United Airlines 2010 Annual Report Download - page 8

(“Trans States”) are all regional carriers, most of which operate under capacity purchase agreements with United
and/or Continental. Under these agreements, the Company pays the regional carriers contractually-agreed fees
(carrier-controlled costs) for operating these flights plus a variable reimbursement (incentive payment for
superior operational performance) based on agreed performance metrics. The carrier-controlled costs are based
on specific rates for various operating expenses of the regional carriers, such as crew expenses, maintenance and
aircraft ownership, some of which are multiplied by specific operating statistics (e.g., block hours, departures)
while others are fixed monthly amounts. Under these capacity purchase agreements, the Company is responsible
for all fuel costs incurred as well as landing fees, facilities rent and other costs, which are passed through without
any markup. In return, the regional carriers operate this capacity on schedules determined by the Company. The
Company also determines pricing, revenues and inventory levels and assumes the inventory and distribution risk
for the available seats.
While the regional carriers operating under capacity purchase agreements comprise more than 95% of all
regional flights, the Company also has prorate agreements with Hyannis Air Service, Inc. (“Cape Air”), Colgan,
Gulfstream International Airlines (“Gulfstream”), SkyWest and Trans States. Under prorate agreements, the
Company and its prorate partners agree to divide revenue collected from each passenger according to a formula,
while both the Company and the prorate partners are individually responsible for their own costs of operations.
Unlike capacity purchase agreements, under a prorate agreement, the regional carrier retains the control and risk
of scheduling, market selection, local seat pricing and inventory for its flights, although the carriers may
coordinate schedules to maximize connections.
Financial information on the Company’s operating revenues by geographic regions, as reported to the U.S.
Department of Transportation (the “DOT”), can be found in Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and Note 10 to the financial statements included in Item 8 of this
report.
Alliances. United and Continental have a number of bilateral and multilateral alliances with other airlines,
which enhance travel options for customers seeking access to markets that United and Continental do not serve
directly. These marketing alliances typically include one or more of the following features: joint loyalty program
participation; codesharing of flight operations (whereby seats on one carrier’s selected flights can be marketed
under the brand name of another carrier); coordination of reservations, ticketing, passenger check-in, baggage
handling and flight schedules; and other resource-sharing activities.
United and Continental are members of Star Alliance, a global integrated airline network co-founded by
United in 1997 and the most comprehensive airline alliance in the world. As of January 1, 2011, Star Alliance
carriers served 1,160 airports in 181 countries with 21,000 daily flights. Current Star Alliance partners, in
addition to United and Continental, are Adria Airways, Aegean Airlines, Air Canada, Air China, Air New
Zealand, All Nippon Airways, Asiana Airlines, Austrian Airlines, Blue1, bmi, Brussels Airlines, Croatia Airlines,
EGYPTAIR, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Singapore Airlines, South African Airways,
Spanair, Swiss International Air Lines, TAM, TAP Portugal, THAI, Turkish Airlines and US Airways. Air India,
Avianca-TACA and Copa Airlines have been announced as future Star Alliance members.
In September 2010, United, Continental and Air Canada entered into a memorandum of understanding to
establish a revenue-sharing, transborder joint venture, subject to the execution of a definitive joint venture
agreement, completion of necessary filings, receipt of regulatory approvals and finalization of documentation.
United, Continental and Air Canada have antitrust immunity from the DOT for transborder coordination. The
joint venture is currently under review by the Canadian Competition Bureau.
In November 2010, United, Continental and All Nippon Airways received antitrust immunity approval from
the Japanese government and the DOT enabling the carriers to establish a trans-Pacific joint venture to integrate
the services they operate between the United States and Japan, and other destinations in Asia, and to derive
potentially significant benefits from coordinated scheduling, pricing, sales and inventory management. The
integration of services will also allow the three carriers to offer passengers highly competitive flight schedules,
fares and services. We expect this joint venture to commence in the second quarter of 2011.
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