NOTE 13 - LEASES AND CAPACITY PURCHASE AGREEMENTS

United leases aircraft, airport passenger terminal space, aircraft hangars and related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and computer equipment and vehicles.

At December 31, 2014, United’s scheduled future minimum lease payments under operating leases having initial or remaining noncancelable lease terms of more than one year, aircraft leases, including aircraft rent under CPAs and capital leases (substantially all of which are for aircraft) were as follows (in millions):


	Capital Leases (a)		Facility and Other Operating Leases (b)		Aircraft Operating Leases (c)
2015	$	168	$	1,283	$	1,446
2016		154		1,123		1,247
2017		115		1,089		1,147
2018		104		842		908
2019		38		766		682
After 2019		495		7,919		1,910

Minimum lease payments	$	1,074	$	13,022	$	7,340

Imputed interest		(393)

Present value of minimum lease payments		681
Current portion		(110)

Long-term obligations under capital leases	$	571

(a) As of December 31, 2014, United’s aircraft capital lease minimum payments relate to leases of 37 mainline and 38 regional aircraft as well as to leases of nonaircraft assets. Imputed interest rate ranges are 3.5% to 18.3%.

(b) See Note 17 of this report for additional information related to facility and other operating leases at Hopkins International Airport (“Cleveland”).

(c) The operating lease payments presented above include future payments of $72 million related to 21 nonoperating aircraft as of December 31, 2014.

Aircraft operating leases have initial terms of six to twenty-eight years, with expiration dates ranging from 2015 through 2024. Under the terms of most leases, United has the right to purchase the aircraft at the end of the lease term, in some cases at fair market value, and in others, at fair market value or a percentage of cost. United has facility operating leases that extend to 2041.

United is the lessee of real property under long-term operating leases at a number of airports where we are also the guarantor of approximately $1.5 billion of underlying debt and interest thereon as of December 31, 2014. These leases are typically with municipalities or other governmental entities, which are excluded from the consolidation requirements concerning a variable interest entity (“VIE”). To the extent United’s leases and related guarantees are with a separate legal entity other than a governmental entity, United is not the primary beneficiary because the lease terms are consistent with market terms at the inception of the lease and the lease does not include a residual value guarantee, fixed-price purchase option, or similar feature.

In September 2014, United entered into a 10-year lease extension through 2035 with the City and County of Denver to continue its use of the airport terminal space at Denver International Airport. This extension is expected to result in annual cost savings through 2025 for the Company.

In November 2013, United signed a lease amendment with the City of Los Angeles and Los Angeles World Airports (“LAWA”) to its terminal facilities lease at Los Angeles International Airport (“LAX”). The amendment allows United to make approximately $450 million in renovations at LAX that we expect to complete in late 2017. United will fund the cost of these renovations and LAWA will acquire the improvements at the end of each designated construction phase through a cash payment at the construction cost. United expects to be considered the owner of the property during and after the construction period for accounting purposes. As a result, the construction project will be included on the Company’s balance sheet as operating property and equipment and with the construction obligation under other liabilities.

United’s nonaircraft rent expense was approximately $1.4 billion, $1.3 billion and $1.3 billion for the years ended December 31, 2014, 2013 and 2012, respectively.

In addition to nonaircraft rent and aircraft rent, which is separately presented in the consolidated statements of operations, United had aircraft rent related to regional aircraft operating leases, which is included as part of regional capacity purchase expense in United’s consolidated statement of operations, of $442 million, $428 million and $463 million for the years ended December 31, 2014, 2013 and 2012, respectively.

In connection with UAL Corporation’s and United Air Lines, Inc.’s fresh-start reporting requirements upon their exit from Chapter 11 bankruptcy protection in 2006 and the Company’s acquisition accounting adjustments related to the Company’s merger transaction in 2010, lease valuation adjustments for operating leases were initially recorded in the consolidated balance sheet, representing the net present value of the differences between contractual lease rates and the fair market lease rates for similar leased assets at the time. An asset (liability) results when the contractual lease rates are more (less) favorable than market lease terms at the valuation date. The lease valuation adjustment is amortized on a straight-line basis as an increase (decrease) to rent expense over the individual applicable remaining lease terms, resulting in recognition of rent expense as if United had entered into the leases at market rates. The related remaining lease terms are one to ten years for United. The lease valuation adjustments are classified within other noncurrent liabilities and the net accretion amounts are $160 million, $173 million and $240 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Regional CPAs

United has CPAs with certain regional carriers. We purchase all of the capacity from the flights covered by the CPA at a negotiated price. We pay the regional carrier a pre-determined rate, subject to annual inflation adjustments, primarily for block hours flown (the hours from gate departure to gate arrival) and other operating factors and reimburse the regional carrier for various pass-through expenses related to the flights. Under the CPAs, we are responsible for the cost of providing fuel for all flights and for paying aircraft rent for all of the aircraft covered by the CPAs. Generally, the CPAs contain incentive bonus and rebate provisions based upon each regional carrier’s operational performance. United’s CPAs are for 566 regional aircraft, and the CPAs have terms expiring through 2029. Aircraft operated under CPAs include aircraft leased directly from the regional carriers and those owned by United or leased from third-party lessors and operated by the regional carriers.

In September 2014, United entered into an amendment to a contract with Shuttle America Corporation (“Shuttle America”), a wholly-owned subsidiary of Republic Airways Holdings, for Shuttle America to operate 50 new Embraer S.A. (“Embraer”) 175 aircraft under the United Express brand and extend the term of 38 existing Embraer 170 aircraft operating under the United Express brand. Shuttle America will acquire fifty 76-seat Embraer E175 aircraft with deliveries from 2015 through 2017, although United has the right to acquire the aircraft under certain circumstances and lease the aircraft to Shuttle America. These 50 aircraft are in addition to United’s other 70 Embraer E175 aircraft that are currently being operated or will in the future be operated by different United Express carriers under CPAs. In a separate but related amendment with Republic Airways Holdings Inc. and its subsidiary, Republic Airline Inc. (“Republic”), United and Republic agreed to remove 31 Q400 aircraft from United Express service in 2015 and 2016.

In May 2013, United entered into a CPA with SkyWest Airlines, Inc. (“SkyWest”), a wholly-owned subsidiary of SkyWest, Inc. to operate 40 Embraer E175 aircraft under the United Express brand. As of December 31, 2014, SkyWest is operating 19 of these aircraft and expects to bring into service the remaining 21 aircraft in 2015.

In April 2013, United agreed to purchase 30 Embraer E175 aircraft. In August 2013, United entered into a CPA with Mesa Air Group, Inc. and Mesa Airlines, Inc. (“Mesa”), a wholly-owned subsidiary of Mesa Air Group, Inc., for Mesa to operate these 30 Embraer E175 aircraft under the United Express brand. As of December 31, 2014, Mesa is operating 14 of these aircraft with the remaining aircraft to be brought into service in 2015.

Our future commitments under our CPAs are dependent on numerous variables, and are therefore difficult to predict. The most important of these variables is the number of scheduled block hours. Although we are not required to purchase a minimum number of block hours under certain of our CPAs, we have set forth below estimates of our future payments under the CPAs based on our assumptions. United’s estimates of its future payments under all of the CPAs do not include the portion of the underlying obligation for any aircraft leased to ExpressJet or deemed to be leased from other regional carriers and facility rent that are disclosed as part of aircraft and nonaircraft operating leases. For purposes of calculating these estimates, we have assumed (1) the number of block hours flown is based on our anticipated level of flight activity or at any contractual minimum utilization levels if applicable, whichever is higher, (2) that we will reduce the fleet as rapidly as contractually allowed under each CPA, (3) that aircraft utilization, stage length and load factors will remain constant, (4) that each carrier’s operational performance will remain at historic levels and (5) an annual projected inflation rate. These amounts exclude variable pass-through costs such as fuel and landing fees, among others. Based on these assumptions as of December 31, 2014, our future payments through the end of the terms of our CPAs are presented in the table below (in millions):


2015	$	1,893
2016		1,760
2017		1,653
2018		1,301
2019		973
After 2019		3,497

	$	11,077

It is important to note that the actual amounts we pay to our regional operators under CPAs could differ materially from these estimates. For example, a 10% increase or decrease in scheduled block hours for all of United’s regional operators (whether as a result of changes in average daily utilization or otherwise) in 2015 would result in a corresponding change in annual cash obligations under the CPAs of approximately $152 million (8.0%).