Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

NOTE 12 - FAIR VALUE MEASUREMENTS

Fair Value Information. Accounting standards require us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1	Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value
Level 2	Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
Level 3	Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities

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

	2012								2011
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	UAL
Cash and cash equivalents	$	4,770	$	4,770	$	—	$	—	$	6,246	$	6,246	$	—	$	—
Short-term investments:
Asset-backed securities		715		—		715		—		478		—		478		—
Corporate debt		537		—		537		—		515		—		515		—
Certificates of deposit placed through an account registry service (“CDARS”)		367		—		367		—		355		—		355		—
Auction rate securities		116		—		—		116		113		—		—		113
U.S. government and agency notes		12		—		12		—		22		—		22		—
Other fixed income securities		26		—		26		—		33		—		33		—
Enhanced equipment trust certificates (“EETC”)		63		—		—		63		60		—		—		60
Fuel derivatives, net		46		—		46		—		73		—		73		—
Foreign currency derivatives		—		—		—		—		(1)		—		(1)		—
Restricted cash		447		447		—		—		569		569		—		—
	United
Cash and cash equivalents	$	2,766	$	2,766	$	—	$	—	$	3,458	$	3,458	$	—	$	—
Short-term investments:
Asset-backed securities		16		—		16		—		29		—		29		—
Corporate debt		139		—		139		—		138		—		138		—
CDARS		139		—		139		—		87		—		87		—
U.S. government and agency notes		8		—		8		—		5		—		5		—
Other fixed income securities		24		—		24		—		16		—		16		—
EETC		63		—		—		63		60		—		—		60
Fuel derivatives, net		28		—		28		—		44		—		44		—
Restricted cash		337		337		—		—		433		433		—		—

	2012								2011
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	Continental
Cash and cash equivalents	$	1,999	$	1,999	$	—	$	—	$	2,782	$	2,782	$	—	$	—
Short-term investments:
Asset-backed securities		699		—		699		—		449		—		449		—
Corporate debt		398		—		398		—		377		—		377		—
CDARS		228		—		228		—		268		—		268		—
Auction rate securities		116		—		—		116		113		—		—		113
U.S. government and agency notes		4		—		4		—		17		—		17		—
Other fixed income securities		2		—		2		—		17		—		17		—
Fuel derivatives, net		18		—		18		—		29		—		29		—
Foreign currency derivatives		—		—		—		—		(1)		—		(1)		—
Restricted cash		110		110		—		—		135		135		—		—
Convertible debt derivative asset		268		—		—		268		193		—		—		193
Convertible debt option liability		(128)		—		—		(128)		(95)		—		—		(95)

The tables below present disclosures about the activity for “Level 3” financial assets and financial liabilities for the year ended December 31 (in millions):

	2012				2011
UAL (a)	Auction Rate Securities		EETC		Auction Rate Securities		EETC
Balance at January 1	$	113	$	60	$	119	$	66
Settlements		—		(5)		(10)		(4)
Gains reported in earnings		1		—		3		—
Reported in other comprehensive income (loss)		2		8		1		(2)
Balance at December 31	$	116	$	63	$	113	$	60

(a) For 2012 and 2011, United’s only Level 3 recurring measurements are the above EETC securities.

As of December 31, 2012, Continental’s auction rate securities, which had a par value of $135 million, were variable-rate debt instruments with contractual maturities generally greater than ten years and with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that Continental holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

As of December 31, 2012, United’s EETC securities had unrealized gains of $2 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

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

	2012						2011
Continental	Student Loan-Related Auction Rate Securities		Convertible Debt Supplemental Derivative Asset		Convertible Debt Conversion Option Liability		Student Loan-Related Auction Rate Securities		Convertible Debt Supplemental Derivative Asset		Convertible Debt Conversion Option Liability
Balance at January 1	$	113	$	193	$	(95)	$	119	$	286	$	(164)
Purchases, sales, issuances and settlements (net)		—		—		—		(10)		—		—
Gains and (losses):
Reported in earnings:
Realized		—		—		—		1		—		—
Unrealized		1		75		(33)		2		(93)		69
Reported in other comprehensive income		2		—		—		1		—		—
Balance at December 31	$	116	$	268	$	(128)	$	113	$	193	$	(95)

Derivative instruments and investments presented in the tables above have the same fair value as their carrying value. The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above for the years ended December 31 (in millions):

	Fair Value of Debt by Fair Value Hierarchy Level
	2012										2011
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3				Total		Level 1		Level 2		Level 3
UAL debt	$	12,252	$	13,419	$	—	$	8,045	$	5,374	$	11,682	$	11,992	$	—	$	859	$	11,133
United debt		5,375		5,595		—		2,272		3,323		5,745		5,630		—		—		5,630
Continental debt		6,475		6,865		—		4,814		2,051		5,528		5,503		—		—		5,503

Quantitative Information About Level 3 Fair Value Measurements as of December 31, 2012 ($ in millions)
Item	Fair Value at December 31, 2012			Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	$	116		Discounted Cash Flows	Credit risk premium (a)	1%
					Illiquidity premium (b)	5%
					Expected repayments (c)	Assumed repayment in years 2013 through 2036
EETC		63		Discounted Cash Flows	Structure credit risk (d)	6% - 7% (6%)
Convertible debt derivative asset		268		Binomial Lattice Model	Expected volatility (e) Own credit risk (f)	45% - 60% (48%) 7% - 9% (8%)
Convertible debt option liability		(128	)	Binomial Lattice Model	Expected volatility (e) Own credit risk (f)	45% - 60% (49%) 7% - 9% (8%)

(a) Represents the credit risk premium component of the discount rate that the Company has determined market participants would use in pricing the investments.

(b) Represents the illiquidity premium component of the discount rate that the Company has determined market participants would use in pricing the investments.

(c) Represents the estimated timing of principal repayments used in the discounted cash flow model.

(d) Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use in pricing the instruments.

(e) Represents the range in volatility estimates that the Company has determined market participants would use when pricing the instruments.

(f) Represents the range of Company-specific risk adjustments that the Company has determined market participants would use as a model input.

Fair value of the Company’s financial instruments was determined as follows:

Description	Fair Value Methodology
Cash, Cash Equivalents, Short-term Investments, Investments and Restricted Cash	The carrying amounts approximate fair value because of the short-term maturity of these assets and liabilities. These assets have maturities of less than one year except for the EETCs, auction rate securities and corporate debt.
	Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, or (c) internally-developed models of the expected future cash flows related to the securities.
Fuel Derivatives	Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.
Foreign Currency Derivatives	Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.
Debt	Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.
Convertible Debt Derivative Asset and Option Liability	The Company used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and discount rate.

Nonrecurring Fair Value Measurements

The table below presents fair value measurements of nonfinancial assets at UAL and Continental that were performed during the years ended December 31 (in millions):

	2012				2011
	Fair Value		Loss		Fair Value		Loss
Airport slots	$	102	$	30	$	8	$	4

During 2012 and 2011, Continental recorded impairment charges of $30 million and $4 million, respectively, on certain intangible assets related to foreign take-off and landing slots to reflect the estimated fair value of these assets as part of its annual impairment test of indefinite-lived intangible assets. Slots were valued using a combination of the income and market approaches. The Company considers the valuation of the items above to be Level 3 due to the inclusion of unobservable inputs.