United Airlines 2010 Annual Report Download - page 19

required reserves increasing to stated percentages of net current exposure that could be significant as United’s
unrestricted cash balance falls below certain minimum cash amounts. The agreement with American Express
permits United to provide certain replacement collateral in lieu of cash collateral, as long as United’s unrestricted
cash is above $1.35 billion. Such replacement collateral may be pledged for any amount of the required reserve
up to the full amount thereof, with the stated value of such collateral determined according to the agreement.
Replacement collateral may be comprised of aircraft, slots and routes, real estate or other collateral as agreed
between the parties. Based on United’s unrestricted cash balance at December 31, 2010, United was not required
to provide any reserves under this agreement.
Continental’s credit card processing agreement with JPMorgan Chase and affiliates of JPMorgan Chase
contains financial covenants that require, among other things, that Continental post additional cash collateral if it
fails to maintain (1) a minimum level of Continental’s unrestricted cash, cash equivalents and short-term
investments, (2) a minimum ratio of Continental’s unrestricted cash, cash equivalents and short-term investments
to current liabilities of 0.25 to 1.0 or (3) a minimum senior unsecured debt rating for Continental of at least Caa3
and CCC- from Moody’s and Standard & Poor’s, respectively. If a covenant trigger under the JPMorgan Chase
processing agreement results in Continental’s posting additional collateral under that agreement, Continental will
also be required to post additional collateral under its credit card processing agreement with American Express
that could be significant.
If Continental’s unrestricted cash balance is at or more than $2.0 billion as of any calendar month-end
measurement date, its required reserve will remain at $25 million. However, if Continental’s unrestricted cash
balance is less than $2.0 billion or certain lower minimum cash amounts, its required reserve will increase to
stated percentages of relevant advance ticket sales that could be significant. Based on Continental’s
December 31, 2010 unrestricted cash balance, Continental was not required to provide cash collateral above the
current $25 million reserve balance.
An increase in the future reserve requirements and the posting of a significant amount of cash collateral, as
provided by the terms of any or all of United’s and Continental’s material credit card processing agreements,
could materially reduce the Company’s liquidity. See Note 17 to the financial statements included in Item 8 of
this report for a detailed discussion of our obligations under the Company’s credit card processing agreements.
The Company may not be able to maintain adequate liquidity.
The Company has a significant amount of financial leverage from fixed obligations, including aircraft lease
and debt financings, leases of airport property and other facilities, and other material cash obligations. In
addition, the Company has substantial non-cancelable commitments for capital expenditures, including the
acquisition of new aircraft and related spare engines. While the Company’s cash flows from operations and its
available capital, including the proceeds from financing transactions, have been sufficient to meet these
obligations and commitments to date, the Company’s future liquidity could be negatively impacted by the risk
factors discussed in this Item 1A, including, but not limited to, substantial volatility in the price of fuel, adverse
economic conditions and disruptions in the global capital markets.
In the event that the Company’s liquidity is constrained due to the factors noted above or otherwise, the
Company’s failure to comply with certain financial covenants under its financing and credit card processing
agreements, timely pay its debts, or comply with other material provisions of its contractual obligations could
result in a variety of adverse consequences, including the acceleration of the Company’s indebtedness, the
increase of required reserves under credit card processing agreements, the withholding of credit card sale
proceeds by its credit card service providers and the exercise of other remedies by its creditors and equipment
lessors that could result in material adverse effects on the Company’s financial position and results of operations.
Further, certain of the Company’s debt is secured by collateral and the Company may have limited
remaining assets available as collateral for loans or other indebtedness, which may make it difficult to raise
additional capital to meet its liquidity needs. The Company’s level of indebtedness, non-investment grade credit
17