors.

         United Cargo.  United Cargo offers both domestic and international shipping through a variety of services including Small Package Delivery, T.D. Guaranteed, First Freight, International Freight and Global SP. Freight accounts for approximately 77% of United Cargo's shipments, with mail accounting for the remaining 23%. During 2004, United Cargo accounted for 4% of UAL's revenues by generating $704 million in freight and mail revenue, a 12% increase versus 2003. Although United Cargo is not a separate reporting segment, cargo revenues are allocated to the North America, Pacific, Atlantic and Latin America reporting segments of United. The majority of United Cargo revenues are earned in the international segments of the Company's operations.

        Fuel.  Fuel is our second largest cost behind labor. Our fuel costs and consumption for the years 2004, 2003 and 2002 are as follows:
 

        The price and availability of jet fuel significantly affect our operations. A significant rise in crude oil prices was the primary reason for our fuel expense increasing $871 million in 2004 over our 2003 fuel costs. Due to the highly competitive nature of the airline industry, our ability to pass on increased fuel costs to our customers in the form of higher ticket prices has been limited.

         To ensure adequate supplies of fuel and to provide a measure of control over fuel costs, we arrange to have fuel shipped on major pipelines and stored close to our major hub locations. Although we currently do not anticipate a significant reduction in the availability of jet fuel, a number of factors make predicting fuel prices and fuel availability difficult, including increased world demand due to the improving global economy, geopolitical uncertainties in oil-producing nations, threats of terrorism directed at oil supply infrastructure, and changes in relative demand for other petroleum products that may impact the quantity and price of jet fuel produced from period to period.

        Insurance.  We carry hull and liability insurance of a type customary in the air transportation industry, in amounts which we deem adequate, covering passenger liability, public liability and damage to our aircraft and other physical property. Since the September 11, 2001 terrorist attacks, our premiums have increased significantly.

        After September 11, 2001, commercial insurers cancelled our liability insurance for losses resulting from war and associated perils (terrorism, sabotage, hijacking and other similar events), but we obtained replacement coverage through the federal government. The Homeland Security Act, which became effective in February 2003, mandated the Federal Aviation Administration ("FAA") to provide third-party, passenger and hull war-risk insurance to commercial air carriers through August 31, 2003, and permitted such coverage to be extended to December 31, 2004. The Consolidated Appropriations Act, 2005 signed into law on December 8, 2004, extends this war-risk insurance coverage to commercial air carriers through August 31, 2005, and permits such coverage to be extended until December 31, 2005, if the federal government determines that such an extension is in the national interest. Should the government discontinue this coverage, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all. If we are unable to obtain adequate war risk insurance, our business would be materially and adversely affected.

        Also, we maintain other types of insurance such as property, directors and officers, cargo, automobile and the like, with limits and deductibles that are standard within the industry. These premiums have also risen substantially since September 11, 2001.

        Alliances.  We have entered into a number of bilateral and multilateral alliances with other airlines to provide our customers more travel choices and to participate in markets worldwide that we do not serve directly. These collaborative marketing arrangements typically include one or more of the following features: joint frequent flyer program participation; code sharing of flight operations (whereby one carrier's flights can be marketed under the two-letter airline designator code of another carrier); coordination of reservations, baggage handling and flight schedules; and other resource-sharing activities.

        The most significant of these is the Star Alliance, a global integrated airline network co-founded by United in 1997. As of December 31, 2004, Star Alliance carriers served approximately 780 destinations in over 130 countries with over 13,000 daily flights. Current Star Alliance partners, in addition to United, are Air Canada, Air New Zealand, All Nippon Airways, Asiana, the Austrian Airlines Group (which includes Austrian Airlines, Lauda Air and Austrian Arrows, formerly Tyrolean), bmi, LOT Polish Airlines, Lufthansa, SAS, Singapore Airways, Spanair, Thai International Airways, US Airways and Varig. Mexicana withdrew from the Star Alliance effective March 31, 2004. Effective the same day, the United-Mexicana code share agreement was terminated.

       Star Alliance announced that during 2005, TAP Air Portugal and South African Airways will join the alliance as full members and that Blue1 (owned by SAS), Adria Airways (Slovenia's national carrier) and Croatia Airways (Croatia's national carrier) will join as regional Star Alliance members.

       In addition to these marketing relationships, United currently has independent marketing agreements with other air carriers, including Air China, Air Dolomiti, Aloha, BWIA West Indies Airways, Continental Connection (operated by Gulfstream), Fair Inc., dba "ANA Connection," Great Lakes Airlines (a regional carrier), and Virgin Blue.

        Mileage Plus.  Our Mileage Plus frequent flyer program encourages customer loyalty by offering awards and services to frequent travelers. There are more than 45 million members enrolled in Mileage Plus, who earn mileage credit for flights on United, United Express, Ted, the Star Alliance and certain other airlines that participate in the program. Miles also can be earned by purchasing the goods and services of our non-airline partners, such as hotels, car rental companies, and credit card issuers. Mileage credits can be redeemed for free, discounted or upgraded travel and non-travel awards. For a detailed description of the accounting treatment of Mileage Plus awards, see "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Distribution Channels.  The majority of our airline inventory continues to be distributed through the traditional channels of travel agencies and global distribution systems. The growing use of electronic ticket distribution systems, including electronic tickets and the Internet, however, provides us with an opportunity to lower our ticket distribution costs. To capitalize on these cost-saving opportunities, we continue to expand the capabilities of our website, united.com, and encourage our customers to make their bookings on united.com.

Industry Conditions

        Seasonality.  The air travel business is subject to seasonal fluctuations. Our operations can be adversely impacted by severe weather and our first- and fourth-quarter results normally reflect reduced travel demand. Historically, results of operations are better in the second and third quarters. From 2001 through 2003, however, the typical seasonal relationships were distorted by the events of September 11, 2001, the fear of terrorism, the Iraq war, fluctuations in fuel prices, and general economic conditions. The Company experienced a more typical seasonal pattern of financial results in 2004.

        Domestic Competition.  The domestic airline industry is highly competitive and volatile. In domestic markets, new and existing carriers deemed fit by the Department of Transportation ("DOT") are free to initiate service between any two points in the U.S. Our domestic competitors are primarily the other U.S. airlines, a number of whom are low-cost carriers ("LCCs") with significantly lower cost structures than ours, and, to a lesser extent, other forms of transportation.

        United faces significantly more domestic competition now than it did in the past. This increase is largely attributable to the growth of LCCs, whose share of domestic passengers is now over 30 percent. Accordingly, about 75 percent of United's domestic revenue is now exposed to LCCs, which is double the percentage from a decade ago. We anticipate that competition from LCCs and other U.S. airlines will continue to intensify in the future.

        Domestic pricing decisions are largely affected by the need to meet competition from other U.S. airlines. Fare discounting by competitors has historically had a negative effect on our financial results because we generally find it necessary to match competitors' fares to maintain passenger traffic. Periodic attempts by United and other network airlines to raise fares have often failed due to lack of competitive matching by LCCs. Because of vastly different cost structures, low-ticket prices that generate a profit for an LCC usually have a negative effect on our financial results. The introduction of Ted by United in early 2004 is designed to provide United with a lower-cost operation in selected leisure markets, under which United can be more economically competitive with its LCC rivals.

        International Competition. In our international networks, we compete not only with U.S. airlines, but also with foreign carriers. Our competition on specified international routes is subject to varying degrees of governmental regulations. See "Industry Regulation" below. As the U.S. is the largest market for air travel worldwide, our ability to generate U.S. originating traffic from our integrated domestic route systems provides us with an advantage over non-U.S. carriers. Foreign carriers are prohibited by U.S. law from carrying local passengers between two points in the U.S. and we experience comparable restrictions in foreign countries. In addition, U.S. carriers are often constrained from carrying passengers to points beyond designated international gateway cities due to limitations in air service agreements or restrictions imposed unilaterally by foreign governments. To compensate for these structural limitations, U.S. and foreign carriers have entered into alliances and marketing arrangements that allow the carriers to feed traffic to each other's flights. See "Alliances" above.

Industry Regulation

        Domestic Regulation.

        General. All carriers engaged in air transportation in the United States are subject to regulation by the DOT. Among its responsibilities, the DOT has authority to issue certificates of public convenience and necessity for domestic air transportation (no air carrier, unless exempted, may provide air transportation without a DOT certificate of public convenience and necessity), grants international route authorities, approves international code share agreements, regulates methods of competition and enforces certain consumer protection regulations, such as those dealing with advertising, denied boarding compensation and baggage liability. We operate under a certificate of public convenience and necessity issued by the DOT. This certificate may be altered, amended, modified or suspended by the DOT if public convenience and necessity so require, or may be revoked for intentional failure to comply with the terms and conditions of the certificate.

        Airlines also are regulated by the FAA, a division of the DOT, primarily in the areas of flight operations, maintenance and other safety and technical matters. The FAA has authority to issue air carrier operating certificates and aircraft airworthiness certificates, prescribe maintenance procedures, and regulate pilot and other employee training, among other responsibilities. From time to time, the FAA issues rules that require air carriers to take certain actions, such as the inspection or modification of aircraft and other equipment, that may cause us to incur substantial, unplanned expenses. We are also subject to inquiries by these and other U.S. and international regulatory bodies. We do not believe that any such existing inquiries will have a material affect on our business.

        The airline industry is also subject to various other federal, state and local laws and regulations. The Department of Homeland Security has jurisdiction over virtually all aspects of civil aviation security. See "Legislation" below. The Department of Justice has jurisdiction over certain airline competition matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail. Labor relations in the airline industry are generally governed by the Railway Labor Act. Future regulatory and legal compliance developments in the U.S. and abroad could materially and adversely affect operations and increase operating costs for the airline industry, including the Company.

        Airport Access. Access to landing and take-off rights, or "slots," at three major U.S. airports and certain foreign airports served by United are subject to government regulation. The FAA has designated John F. Kennedy International Airport ("Kennedy") and LaGuardia Airport ("LaGuardia") in New York and Ronald Reagan Washington National Airport in Washington, D.C. as "high density traffic airports" and has limited the number of departure and arrival slots at those airports. Slot restrictions at O'Hare International Airport in Chicago ("O'Hare") were eliminated in July 2002 and are slated to be eliminated at Kennedy and LaGuardia by 2007. From time to time, the elimination of slot restrictions has impacted our operational performance and reliability.

        To address congestion concerns and delays at O'Hare, United and American Airlines reached agreements with the FAA in January 2004 to reduce each of their flight schedules at O'Hare. We reduced our flight schedule at O'Hare beginning February 2004 between the peak hours of 1:00 p.m. and 8:00 p.m. In addition, effective March 2004, we again depeaked our flight schedule by 5%. Subsequently, United, American Airlines and certain other carriers complied with the FAA's request to further depeak afternoon operations at O'Hare resulting in a slight reduction in operations overall beginning in November 2004. On February 10, 2005, the FAA issued an order to show cause why the current operating restrictions at O'Hare should not remain in place through October 2005. We expect a formal rulemaking process to address O'Hare congestion to begin later this year.

        Legislation. Since September 11, 2001, aviation security has been and continues to be a subject of frequent legislative action, requiring changes to our security processes and increasing the economic cost of security procedures on the Company. The Aviation and Transportation Security Act (the "Aviation Security Act"), enacted in November 2001, has had wide-ranging effects on our operations. The Aviation Security Act made the federal government responsible for virtually all aspects of civil aviation security, creating a new Transportation Security Administration ("TSA"), which is a part of the Department of Homeland Security pursuant to the Homeland Security Act of 2002. Under the Aviation Security Act, substantially all security screeners at airports are now federal employees and significant other aspects of airline and airport security are now overseen by the TSA. Pursuant to the Aviation Security Act, funding for airline and airport security is provided in part by a passenger security fee of $2.50 per flight segment (capped at $10.00 per round trip), which is collected by the air carriers from passengers and remitted to the government. In addition, air carriers are required to submit to the government an additional security fee equal to the amount the air carrier paid for security screening of passengers and property in 2000. It is expected that aviation security laws and processes will continue to be under review and subject to change by the federal government in the future.

        International Regulation.

        General. International air transportation is subject to extensive government regulation. In connection with our international services, we are regulated by both the U.S. government and the governments of the foreign countries we serve. In addition, the availability of international routes to U.S. carriers is regulated by treaties and related aviation agreements between the U.S. and foreign governments, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments.

       Airport Access. Historically, access to foreign markets has been tightly controlled through bilateral agreements between the U.S. and each foreign country involved. These agreements regulate the number of markets served, the number of carriers allowed to serve each market, and the frequency of carriers' flights. Since the early 1990s, the U.S. has pursued a policy of "open skies" (meaning all carriers have access to the destination), under which the U.S. government has negotiated a number of bilateral agreements allowing unrestricted access to foreign markets. Additionally, all of the airports that United serves in Europe and Asia maintain slot controls, and many of these are restrictive due to congestion at these airports. London Heathrow, Frankfurt and Tokyo Narita are among the most restrictive due to capacity limitations, and United has significant operations at these locations.

        Further, our ability to serve some countries and expand into certain others is limited by the absence altogether of aviation agreements between the U.S. and the relevant governments. Shifts in U.S. or foreign government aviation policies can lead to the alteration or termination of air service agreements between the U.S. and other countries. Depending on the nature of the change, the value of our route authorities may be enhanced or diminished.

        In June 2004, the United States and the People's Republic of China agreed to implement various amendments to the existing air services agreement, providing an opportunity for some new U.S. China air service for U.S. and Chinese carriers. Subsequently, United obtained rights to operate seven new frequencies, which it is using to operate daily nonstop Chicago-Shanghai roundtrip service, effective October 31, 2004.

        In 2004, the United States and the European Commission attempted to negotiate a single air services agreement to replace the existing bilateral agreements between the United States and the European Union ("EU") member states. The negotiations were not successful and further discussions between the parties are expected in 2005. The European Commission has called upon the EU member states to renounce their air services agreements with the United States because they allegedly do not comply with EU law. To date, no EU member state has indicated a willingness to renounce its air services agreement with the U.S. If EU member states do renounce such agreements, the status of our existing antitrust immunity with our European partners would be in doubt because the immunity is based upon an open skies agreement between the United States and the applicable EU member state.

        In late 2004, the European Commission commenced a consultation process that seeks stakeholder input on the introduction of market-based mechanisms for slot allocation at EU airports. The Commission proposes to introduce a highly regulated form of secondary slot trading. The availability of such slots is not assured and the inability of the Company to obtain or retain needed slots could inhibit its efforts to compete in certain international markets.

        Environmental Regulation.

        The airline industry is subject to increasingly stringent federal, state, local, and foreign environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils, and waste materials. Our industry is also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives. It is our policy to comply with all environmental laws and regulations, which can require significant expenditures. Under the federal Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "Superfund") and similar environmental cleanup laws, generators of waste materials, and owners or facility operators, can be subject to liability for investigation and remediation costs at facilities that have been identified as requiring response actions. We also conduct voluntary remediation actions. Such cleanup obligations can arise from, among other circumstances, the operation of fueling facilities, and primarily involve airport sites. Future costs associated with these activities are not expected to have a material adverse affect on our business.

        From time to time we become aware of United's potential non-compliance with environmental regulations, which have either been identified by the Company (through our internal environmental compliance auditing program) or through notice from a governmental entity. In some instances, these matters could potentially become the subject of an administrative or judicial proceeding and could potentially involve monetary sanctions. We do not expect these matters, individually or collectively, to have a material adverse affect on our business.

Employees

        As of December 31, 2004, the Company and its subsidiaries had approximately 61,000 active employees, of whom approximately 80% are represented by various U.S. labor organizations.

        As of December 31, 2004, the employee groups, number of employees and labor organization for each of United's collective bargaining groups were as follows:
 

(1)  Air Line Pilots Association ("ALPA"); Association of Flight Attendants - Communication Workers of America ("AFA"); Aircraft Mechanics Fraternal Association ("AMFA"); International Association of Machinists and Aerospace Workers ("IAM"); Professional Airline Flight Control Association ("PAFCA"); Transport Workers Union ("TWU"); and International Federation of Professional and Technical Engineers ("IFPTE")

(2)  Amendable dates are as of the filing date of this annual report.

        Collective bargaining agreements are negotiated under the Railway Labor Act, which governs labor relations in the transportation industry, and such agreements typically do not contain an expiration date. Instead, they specify an amendable date, upon which the contract is considered "open for amendment." Prior to the amendable date, neither party is required to agree to modifications to the bargaining agreement. Nevertheless, nothing prevents the parties from agreeing to start negotiations or to modify the agreement in advance of the amendable date. Contracts remain in effect while new agreements are negotiated. During the negotiating period, both the Company and the negotiating union are required to maintain the status quo.

        For detailed information on labor matters, see "Labor Restructuring" in Management's Discussion and Analysis of Financial Condition and Results of Operations.
 

ITEM 2.  PROPERTIES.

Flight Equipment

        As of December 31, 2004, United's operating aircraft fleet totaled 497 jet aircraft, of which 237 were owned and 260 were leased. United has announced plans to reduce the operating fleet to 455 aircraft in the first half of 2005. Details of the operating fleet as of December 31, 2004 are provided in the following table:
 

        As of December 31, 2004, all 237 of the aircraft owned by us were encumbered under debt agreements. For additional information on accounting for aircraft financings see Note 9, "Long-Term Debt" and Note 10, "Lease Obligations" in the Notes to Consolidated Financial Statements.

Ground Facilities

        We have entered into various leases relating to our use of airport landing areas, gates, hangar sites, terminal buildings and other airport facilities in most of the municipalities we serve. These leases are subject to assumption or rejection under the Chapter 11 process. As of December 31, 2004, we have assumed leases in Washington (Dulles and Reagan), Denver (terminal lease only) and San Francisco. Major leases expire at San Francisco in 2011 and 2013, Washington-Dulles in 2014, Chicago O'Hare in 2018, Los Angeles in 2021 and Denver in 2025.

        We own a 93.5-acre complex in suburban Chicago consisting of more than 1 million square feet of office space for our world headquarters, a computer facility and a training center. We also own a flight training center, located in Denver, which can accommodate 36 flight simulators and more than 90 computer-based training stations. We own a limited number of other properties, including a reservations facility and an office building in Denver and a crew hotel in Honolulu. All of these facilities are mortgaged.

        Our Maintenance Operation Center at San Francisco International Airport occupies 130 acres of land, 2.9 million square feet of floor space and 9 aircraft hangar bays under a lease expiring in 2013.

        Our off-airport leased properties have included a number of ticketing, sales and general office facilities in the downtown and outlying areas of most of the larger cities within the United system. As part of our restructuring and cost containment efforts, we have closed, terminated or rejected all of our domestic city ticket office leases. We continue to lease and operate a number of administrative, reservations, sales and other support facilities worldwide.
 

ITEM 3.  LEGAL PROCEEDINGS.

In re: UAL Corporation, et. al.

         As discussed above, on the Petition Date, the Company, United and 26 other direct and indirect wholly owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption "In re UAL Corporation, et al., Case No. 02-B-48191." As debtors-in-possession, we are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. As of the Petition Date, virtually all pending litigation (including some of the actions described below) is stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action to recover on pre-petition claims against us. In addition, we may reject pre-petition executory contracts and unexpired lease obligations, and parties affected by these rejections may file claims with the Bankruptcy Court. At this time, it is not possible to predict the outcome of the Chapter 11 process or its effect on our business.

Summers v. UAL Corporation ESOP, et. al.

        The UAL Corporation Employee Stock Ownership Plan ("ESOP") and the ESOP Committee were sued in the U.S. District Court for the Northern District of Illinois ("the District Court") on February 28, 2003 by certain ESOP participants seeking monetary damages in a purported class action that alleges that the ESOP Committee breached its fiduciary duty by not selling UAL stock held by the ESOP commencing as of July 19, 2001. The complaint cites numerous events and disclosures that allegedly should have alerted the ESOP Committee to the need to sell the shares. The ESOP Committee appointed State Street Bank and Trust Company ("State Street") in September 2002 to act as fiduciary, and State Street started selling the shares in September 2002 when the stock was trading between $1 and $5 per share. Members of the purported class have also filed claims against the Company in the Chapter 11 proceeding asserting that the Company also is liable for the failure to sell the ESOP shares. The Company has $10 million in fiduciary insurance in place to cover some portion of any liability and has a pre-petition obligation to indemnify the ESOP Committee members beyond that coverage, which indemnification obligation may or may not be assumed as part of our plan of reorganization. The parties have entered into a stipulation under which the plaintiffs have agreed to proceed only against the insurance proceeds. The plaintiffs have also added State Street as a defendant. State Street has a pre-petition indemnification claim against the Company under its Investment Manager Agreement as Trustee of the ESOP and has filed a contingent indemnity claim in the Bankruptcy Court. On February 17, 2005, the District Court certified this matter to proceed as a class action on behalf of all participants in the ESOP. It is not possible to quantify the potential exposure to the Company at this time.

Hall d.b.a. Travel Specialists v. United

        Six travel agencies filed an antitrust class action suit against United and other air carriers in federal court in North Carolina following the reduction by the air carrier defendants of commission rates payable to travel agents in 1997, 1998, 2001 and 2002 in alleged violation of the Sherman Act. The agencies asked for the matter to be treated as a class action and sought treble damages for lost commissions and other injunctive relief. The total amount claimed, assuming liability, is approximately $13 billion. United's share of this amount was not separately alleged by plaintiffs. Upon UAL's Chapter 11 filing, this case was stayed as against United. On October 30, 2003, the trial court entered judgment on behalf of the carrier defendants and dismissed all of the plaintiffs' claims. On December 9, 2004, an appellate court affirmed the trial court's ruling dismissing all claims. Plaintiffs have asked the appellate court to reconsider its decision.

        United was named in several similar lawsuits filed in the U.S. and Canada, involving commission rates payable to travel agencies. Most of these cases have either been stayed or dismissed. We do not expect the outcome of Hall and the related cases to have any material affect upon UAL's consolidated financial position or results of operations.

Litigation Associated with September 11 Terrorism

        Approximately 125 lawsuits against United are pending in the U.S. District Court for the Southern District of New York related to the September 11, 2001 terrorist attacks. The suits allege a variety of liabilities, including wrongful death, injury or property damage, and claim that United and others breached their duty of care to the passengers and to the ground victims. Identical actions have also been filed against American Airlines and other defendants. Under the Air Transportation Safety and System Stabilization Act of 2001 ("the Act"), United's liability on such claims will be limited to the amount of United's insurance coverage in place as of the day of the attacks. In addition, approximately 98% of families of the victims of the September 11 terrorist attacks have opted to seek relief from a fund created under federal law to provide an alternative to litigation and as a consequence will not be seeking compensation from United. United has stipulated that the automatic stay under the U.S. Bankruptcy Code applicable to the lawsuits filed against United, and covered up to the amount of United's insurance coverage, can be modified so that these claims may proceed.
 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        None.
 

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        Our common stock, $.01 par value, ("Common Stock") has historically and principally traded on the New York Stock Exchange ("NYSE"), under the symbol UAL. However, as a result of the delisting of our securities, the last day of trading on the NYSE was April 2, 2003. UAL securities have traded on the over-the-counter market (OTCBB) since then under the symbol UALAQ.OB.

        The following table sets forth the ranges of high and low sales prices per share of our Common Stock.
 
 

		High	Low
2004:
	1st quarter	$ 3.70	$ 1.01
	2nd quarter	1.60	0.98
	3rd quarter	1.44	0.87
	4th quarter	1.38	0.92
2003:
	1st quarter	$ 1.52	$ 0.75
	2nd quarter	2.00	0.48
	3rd quarter	1.23	0.43
	4th quarter	1.80	0.99

        We suspended the payment of cash dividends on the Common Stock in 2002 and we do not anticipate paying any dividends on the Common Stock in the future.

        We believe that UAL's presently outstanding equity securities will have no value and will be canceled under any plan of reorganization that we propose. For this reason, we urge that caution be exercised with respect to existing and future investments in any UAL security.

        On March 1, 2005, based on reports by the Company's transfer agent for the Common Stock, there were 66,566 common stockholders of record.
 

ITEM 6. SELECTED FINANCIAL DATA AND OPERATING STATISTICS.
 

(In Millions, Except Per Share and Rates)	Year Ended December 31
	2004	2003	2002	2001	2000
Income Statement Data:
Operating revenues	$ 16,391	$  14,928	$ 15,822	$ 17,396	$ 20,023
Operating expenses	17,245	16,288	18,659	21,167	19,369
Earnings (loss) before extraordinary item
and cumulative effect	(1,721)	(2,808)	(3,212)	(2,137)	265
Net earnings (loss)	(1,721)	(2,808)	(3,212)	(2,145)	50
Per share amounts, diluted:
Earnings (loss) before extraordinary
item and cumulative effect	(15.25)	(27.36)	(53.55)	(39.90)	1.89
Net earnings (loss)	(15.25)	(27.36)	(53.55)	(40.04)	0.04
Cash dividends declared per common share	-	-	-	0.36	1.25
Balance Sheet Data:
Total assets at year-end	$ 20,705	$ 21,979	$ 23,656	$ 25,197	$ 24,355
Long-term debt and capital lease
obligations, including current portion,
and redeemable preferred stock	1,204	852	700	10,117	7,487
Liabilities subject to compromise	16,035	13,964	13,833	-	-
Operating Statistics and Other (Note 1):
Revenue passengers	71	66	69	75	85
Revenue passenger miles ("RPM")	115,198	104,464	109,460	116,635	126,933
Available seat miles ("ASM")	145,361	136,630	148,827	164,849	175,485
Passenger load factor	79.2%	76.5%	73.5%	70.8%	72.3%
Breakeven passenger load factor	86.7%	87.4%	91.9%	89.8%	69.4%
Passenger revenue per RPM (Note 2)	10.8¢	10.7¢	11.0¢	11.9¢	13.3¢
Operating revenue per ASM (Note 3)	9.7¢	9.6¢	9.5¢	9.9¢	11.0¢
Operating expense per ASM (Note 4)	10.2¢	10.5¢	11.3¢	12.0¢	10.6¢
Fuel gallons consumed	2,349	2,202	2,458	2,861	3,101
Average price per gallon of jet
fuel, including tax and hedge impact	125.3¢	94.1¢	78.2¢	86.5¢	81.0¢

Note 1 - Operating statistics include only the mainline operations of United. Mainline operations of United exclude the operations of independent regional carriers operating as United Express.

Note 2 - Passenger revenue per RPM is calculated as follows:
United passenger mainline revenue
Less: Industry and employee discounted tickets
Divided by RPMs

Note 3 - Operating revenue per ASM is calculated as follows:
United operating revenues
Less: Passenger revenue - Regional affiliates
Divided by ASMs

Note 4 - Operating expense per ASM is calculated as follows:
United operating expense
Less: Operating expense - Regional affiliates
Divided by ASMs
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

        Over the past several years, the Company and the airline industry have been faced with severe business challenges and fundamental changes in the airline industry that have produced material adverse impacts on our results of operations, financial position and liquidity. We reported operating losses of $0.9 billion, $1.4 billion and $2.8 billion for the years ended December 31, 2004, 2003 and 2002, respectively; and we reported net losses of $1.7 billion, $2.8 billion and $3.2 billion for the same respective periods. Our ongoing losses and increasing leverage, coupled with our inability to obtain suitable sources of new financing and the initial rejection of our application for a loan guarantee by the ATSB in late 2002, resulted in the December 9, 2002 filing of voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code for UAL, United and 26 direct and indirect wholly owned subsidiaries of the Company.

        Several significant events and trends have adversely impacted our operating revenues since 2000. General economic conditions in the United States began to weaken in 2001, and slower economic growth adversely impacted airline revenues for several years thereafter. The terrorist attacks of September 11, 2001, significantly reduced consumer demand for air travel well into 2002 due to ongoing consumer concerns about further terrorist activities. Enhanced airport security measures were enacted into law shortly after the terrorist attacks, which increased airport inconvenience and produced some negative customer reaction. Our revenues were also adversely affected by the enactment of federal taxes on ticket sales to fund those new security measures, which reduced our net revenues from ticket sales, since such taxes could not easily be passed on to customers in the form of higher ticket prices. The outbreak of Severe Acute Respiratory Syndrome in early 2003 further reduced demand for air travel for a time, particularly for air carriers like us with significant operations in Asia. The growth of low-cost carriers in the United States has placed further downward pressures on revenues by forcing us to compete with discounted fares offered by low-cost airlines in a growing percentage of the markets we serve. The growth of such low-cost carriers has also added new capacity into the domestic U.S. aviation system, which has further aggravated the imbalance between air transportation supply and demand. These and other adverse factors caused United mainline passenger revenue per revenue passenger mile to decline from 13.3 cents in 2000 (the last year we reported an operating profit) to 10.8 cents in 2004. We have been able to increase mainline load factors over the same time period to partially compensate for lower ticket prices. In addition, we have replaced some mainline flying by United with the operation of smaller aircraft by United Express regional carriers; these revenues have increased by 50% between 2002 and 2004.

        During the same time period, our operating expenses have fluctuated as we sought to restructure our obligations in bankruptcy, adjust our mainline and regional carrier operating capacity to match marketplace demand, and cope with historically high jet fuel prices throughout this period. United mainline operating cost per available seat mile increased from 10.6 cents in 2000 to 12.0 cents in 2001, and then declined to 10.2 cents by 2004. In spite of significant accomplishments in restructuring our operating expenses, including significant contributions from employees and creditors through the bankruptcy process, high fuel costs have had a significant adverse affect on unit operating costs, particularly in 2003 and 2004.

        In the summer of 2004, we identified a further $2 billion in required future annual cash savings (to be fully realized in fiscal year 2007) that we believe are necessary to qualify for non-guaranteed financing and to emerge from reorganization later in 2005. We are using all means available to us in the bankruptcy process to implement changes to our CBAs to enable us to achieve approximately $725 million in average annual labor savings toward the $2 billion goal. We are seeking operational savings and the termination and replacement of defined benefit pension plans to achieve the remainder of the $2 billion savings target.

Chapter 11 Restructuring Efforts

        The following sections describe details of restructuring efforts underway by the Company in the areas of labor agreements, defined benefit pension plans, business improvement initiatives, aircraft financings, municipal bond obligations, future operating fleet redeployment and reductions, and the ongoing bankruptcy claims resolution process. See Note 1, "Voluntary Reorganization Under Chapter 11" in the Notes to Consolidated Financial Statements for further information on the reorganization process.

        Labor Restructuring.  In March and April 2003, United employees represented by various unions ratified tentative agreements between the Company and their unions to amend the then-existing CBAs. These agreements, when combined with compensation savings from the non-represented salaried and management employee group, were expected to reduce our average annual labor costs by approximately $2.5 billion per year through 2009, as compared to expected costs under terms of the previous CBAs. We then devoted the next fourteen months of our restructuring to implementing a business plan to secure an ATSB loan guarantee on terms that would have allowed us to emerge from bankruptcy with these revised CBAs (and existing pension plans) intact.

        In June 2004, however, the ATSB issued a final denial for our application for a federal loan guarantee, resulting in a need for the Company to qualify for non-guaranteed exit financing. This new requirement, coupled with recent extraordinary increases in fuel prices and continuing weak revenue environment, made it necessary for us to revisit our proposed cost structure, particularly our expected labor costs, which remain our single largest operating expense. During the fourth quarter 2004, we advised the Bankruptcy Court that the continuing harsh financial environment across the industry, and for the Company, made termination and replacement of our defined benefit pension plans necessary and that, in addition, our updated business plan would require approximately $725 million in further average annual labor savings from our union and non-represented employees. In November 2004, we commenced the process available to us under Section 1113 of the Bankruptcy Code to modify our CBAs in an effort to achieve the necessary labor cost reductions from our union employees, and to eliminate any CBA requirement to maintain a defined benefit pension plan.

        Effective January 1, 2005, the Company reduced the compensation of its non-represented salaried and management employees and announced changes to benefits and productivity for this group. The combination of lower salaries, benefit changes and workforce reductions are expected to provide the Company with approximately $112 million of the targeted $725 million in average annual savings.

        On January 31, 2005, the Bankruptcy Court approved amended CBAs between the Company and AFA, ALPA, PAFCA and TWU (all of whom had ratified such amendments) that are expected to provide approximately $130 million, $181 million, $2.8 million and $0.2 million, respectively, in average annual savings through 2009 from changes in salaries, work rules and benefits. Together with savings expected from salaried and management employees, all expected savings realized to date for labor groups represents approximately 60% of the $725 million target.

        The ALPA, PAFCA and TWU contracts also include contingent commitments to issue, respectively, $550 million, $0.4 million and $24,000 in convertible notes upon the emergence of the Company from bankruptcy in the event the groups' defined benefit pension plans are terminated. These groups have agreed to eliminate any CBA requirement to maintain, and not to oppose efforts by the Company to terminate, their respective defined benefit pension plans.

        The AFA, ALPA, PAFCA, and TWU agreements each contain termination rights for the respective union. Among other things, all provide that the unions can terminate the agreement (upon two days notice and a failure of the Company to cure within twenty days) if the Company fails to obtain specified levels of average annual savings from all other union groups and the Company's salaried and management employees. Additionally, the PAFCA and TWU agreements each provide that the Company can terminate the agreements if a court of competent jurisdiction enters a final order that the Company is not entitled to terminate the defined benefit pension plans covering that employee group.

        We have been unable to reach ratified agreements on amended CBAs with the employees represented by IAM and AMFA. As such, on January 6, 2005, the Bankruptcy Court approved the Company's 1113(e) motion seeking interim savings from IAM. The Bankruptcy Court's order, effective through April 11, 2005, requires a temporary pay rate reduction for IAM-represented employees of 11.5% and provides that these employees will receive 70% of the pay they would normally have received for sick days taken.

        Likewise, on January 31, 2005, the Bankruptcy Court approved the Company's 1113(e) motion seeking interim savings from AMFA. The Bankruptcy Court's order, effective through May 31, 2005, requires a temporary pay rate reduction for AMFA-represented employees of 9.8% and that these employees receive 75% of the pay they would normally have received for sick days taken, up to the first 15 days.

        These interim cost savings ordered by the Bankruptcy Court will provide the Company with additional time to attempt to resolve the longer-term cost savings it needs from both IAM and AMFA and to work together to resolve pension issues. If the Company cannot reach ratifiable long-term agreements with both IAM and AMFA, as well as an agreement with AFA on pension matters, the Company will proceed to a trial under Section 1113(c) of the Bankruptcy Code, scheduled to begin on May 11, 2005 in the Bankruptcy Court.

        The Company has agreed to provide each union employee group a portion of the equity, securities or other consideration provided to general unsecured creditors under any plan of reorganization proposed or supported by the Company. Each union employee group is to receive a distribution based on the value of cost savings provided by that group.

        Pensions. Our projected minimum pension funding obligation between 2005 and 2010 is approximately $4.9 billion for our defined benefit pension plans, even after giving consideration to the temporary pension funding relief provided by the Pension Funding Equity Act of 2004. Effective July 2004, the Company ceased making contributions to its qualified defined benefit pension plans to preserve its liquidity and does not anticipate making further contributions; however, the Company is current on its pension premium payments to the Pension Benefit Guaranty Corporation ("PBGC") as of February 28, 2005. We believe that in order to obtain non-guaranteed exit financing, and successfully reorganize and emerge from Chapter 11 bankruptcy proceedings, it is necessary to terminate and replace our defined benefit pension plans. We are currently working with all employee groups to explore all issues and possibilities with respect to the future disposition of pension plans. If consensual agreement is not reached, the issue of pension termination also will be before the Bankruptcy Court at the trial scheduled to begin on May 11, 2005.

        On November 30, 2004, Independent Fiduciary Services, Inc., the independent fiduciary appointed by the Company for its pension plans, filed a motion in the Bankruptcy Court requesting the allowance of a $288 million to $993 million administrative claim against the Company for unpaid minimum funding contributions with respect to the following defined benefit pension plans maintained by the Company: the Flight Attendant Plan; the Union Ground Plan; and the Management, Administrative, and Public Contact Plan. This matter is currently pending before the Bankruptcy Court. See "Claims Resolution Process" below for further details.

        On December 30, 2004, the PBGC filed a complaint against the Company in the U.S. District Court for the Northern District of Illinois (the "District Court") to seek the involuntary termination of the defined benefit pension plan of United's pilots. The PBGC is seeking to assume pension responsibility for the Company's active and retired pilots, with benefit accruals terminated effective December 30, 2004. The Company's motion to refer the PBGC's involuntary termination action to the Bankruptcy Court was granted by the District Court on January 27, 2005. The PBGC has indicated that it may appeal the District Court's decision. The Company is evaluating its legal and other options. The Company recorded a $152 million curtailment charge in the fourth quarter of 2004 relating to the PBGC's involuntary termination action.

        Similarly, on March 11, 2005, the PBGC filed a complaint against the Company in the U.S. District Court for the Eastern District of Virginia to seek the involuntary termination of the defined benefit pension plan of United's mechanics and related employees represented by AMFA; United's ramp and stores, food services, and security officer employees represented by IAM; and a small number of retired flight dispatchers. The PBGC is seeking to assume pension responsibility with benefits accruals terminated effective March 11, 2005. The Company is studying the PBGC's actions and evaluating its legal and other options.

        Historically, the Company has maintained a nonqualified supplemental retirement plan for management employees who have benefits under the tax-qualified pension plan that cannot be paid due to Internal Revenue Code ("IRC") limits on compensation or benefits. In June 2003, we terminated all participation and benefit payments under the nonqualified plan for those participants who had terminated employment with the Company prior to December 9, 2002. Effective February 28, 2005, we terminated the nonqualified supplemental plan for all remaining participants.

        Business Improvement Initiatives. As part of the Company's goal to achieve $2 billion in annual cash savings by fiscal year 2007, certain initiatives have been identified to more efficiently operate our business. For example, the Company expects to lower its cost of operations for aircraft maintenance and airports through more efficient use of labor and non-labor resources in those divisions. The cost of product distribution is also expected to be reduced by providing our customers with a better choice of low-cost means to reserve and purchase airline seats. The Company also expects to reduce costs through call center automation, outsourcing and renegotiation of United Express ground handling and air contracts. The Company did achieve significant savings in 2003 and 2004 in business improvement initiatives like these towards accomplishing the $5 billion in cash savings already realized, and it expects to achieve similar types of savings toward the new goal of $2 billion in cash savings in future years.

        Section 1110 Aircraft Restructuring.  All vendors are being paid for all goods furnished and services provided after the Petition Date in the ordinary course of business. However, under Section 362 of the Bankruptcy Code, actions to collect most of our pre-petition liabilities are automatically stayed, among other things, except for liabilities relating to certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract. Under Section 1110 of the Bankruptcy Code, actions to collect such aircraft-related pre-petition liabilities are automatically stayed for 60 days after the Petition Date (the stay of such actions in our case ended on February 7, 2003), except under two conditions: (a) the debtor may extend the 60-day period by agreement with the relevant financier and with court approval; or (b) the debtor may agree to perform all of the obligations under the applicable lease or financing and cure any defaults as required under the Bankruptcy Code. If neither of these conditions is met, the lessor or financier may demand the return of the aircraft and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such property.

        We have negotiated with our aircraft lessors and lenders to restructure existing financings to reduce aircraft ownership costs to better reflect current market rates, and we have reached agreements in principle to restructure transactions with respect to a majority of our financed aircraft. However, the need for further cost reductions due to difficult changes in the airline industry, substantially higher fuel prices and the continuing weak revenue environment, has required us to re-examine these agreements and to seek to renegotiate certain of those financings. To the extent we are unable to restructure any financings that we believe are unaffordable under our revised business plan, we may face the possibility that one or more lessors or lenders may seek to repossess aircraft. We also will need to finalize those agreements in principle, and to the extent we are unable to do so, we may likewise face the possibility of repossessions. In either case, the loss of a significant number of aircraft could result in a material adverse effect on our financial and operational performance.

        We are currently in discussions with a large group of mostly public-market financiers to renegotiate an agreement in principle for a group of aircraft reached in the summer of 2004 from which we subsequently withdrew due to the need for further cost reductions. While we believe we can ultimately reach a mutually acceptable restructuring for the continued use of these aircraft at affordable rates, the financiers have demanded the return of certain aircraft and there can be no assurance that these aircraft will be available for our continued use. To date, repossession of these aircraft has been enjoined by the Bankruptcy Court, but to the extent the Bankruptcy Court, or another court of competent jurisdiction, permits the repossession of these or other aircraft, our financial and operational performance could be adversely affected.

        We have also rejected or abandoned certain surplus aircraft to adjust our fleet size and composition to more closely match market demand, and are continuing this process to achieve a reduced fleet of 455 aircraft in the first half of 2005. In addition, as part of ongoing negotiations with financiers, we have converted many long-term financing arrangements into short-term operating leases and, in several instances, re-acquired previously rejected aircraft as circumstances warranted.

        Redeployment and Reduction of Fleet.  On October 6, 2004, the Company announced a plan to expand its international route network, redeploying aircraft to more profitable routes and reducing the overall size of its mainline fleet. These actions are part of the Company's ongoing strategy to adjust fleet size and route mix to current market conditions, which continue to be intensely competitive. Fundamental changes in our industry demand that we take aggressive steps now to implement this plan to ensure that we remain competitive. In the first half of 2005, the Company expects to:

• Reallocate aircraft to more profitable routes, expanding and strengthening the international network, which will account for over 40 percent of United's global capacity, while shifting some additional domestic flying to United Express.

• Reduce United's mainline fleet to 455 aircraft - 42 fewer aircraft than United flew in December 2004 and a reduction of 112 aircraft (or nearly 20 percent) of the fleet since December 2002.

        In addition, the Ted fleet of aircraft will grow from 47 to 56 aircraft. The Company plans to expand its Ted fleet by converting nine mainline A320 aircraft to the Ted configuration.

        Municipal Bond Obligations. As a result of our bankruptcy filing, we are not permitted to make payments on unsecured pre-petition debt. We have been advised that our special facility revenue bonds ("municipal bonds") may be unsecured (or in certain instances, partially secured) pre-petition debt. At December 31, 2004, we had approximately $1.7 billion outstanding in municipal bonds that were issued on behalf of United to finance the construction of improvements at airport-related facilities.

        During 2003, we filed complaints for declaratory judgment and corresponding motions for temporary restraining orders concerning United's municipal bond obligations (which represent approximately $509 million in principal) for facilities at the Denver International Airport ("DEN"), the New York City - John F. Kennedy International Airport ("JFK"), the San Francisco International Airport ("SFO"), and the Los Angeles International Airport ("LAX"). In each case, we sought clarification of our obligations to pay principal and interest under the applicable municipal bonds, and the protection of our rights concerning related airport lease agreements at the applicable airports. In addition, we filed a complaint for declaratory judgment for all seven municipal bond issues (which represents approximately $601 million in principal) relating to our facilities at Chicago O'Hare International Airport ("O'Hare"), seeking, among other things, a declaration that a certain cross-default provision in the O'Hare airport lease is unenforceable.

        We have received a favorable ruling for JFK, and adverse rulings for DEN, SFO and LAX. The Company has appealed each of these adverse rulings and expects that the defendants will appeal the ruling in the JFK matter. The outcome of these matters is uncertain and, therefore, the ultimate treatment of these municipal bond obligations in reorganization is uncertain.

        On February 15, 2005, the Bankruptcy Court approved an agreement resolving the disputes between the parties to the O'Hare proceeding that in effect reduces the Company's indebtedness related to these bond issues from approximately $601 million to $150 million (the "O'Hare Settlement Agreement"). The City of Chicago, a party to these adversary proceedings, is not a party to the O'Hare Settlement Agreement.

        For further details, see Note 16 "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements.

        Claims Resolution Process. As permitted under the bankruptcy process, our creditors have filed proofs of claim with the Bankruptcy Court and we expect new claims to be filed in the future. Approximately 44,000 proofs of claim (including late-filed claims) have been filed so far with the Bankruptcy Court requesting payments from United. Through the claims resolution process we have identified many claims which we believe should be disallowed by the Bankruptcy Court, for a number of reasons such as our identification of claims that are duplicative, have been amended or superseded by later filed claims, are without merit, or are otherwise overstated. We have filed omnibus objections to many of these claims and will continue to file additional objections. As of December 31, 2004, approximately 31,000 of the total claims have either been withdrawn by the claimants or disallowed by the Bankruptcy Court.

        As of December 31, 2004, approximately 13,000 proofs of claim totaling $57 billion remain filed with the Bankruptcy Court. The remaining amount of the proofs of claim filed continues to far exceed our estimate of ultimate liability. Differences in amount between claims filed by creditors and liabilities shown in our records continue to be investigated and resolved in connection with our claims resolution process. While we have made significant progress to date, we expect this process to continue for some time and believe that further resolution of claims will enable us to determine with more precision the likely range of creditor distributions under a proposed plan of reorganization. We have recorded liability amounts for the claims that can be reasonably estimated and which we believe are probable of being allowed by the Bankruptcy Court and we have classified these as liabilities subject to compromise in the attached Statements of Consolidated Financial Position.

        We will continue to evaluate existing and new claims filed and will make adjustments, as appropriate. To date, such adjustments have been material and we anticipate that future adjustments will be material as well. At this time, the ultimate number and allowed amount of such claims cannot be determined, due primarily to the uncertainties of the Chapter 11 process, and the in-progress state of our investigation and resolution of submitted claims.

Results of Operations

        The air travel business is subject to seasonal fluctuations. Our operations can be impacted by adverse weather and our first- and fourth-quarter results normally reflect reduced travel demand. Historically, results of operations are better in the second and third quarters. From 2001 through 2003, however, the typical seasonal relationships were distorted by the events of September 11, 2001, the fear of terrorism, the Iraq war, fluctuations in fuel prices, and general economic conditions. The Company experienced a more typical seasonal pattern of financial results in 2004.

        Summary of Results. UAL's loss from operations was $(0.9) billion in 2004, compared to $(1.4) billion in 2003 and $(2.8) billion in 2002. UAL's net loss for 2004 was $(1.7) billion, or $(15.25) per share, compared to $(2.8) billion, or $(27.36) per share in 2003 and $(3.2) billion, or $(53.55) per share in 2002.

        The 2004 results included a favorable adjustment to passenger mainline revenue of $60 million, an operating charge of $47 million related to our Mileage Plus frequent flyer program and non-operating special items of $5 million. Additionally, non-operating expense includes $158 million in gains from the sale of investments as well as $611 million in reorganization expenses related to our bankruptcy filing.

        The 2003 results include operating special items of $178 million (including curtailment charges of $152 million) and non-operating special items of $251 million. Additionally, non-operating expense includes $300 million in government compensation and $158 million in gains from the sale of investments, as well as $1.2 billion in reorganization expenses related to our bankruptcy filing.

        The 2002 results include operating special items of $149 million. Additionally, non-operating expense includes $130 million in government compensation and $46 million in gains from the sale of investments, as well as $10 million in reorganization costs.

        Certain items are described more fully in Note 1, "Voluntary Reorganization Under Chapter 11," Note 3, "Special Items," and Note 7 "Investments" in the Notes to Consolidated Financial Statements.

        As of third quarter 2004, all of our United Express regional carrier revenues and expenses are presented gross on our financial statements. Prior periods have been reclassified to conform to this presentation. See Note 2(i), "Summary of Significant Accounting Policies - United Express" in the Notes to Consolidated Financial Statements.

2004 Compared with 2003 -
        Operating Revenues. Consolidated operating revenues increased by 10%, or $1.5 billion, in 2004 as compared to 2003, and United's mainline revenue per available seat mile increased 1% from 9.57 cents to 9.70 cents. Mainline passenger revenues increased 10%, or $1.2 billion, primarily due to a 10% increase in revenue passenger miles. United's system available seat miles increased 6% and passenger load factor increased 2.7 points to 79.2%. The following analysis by market is based on information reported to the DOT for United:
 

2004	System	Domestic	Pacific	Atlantic	Latin
Passenger revenues (in millions)	$ 12,483	$ 8,128	$ 2,277	$ 1,716	$ 362
Increase (Decrease) from 2003:
Passenger revenues (in millions)	1,166	283	622	257	4
Passenger revenues (percent)	10%	4%	38%	18%	1%
Available seat miles (capacity)	6%	5%	15%	5%	(13%)
Passenger load factor	2.7 pts	2.3 pts	4.4 pts	2.2 pts	4.2 pts
Revenue passenger miles (traffic)	10%	9%	22%	8%	(8%)
Revenue per revenue passenger mile (yield)	-	(4%)	13%	11%	11%

        Cargo revenues increased by 12%, or $74 million, in 2004 as compared to 2003 due to a 5% increase in cargo ton miles and a 6% increase in cargo yields. Other operating revenues decreased 12%, or $175 million, primarily due to a decrease of $295 million in United Airlines Fuel Corporation ("UAFC") fuel sales to third parties, partially offset by increases in third party maintenance revenues and ULS revenues.

        Operating Expenses. Consolidated operating expenses increased 6%, or $957 million, in 2004 as compared to 2003 and United's mainline cost per available seat mile decreased 3% from 10.46 cents to 10.16 cents.
 

(In millions) Operating expenses:	Increase/(Decrease) from 2003	Percentage Change
Salaries and related costs	$ (371)	(6.9%)
Aircraft fuel	871	42.0%	(a)
Regional affiliates	504	26.2%	(b)
Purchased services	161	12.4%	(c)
Landing fees and other rent	34	3.7%
Depreciation and amortization	(94)	(9.7%)
Aircraft maintenance	175	30.6%	(d)
Cost of sales	(250)	(26.1%)	(e)
Aircraft rent	(79)	(12.9%)	(f)
Commissions	28	10.1%	(g)
Other	4	0.3%
Special items (Note 3)	(26)	(100%)
	$ 957	5.9%

    (a)  Increased primarily as a result of a 33% increase in the average cost of fuel (including tax and hedge impact) and a 7% increase in consumption.
    (b)  Increased primarily due to increased capacity flown by our regional carriers.
    (c)  Increased as a result of increased levels of outsourcing of cargo handling and aircraft cleaning; higher credit card discount fees and computer reservation system fees associated with higher passenger revenues; and increased professional fees.
    (d)  Increased due to higher levels of maintenance activity, including contracted maintenance and maintenance materials.
    (e)  Decreased primarily due to lower third-party fuel sales by UAFC.
    (f)   Decreased due to restructuring of aircraft lease obligations and fleet reductions.
    (g)  Increased due to higher commissionable passenger revenues.

        Other income (expense). Other non-operating expense amounted to $424 million in 2004 compared to $478 million in 2003, excluding special items, reorganization items, gains on sales and government compensation. Interest expense decreased 15%, or $78 million, primarily due to a lower number of mortgaged aircraft and lower fees and interest associated with our debtor-in-possession secured financing ("DIP Financing"). Interest income decreased 55%, or $30 million, primarily due to interest income on IRS tax refunds received in 2003 offset partially by higher amounts of interest earned on restricted cash in 2004.

2003 Compared with 2002 -
        Operating Revenues. Consolidated operating revenues decreased 6%, or $894 million, in 2003 as compared to 2002 and United's mainline revenue per available seat mile increased 1% from 9.52 cents to 9.57 cents. Mainline passenger revenues decreased 7%, or $810 million, due to a 5% decrease in revenue passenger miles and a 2% decrease in yield. United's system available seat miles decreased 8%; however, passenger load factor increased 3.0 points to 76.5%. The following analysis by market is based on information reported to the DOT for United:
 

2003	System	Domestic	Pacific	Atlantic	Latin
Passenger revenues (in millions)	$ 11,317	$ 7,845	$ 1,655	$ 1,459	$ 358
Increase (Decrease) from 2002:
Passenger revenues (in millions)	(810)	(384)	(302)	(72)	(52)
Passenger revenues (percent)	(7%)	(5%)	(15%)	(5%)	(13%)
Available seat miles (capacity)	(8%)	(6%)	(13%)	(10%)	(18%)
Passenger load factor	3.0 pts	4.1 pts	(1.6) pts	1.8 pts	8.6 pts
Revenue passenger miles (traffic)	(5%)	-	(14%)	(8%)	(7%)
Revenue per revenue passenger mile (yield)	(2%)	(4%)	(1%)	(1%)	(6%)

        Cargo revenues decreased 6%, or $43 million, in 2004 as compared to 2003 due to a 17% decrease in cargo ton miles partially offset by a 13% increase in cargo yield. Other operating revenues decreased 17%, or $289 million, primarily due to a $209 million decrease in UAFC fuel sales to third parties, as well as decreases in third-party maintenance revenues and ULS revenues.

        Operating Expenses. Consolidated operating expenses decreased 13%, or $2.4 billion, in 2003 as compared to 2002 and United's mainline cost per available seat mile decreased 8% from 11.32 cents to 10.46 cents.
 

(In millions) Operating expenses:	Increase/(Decrease) from 2002	Percentage Change
Salaries and related costs	$ (1,641)	(23.4%)	(a)
Aircraft fuel	151	7.9%
Regional affiliates	300	18.5%	(b)
Purchased services	(110)	(7.8%)
Landing fees and other rent	(91)	(8.9%)
Depreciation and amortization	8	0.8%
Aircraft maintenance	12	2.1%
Cost of sales	(207)	(17.8%)	(c)
Aircraft rent	(239)	(28.1%)	(d)
Commissions	(139)	(33.4%)	(e)
Other	(292)	(18.7%)	(f)
Special items (Note 3)	(123)	(82.6%)
	$ (2,371)	(12.7%)

    (a)  Decreased primarily as the result of lower capacity and new labor agreements for all employee groups that both lowered wage and benefit levels and enabled significant enhanced productivity levels. The 2003 amount also includes a one-time benefit of $102 million for the reversal of a contractual payment to certain employees and changes in vacation accruals as a result of new lower pay rates for all union groups, and a curtailment charge of $152 million.
    (b)  Increased primarily due to increased capacity flown by our regional carriers.
    (c)  Decreased due to lower third-party fuel sales by UAFC.
    (d)  Decreased due to the restructuring and rejections of aircraft financings under Section 1110.
    (e)  Decreased primarily due to a decrease in commissionable revenues.
    (f)   Decreased primarily due to volume-driven decreases in crew layover expenses and food and beverage costs.

        Other income (expense). Other non-operating expense amounted to $478 million in 2003 compared to $527 million in 2002, excluding special items, reorganization items, gains on sales and government compensation. Interest expense decreased 11%, or $63 million, as we discontinued recording interest expense on all unsecured pre-petition debt. Interest capitalized decreased 88%, or $22 million, as we discontinued capitalizing interest on advance payments for aircraft pending discussions with the aircraft manufacturers regarding the status of future deliveries.

Liquidity and Capital Resources

         The matters described in "Liquidity and Capital Resources," to the extent that they relate to future events or expectations, may be significantly affected by the Chapter 11 reorganization process. Those proceedings involve, or may result in, various restrictions on the Company's activities, limitations on financing, and may require Bankruptcy Court and Creditors' Committee approval for various matters, and may create uncertainty as to ongoing relationships with vendors, suppliers, customers and others with whom we may conduct or seek to conduct business.

        Generally, under the Bankruptcy Code most of a debtor's liabilities must be satisfied in full before the debtor's stockholders can receive any distribution on account of such shares. The rights and claims of our various creditors and security holders will be determined by the confirmed plan of reorganization. It is likely that pre-petition unsecured claims against the Company will be substantially impaired in connection with our reorganization. At this time we can make no prediction concerning how each of these claims will be valued in the bankruptcy proceedings. We believe that UAL's presently outstanding equity securities will have no value and it is expected that those securities will be canceled under any plan of reorganization that we propose.

        Liquidity. UAL's total of cash, cash equivalents and short-term investments, including restricted cash, was $2.2 billion at December 31, 2004, compared to $2.4 billion at December 31, 2003.

        As of December 31, 2004, we had $877 million in restricted cash, an increase of $198 million as compared to December 31, 2003. Restricted cash primarily represents cash collateral to secure workers' compensation obligations, security deposits for airport leases and reserves with institutions that process our credit card ticket sales. Prior to 2003, we met many of these obligations (which were smaller in amount) through surety bonds or secured letters of credit; however, such facilities are currently largely unavailable to us. As a result, we may be required to post significant additional cash collateral to meet such obligations in the future.

        The Company's agreement with a bank for MasterCard and Visa processing currently does not provide the bank with the right to withhold any significant cash deposit to secure the bank's potential obligations to card holders in the event the Company does not provide the promised transportation services. This five-year agreement expires on January 16, 2006. The Company is currently negotiating the terms of a replacement agreement. In the event that the Company does not successfully negotiate a replacement agreement on similar terms to the current agreement, it is possible that the Company will be required to provide a significant cash deposit to secure future processing of MasterCard and Visa charges for the Company's ticket sales.

        Operating Activities. For the year ended December 31, 2004, we generated cash flow from operations of $99 million, a significant decline of $902 million from operating cash flows generated in 2003. Operations used cash of $1.1 billion in 2002. The significant improvement in operating cash flow in 2003 was partly due to the receipt of $365 million in income tax refunds and $314 million in government compensation, together with other working capital changes.

        In October 2003, United and one of its subsidiaries, UAFC, entered into an agreement with a third party to supply approximately 50% of the fuel required by United and UAFC and assume some of their supply, infrastructure and third-party sale agreements. The third party acquires fuel on behalf of United and UAFC, transports it and maintains minimum inventory levels at specified locations for subsequent sale to them. Under this arrangement, the Company generated approximately $105 million of additional working capital during 2004 by reducing working capital requirements for fuel inventory and accounts receivable.

        We contributed $127 million towards our pension funding obligations in 2004 and $6 million in 2003, but made no cash contributions in 2002. Instead, we met our minimum required contribution in 2002 by using a portion of our credit balance (the cumulative difference between the prior year's minimum required contributions and actual contributions). We currently anticipate that we will not make any further cash pension contributions, and believe that it will be necessary for the Company to terminate and replace its defined benefit pension plans to obtain non-guaranteed exit financing and successfully emerge from bankruptcy. Detailed information regarding our pension plans is included in Note 15, "Retirement and Postretirement Plans" in the Notes to Consolidated Financial Statements.

        Investing Activities. Cash used in investing activities was $322 million in 2004 compared to cash generated from investing activities of $271 million in 2003 and $71 million in 2002. The change from 2003 to 2004 primarily reflects fewer short-term investment conversions to cash, increased property additions (including aircraft and aircraft spare parts), fewer proceeds from aircraft sales and increased credit card holdbacks. During 2004, we re-acquired two B737, one B757 and one B777 aircraft (all of which were previously rejected). In addition, four B767 aircraft were transferred to non-operating status, and we rejected (and/or returned to the lessor) 27 B737, two B747, two B767 and four B777 aircraft under Section 1110 of the Bankruptcy Code.

        Additionally, during 2004, we received $218 million from the sales of our investments in Orbitz and Air Canada. In 2003 and 2002, we received $150 million and $137 million, respectively, related to the sale of our investments in Hotwire, Orbitz and Cendant.

        Financing Activities. Cash flows used in financing activities were $46 million in 2004 and $336 million in 2003, compared to cash flows generated from financing activities of $266 million in 2002. During 2004, we made principal payments under debt and capital lease obligations of $180 million and $244 million, respectively. These amounts represent payments made under Section 1110 elections for aircraft obligations, which are currently classified as liabilities subject to compromise.

        During 2004, we made $313 million in principal payments on the DIP Financing. In addition, we renegotiated and expanded our DIP Financing availability, allowing us to borrow an additional $513 million.

        During 2003, the sale of two B747 aircraft and certain equity investments enabled us to pay down a portion of the DIP Financing, allowing for additional amounts to be drawn during the year. This activity resulted in a net reduction to our obligations under the DIP Financing of $37 million.

        At December 31, 2004, we had a total of $863 million in debt outstanding under the DIP Financing and $37 million in letters of credit. For further details, see Note 1, "Voluntary Reorganization Under Chapter 11 - DIP Financing" in the Notes to Consolidated Financial Statements.

        Capital Commitments and Off-Balance Sheet Arrangements.  Our business is very capital intensive, requiring significant amounts of capital to fund the acquisition of assets, particularly aircraft. In the past, we have funded the acquisition of aircraft through outright purchase, by issuing debt, by entering into capital or operating leases, or through vendor financings. We also often enter into long-term lease commitments with airports to ensure access to terminal, cargo, maintenance and other required facilities. As can be seen in the table below, these operating lease commitments (which are sometimes referred to as "off-balance sheet arrangements") are significant.

        Following is a summary of our material contractual cash obligations as of December 31, 2004:
 

(In billions)	One year	Years	Years	After
	or less	2 and 3	4 and 5	5 years	Total
Long-term debt, including current portion	$ 0.9	$ -	$ -	$ 0.1	$ 1.0
Long-term debt included in liabilities
subject to compromise	0.1	0.2	0.3	1.3	1.9
Capital lease obligations	0.2	0.4	0.4	0.7	1.7
Operating lease obligations	1.4	2.5	2.4	8.2	14.5
Postretirement obligations	0.2	0.3	0.3	0.1	0.9
Capital spending commitments	0.1	0.6	0.9	0.2	1.8
Total contractual cash obligations	$ 2.9	$ 4.0	$ 4.3	$ 10.6	$ 21.8

        Although we are not generally permitted to make any payments on pre-petition debt as a result of the bankruptcy filing, we have reached agreements with certain aircraft financiers under Section 1110 of the Bankruptcy Code and received approval from the Bankruptcy Court to continue to make payments on certain aircraft debt and lease obligations. The amounts included in the above table represent only those obligations for which we have finalized an agreement; however, these numbers are still subject to change until such time as the plan of reorganization is approved and we emerge from bankruptcy. In addition, we may still assume, assume and assign or reject certain executory contracts and unexpired leases pursuant to the Bankruptcy Code. As a result, we anticipate that other lease obligations as currently quantified in the preceding table will continue to change.

        At December 31, 2004, our qualified and non-qualified future cash pension obligations approximated $4.9 billion for the period of 2005 through 2010. Our future cash pension obligations under existing plan provisions would be $1.3 billion in 2005, $2.7 billion in 2006 and 2007, $0.8 billion in 2008 and 2009 and $0.1 billion in 2010. Due to uncertainties regarding significant assumptions, such as interest rates and asset returns, involved in estimating future required contributions to our defined benefit pension plans, we are not able to reasonably estimate our future required contributions beyond 2010. Effective July 2004, the Company ceased making contributions to its qualified defined benefit pension plans to preserve its liquidity and does not anticipate making further contributions. The Company believes that in order to obtain non-guaranteed exit financing, and successfully reorganize and emerge from Chapter 11 bankruptcy proceedings, it will be necessary to terminate and replace its defined benefit pension plans. On December 30, 2004 and March 11, 2005, the PBGC filed complaints against the Company to seek the involuntary termination of the defined benefit pension plan for certain employee groups.  These estimated amounts of future cash obligations provided above do not assume termination of any defined benefit pension plan nor do they take into consideration any cash obligations that may arise from any replacement plans. Due to significant uncertainties surrounding the future disposition of the Company's defined benefit pension plans, related estimated cash obligations have been omitted from the table of material contractual cash obligations above.  See "Chapter 11 Restructuring Efforts - Pensions" above for further details.

        At December 31, 2004, our future cash postretirement benefit payments approximated $0.9 billion for the period of 2005 through 2010. Due to uncertainties regarding significant assumptions involved in estimating future benefit payments under our postretirement obligations (such as health care cost trend rates), we are not able to reasonably estimate our future required cash flows beyond 2010.

         At December 31, 2004, future commitments for the purchase of property and equipment, principally aircraft, approximated $1.8 billion, after deducting advance payments. Our current commitments are primarily for the purchase of A319, A320 and B777 aircraft. However, since September 11, 2001, we have reached agreements with the aircraft manufacturers enabling us to delay delivery of future orders. Since flexibility with our fleet plan is critical to our overall restructuring, we continue to hold discussions regarding future deliveries and it is likely that the amount and timing of these obligations will change, and could potentially be eliminated in their entirety. The disposition of $161 million of advance payments made by the Company to the manufacturers is also uncertain and will be subject to the ultimate outcome of these discussions. In March 2005, United reached an agreement with respect to the undelivered B777 aircraft, eliminating this obligation and allowing United to use a significant portion of the approximately $45 million in associated advance payments for other purposes. However, since that agreement remains subject to Bankruptcy Court approval, we have not excluded those commitments from the obligations above.

        See Note 9, "Long-Term Debt," Note 10, "Lease Obligations," Note 15, "Retirement and Postretirement Plans" and Note 16, "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements for additional discussion of these items.

       Off-Balance Sheet Arrangements - - An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or research and development arrangements with the Company. The Company has off-balance sheet arrangements related to (1) and (4) above as noted below.

        Certain municipalities issued municipal bonds on behalf of United to finance the construction of improvements at airport-related facilities. The Company leases facilities at airports where municipal bonds funded at least some of the construction of airport-related projects. However, as a result of our bankruptcy filing, we are not permitted to make payments on unsecured pre-petition debt. We have been advised that our municipal bonds may be unsecured (or in certain instances, partially secured) pre-petition debt. At December 31, 2004, $1.2 billion in principal of such bonds was outstanding but not recorded in the Statements of Consolidated Financial Position in accordance with generally accepted accounting principles ("GAAP"). The Company has determined that these bonds are pre-petition obligations and accordingly has reclassified certain accrued and unpaid rent pertaining to these off-balance sheet arrangements to liabilities subject to compromise. As of December 31, 2004, UAL and United had jointly guaranteed $60 million of such bonds and United had guaranteed $1.2 billion of such bonds, including accrued interest. For further details, see "Municipal Bond Obligations" above and Note 16 "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements.

        We have various financing arrangements for aircraft in which the lessors are trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities; however, we are not considered the primary beneficiary of the leasing entities since the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates us to absorb decreases in value or entitles us to participate in increases in the value of the aircraft. These financing arrangements include 114 aircraft operating leases that contain a fair market value purchase option. These leases are subject to, and would become effective upon, the assumption of the leases by United in association with confirmation of a plan of reorganization. In addition, the Company has 84operating leases that have either fixed price or fair market value purchase options, the majority of which the Company expects to renegotiate as permitted under Section 1110. United does not guarantee the residual value of these leased aircraft.

        In addition, the Company has operating leases, primarily for aircraft (including the aircraft noted above), with total future minimum lease payments of $14.5 billion as of December 31, 2004. For detailed information, see Note 10, "Lease Obligations" in the Notes to Consolidated Financial Statements.

        Capital Resources. J.P. Morgan Chase Bank, Citicorp USA, Inc., The CIT Group/Business Credit, Inc. and General Electric Capital Corporation provide our DIP Financing, a $1.0 billion financing facility of which only $900 million is available due to a $100 million holdback for collateral maintenance and liquidation expenses. The DIP Financing consists of a revolving credit and letter of credit facility of $200 million and a term loan of $800 million, which matures on September 30, 2005. At December 31, 2004, we had outstanding borrowings of $863 million and issued letters of credit totaling $37 million. Therefore, we currently do not have any additional access to capital under the DIP Financing. We believe that the existing DIP Financing is adequate to provide for our projected future liquidity needs through our emergence from bankruptcy.

        With the historically high fuel prices and continuing weak revenue environment, we have continued to restructure our costs to achieve a business plan that will permit the Company to qualify for non-guaranteed exit financing for our projected future liquidity needs upon emergence from bankruptcy. This non-guaranteed exit financing, together with other available cash and cash flows from future operations, is expected to provide us with adequate levels of liquidity necessary for our ongoing operations and to service our restructured fixed obligations. We expect that in order for the Company to qualify for non-guaranteed exit financing, we will be required to conform to financial covenants, and that such financing would be approved as part of an overall plan of reorganization. However, the Company cannot guarantee that such financing will be obtained, or that a plan of reorganization will be approved or implemented successfully.

Other Information

        Price Competition.  United's domestic competitors have initiated fundamental changes to their fare structures to compete with low-cost carriers with significant fare adjustments continuing to occur in early 2005. Fare discounting by competitors has historically had a negative effect on our financial results because we are generally required to match competitors' fares to maintain passenger traffic. Because of vastly different cost structures, low ticket prices that generate a profit for a low-cost carrier usually have a negative effect on our financial results. We are unable to accurately predict the financial impact of existing and future competitive fare adjustments on our financial results.

       Foreign Operations. We generate revenues and incur expenses in numerous foreign currencies. Such expenses include aircraft leases, commissions, catering, personnel expense, advertising and distribution costs, customer service expenses and aircraft maintenance. Changes in foreign currency exchange rates impact our results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses.

        Despite the adverse effects a strengthening foreign currency may have on U.S. originating traffic, a strengthening of foreign currencies tends to increase reported revenue and operating income because our foreign currency-denominated operating revenue generally exceeds our foreign currency-denominated operating expense for each currency. Likewise, despite the favorable effects a weakening foreign currency may have on U.S. originating traffic, a weakening of foreign currencies tends to decrease reported revenue and operating income.

        Our biggest net foreign currency exposures are typically for the Australian dollar, British pound, Canadian dollar, Chinese renminbi, Hong Kong dollar and Japanese yen. The table below sets forth our exposure to various currencies for 2004:
 

		Operating revenue net of operating expense
	Currency (in millions)	Foreign Currency	USD
		Value	Value
	Canadian dollar	174	$ 134
	British pound	70	128
	Chinese renminbi	876	106
	Australian dollar	146	103
	Hong Kong dollar	733	97
	Japanese yen	9,953	91

        Our foreign operations involve insignificant amounts of dedicated physical assets; however, we do have sizable intangible assets related to our previous acquisitions of Atlantic and Latin American route authorities. Because operating authorities in international markets are governed by bilateral aviation agreements between the U.S. and foreign countries, changes in U.S. or foreign government aviation policies can lead to the alteration or termination of existing air service agreements that could adversely impact the value of our international route authorities. Significant changes in such policies could also have a material impact on our operating revenues and results of operations.

        Environmental and Legal Contingencies.  United has been named as a Potentially Responsible Party at certain Environmental Protection Agency or State Environmental Protection Agency ("EPA or State EPA") cleanup sites that have been designated as Superfund Sites. Our alleged proportionate contributions at the sites are minimal; however, at sites where the EPA or State EPA has commenced litigation or administrative proceedings, potential liability is joint and several. Additionally, we have participated and are participating in remediation actions at certain other sites, primarily airports. We accrue the estimated cost of these actions when we have determined that it is probable that we are liable. Environmental regulations and remediation processes are subject to future change, and determining the actual cost of remediation often requires further investigation and additional progress of the remediation. Therefore, the ultimate disposition cannot be exactly predicted. However, while such ultimate cost may vary from our current estimate, we believe the difference between the accrued reserve and the ultimate liability will not be material.

        UAL has certain other contingencies resulting from the above environmental actions and other litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel, the nature of such contingencies and prior experience, that the ultimate disposition of these contingencies is not likely to materially affect the Company's financial condition, operating results or liquidity.

        The Company anticipates that its liability from claims arising from the events of September 11, 2001 will be significant; however, we believe that, under the Act, our liability will be limited to our insurance coverage. We have not incurred any material environmental obligations relating to the events of September 11, 2001.

        As a result of our Chapter 11 filing, as of the Petition Date virtually all pending litigation is stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, again subject to certain exceptions, to recover on pre-petition claims against the Company.

        Critical Accounting Policies.  Critical accounting policies are defined as those that are affected by significant judgments and uncertainties and potentially could result in materially different accounting under different assumptions and conditions. We have prepared the accompanying financial statements in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. We have identified the following critical accounting policies that impact the preparation of these financial statements.

        Accounting for Long-Lived Assets. We have approximately $14.2 billion in net book value of operating property and equipment at December 31, 2004. In addition to the original cost of these assets, their recorded value is impacted by a number of accounting policy elections, including the estimation of useful lives and residual values and, when necessary, the recognition of asset impairment charges.

        We record aircraft at acquisition cost. Depreciable life is determined through economic analysis, such as reviewing existing fleet plans, and comparing estimated lives to other airlines that operate similar fleets. Older generation aircraft are assigned lives of 25 years that is generally consistent with the experience of United and the practice of other airlines. As aircraft technology has improved, useful life has increased and we have estimated the lives of "new generation" aircraft to be 30 years. Residual values are estimated based on our historical experience with regards to the sale of both aircraft and spare parts, and are established in conjunction with the estimated useful lives of the related fleets. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are revised periodically to recognize changes in our fleet plan and other relevant information.

        Our policy is to recognize an impairment charge when an asset's carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset's book value and fair market value (sometimes estimated using third-party appraisals). Typically, we estimate the undiscounted future cash flows for our various aircraft with financial models used by the Company to make fleet and scheduling decisions. These models utilize our projections of passenger yield, fuel costs, labor costs and other relevant factors specific to the markets where the aircraft will operate.

        In 2003, this process resulted in the recognition of an impairment charge of $26 million for the early retirement of the B767-200 aircraft fleet. (See Note 3, "Special Items" in the Notes to Consolidated Financial Statements.)

        See Note 2(f), "Summary of Significant Accounting Policies - Operating Property and Equipment" in the Notes to Consolidated Financial Statements for additional information regarding United's policies on accounting for long-lived assets.

        Frequent Flyer Accounting. United's Mileage Plus frequent flyer program awards miles to passengers who fly on United, Ted, United Express, the Star Alliance carriers and certain other airlines that participate in the program. Additionally, United sells mileage credits to participating airline partners in the Mileage Plus program and ULS sells mileage credits to non-airline business partners. In either case, the outstanding miles may be redeemed for travel on any airline that participates in the program (in which case, United pays a designated amount to the transporting carrier). The Company has an obligation to provide this future travel; therefore, we recognize a liability and corresponding expense for mileage earned by passengers who flew on United, Ted, United Express, Star Alliance partners, or one of the Mileage Plus airline partners. For miles earned by members through non-airline business partners, a portion of revenue from the sale of mileage is deferred and recognized when the transportation is provided.

        At December 31, 2004, our estimated outstanding number of awards to be issued against earned and outstanding mileage credits was approximately 10.2 million, as compared with 9.7 million at the end of the prior year. We currently estimate that approximately 8.4 million of these awards will ultimately be redeemed and, accordingly, have recorded a liability of $840 million, which includes the deferred revenue from the sale of miles to non-airline business partners. We utilize a number of estimates in accounting for the Mileage Plus program that require management judgment.

        Members may not reach the threshold necessary for a free ticket award and outstanding miles may not always be redeemed for free travel. Therefore, based on historical data and other information, we estimate how many miles will never be used for an award and exclude those miles from our estimate of the Company's liability. We also estimate the number of miles that will be used per award which can vary depending upon member choices from alternatives. If actual miles used are more or less than previously estimated, we must subsequently adjust the liability and corresponding expense.

        When a travel award level is attained by a Mileage Plus member, we record a liability for the estimated incremental cost to United of providing the related future travel, based on expected redemption. For award redemptions on United, United's incremental costs are estimated to include variable items such as fuel, meals, insurance and ticketing costs, for what would otherwise be a vacant seat. The estimate of incremental costs does not include any indirect costs or contribution to overhead or profit. A change to these cost estimates could have a significant impact on our liability in the year of change as well as in future years, since underlying variable cost factors (such as the price of fuel) can vary significantly from period to period.

        In 2004, 1.7 million Mileage Plus travel awards were used on United as compared to 2.0 million in each of 2003 and 2002. This number represents the number of awards for which travel was actually provided and not the number of seats that were allocated to award travel. These awards represented 7.4% of United's total revenue passenger miles in 2004, 9.0% in 2003 and 7.8% in 2002. Passenger preference for Saver awards, which have stringent seat inventory level limitations, keeps the potential displacement of revenue passengers by award travel at an acceptable level. Total miles redeemed for travel on United in 2004, including travel awards and class-of-service upgrades, represented 77% of the total miles redeemed, of which 71% were used for travel within the U.S. and Canada.

        In addition to the awards issued for travel on United, approximately 23% of the total miles redeemed in 2004 were used for travel on partner airlines. In these cases, United estimates its liability based upon agreements with partner airlines that specify reimbursement rates. Costs to United for awards issued on partner airlines are generally much higher than incremental costs of awards issued for travel on United. Therefore, a change in customer preference from United to a partner airline can significantly affect the estimated cost of mileage credits.

        Pension Accounting. The Company accounts for pension benefits using SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"). Under SFAS No. 87, pension expense is recognized on an accrual basis over employees' approximate service periods and is generally calculated independently of funding decisions or requirements. Detailed information regarding our pension plans is included in Note 15, "Retirement and Postretirement Plans" in the Notes to Consolidated Financial Statements. Our anticipated future funding requirements are discussed in "Chapter 11 Restructuring Efforts" above.

        The calculation of pension expense and pension obligations requires the use of a number of assumptions, including the assumed discount rate and the expected return on plan assets. The fair value of plan assets increased from $7.0 billion at December 31, 2003 to $7.2 billion at December 31, 2004. Higher benefit obligations resulting from increased retirements and declining discount rates have increased the difference between the plans' fair value and accumulated benefit obligations from $5.7 billion at December 31, 2003 to $6.0 billion at December 31, 2004.

        We utilized a weighted-average discount rate of 5.84% at December 31, 2004, compared to 6.25% at December 31, 2003 and 6.75% at December 31, 2002. The discount rates were based on the Rate: Link approach for 2004 and Moody's Aa bond index yield model for 2003 and 2002, adjusted according to the timing of expected cash flows for our future pension obligations. Duration is a commonly used measure of interest rate risk that either assumes that yield changes do not change the expected cash flows ("modified duration") or assumes that expected cash flows may change given the fact that the yield changes ("effective duration"). Since United's pension obligations are generally not satisfied in a single lump sum distribution, management, with assistance from our actuary, used the modified duration methodology to determine an acceptable discount rate by matching the expected cash outflows of our pension obligations against available bonds with appropriate maturities.

        We assumed an expected rate of return on plan assets of 9.0% at December 31, 2004, 2003 and 2002. The expected return on plan assets is based on an evaluation of the historical behavior of the broad financial markets and the Company's investment portfolio, taking into consideration input from the plans' investment consultant and actuary regarding expected long-term market conditions and investment management performance. The expected long-term rate of return on plan assets is based on a target allocation of assets to the following fund types: 60% equities, 35% fixed income and 5% other with approximate expected long-term rates of return of 10%, 7.5% and 15%, respectively.

        We believe that the long-term asset allocation on average will approximate the targeted allocation and we regularly review the actual asset allocation to periodically rebalance the investments to the targeted allocation when appropriate. Pension expense is reduced by the expected return on plan assets, which is measured by assuming the market-related value of plan assets increases at the expected rate of return. The market-related value is a calculated value that phases in differences between the expected rate of return and the actual return over a period of five years.

        Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions. Under SFAS No. 87, those gains and losses are not required to be recognized currently as pension expense, but instead may be deferred. If the unrecognized net gain or loss exceeds 10% of the greater of the projected benefit obligations and the market-related value of plan assets, the amount outside the 10% corridor is subject to amortization over the average remaining service life of the covered active employees. At December 31, 2004, we had unrecognized actuarial losses of $4.0 billion, which will be amortized into future years' pension expense. Additionally, we had unrecognized prior service costs from past benefit improvements of $636 million, which will be amortized as a component of pension expense over the average remaining service of the covered active employees.

       Valuation Allowance for Deferred Tax Assets. We initially recorded a tax valuation allowance against our deferred tax assets in the third quarter of 2002. In recording the valuation allowance, management considered whether it was more likely than not that some or all of the deferred tax assets would be realized. This analysis included consideration of scheduled reversals of deferred tax liabilities, projected future taxable income, carryback potential and tax planning strategies, in accordance with SFAS No. 109, "Accounting for Income Taxes." At December 31, 2004, our valuation allowance totaled $2.8 billion. See also Note 6, "Income Taxes" in the Notes to Consolidated Financial Statements for additional information.

        New Accounting Pronouncements.  For detailed information, see Note 2 (n), "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements.

Outlook

        United expects first-quarter system mainline capacity to be down about 2% year-over-year. System mainline capacity for 2005 is expected to be about 3% lower than 2004. The Company projects fuel price, including taxes and expected hedge impact, for the first quarter to average $1.44 per gallon. The Company has 32% of its expected fuel consumption for the first quarter hedged at an average of $1.38 per gallon, including taxes.

        Certain statements throughout Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking and thus reflect the Company's current expectations and beliefs with respect to certain current and future events and financial performance. Such forward-looking statements are and will be subject to many risks and uncertainties relating to our operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, without limitation, the following: our ability to continue as a going concern; our ability to comply with the terms of the DIP Financing or negotiate modifications or amendments thereto as necessary; our ability to obtain court approval with respect to motions in the Chapter 11 proceeding prosecuted by us from time to time; our ability to develop, prosecute, confirm and consummate one or more plans of reorganization with respect to the Chapter 11 cases; risks associated with third parties seeking and obtaining court approval to terminate or shorten our exclusive period to propose and confirm one or more plans of reorganization; the potential adverse impact of the Chapter 11 cases on our liquidity or results of operations; the appointment of a Chapter 11 trustee or conversion of the cases to Chapter 7; the costs and availability of financing; our ability to execute our business plan; our ability to attract, motivate and/or retain key employees; our ability to attract and retain customers; demand for transportation in the markets in which we operate; general economic conditions; the effects of any hostilities or act of war or any terrorist attack; the ability of other air carriers with whom we have alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; the costs and availability of aircraft insurance; the costs of aviation fuel; the costs associated with security measures and practices; labor costs; competitive pressures on pricing (particularly from lower-cost competitors) and on demand; government legislation and regulation; the ability of the Company to maintain satisfactory labor relations; weather conditions; and other risks and uncertainties set forth from time to time in UAL's reports to the United States Securities and Exchange Commission. Consequently, the forward-looking statements should not be regarded as representations or warranties by the Company that such matters will be realized. We disclaim any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.
 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Interest Rate Risk - United's exposure to market risk associated with changes in interest rates relates primarily to its debt obligations (including capital leases) and short-term investments. We do not use derivative financial instruments in our investment portfolio. Our policy is to manage interest rate risk through a combination of fixed and floating rate debt and entering into swap agreements, depending upon market conditions. A portion of our borrowings is denominated in foreign currencies that expose us to risks associated with changes in foreign exchange rates. To hedge against some of this risk, we have placed foreign currency deposits (primarily for euros) to meet foreign currency lease obligations designated in the respective currencies. Since unrealized mark-to-market gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency obligations, we reduce our overall exposure to foreign currency exchange rate volatility. The fair value of these deposits is determined based on the present value of future cash flows using an appropriate swap rate. The fair value of long-term debt is based on the quoted market prices for the same or similar issues or the present value of future cash flows using a U.S. Treasury rate that matches the remaining life of the instrument, adjusted by a credit spread.
 

  ¹Estimated fair values represent the amount United would pay/receive on December 31, 2004 or December 31, 2003 to terminate the contracts.

        Price Risk (Aircraft Fuel) - - When market conditions indicate risk reduction is achievable, United enters into fuel option contracts to reduce its price risk exposure to jet fuel. The option contracts are designed to provide protection against sharp increases in the price of aircraft fuel. As market conditions change, so may United's hedging program. During the second quarter of 2004, we began hedging future aircraft fuel purchases for 2004 and beyond.
 

  ²Estimated fair values represent the amount United would pay/receive on December 31, 2004 to terminate the contracts.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
UAL Corporation
Elk Grove Township, Illinois

We have audited the accompanying consolidated statements of financial position of UAL Corporation (Debtor-in-Possession) and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15. These consolidated financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects, the financial position of UAL Corporation (Debtor-in-Possession) and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1, the Company filed for reorganization under Chapter 11 of the United States Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, as a result of the bankruptcy filing, realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty and raise substantial doubt about the Company's ability to continue as a going concern. Management's plan concerning these matters is also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Chicago, Illinois
March 15, 2005
 
 

(1) Voluntary Reorganization Under Chapter 11

        Bankruptcy Considerations.  On December 9, 2002 ("Petition Date"), UAL, United and 26 direct and indirect wholly owned subsidiaries filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"). The Bankruptcy Court is jointly administering these cases as "In re UAL Corporation, et al., Case No. 02-B-48191." The consolidated financial statements shown here include certain subsidiaries that did not file to reorganize under Chapter 11. The assets and liabilities of these subsidiaries are not considered material to the consolidated financial statements.

        As required by the Bankruptcy Code, the United States Trustee for the Northern District of Illinois appointed on December 13, 2002 an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court concerning our reorganization. There can be no assurance that the Creditors' Committee will support our positions or our plan of reorganization, and any disagreements between the Creditors' Committee and us could protract the Chapter 11 process, hinder our ability to operate during the Chapter 11 process, and delay our emergence from Chapter 11.

        With the exception of our non-filing subsidiaries, we continue to operate our businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. In general, as debtors-in-possession, we are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

        All vendors are being paid for all goods furnished and services provided after the Petition Date in the ordinary course of business. However, under Section 362 of the Bankruptcy Code, actions to collect most of our pre-petition liabilities are automatically stayed, among other things, except for liabilities relating to certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract. Under Section 1110 of the Bankruptcy Code, actions to collect such aircraft-related pre-petition liabilities are automatically stayed for 60 days after the Petition Date (the stay of such actions in our case ended on February 7, 2003), except under two conditions: (a) the debtor may extend the 60-day period by agreement with the relevant financier and with court approval; or (b) the debtor may agree to perform all of the obligations under the applicable lease or financing and cure any defaults as required under the Bankruptcy Code. If neither of these conditions is met, the lessor or financier may demand the return of the aircraft and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such property.

        We have negotiated with our aircraft lessors and lenders to restructure existing financings to reduce aircraft ownership costs to better reflect current market rates, and we have reached agreements in principle to restructure transactions with respect to a majority of our financed aircraft. However, the need for further cost reductions due to difficult changes in the airline industry, substantially higher fuel prices and the continuing weak revenue environment, has required us to re-examine these agreements and to seek to renegotiate certain of those financings. To the extent we are unable to restructure any financings that we believe are unaffordable under our revised business plan, we may face the possibility that one or more lessors or lenders may seek to repossess aircraft. We also will need to finalize those agreements in principle, and to the extent we are unable to do so, we may likewise face the possibility of repossessions. In either case, the loss of a significant number of aircraft could result in a material adverse affect on our financial and operational performance.

        We are currently in discussions with a large group of mostly public-market financiers to renegotiate an agreement in principle for a group of aircraft reached in the summer of 2004 from which we subsequently withdrew due to the need for further cost reductions. While we believe we can ultimately reach a mutually acceptable restructuring for the continued use of these aircraft at affordable rates, the financiers have demanded the return of certain aircraft and there can be no assurance that these aircraft will be available for our continued use. To date, repossession of these aircraft has been enjoined by the Bankruptcy Court, but to the extent the Bankruptcy Court, or another court of competent jurisdiction, permits the repossession of these or other aircraft, our financial and operational performance could be adversely affected.

        We have also rejected or abandoned certain surplus aircraft to adjust our fleet size and composition to more closely match market demand. In addition, as part of ongoing negotiations with financiers, we have converted many long-term financing arrangements into short-term operating leases and, in several instances, re-acquired previously rejected aircraft as circumstances warranted.

        Under Section 365 of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. By order of the Bankruptcy Court, our Section 365 rights to assume, assume and assign, or reject unexpired leases of non-residential real estate expire on the earlier of the date of termination of our exclusive period to file a plan of reorganization (currently, April 30, 2005) or the date of the conclusion of a disclosure statement hearing in connection with a proposed plan of reorganization.

        In general, if we reject an executory contract or unexpired lease, it is treated as a pre-petition breach of the lease or contract in question and, subject to certain exceptions, relieves us of performing any future obligations. However, such a rejection entitles the lessor or contract counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach and accordingly, the counterparty may file a claim against us for such damages. As a result, liabilities subject to compromise are likely to change in the future as a result of damage claims created by our rejection of various aircraft, executory contracts and unexpired leases. Generally, if we assume an aircraft financing agreement, executory contract or unexpired lease we are required to cure existing defaults under such contract or lease. We expect that the future assumption of certain executory contracts and unexpired leases may convert liabilities currently shown as subject to compromise to liabilities not subject to compromise.

        To successfully emerge from Chapter 11, in addition to obtaining non-guaranteed exit financing, the Bankruptcy Court must confirm a plan of reorganization, the filing of which will depend on the timing and outcome of numerous ongoing matters in the Chapter 11 process. We expect to file a plan of reorganization that provides for UAL's emergence from bankruptcy later in 2005, but there can be no assurance that the Bankruptcy Court will confirm a plan of reorganization or that any such plan will be implemented successfully.

        The reorganization plan will determine the rights and claims of various creditors and security holders. At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on our business, nor can we make any predictions concerning how each of these claims will be valued in the bankruptcy proceedings. We believe that UAL's presently outstanding equity securities will have no value and will be canceled under any plan of reorganization that we propose. For this reason, we urge that caution be exercised with respect to existing and future investments in any UAL security.

        Financial Statement Presentation. We have prepared the accompanying consolidated financial statements in accordance with American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a going-concern basis, which assumes continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.

        SOP 90-7 requires that the financial statements for periods subsequent to a Chapter 11 filing separate transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, all transactions (including, but not limited to all professional fees, realized gains and losses and provisions for losses) directly associated with the reorganization and restructuring of the business are reported separately in the financial statements. As of December 31, 2004, 2003 and 2002, we had recognized the following reorganization expenses in our financial statements:
 

(In millions)	Year Ended December 31
	2004	2003	2002
Aircraft rejection charges	$ 341	$ 721	$ -
Transfer of lease certificates	-	223	-
Professional fees	160	142	10
Curtailment charges	152	-	-
Severance and employee retention	13	94	-
Interest income	(19)	(16)	-
Other	(36)	9	-
	$ 611	$1,173	$ 10

        Aircraft rejection charges are non-cash costs that include our estimate of claims resulting from United's rejection of certain aircraft leases and return of aircraft as part of the bankruptcy process.

        During 2003, we renegotiated certain off-balance sheet leases subject to Section 1110 of the Bankruptcy Code. Under the terms of the revised leases, we surrendered our investment in the junior portion of the original lease debt to the original equity participant. As a result, our investment in the corresponding lease certificates was reduced to zero, resulting in a $223 million non-cash charge in reorganization items.

        As we restructure aircraft financings as permitted by Section 1110 of the Bankruptcy Code, our policy is to reflect the revised lease rates in aircraft rent once we have signed definitive term sheets for the financing.

        During 2004, we recognized a pension curtailment charge of $152 million associated with a motion filed by the PBGC to involuntarily terminate (on December 30, 2004) the Company's defined benefit pension plan for covered members of ALPA. Based upon the involuntary nature of the termination of the defined benefit pension plan and its direct relationship to the Company's reorganization, the 2004 curtailment charge is classified as a reorganization expense.

        The Statements of Consolidated Financial Position distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities subject to compromise are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. For further details, see Note 8, "Liabilities Subject to Compromise".

        In addition, as a result of the Chapter 11 filing, the realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 and subject to approval of the Bankruptcy Court and the terms of the applicable DIP Financing covenants, or otherwise as permitted in the ordinary course of business, we may sell or otherwise dispose of assets (including aircraft) and liquidate or settle liabilities for some amounts other than those reflected in the consolidated financial statements. Further, the forthcoming plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements.

        Pursuant to the Bankruptcy Code, we have filed schedules with the Bankruptcy Court identifying our assets and liabilities as of the Petition Date, while our creditors have been able to file proofs of claim with the Bankruptcy Court and we expect new claims to be filed in the future. Approximately 44,000 proofs of claim (including late-filed claims) have been filed so far with the Bankruptcy Court requesting payments from United. Through the claims resolution process we have identified many claims which we believe should be disallowed by the Bankruptcy Court, for a number of reasons such as our identification of claims that are duplicative, have been amended or superseded by later filed claims, are without merit, or are otherwise overstated. We have filed omnibus objections to many of these claims and will continue to file additional objections. As of December 31, 2004, approximately 31,000 of the total claims have either been withdrawn by the claimants or disallowed by the Bankruptcy Court.

        As of December 31, 2004, approximately 13,000 proofs of claim totaling $57 billion remain filed with the Bankruptcy Court. The remaining amount of the proofs of claim filed continues to far exceed our estimate of ultimate liability. Differences in amount between claims filed by creditors and liabilities shown in our records continue to be investigated and resolved in connection with our claims resolution process. While we have made significant progress to date, we expect this process to continue for some time and believe that further resolution of claims will enable us to determine with more precision the likely range of creditor distributions under a proposed plan of reorganization. We have recorded liability amounts for the claims that can be reasonably estimated and which we believe are probable of being allowed by the Bankruptcy Court and we have classified these as liabilities subject to compromise in the attached Statements of Consolidated Financial Position.

        We will continue to evaluate existing and new claims filed and will make adjustments, as appropriate. To date, such adjustments have been material and we anticipate that future adjustments will be material as well. At this time, the ultimate number and allowed amount of such claims cannot be determined, due primarily to the uncertainties of the Chapter 11 process, and the in-progress state of our investigation and resolution of submitted claims.

        DIP Financing. In connection with UAL's Chapter 11 case, the Company arranged DIP Financing. The initial DIP Financing consisted of two facilities, a $300 million facility provided by Bank One N.A., which was repaid in full as of December 31, 2004, and a $1.2 billion revolving credit and letter of credit facility. Subsequently, we reached agreements to modify terms of the DIP Financing. As of December 31, 2004, the DIP Financing consisted of a $1.0 billion facility of which $900 million was available due to a $100 million holdback for collateral maintenance and liquidation expenses. The facility included a revolving credit and letter of credit facility of $200 million and a term loan of $800 million, which was scheduled to mature on June 30, 2005. We had the option of borrowing under the DIP Financing at an interest rate of the prime rate plus 4% or LIBOR plus 5% (with a LIBOR floor of 3%) and fees. As of December 31, 2004, we had outstanding borrowings of $863 million at a rate of 8%. In addition, as of the end of 2004, letters of credit were issued under the DIP Financing in the amount of $37 million. We were required to maintain a minimum unrestricted cash balance of $750 million.

        The terms of the DIP Financing include covenants that require us to satisfy ongoing monthly financial requirements, including minimum EBITDAR thresholds and limitations on capital expenditures. Failure to comply with these covenants would constitute a default of the DIP Financing, which would allow the lenders to accelerate the loan. For the months of October, November and December of 2004, we obtained a waiver from the providers of the DIP Financing for the default provisions regarding our EBITDAR covenant.

        The terms of the DIP Financing also contain financial covenants that do not permit us to make payments inconsistent with our business plan, unless the lenders otherwise consent based on approval of a modified business plan. To preserve the Company's liquidity, our business plan does not provide for contributions to our defined benefit pension plans.

        Effective February 22, 2005, we reached an agreement with the DIP Financing lenders to modify certain terms of the DIP Financing. The modified DIP Financing extends the maturity date to September 30, 2005, amends the interest rates to prime rate plus 3.5% or LIBOR plus 4.5%, modifies and extends the minimum EBITDAR covenants through August 31, 2005, allows for a future reduction in the minimum unrestricted cash balance from $750 million to $600 million if certain EBITDAR milestones are met and provides a waiver for the default provisions regarding our EBITDAR covenant for the month of January 2005.

        Borrowing availability is determined by a formula based on a percentage of eligible assets. The eligible assets consist of certain previously unencumbered aircraft, spare engines, spare parts inventory, certain flight simulators and quick engine change kits. The underlying value of such assets may fluctuate periodically due to prevailing market conditions and fluctuations in value may have an impact on the borrowing availability under the DIP Financing. Availability may be further limited by additional reserves imposed by the lending banks in their commercially reasonable discretion.

        The DIP Financing is guaranteed by UAL and United and all filing subsidiaries and is secured by first priority liens on all unencumbered present and future assets and by junior liens on all other assets, other than certain specified assets, including assets which are subject to financing agreements that are entitled to the benefits of Section 1110 and to the extent such financing agreements prohibit such junior liens.

(2) Summary of Significant Accounting Policies

        (a) Basis of Presentation - UAL is a holding company whose principal subsidiary is United. The consolidated financial statements include the accounts of UAL and all of our majority-owned affiliates. We sometimes collectively refer to UAL Corporation, together with our consolidated subsidiaries, as "we," "UAL" or the "Company." All significant intercompany transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation. See (i) "United Express" below for details.

        (b) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

        (c) Airline Revenues- We record passenger fares and cargo revenues as operating revenues when the transportation is provided. The value of unused passenger tickets is included in current liabilities as advance ticket sales. We periodically evaluate the balance in advance ticket sales and record any adjustments, which can be material, in the period the evaluation is completed. In addition, we have code-sharing agreements with other airlines under which one carrier's flights can be marketed under the two-letter airline designator code of another carrier. Revenues earned under these arrangements are allocated between the code share partners based on existing contractual agreements and airline industry standard prorate formulas and are recognized as passenger revenue when the transportation is provided.

        (d) Cash and Cash Equivalents and Short-Term Investments - Cash in excess of operating requirements is invested in short-term, highly liquid, income-producing investments. Investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents. Other investments are classified as short-term investments.

        At December 31, 2004 and 2003, we had $10 million and $140 million, respectively, of investments in debt securities that were classified as available-for-sale, and $1.1 billion and $1.5 billion, respectively, that were classified as held-to-maturity. Investments in debt securities classified as available-for-sale are stated at fair value, based on the quoted market prices for the securities, which does not differ significantly from their cost basis. Investments classified as held-to-maturity are stated at cost, which approximates market due to their short-term maturities. The gains or losses from sales of available-for-sale securities are included in interest income for each respective year.

        We had $877 million and $679 million classified as short-term restricted cash at December 31, 2004 and 2003, respectively, representing security for worker compensation obligations, security deposits for airport leases and reserves with institutions that process our credit card ticket sales.

        (e) Aircraft Fuel, Spare Parts and Supplies - Aircraft fuel and maintenance and operating supplies are stated at average cost. Flight equipment spare parts are stated at average cost less an obsolescence allowance.

        (f) Operating Property and Equipment - Owned operating property and equipment are stated at cost. Property under capital leases, and the related obligation for future lease payments, is recorded at an amount equal to the initial present value of those lease payments.

        Depreciation and amortization of owned depreciable assets is based on the straight-line method over the assets' estimated service lives. Leasehold improvements are amortized over the remaining period of the lease or the estimated service life of the related asset, whichever is less. Aircraft are depreciated to estimated salvage values, generally over lives of 25 to 30 years; buildings are depreciated over lives of 25 to 45 years; and other property and equipment are depreciated over lives of 3 to 15 years.

        Properties under capital leases are amortized on the straight-line method over the life of the lease or, in the case of certain aircraft, over their estimated service lives. Lease terms are 10 to 22 years for aircraft and 29 years for buildings. Amortization of capital leases is included in depreciation and amortization expense.

        Maintenance and repairs, including the cost of minor replacements, are charged to maintenance expense as incurred, except for our costs incurred under our power by the hour engine maintenance agreement, which are accrued monthly based upon the number of hours flown. Costs of additions to and renewals of units of property are capitalized as property and equipment additions.

        (g) Mileage Plus Awards - United's Mileage Plus frequent flyer program awards miles to passengers who fly on United, Ted, United Express, the Star Alliance carriers and certain other airlines that participate in the program. Additionally, United sells mileage credits to participating airline partners in the Mileage Plus program and ULS sells mileage credits to non-airline business partners. In either case, the outstanding miles may be redeemed for travel on any airline that participates in the program.

        When a travel award level is attained by a Mileage Plus member, we record a liability for the estimated cost of such awards. Our cost includes an estimated incremental cost to United for future travel redeemed on United, or the contractually determined amount per award for travel redeemed on other participating airline partners.

        Members may not reach the threshold necessary for a free ticket award and outstanding miles may not always be redeemed for free travel. Therefore, based on historical data and other information, we estimate how many miles will never be used for an award and exclude those miles from our estimate of the Company's liability. We also estimate the number of miles that will be used per award which can vary depending upon member choices from alternatives.

        For miles earned by members through non-airline business partners, a portion of revenue from the sale of mileage is deferred and recognized when the transportation is provided.

        (h) Deferred Gains - Gains on aircraft sale and leaseback transactions are deferred and amortized over the terms of the related leases as a reduction of aircraft rent expense.

        (i) United Express - United has marketing agreements under which independent regional carriers, flying under the United Express ("UAX") name, connect passengers to other United-branded flights, which we refer to as mainline operations.

        Historically, we have paid UAX regional carriers on a fee-per-departure basis and included the revenues derived from them in passenger revenue, net of these expenses. Beginning in the third quarter of 2004, our Statements of Consolidated Operations reflect reclassifications of regional carrier revenue and expenses in order to provide better presentation of results of operations for our United Airlines mainline and United Express (Regional affiliates). Revenues and expenses for all of our UAX carriers are now presented gross on our financial statements as "Regional affiliates". Prior periods have been reclassified to conform to the current year's presentation. These reclassifications did not impact our operating loss, net loss or related per share amounts for any period presented.

        The following table shows the effect of these reclassifications on operating revenues and operating expenses for amounts previously reported in prior years:
 

        Additionally, contractual payments made to UAX regional carriers include payments for aircraft operated by them as United Express and as a result, we consider these aircraft to be effectively leased by UAL. Accordingly, the minimum future lease payments for these UAX-operated aircraft are included in our lease obligations as described in Note 10, "Lease Obligations."

        We also have call options on 185 regional jets owned or leased by these carriers. The call option is intended to allow United to secure control over regional jets used for United Express flying in the event a United Express agreement is terminated and are exercisable only if United maintains a specified credit rating and the United Express carrier fails to meet required operating and/or financial performance levels for a specified period of time. None of the call options are exercisable at this time.

        Generally, the marketing agreements (or capacity purchase agreements) with our regional carriers are not considered to be variable interest entities ("VIEs"), as all but one regional carrier meets the definition of an independent business. In the case of one agreement, substantially all of that regional carrier's revenues are derived from United. The current capacity purchase agreement with this entity is effective from October 1, 2003 through December 31, 2014. Qualitatively, we have determined that United is not the primary beneficiary of this VIE. We believe our exposure to loss under this agreement is not material.

        (j) Advertising- Advertising costs, which are included in other operating expenses, are expensed as incurred. Advertising expense was $250 million, $190 million and $169 million for the years ended December 31, 2004, 2003 and 2002, respectively.

        (k) Intangibles- Intangibles consist primarily of route acquisition costs and intangible pension assets (see Note 15, "Retirement and Postretirement Plans").

        SFAS No. 142, "Goodwill and Other Intangible Assets" requires companies to test intangibles for impairment on an annual basis or on an interim basis when a triggering event occurs. At December 31, 2004, we performed an evaluation of our intangibles and determined that the fair value remained in excess of the book value.

        The following information relates to our intangibles at December 31, 2004 and 2003:
 

(In millions)	2004		2003
	Gross Carrying	Accumulated	Gross Carrying	Accumulated
	Amount	Amortization	Amount	Amortization
Amortized intangible assets
Airport Slots and Gates	$ 38	$ 23	$ 184	$ 167
Other	51	28	51	23
	$ 89	$ 51	$ 235	$ 190
Unamortized intangible assets
Route Authorities	$ 344		$ 344
Goodwill	17		17
	$ 361		$ 361

        Gates are amortized on a straight-line basis over the life of the related leases. Airport slots and other intangibles are amortized over periods of 2 to 5 years. Total amortization expense recognized was $5 million in 2004, $8 million in 2003 and $12 million in 2002. We expect to record amortization expense of $4 million in 2005, and $3 million in each of 2006, 2007, 2008 and 2009, with respect to amortized intangible assets recorded as of December 31, 2004.

        During 2004, we removed the book value on certain airport slots that were fully-amortized in accordance with Company policy. This lowered our gross carrying amount and accumulated amortization by approximately $145 million each.

        Route authorities are rights granted by governments to operate flights to and from a particular country. These authorities are very specific and limited, fixed in nature and are rarely available in the marketplace. Accordingly, route authorities are highly valued and sought-after assets by all airlines. During 2004, we obtained third-party appraisals of our route authorities that indicated that the market value of these assets continues to be in excess of their book value.

        Slots and gates, like routes, are highly valued assets that do not frequently come into the marketplace. We believe that their market value continues to be in excess of recorded book value.

        (l) Measurement of Impairments - We recognize an impairment charge when an asset's carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset's carrying value and fair market value.

        (m) Stock Option Accounting- At December 31, 2004, we had certain stock-based employee compensation plans, as described in Note 14, "Stock Options and Awards." We account for these plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related Interpretations. No stock-based employee compensation cost for stock options is reflected in our financial statements as provided under APB 25, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

        If compensation cost for stock-based employee compensation plans had been determined using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," we would have reported our net loss and loss per share as the pro forma amounts indicated below:
 

(In millions, except per share)	Year Ended December 31
	2004	2003	2002
Net loss, as reported	$(1,721)	$(2,808)	$ (3,212)
Less: Total compensation expense determined under
fair value method	(10)	(14)	(28)
Net loss, pro forma	$(1,731)	$(2,822)	$ (3,240)
Net loss per share:
Basic and Diluted - as reported	$ (15.25)	$ (27.36)	$ (53.55)
Basic and Diluted - pro forma	$ (15.34)	$ (27.50)	$ (54.01)

        (n) New Accounting Pronouncements - In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R") which establishes standards for accounting for transactions in which an entity obtains employee services in exchange for stock options or share-based payments. SFAS 123R requires that the compensation cost (as measured by the fair value of the equity or liability instruments issued) relating to share-based payment transactions be recognized in financial statements. This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Currently we account for stock options under APB Opinion No. 25 as permitted by SFAS No. 123. SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. The Company will recognize compensation expense for its participation in stock-based compensation plans for the portion of outstanding awards for which the employee service has not yet been rendered, based on the grant date fair value of those awards calculated under SFAS 123R. We anticipate the adoption of SFAS 123R will have no material impact on our financial statements.

        (o) Tax Contingencies- We have recorded reserves for taxes and associated interest in accordance with SFAS No. 5, "Accounting for Contingencies", that may become payable in future years as a result of audits by tax authorities. Although we believe that the positions taken by the Company on previously filed tax returns are reasonable, we nevertheless have established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken by the Company resulting in additional liabilities for taxes and interest. The tax reserves are reviewed as circumstances warrant and adjusted as events occur that affect our potential liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, release of administrative guidance, or rendering a court decision affecting a particular tax issue.

(3) Special Items

2004 -
        Air Canada. During the third quarter of 2004, Air Canada successfully emerged from bankruptcy protection under the Companies' Creditors Arrangement Act ("CCAA") of the Canada Business Corporation Act. We had filed a pre-petition claim against Air Canada based on our equity interest in three Airbus A330 aircraft leased to Air Canada. As part of its plan of reorganization, Air Canada offered its unsecured creditors the opportunity to participate in their initial public offering. We subscribed to 986,986 shares in the reorganized company in August 2004 and sold them in October 2004 for a nominal gain. Separately, we sold our interest in our pre-petition claim to a third party and recorded a non-operating gain of $18 million during the third quarter of 2004.

        Aircraft Write-down. During the first quarter of 2004, we incurred a $13 million charge in non-operating expense for the write-down of certain non-operating B767 aircraft.

2003 -
        Aircraft Impairment. As a result of our review of our operating fleet as part of our overall restructuring, we decided to accelerate the retirement of our B767-200 aircraft from 2008 to 2005. Therefore, in accordance with SFAS No. 144, we reviewed the B767-200 fleet for impairment and adjusted the carrying value of these aircraft to their fair market values, as estimated using third party appraisals. An impairment charge of $26 million was recorded in the third quarter of 2003.

        Aircraft Write-down. During the third quarter of 2003, we also incurred a $25 million charge in non-operating expense for the write-down of certain non-operating B767 aircraft.

        Curtailment Charge. Due to the ratification of new labor contracts for our major employee groups, which resulted in lower wage and benefit levels and significant levels of employee attrition (both voluntary and involuntary), we recorded a curtailment charge of $152 million in the second quarter of 2003, which is included in salaries and related costs.

        Air Canada. On April 1, 2003, Air Canada filed for protection under the CCAA of the Canada Business Corporation Act. During 2003, we recorded a non-operating special charge of $226 million in connection with Air Canada's CCAA filing. The charge included $46 million for the impairment of our investment in Air Canada preferred stock, $91 million to record a liability resulting from our guarantee of Air Canada debt, and $89 million for the write-off of our equity interest in three Airbus A330 aircraft leased to Air Canada. We consider the liability for the guarantee to be a pre-petition obligation and accordingly, have classified it in liabilities subject to compromise.

        Government Compensation. On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act ("Wartime Act") was signed into law. The legislation included approximately $3 billion of direct compensation for U.S. airlines. Of the total, $2.4 billion was intended to compensate air carriers for lost revenues and costs related to aviation security (including $100 million for reinforcing cockpit doors). In addition, collection of passenger security fees and payment of air carrier security fees were suspended from June 1 through September 30, 2003.

        In addition, the Wartime Act required that the total compensation of the two most highly-compensated executives of certain airlines (including United) be limited, during the period between April 1, 2003 and April 1, 2004, to the salary they were paid in 2002. We executed a contract with the government agreeing to comply with these limits. Any violation of this provision would have required us to repay the government the amount of compensation we received for airline security fees described above. We believe that we complied with this provision and that the likelihood of repaying the government is remote. In May 2003, we received approximately $300 million in compensation under the Wartime Act. In September 2003, we received an additional $14 million for cockpit door reinforcement, which was accounted for as recovery of the capitalized cost of door reinforcements previously completed.

2002 -
        Avolar. On March 22, 2002, we announced the orderly shutdown of our wholly owned subsidiary Avolar, which was formed in early 2001 to operate and sell fractional ownership interests in premium business aircraft. In connection with Avolar's closing, we recorded a special charge of $82 million in the first quarter 2002 which included aircraft deposits and termination fees ($55 million), operating-related expenses ($18 million), severance-related costs ($7 million) and other costs ($2 million). This charge was classified as other operating expense.

        In accordance with EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," we identified those charges that should be recognized at the time management had committed to an exit plan. The resulting special charge included current period and future estimated liabilities incurred that would not produce any future economic benefits.

        Specifically, the current period expenses included in the charge were related to obligations incurred prior to the commitment date, including costs for promotional flights, consultant fees for the development of computer systems, advertising in anticipation of operations and other miscellaneous expenses.

        Government Compensation.  As part of the Act enacted in response to the events of September 11, 2001, the federal government made $5.0 billion in federal grants available to the airline industry. During 2002, we received our final allocation of the grant money under the Act of $130 million.

        Severance. During the fourth quarter of 2002, we announced the closing of three reservation centers, a maintenance line and four international stations and the conversion of five stations to United Express service, which resulted in the furloughing of a number of employees. Additionally, in connection with our plan to decrease the airline's flying schedule, as well as overall cost-saving measures, we announced a reduction in employment levels effective January and February 2003. As a result of the announced furloughs, we recorded a special charge of $67 million.

Reconciliation of Accruals - In the period following September 11, 2001, we recorded an accrual of $162 million to reflect our estimate of the early termination fees associated with certain contracts. This obligation has yet to be resolved, and therefore continues to be included in liabilities subject to compromise in its entirety.

        Following is a reconciliation of activity related to the accruals for the reduction in force:
 

(4) Per Share Amounts

        Basic loss per share amounts were computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the year.
 

        Stock options to purchase approximately 10 million shares of common stock at December 31, 2004, 11 million shares of common stock at December 31, 2003 and 13 million shares of common stock at December 31, 2002 were outstanding but were not included in the computation of earnings per share because the exercise price of the options in all periods was greater than the average market price of the common shares. In addition, approximately 6 million and 34 million shares of convertible ESOP preferred stock for years 2003 and 2002, respectively, were not included in the computation as the result would have been antidilutive.

(5) Comprehensive Income (Loss)

        Accumulated other comprehensive income (loss) is made up of the following (net of taxes in 2001):
 

(6) Income Taxes

        In 2004, UAL incurred both a regular and an alternative minimum tax ("AMT") loss. The primary differences between our regular tax loss and AMT loss are the depreciation adjustments and preferences.

        In assessing the realizability of our deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax asset will be realized. During 2004, 2003 and 2002, we recorded a valuation allowance against our deferred tax assets.

        The 2002 provision (credit) for income taxes is summarized as follows:
 

        The significant components of the deferred income tax provision (credit) are as follows:
 

        The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows:
 

        Temporary differences and carryforwards that give rise to a significant portion of deferred tax assets and liabilities for 2004 and 2003 are as follows:
 

        At December 31, 2004, UAL and its subsidiaries had $294 million of federal AMT credits and $2.4 billion of federal and state tax benefits resulting from $6.1 billion of net operating losses which may be carried forward to reduce the tax liabilities of future years. Federal tax benefits of $0.2 billion expire in 2022, $1.2 billion expire in 2023, $0.3 billion expire in 2024 and $0.3 billion expire in 2025.

        We have determined that it is more likely than not that our net deferred tax asset at December 31, 2004, will be realized through the reversals of existing deferred tax credits.

(7) Investments

        In January 2002, we sold our remaining investment in Cendant for net proceeds of $137 million, resulting in a gain of $46 million.

        At December 31, 2002, we owned approximately 14% of Hotwire, a leading discount travel website, through a combination of stocks and warrants. On November 5, 2003, IAC/InterActive Corp acquired all of the outstanding common stock of Hotwire for cash and the assumption of outstanding options and warrants. As a result, we tendered all of our shares, including options and warrants, in Hotwire for $85 million in cash, resulting in a gain of $81 million.

        In December 2003, Orbitz completed an initial public offering of its stock, which resulted in a reduction of our ownership percentage. As a result, we recognized a gain of $23 million in accordance with Staff Accounting Bulletin No. 51 "Accounting for Sales of Stock by a Subsidiary". In addition, we sold a portion of our investment in Orbitz for cash proceeds of $65 million and recognized a gain of $54 million. On September 29, 2004, Cendant and Orbitz announced their planned merger. Cendant offered to acquire all of the outstanding common stock of Orbitz for cash. In addition, we entered into a Stockholder Agreement to tender our shares. Subsequent to Bankruptcy Court approval, we tendered all of our shares in Orbitz for $185 million in cash, resulting in a gain of $158 million.

(8) Liabilities Subject to Compromise

        Liabilities subject to compromise refers to both secured and unsecured obligations which will be accounted for under a plan of reorganization, including claims incurred prior to the Petition Date. They represent the estimated amount expected to be allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim or other events. To date, such adjustments, as reflected in reorganization expense, have been material and we anticipate that future adjustments will be material as well.

        Differences between liability amounts we have estimated and claims filed by our creditors are being investigated and the Bankruptcy Court will make a final determination of the allowable claims. The determination of how these liabilities ultimately will be treated cannot be made until the Bankruptcy Court approves a plan of reorganization. We will continue to evaluate the amounts of these liabilities through the remainder of the Chapter 11 process. To the extent that we identify additional amounts subject to compromise, we recognize them accordingly. As a result, the amounts of liabilities subject to compromise are subject to change.

         At December 31, we had liabilities subject to compromise consisting of the following:
 

(9) Long-Term Debt

        As of December 31, 2004, long-term debt consisted of the DIP Financing and debt associated with certain aircraft operated by Air Canada ("Air Canada debt"). All of the DIP Financing (which is described more fully in Note 1, "Voluntary Reorganization Under Chapter 11 - DIP Financing") is classified as current. As of December 31, 2004, we had outstanding debt of $166 million associated with an operating lease for aircraft operated by Air Canada. The debt has a fixed interest rate of 7.15% and is scheduled to mature at various times through January 2016.

        All of our pre-petition debt is in default due to the Chapter 11 filing. In general, we are not permitted to make payments on pre-petition debt while in Chapter 11; however, to the extent we have reached agreements with certain financiers on specific aircraft governed by Section 1110 of the Bankruptcy Code, we have continued to make payments on the secured notes financing the aircraft with approval of the Bankruptcy Court. In addition, we have rejected certain aircraft that were originally financed under secured notes and have written off $624 million in principal amount of these notes. Our pre-petition debt, which is included in liabilities subject to compromise, consisted of the following as of December 31: