NOTE 17 - INTEGRATION-RELATED COSTS AND SPECIAL ITEMS

Integration-related costs and special items classified as special charges in the statements of consolidated operations consisted of the following for the years ended December 31 (in millions):


Operating:	2014		2013		2012
Severance and benefit costs	$	199	$	105	$	125
Integration-related costs		96		205		739
Costs associated with permanently grounding Embraer ERJ 135 aircraft		66		—		—
Impairment of assets		49		33		30
Labor agreement costs		—		127		475
(Gains) losses on sale of assets and other special (gains) losses, net		33		50		(46)

Special charges	$	443	$	520	$	1,323
Nonoperating:
Loss on extinguishment of debt and other, net	$	74	$	—	$	—
Income tax benefit		(10)		(7)		(11)

Total operating and nonoperating special charges, net of income taxes	$	507	$	513	$	1,312

2014

The Company recorded $141 million of severance and benefit costs related primarily to a voluntary early-out program for its flight attendants. More than 2,500 participants elected a one-time opportunity to voluntarily separate from the Company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates from November 30, 2014 through the end of 2015. The Company will record approximately $100 million of additional expense associated with this program through 2015 over the remaining required service periods. In addition, the Company recorded $58 million of severance and benefits primarily related to reductions of management and front-line employees, including from Cleveland, as part of its cost savings initiatives. The Company is currently evaluating its options regarding its long-term contractual lease commitments at Cleveland. The capacity reductions at Cleveland may result in further special charges, which could be significant, related to our contractual commitments.

Integration-related costs include compensation costs related to systems integration, training, severance and relocation for employees.

The Company recorded $66 million for the permanent grounding of 21 of the Company’s Embraer ERJ 135 regional aircraft under lease through 2018, which includes an accrual for remaining lease payments and an amount for maintenance return conditions. As a result of fuel prices, new Embraer E175 regional jet deliveries and impact of pilot shortages at regional carriers, the Company decided to permanently ground these 21 Embraer ERJ 135 aircraft. The Company continues to operate nine Embraer ERJ 135 aircraft and will assess the possibility of grounding those aircraft when the term of the current capacity purchase contract ends in 2015.

The Company recorded a charge of $16 million ($10 million net of related income tax benefits) related to its annual assessment of impairment of its indefinite-lived intangible assets (certain international Pacific routes). In addition, the Company recorded $33 million for charges related primarily to impairment of its flight equipment held for disposal associated with its Boeing 737-300 and 737-500 fleets.

United used cash to retire, at par, the entire $248 million principal balance of the 6% Convertible Debentures and the 6% Convertible Preferred Securities, Term Income Deferrable Equity Securities (TIDES) and incurred $74 million of expense primarily associated with the write-off of the related non-cash debt discounts recorded due to purchase accounting during the Company’s merger transaction in 2010.

2013

The Company offered a voluntary retirement program for its fleet service, passenger service, storekeeper and pilot work groups. Approximately 1,200 employees volunteered under the program during the fourth quarter of 2013 and United recorded approximately $64 million of severance and benefit costs for the programs. The Company also offered voluntary leave of absence programs which allowed for continued medical coverage for flight attendants who volunteered during the leave of absence period, resulting in a charge of approximately $26 million. The remaining $15 million of severance and benefit costs was related to involuntary severance programs associated with flight attendants and other work groups.

Integration-related costs included compensation costs related to systems integration and training, branding activities, new uniforms, write-off or acceleration of depreciation on systems and facilities that were no longer used or planned to be used for significantly shorter periods, relocation for employees and severance primarily associated with administrative headcount reductions.

The Company recorded $32 million of impairment charges of its flight equipment held for disposal associated with its Boeing 737-300 and 737-500 fleets and $1 million on an intangible asset for a route to Manila in order to reflect the estimated fair value of this asset as part of the Company’s annual impairment test of indefinite-lived intangible assets.

The fleet service, passenger service and storekeeper employees represented by the International Association of Machinists ratified a joint collective bargaining agreement with the Company during 2013. The Company recorded a $127 million special charge for lump sum payments made in conjunction with the ratification. The lump sum payments were not in lieu of future pay increases. The Company completed substantially all cash payments in 2013.

The Company recorded $18 million associated with the temporary grounding of its Boeing 787 aircraft. The charges were comprised of aircraft depreciation expense and dedicated personnel costs that the Company incurred while the aircraft were grounded. The aircraft returned to service in May 2013. In addition, the Company adjusted its reserves for certain legal matters by $29 million and recorded approximately $11 million in accruals for future rent associated with the early retirement of four leased Boeing 757-200 aircraft. Additionally, the Company recorded a $5 million gain related to a contract termination and $3 million in gains on the sale of assets.

2012

The Company recorded $125 million of severance and benefits associated with various voluntary retirement and leave of absence programs for its various employee groups. During the first quarter of 2012, approximately 400 mechanics offered to retire early in exchange for a cash severance payment that was based on the number of years of service each employee had accumulated. The expense for this voluntary program was approximately $32 million. The Company also offered a voluntary leave of absence program that approximately 1,800 flight attendants accepted, which allowed for continued medical coverage during the leave of absence period. The expense for this voluntary program was approximately $17 million. During the second quarter of 2012, as part of the recently amended collective bargaining agreement with the Association of Flight Attendants, the Company offered a voluntary program for flight attendants to retire early in exchange for a cash severance payment. The payments are dependent on the number of years of service each employee has accumulated. Approximately 1,300 flight attendants accepted this program and the expense for this voluntary program was approximately $76 million.

Integration-related costs included compensation costs related to systems integration and training, branding activities, write-off or acceleration of depreciation on systems and facilities that are either no longer used or planned to be used for significantly shorter periods, as well as relocation for employees and severance primarily associated with administrative headcount reductions.

On December 31, 2012, UAL and United Air Lines, Inc. entered into an agreement with the Pension Benefit Guaranty Corporation (“PBGC”) that reduced the aggregate amount of 8% Contingent Senior Notes to be issued by UAL, and eliminated the contingent nature of such obligation by replacing the $188 million principal amount of 8% Contingent Senior Notes incurred as of December 31, 2012 and the obligation to issue any additional 8% Contingent Senior Notes with $400 million principal amount of new 8% Notes. In addition, UAL agreed to replace the $652 million principal amount outstanding of 6% Senior Notes due 2031 with $326 million principal amount of new 6% Notes due 2026 and $326 million principal amount of 6% Notes due 2028 (collectively, the “New 6% Notes” and together with the 8% Notes, the “New PBGC Notes”). The Company did not receive any cash proceeds in connection with the issuance of the New PBGC Notes. The Company accounted for this agreement as a debt extinguishment, resulting in a charge of $309 million in 2012 that represented the fair value of $212 million of 8% Notes that it agreed to issue and the change in the fair value of the New 6% Notes and the $188 million of 8% Notes versus their previous carrying values. The Company classified the expense as a component of special charges within integration-related costs because the note restructuring would not have occurred if it were not for the Company’s merger transaction in 2010.

The Company recorded impairment charges of $30 million on an intangible asset for European take-off and landing slots in order to reflect the estimated fair value of these assets as part of its annual impairment test of indefinite-lived intangible assets.

In December 2012, the pilots represented by the Air Line Pilots Association, International ratified a new joint collective bargaining agreement with the Company. The Company recorded $475 million of expense associated with lump sum cash payments that would be made in conjunction with the ratification of the contract and the completion of the integrated pilot seniority list. This charge also includes $80 million associated with changes to existing pilot disability plans negotiated in connection with the agreement. The lump sum payments are not in lieu of future pay increases. The Company completed substantially all cash payments in 2013.

The Company recorded net gains of $46 million related to gains and losses on the disposal of aircraft and related parts and other assets.

Accrual Activity

Activity related to the accruals for severance and medical costs and future lease payments on permanently grounded aircraft is as follows (in millions):


	Severance/ Medical Costs		Permanently Grounded Aircraft
Balance at December 31, 2011	$	55	$	31
Accrual		170		(1)
Payments		(160)		(25)

Balance at December 31, 2012		65		5
Accrual		120		10
Payments		(94)		(4)

Balance at December 31, 2013		91		11
Accrual		199		102
Payments		(181)		(11)

Balance at December 31, 2014	$	109	$	102

The Company’s accrual and payment activity is primarily related to severance and other compensation expense associated with voluntary employee programs and the Company’s merger transaction in 2010, respectively.