United Airlines 2012 Annual Report Download - page 8

Table of Contents
(a) Calculation excludes special charges identified in Note 21 to the financial statements included in Item 8 of this report.
(b) Excludes fuel consumption and cost for Continental Predecessor prior to October 1, 2010.
The availability and price of aircraft fuel significantly affect the Company’s operations, results of operations, financial position and liquidity. To provide
adequate supplies of fuel, the Company routinely enters into short-term and long-term purchase contracts and has some ability to store fuel close to its major
hub locations. To protect against increases in the prices of aircraft fuel, the Company routinely hedges a portion of its future fuel requirements. The Company
generally uses commonly used financial hedge instruments based on aircraft fuel or closely related commodities including heating oil, diesel fuel and crude oil.
Third-Party Business. United has third-party business revenue that includes fuel sales, catering, ground handling, maintenance services and frequent flyer
award non-air redemptions, and third-party business revenue is recorded in other revenue. The Company has a contract to sell aircraft fuel to a third party
which is earnings-neutral but results in revenue and expense, specifically cost of sale which is unrelated to the operation of the airline. United also incurs third-
party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and non-air mileage redemptions, and those
third-party business expenses are recorded in other operating expenses.
Distribution Channels. The majority of the Company’s airline seat inventory continues to be distributed through the traditional channels of travel agencies
and global distribution systems (“GDS”). The growing use of the Company’s direct sales website, united.com, the Company’s mobile applications and
alternative distribution systems, provides the Company with an opportunity to de-commoditize its services, better control its content, make more targeted
offerings, better retain its customers, enhance its brand and lower its ticket distribution costs. To encourage customer use of lower-cost channels and capitalize
on these cost-saving opportunities, the Company will continue to expand the capabilities of its website and mobile applications and explore alternative
distribution channels.
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Domestic Competition. The domestic airline industry is highly competitive and dynamic. Currently, any U.S. carrier deemed fit by the DOT is free to
operate scheduled passenger service between any two points within the United States. The Company’s competitors consist primarily of other airlines and, to a
lesser extent, other forms of transportation. Competition can be direct, in the form of another carrier flying the exact non-stop route, or indirect, where a carrier
serves the same two cities non-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport.
Air carriers’ cost structures are not uniform and there are numerous factors influencing cost structure. Carriers with lower costs may deliver lower fares to
passengers, which could have a potential negative impact on the Company’s revenues. In addition, future airline mergers, acquisitions or reorganizations
pursuant to Chapter 11 of the United States Bankruptcy Code may enable airlines to improve their revenue and cost performance relative to peers and thus
enhance their competitive position within the industry.
Decisions on domestic pricing are based on intense competitive pressure exerted on the Company by other U.S. airlines. In order to remain competitive and
maintain passenger traffic levels, we often find it necessary to match competitors’ discounted fares. Since we compete in a dynamic marketplace, attempts to
generate additional revenue through increased fares oftentimes fail.
International Competition. Internationally, the Company competes not only with U.S. airlines, but also with foreign carriers. International competition has
increased and may increase in the future as a result of airline mergers and acquisitions, joint ventures, alliances, restructurings, liberalization of aviation
bilateral agreements and new or increased service by competitors. Competition on international routes is subject to varying degrees of governmental regulation.
The Company’s ability to compete successfully with non-U.S. carriers on international routes depends in part on its ability to generate traffic to and from the
entire United States via its integrated domestic route network and its ability to overcome business and operational challenges across its network
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