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[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to______

Commission File No. 1-11355

Securities registered pursuant to Section 12(b) of the Act: NONE
 

Securities registered pursuant to Section 12 (g) of the Act:
 

   Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X                   No  ___

   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

    Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes          No _X__

    The number of shares of common stock outstanding as of February 20, 2004 was 205.  The Registrant is a wholly owned subsidiary of UAL Corporation, and there is no market for the Registrant's common stock.
 
 

ITEM 1.  BUSINESS.

        United Air Lines, Inc. (together with its consolidated subsidiaries, "we," "our," "us," "United" or the "Company") was incorporated under the laws of the State of Delaware on December 30, 1968.  Our world headquarters is located at 1200 East Algonquin Road, Elk Grove Township, Illinois 60007.  Our mailing address is P.O. Box 66919, Chicago, Illinois 60666 (telephone number (847) 700-4000).

        United is the principal subsidiary of UAL Corporation ("UAL"), a Delaware corporation, and is wholly owned by UAL.  United's operations, which consist primarily of the transportation of persons, property and mail throughout the U.S. and abroad, accounted for most of UAL's revenues and expenses in 2003.  United is one of the largest scheduled passenger airlines in the world with over 1,600 daily departures to more than 110 destinations in 23 countries and two U.S. territories. Through United's unsurpassed global route network, we serve virtually every major market around the world, either directly or through the Star Alliance, which is the world's largest airline network. In addition to the Star Alliance, we provide regional service into our domestic hubs through partnerships with United Express carriers. In 2004, we added a new low-fare carrier, called Ted, designed to serve select leisure markets in a way that allows us to be competitive with other low-fare carriers.

        Our web address is www.united.com. Through our website, our filings with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are accessible (free of charge) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

This Form 10-K contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to us on the date of the filing of this Form 10-K, and are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from those referenced in the forward-looking statements are listed in the last paragraph of, "Outlook" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. We disclaim any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.

Bankruptcy Considerations

        The following discussion provides general background information regarding our Chapter 11 cases, and is not intended to be an exhaustive summary. Specific information pertaining to our bankruptcy filing may be obtained through the website www.pd-ual.com.

       The airline industry is highly competitive and labor intensive. Our business is highly sensitive to fuel costs, fare levels and demand for travel. Passenger demand and fare levels are influenced by, among other things, the state of the global economy, domestic and international events, airline capacity and pricing actions taken by carriers. Beginning in 2000, the slowing economy and decrease in high-yield business travel, among other things, caused a significant decline in our revenues. Simultaneously, our labor costs increased dramatically as we entered into new collective bargaining agreements with most of our employee groups that contained wage increases retroactive to mid-2000. Finally, the terrorist attacks of September 11, 2001 had an unprecedented, negative impact on passenger and cargo demand for air travel.

       In response to the events of September 11, we took dramatic steps to improve our financial condition. These actions included reducing our flight schedule, retiring aircraft, curtailing new aircraft deliveries, significantly reducing planned capital spending, closing several reservation centers and international stations, eliminating some commissions paid to travel agencies, and significantly downsizing our workforce.

       In addition, we tried to negotiate labor cost reductions from our unions in an amount and of a duration sufficient to ward off bankruptcy.

       Despite these measures, we depleted our cash reserves at an unprecedented rate, and we were unable to obtain any meaningful levels of financing in the public or private capital markets.

       Thus, in June 2002, we approached the Air Transportation Stabilization Board (the "ATSB") for a $1.8 billion federal loan guarantee with a business plan contemplating capacity cuts, revenue increases and lower labor costs. On December 4, 2002, the ATSB decided not to approve our proposal for a federal loan guarantee. Facing approximately $875 million in debt maturities, we filed for bankruptcy as the best means available to facilitate the implementation of necessary changes to our business and bring costs and operations in line with the current business environment.

       On December 9, 2002 ("Petition Date"), UAL, United and 26 direct and indirect wholly owned subsidiaries filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"). The Bankruptcy Court is jointly administering these cases as "In re UAL Corporation, et al., Case No. 02-48191." On December 13, 2002, the United States Trustee appointed an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court concerning our reorganization.

       In connection with these Chapter 11 filings, we arranged a debtor-in-possession secured financing for $1.5 billion ("DIP Financing"), which was approved by the Bankruptcy Court on December 30, 2002. The DIP Financing consists of two facilities, a $300 million facility provided by Bank One N.A. and a $1.2 billion facility provided by J.P. Morgan Chase Bank, Citicorp USA, Inc., Bank One, N.A., and The CIT Group/Business Credit, Inc. For more information on our DIP Financing, see "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, "Voluntary Reorganization Under Chapter 11" in the Notes to Consolidated Financial Statements.

        We continue to operate our businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. All vendors are being paid for all goods furnished and services provided after the Petition Date in the ordinary course of business. However, under Section 362 of the Bankruptcy Code, actions to collect most of our pre-petition liabilities are automatically stayed. Most of these pre-petition liabilities will be settled under a plan of reorganization which must be approved by the Bankruptcy Court.

        Since the Petition Date, we have made substantial progress in restructuring United, achieving a lower labor and non-labor cost structure and improving revenue while sustaining superior levels of operating performance and customer satisfaction. For example, we negotiated new six-year contracts with each of our unions, which, when combined with wage and benefit reductions for salaried and management employees will allow us to realize average annual labor savings of $2.5 billion by 2005. Our Business Transformation Office is implementing profit improvement initiatives in the areas of productivity, strategic sourcing, ticketing policy changes and others which are expected to deliver $1.4 billion in annual profit improvements in 2004. We launched a series of aggressive marketing and sales activities, inventory management enhancements and route and capacity adjustments to improve our revenue performance, and in the fourth quarter we outperformed the industry and grew unit revenue by 10% (as compared to fourth quarter 2002). We also recorded our best-ever performance in departures on-time this year, and second-best year for both departure completion and arrivals on-time within 14 minutes (as measured by the Department of Transportation).

        Integral to our overall reorganization efforts has been the restructuring of our aircraft fleet and the related financings. Under Section 1110 of the Bankruptcy Code we have negotiated with lessors and lenders to restructure existing financings to current market rates and reduce aircraft ownership costs. To date, we have reached agreements in principle with respect to a substantial majority of our financed aircraft. There can be no assurance, however, that those tentative agreements will be successfully converted to final contracts. If we are unable to finalize these agreements, there can be no assurance that we will be able to reach new agreements at comparable economics or that financiers will not repossess aircraft. Either of these outcomes, although unlikely, could have a material adverse affect on our financial and operational performance.

        In accordance with Section 1110 of the Bankruptcy Code, we have also rejected or abandoned certain surplus aircraft to adjust our fleet size and composition to more closely match market demand. In addition, we have converted many longer-term financing arrangements into short-term operating leases. Through this process, we expect to achieve average annual cash savings of approximately $900 million over the next five years. When combined with the $2.5 billion in labor cost reductions and $1.4 billion in business transformation initiatives, we are on track to generate approximately $5 billion in average annual cash savings by 2005 as compared to our pre-bankruptcy projections.

       Pending approval of our updated application for a $1.6 billion federal loan guarantee from the ATSB (which we submitted on December 18, 2003) J.P. Morgan Chase Bank ("JP Morgan") and Citicorp USA, Inc. ("Citigroup") have agreed to provide a $2.0 billion exit financing facility ("Exit Facility"), an amount we believe results in an optimal level of liquidity upon emergence from bankruptcy. The commitment letter for the Exit Facility was approved by the Bankruptcy Court on January 16, 2004. Under the Exit Facility, JP Morgan and Citigroup will each underwrite $200 million of the non-guaranteed portion of the facility and $800 million of the guaranteed portion. Without an ATSB loan guarantee, we might be unable to obtain optimal or even sufficient funding to meet our future liquidity needs and reorganize successfully. As of the date of this filing, the ATSB has not yet reached a decision on our application.

       To successfully exit Chapter 11, we must obtain confirmation by the Bankruptcy Court of a plan of reorganization. A plan of reorganization would, among other things, resolve our pre-petition obligations, set forth our revised capital structure and establish our corporate governance subsequent to exit from bankruptcy. We are currently operating under an "exclusive period," which expires on April 7, 2004, during which we are the only party permitted to file a plan of reorganization. The decision as to when we will file a plan of reorganization depends on the timing and outcome of numerous ongoing matters in the Chapter 11 process. These issues include our pending application for a federal loan guarantee from the ATSB, pension obligations, proposed changes to retiree medical benefits, Section 1110 aircraft restructuring efforts, municipal bond obligations, United Express contracts and the pre-petition claims. We expect to file a plan of reorganization that provides for UAL's emergence from bankruptcy, but there can be no assurance that the Creditors' Committee will support our positions or our plan of reorganization (disagreements between us and the Creditors' Committee could adversely affect our reorganization process, including our emergence from Chapter 11). Nor can there be any assurance that the Bankruptcy Court will confirm a plan of reorganization or that any such plan will be implemented successfully.

        We are working towards emerging from Chapter 11 in the first half of 2004, but that timing is dependent on, among other things, the timely and successful confirmation and implementation of a plan of reorganization. The rights and claims of various creditors and security holders will be determined by the plan as well.  At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on our business, nor can we make any predictions concerning how each of these claims will be valued in the bankruptcy proceedings. We believe that UAL's presently outstanding equity securities will have no value and it is expected that those securities will be canceled under any plan of reorganization that we propose. For this reason, we urge that caution be exercised with respect to existing and future investments in any UAL security.

       For more information on our bankruptcy proceedings, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, "Voluntary Reorganization Under Chapter 11" in the Notes to Consolidated Financial Statements.

Operations

        Segments.  We operate our businesses through four reporting segments:  North America, the Pacific, the Atlantic and Latin America.  Financial information on our operating segments can be found in Note 15, "Segment Information" in the Notes to Consolidated Financial Statements.

        During 2003, United carried approximately 66 million passengers and flew approximately 104 billion revenue passenger miles.  United's network provides comprehensive transportation service within its North American segment and to international destinations within its Pacific, Atlantic and Latin American segments.

        Operating revenues attributed to United's North America segment were $8.8 billion in each of 2003 and 2002 and $10.7 billion in 2001.  Operating revenues attributed to United's international segments were $4.2 billion in 2003, $4.7 billion in 2002 and $5.4 billion in 2001.

        North America.  As of December 31, 2003, United served approximately 84 destinations throughout North America and operates hubs in Chicago, Denver, Los Angeles, San Francisco and Washington, D.C.  United's North America operations, including United Express, accounted for 68% of United's revenues in 2003.

        Pacific.  Via Tokyo, United provides passenger service between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New York, San Francisco and Seattle) and the Asian cities of Bangkok, Hong Kong, Seoul, Singapore and Taipei. United also provides nonstop service between Hong Kong and each of Chicago, San Francisco and Singapore; between Osaka and each of San Francisco and Honolulu; between San Francisco and each of Seoul, Shanghai, Singapore and Sydney; between Los Angeles and each of Sydney and Melbourne (via Sydney); and between Chicago and Beijing. Effective June 10, 2004, we expect to also provide daily nonstop service between Chicago and Osaka and between San Francisco and Beijing. In 2003, United's Pacific operations accounted for 16% of United's operating revenues.

        Atlantic.  Washington, D.C. is United's primary gateway to Europe, serving Amsterdam, Brussels, Frankfurt, London, Munich and Paris.  Chicago is United's secondary gateway to Europe, with nonstop service to and from Amsterdam, Frankfurt, London and Paris. United also provides nonstop service between San Francisco and each of Paris, London and Frankfurt; and between London and each of Los Angeles and New York. Effective June 13, 2004, we expect to also provide daily nonstop service between Washington, D.C. and Zurich. In 2003, United's Atlantic operations accounted for 13% of United's operating revenues.

        Latin America.  United's primary gateway to Latin America is Washington, D.C., providing service to and from Aruba, Buenos Aires, Montevideo, Cancun, Rio de Janeiro, Sao Paolo, San Jose, San Juan and St. Thomas.  United also provides service between Mexico City and each of Chicago, Los Angeles, San Francisco and Washington, D.C.  In addition, United has service between Chicago and Aruba, Grand Cayman, San Juan, Sao Paulo and St. Thomas; between Los Angeles and each of Guatemala City, San Jose and San Salvador; and between Guatemala City and San Jose. Effective May 1, 2004, we expect to launch nonstop, weekly service for the summer season to Hamilton, Bermuda from Chicago. Also effective May 1, 2004, United will eliminate its daily service from Miami to Buenos Aires and Sao Paulo. Effective October 31, 2004, we expect to add daily nonstop service from Chicago to Buenos Aires. In 2003, United's Latin America operations accounted for 3% of UAL's revenues.

        United Cargo^®.  United Cargo offers both domestic and international shipping through a variety of services including Small Package Delivery, T.D. Guaranteed^®, First Freight, International Freight and Global SP. United Cargo's door-to-door delivery services include United SameDay for packages under 70 pounds and United SameDayPlus for heavy freight.  Freight accounts for most of United Cargo's shipments, with mail making up the balance.

       During 2003, United Cargo accounted for 5% of United's revenues by generating over $630 million in freight and mail revenue, a 6.4% decrease versus 2002.

       United Cargo seeks to leverage revenue opportunities created by our global route network and through strategic alliances while simultaneously creating a more competitive cost structure. As part of these efforts, during 2003, United Cargo, along with Unisys Corporation and two other cargo carriers, launched Cargo Portal Services, an Internet portal that allows customers to more easily book and manage shipments, which we anticipate will reduce transaction costs for both the Company and our customers. We also outsourced the cargo handling functions at all North American warehouses as well as our cargo call center and, as a result of a unique partnership between United and Delta Air Lines, Inc., were awarded a new, expanded mail-carriage contract from the U.S. Postal Service.

       Ted. In September 2003, we announced our plans to launch a low-fare operation, Ted, with an initial first-year fleet size of approximately 45 Airbus A320 aircraft, all of which will be redeployed from our current fleet. We expect Ted to operate at a lower cost than our mainline operation. Ted began flying customers in February 2004 with service from Denver to Reno, Las Vegas, Phoenix, New Orleans, Tampa Bay, Orlando, Ontario (California) and Fort Lauderdale, a new market not previously served by United from Denver. Beyond Denver-based service, Ted offers service between Las Vegas and both Los Angeles and San Francisco and between San Francisco and Phoenix. In April 2004, Ted will fly new service from Washington D.C. to Fort Lauderdale, and take on three existing Washington-based routes to Las Vegas, Tampa Bay and Orlando.

       Fuel.  Fuel is our second largest cost behind labor.  Our fuel costs and consumption for the years 2003, 2002 and 2001 were as follows:
 

       The price and availability of jet fuel significantly affect our operations. For example, at 2003 fuel consumption levels, we estimate that every $0.01 change in the average annual price-per-gallon of jet fuel will impact our fuel costs by approximately $22 million (all other things being equal).  Due to the highly competitive nature of the airline industry, we may be unable to pass on to our customers any increased fuel costs that we may encounter.

        To ensure adequate supplies of fuel and to provide a measure of control over fuel costs, we arrange to have fuel shipped on major pipelines and stored close to our major hub locations.  Although we currently do not anticipate a significant reduction in the availability of jet fuel, a number of factors make accurate predictions impossible, including geopolitical uncertainties in oil-producing nations. For example, hostilities and political turmoil in Iraq or other oil-producing nations could lead to disruptions in oil production and/or to substantially increased oil prices.

        In the fourth quarter, we entered into a jet fuel supply agreement with Morgan Stanley Capital Group Inc. that provides for the supply of jet fuel and the maintenance of jet fuel inventories at specified airport locations. We expect that this arrangement will allow us to meet our jet fuel needs, while reducing our working capital requirements for fuel.

        Insurance.  We carry hull and liability insurance of a type customary in the air transportation industry, in amounts which we deem adequate, covering passenger liability, public liability and damage to our aircraft and other physical property.  Since the September 11, 2001 terrorist attacks, our premiums have increased significantly.

        Additionally, after September 11, 2001 commercial insurers cancelled our liability insurance for losses resulting from war and associated perils (terrorism, sabotage, hijacking and other similar perils), but we obtained replacement coverage through the federal government.  The Homeland Security Act, which became effective in February 2003, mandated the Federal Aviation Administration ("FAA") to provide third-party, passenger and hull war-risk insurance to commercial air carriers through August 31, 2003, and permitted such coverage to be extended to December 31, 2003. The Emergency Wartime Supplemental Appropriations Act, signed into law on April 16, 2003, extends this war-risk insurance coverage to commercial air carriers through August 31, 2004, and permits such coverage to be extended until December 31, 2004, if the federal government determines such an extension is in the national interest.  We are unable to predict whether the government will extend this insurance coverage past August 31, 2004. Should the government discontinue this coverage, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all. If we are unable to obtain adequate insurance, our business would be materially affected.

        Also, we maintain other types of insurance such as property and casualty, directors and officers, cargo, automobile and the like, with limits and deductibles that are standard within the industry.  These premiums have also risen substantially since September 11, 2001 coupled with lower limits.

        Alliances.  We have entered into a number of bilateral and multilateral alliances with other airlines to provide our customers more choices and to participate in markets worldwide that we do not serve directly.  These collaborative marketing arrangements typically include one or more of the following features: joint frequent flyer participation; code sharing of flight operations (whereby one carrier's flights can be marketed under the two-letter airline designator code of another carrier); coordination of reservations, baggage handling and flight schedules; and other resource-sharing activities.

        The most significant of these is the Star AllianceÔ, a global integrated airline network co-founded by United in 1997.  As of December 31, 2003, Star Alliance carriers served approximately 700 destinations in approximately 128 countries with over 10,791 daily flights.  Current Star Alliance partners, in addition to United, are Air Canada, Air New Zealand, All Nippon Airways, Asiana, the Austrian Airlines Group (which includes Austrian Airlines, Lauda Air and Austrian Arrows, formerly Tyrolean), bmi, LOT Polish Airlines, Lufthansa, Mexicana, SAS, Singapore Airways, Spanair, Thai International Airways, and Varig.  Mexicana will leave the Star Alliance as of March 31, 2004 and we will cease our code share agreement with them as of April 1, 2004.

        We have a marketing partnership with US Airways involving joint frequent flyer participation, joint lounge access and code sharing on certain flights. We currently code share on selected flights and expect to complete the implementation of the code sharing element of the partnership by April 2004. In May 2003, the Chief Executive Board of Star Alliance approved the application of US Airways to join the Star Alliance. It is expected that US Airways will join the Star Alliance in 2004.

        We have also formed independent marketing agreements with other air carriers, including Air China, Air Dolomiti, Air Nippon, Aloha, BWIA West Indies Airways, Continental Connection (operated by Gulfstream), Fair Inc., dba "ANA Connection," Great Lakes Airlines (a regional carrier), and Virgin Blue.  We continually evaluate the need for relationships with these and other carriers and from time to time expect to change our independent marketing partners as conditions warrant.

        In addition, we operate the United Express^® marketing program in North America, under which independent regional carriers serve small and medium-sized cities and link them to our mainline network. For more information on United Express, see "United Express Contracts" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2(i), "Summary of Significant Accounting Policies - United Express" in the Notes to Consolidated Financial Statements.

        Mileage Plus and Other Loyalty Programs.  Our Mileage Plus frequent flyer program encourages customer loyalty by offering awards and services to frequent travelers.  There are more than 40 million members enrolled in Mileage Plus who earn mileage credit for flights on United, United Express, the Star Alliance and certain other airlines that participate in the program.  Miles also can be earned by purchasing the goods and services of our non-airline partners, such as hotels, car rental companies, and credit card issuers.  Mileage credits can be redeemed for free, discounted or upgraded travel and non-travel awards. For a detailed description of the treatment of Mileage Plus awards, see "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

        UAL Loyalty Services, Inc. ("ULS"), a wholly owned subsidiary of UAL, operates substantially all United-branded travel distribution and customer loyalty e-commerce activities, such as united.com, and also owns and manages UAL's interests in various third-party e-commerce enterprises.  In addition, ULS owns and operates the Mileage Plus frequent flyer program and is responsible for certain aspects of the program, including member relationships, communications and account management, while United continues to be responsible for other aspects of the program, including the elite Premier, Premier Executive and Premier Executive 1K programs, as well as the air travel accrual and award aspects of the program.  United also retains responsibility for managing relationships with Mileage Plus' airline partners, while ULS manages relationships with non-airline business partners, such as the Mileage Plus Visa Card, hotels, car rental companies and dining programs. ULS also owns and operates certain other United-branded customer programs as well as the MyPoints.com online loyalty program, under which registered consumers earn points for goods and services purchased from participating vendors.

        Distribution Channels.  The majority of our airline inventory continues to be distributed through the traditional channels of travel agencies and global distribution systems. However, inventory distributed through the internet has increased significantly compared to 2002.

Industry Conditions

        Operating Environment.  The air travel business is subject to seasonal fluctuations.  Our operations can be adversely impacted by severe weather and our first- and fourth-quarter results normally reflect reduced travel demand. Historically, operating results are better in the second and third quarters.  More recently, however, the typical seasonal relationships have been distorted by the events of September 11, 2001, the SARS epidemic and the Iraq war.

        Competition.  The airline industry is highly competitive and volatile.  In domestic markets, new and existing carriers are free to initiate service on any route.  Our domestic competitors are primarily the other U.S. airlines, a number of who are low-fare carriers which have cost structures lower than ours.

        In our international service, we compete not only with U.S. airlines, but also with foreign carriers.  Our competition on specified international routes is subject to varying degrees of governmental regulations. (See "Industry Regulation" below.) As the U.S. is the largest market for air travel worldwide, our ability to generate U.S. originating traffic from our integrated domestic route systems provides us with an advantage over non-U.S. carriers. Additionally, foreign carriers are prohibited by U.S. law from carrying local passengers between two points in the U.S. and we experience comparable restrictions in foreign countries.  In addition, U.S. carriers are often constrained from carrying passengers to points beyond designated international gateway cities due to limitations in air service agreements or restrictions imposed unilaterally by foreign governments.  To compensate for these structural limitations, U.S. and foreign carriers have entered into alliances and marketing arrangements that allow the carriers to feed traffic to each other's flights.  See "Alliances" above.

Industry Regulation

        Domestic Regulation.

       General. All carriers engaged in air transportation in the U.S. are subject to regulation by the Department of Transportation ("DOT").  Among its responsibilities, the DOT has authority to issue certificates of public convenience and necessity for domestic air transportation (no air carrier, unless exempted, may provide air transportation without a DOT certificate of public convenience and necessity), grant international route authorities, approve international code share agreements, regulate methods of competition and enforce certain consumer protection regulations, such as those dealing with advertising, denied boarding compensation and baggage liability. We operate under certificates of public convenience and necessity issued by the DOT. These certificates may be altered, amended, modified or suspended by the DOT if public convenience and necessity so require, or may be revoked for intentional failure to comply with the terms and conditions of a certificate.

       Airlines are also regulated by the FAA, a division of the DOT, primarily in the areas of flight operations, maintenance and other safety and technical matters. The FAA has authority to issue air carrier operating certificates and aircraft airworthiness certificates, prescribe maintenance procedures, and regulate pilot and other employee training, among other responsibilities. From time to time, the FAA issues rules that require air carriers to take certain actions, such as the inspection or modification of aircraft and other equipment, that may cause us to incur substantial, unplanned expenses. We are also subject to inquiries by these and other U.S. and international regulatory bodies. We do not believe that any such existing inquiries will have a material effect on our business.

       The airline industry is also subject to various other federal, state and local laws and regulations. The Department of Justice has jurisdiction over airline competition matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail. Labor relations in the airline industry are generally governed by the Railway Labor Act. Future regulatory and legal compliance developments in the U.S. and abroad could materially adversely affect operations and increase operating costs for the airline industry, including the Company.

       Airport Access. Access to landing and take-off rights, or "slots," at three major U.S. airports and certain foreign airports served by United are subject to government regulation. The FAA has designated John F. Kennedy International Airport and LaGuardia Airport in New York and Ronald Reagan Washington National Airport in Washington, D.C., as "high density traffic airports" and has limited the number of departure and arrival slots at those airports. Slot restrictions at O'Hare International Airport in Chicago were eliminated in July 2002 and are slated to be eliminated at Kennedy and LaGuardia by 2007. From time to time, the elimination of slot restrictions has impacted our operational performance and reliability. For example, at O'Hare where the elimination has led to increased traffic congestion resulting in operational delays for a number of airlines, including United.

        To address congestion concerns and delays at O'Hare, United and American Airlines reached an agreement with the FAA in January 2004 to reduce each of their flight schedules at O'Hare. Effective March 2004, we will reduce our flight schedule by 5 percent between the peak hours of 1:00 p.m. and 8:00 p.m. In addition to reducing flights, we also depeaked our schedule at O'Hare beginning in February 2004. We expect that these changes will improve the reliability of O'Hare flights without having a material effect on our financial results.

        Legislation. The Aviation and Transportation Security Act (the "Aviation Security Act"), enacted in November 2001, has had wide-ranging effects on our operations. The Aviation Security Act makes the federal government responsible for virtually all aspects of civil aviation security, creating a new Transportation Security Administration ("TSA"), which is a part of the Department of Homeland Security pursuant to the Homeland Security Act of 2002. Under the Aviation Security Act, substantially all security screeners at airports are now federal employees and significant other aspects of airline and airport security are now overseen by the TSA. Pursuant to the Aviation Security Act, funding for airline and airport security is provided in part by a passenger security fee of $2.50 per flight (capped at $10.00 per round trip) which is collected by the air carriers and remitted to the government. In addition, air carriers are required to submit to the government an additional security fee equal to the amount the air carrier paid for screening passengers and property in 2000.

       On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act was signed into law. The legislation included approximately $3 billion of direct compensation for U.S. airlines. Of the total, $2.4 billion compensates air carriers for lost revenues and costs related to aviation security. Additionally, passenger and air carrier security fees were suspended from June 1 through September 30, 2003 and government-provided war-risk insurance was extended for one year to August 2004. For detailed information on the legislation's impact on United, see Note 3, "Special Charges - Government Compensation" in the Notes to Consolidated Financial Statements.

        International Regulation.

       General. International air transportation is subject to extensive government regulation. In connection with our international services, we are regulated by both the U.S. government and the governments of the foreign countries we serve. In addition, the availability of international routes to U.S. carriers is regulated by treaties and related aviation agreements between the U.S. and foreign governments, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments.

        Airport Access. Historically, access to foreign markets has been tightly controlled through bilateral agreements between the U.S. and the foreign country involved. These agreements regulate the number of markets served, the number of carriers allowed to serve the market, and the frequency of their flights. Since the early 1990s, the U.S. has pursued a policy of "Open Skies" (meaning all carriers have access to the destination), under which the U.S. government has negotiated a number of bilateral agreements allowing unrestricted access to foreign markets.

        While a considerable number of foreign governments have agreed to Open Skies, several major airports remain subject to restrictive bilateral agreements. Among them are London Heathrow and Tokyo Narita, where we have significant operations. Further, our ability to serve some countries and expand into certain others is limited by the absence altogether of aviation agreements between the U.S. and the relevant governments. Shifts in U.S. or foreign government aviation policies can lead to the alteration or termination of air service agreements between the U.S. and other countries.  Depending on the nature of the change, the value of our route authorities may be enhanced or diminished.

        The European Union ("EU") is taking an increasingly active role in regulating international aviation. In November 2002, the European Court of Justice issued a ruling that invalidated certain provisions of aviation agreements between the U.S. and the EU.  The EU member states subsequently granted the EU Commission a mandate to negotiate an air services agreement with the U.S. on their behalf. In granting the mandate, the EU member states made clear that the existing bilateral agreements would remain in force while negotiations between the U.S. and the EU continue.

        The European Commission continues its attempts to modify the existing regulation that governs slots at EU airports.  The EU Council of Transport Ministers, however, recently rejected the Commission's efforts to ban secondary slot trading. The EU Parliament must now consider the Council's position in the coming months. Separately, the Commission is expected to propose a comprehensive revision to the slot regulation in 2004.

        Environmental Regulations.  The airline industry is subject to increasingly stringent federal, state, local, and foreign environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils, and waste materials.  Our industry is also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives.  It is our policy to comply with all environmental laws and regulations, which can require expenditures.  Under the federal Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "Superfund") and similar environmental cleanup laws, waste generators, or owners or facility operators, can be subject to liability for investigation and remediation costs at facilities that have been identified as requiring response actions. We also conduct voluntary remediation actions. Such cleanup obligations arise from, among other circumstances, the operation of fueling facilities, and primarily involve airport sites. The costs associated with these activities are not expected to have a material adverse effect on our business.

       The Company, along with a number of other air carriers, entered into a voluntary agreement with the California Air Resources Board regarding the reduction of air emissions from ground support equipment used at airports in the South Coast Air Basin. Compliance with this agreement will require some expenditure of capital costs over a period of eight years.

        There is a dispute primarily among United, American Airlines, and Ogden Services (as well as Northwest Airlines and Delta) concerning the responsibility for payment of certain cleanup costs for groundwater and soil contamination near Terminals 8 and 9 at New York's Kennedy Airport.  The parties' views on proper allocation of the costs differ. This litigation, which was initiated in 2000 in the Supreme Court of the State of New York, is currently stayed because of our Chapter 11 filing.

        In accordance with a June 1999 order issued by the California Regional Water Quality Control Board ("CRWQCB"), United, along with most of the other tenants of the San Francisco International Airport, has been investigating potential environmental contamination at the airport and conducting remediation when needed.  Among these projects is an investigation and remediation project for solvent impacts to soil, bedrock, and groundwater at United's San Francisco Maintenance Center.  This project is being conducted in accordance with CRWQCB approvals.

        The U.S. Environmental Protection Agency and the State of California are seeking penalties and certain compliance program improvements from the Company for alleged non-compliance with hazardous waste generator requirements at our San Francisco Maintenance Center identified in 1999 and 2001.  We have been working with both governmental entities to resolve this matter.

        In addition to the matters discussed above, from time to time we become aware of potential non-compliance with environmental regulations, which have either been identified by the Company (through our internal environmental compliance auditing program) or through a governmental entity.  In some instances, these matters could potentially become the subject of an administrative or judicial proceeding and could potentially involve monetary sanctions of $100,000 or more.

        We do not expect these matters, individually or collectively, to have a material adverse effect on our business.

Employees

        As of December 31, 2003, the Company and its subsidiaries had approximately 63,000 active employees, of which approximately 78% are represented by various U.S. labor organizations.

        The employee groups, number of employees, labor organization and current contract status for each of United's collective bargaining groups, as of December 31, 2003, were as follows:
 

        Collective bargaining agreements ("CBAs") are negotiated under the Railway Labor Act, which governs labor relations in the transportation industry, and typically do not contain an expiration date.  Instead, they specify an amendable date, upon which the contract is considered "open for amendment."  Prior to the amendable date, neither party is required to agree to modifications to the bargaining agreement.  Nevertheless, nothing prevents the parties from agreeing to start negotiations or to modify the agreement in advance of the amendable date. Contracts remain in effect while new agreements are negotiated.  During the negotiating period, both the Company and the negotiating union are required to maintain the status quo.

        For information on labor matters, see "Other Information - Labor Agreements" in Management's Discussion and Analysis of Financial Condition and Results of Operations.
 

ITEM 2.  PROPERTIES.

Flight Equipment

        As of December 31, 2003, United's operating aircraft fleet totaled 532 jet aircraft, of which 252 were owned and 280 were leased.  These aircraft are listed below:
 

        As of December 31, 2003, all 252 of the aircraft owned by us were encumbered under debt agreements. For additional information on accounting for these aircraft see Note 9, "Long-Term Debt" and Note 10, "Lease Obligations" in the Notes to Consolidated Financial Statements.

Ground Facilities

        We have entered into various leases relating to our use of airport landing areas, gates, hangar sites, terminal buildings and other airport facilities in most of the municipalities we serve.  Major leases expire at San Francisco in 2011 and 2013, Washington-Dulles in 2014, Chicago O'Hare in 2018, Los Angeles in 2021 and Denver in 2025. These leases are subject to assumption or rejection under the Chapter 11 process.

        We own a 93.5-acre complex in suburban Chicago consisting of more than 1 million square feet of office space for our world headquarters, a computer facility and a training center.  We also own a flight training center, located in Denver, which can accommodate 36 flight simulators and more than 90 computer-based training stations.  We own a limited number of other properties, including a reservations facility and an office building in Denver and a crew hotel in Honolulu. All of these facilities are mortgaged.

        Our Maintenance Operation Center at San Francisco International Airport occupies 130 acres of land, 2.9 million square feet of floor space and 9 aircraft hangar bays under a lease expiring in 2013. During 2003, we closed maintenance facilities in Indianapolis and Oakland.

        Our off-airport leased properties have included a number of ticketing, sales and general office space in the downtown and outlying areas of most of the larger cities within the United system. As part of our restructuring and cost containment efforts, we have closed, terminated or rejected all of our city ticket office leases. We continue to lease and operate a number of administrative, reservations, sales and other support facilities worldwide.
 

ITEM 3.  LEGAL PROCEEDINGS.

In re: UAL Corporation, et. al.

         As discussed above, on the Petition Date, UAL, the Company and 26 other direct and indirect wholly owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.  The Chapter 11 Cases are being jointly administered under the caption "In re UAL Corporation, et al., Case No. 02-B-48191."  As debtors-in-possession, we are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.  As of the Petition Date, virtually all pending litigation (including some of the actions described below) is stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, again subject to certain exceptions, to recover on pre-petition claims against us.  In addition, we may reject pre-petition executory contracts and unexpired lease obligations, and parties affected by these rejections may file claims with the Bankruptcy Court.  At this time, it is not possible to predict the outcome of the Chapter 11 process or its effect on our business.

Hall d.b.a. Travel Specialists v. United

        Six travel agencies filed an antitrust class action suit against United and other air carriers in federal court in North Carolina following the reduction by the air carrier defendants of commission rates payable to travel agents in 1997, 1998, 2001 and 2002 in alleged violation of the Sherman Act. The agencies asked for the matter to be treated as a class action and sought treble damages for lost commissions and other injunctive relief. The total amount claimed, assuming liability, is approximately $13 billion. United's share of this amount was not separately alleged by plaintiffs. Upon UAL's Chapter 11 filing, this case was stayed as against United. On October 30, 2003, the trial court entered judgment on behalf of the carrier defendants and dismissed all of the plaintiffs' claims. That decision is currently on appeal.

        In addition to the Hall case, United has been named in several other cases filed in the U.S. and Canada, involving commission rates payable to travel agencies. These cases are in their early stages. We do not expect the outcome of Hall and the related cases to have any material effect upon United's consolidated financial position or results of operations.

Litigation Associated with September 11 Terrorism

        Approximately 130 lawsuits against United are pending in the U.S. District Court for the Southern District of New York related to the September 11, 2001 terrorist attacks.  The suits allege a variety of liability, including wrongful death, injury or property damage, and claim that United and others breached their duty of care to the passengers and to the ground victims.  Identical actions have also been filed against American and other defendants.  Under federal law, United's liability on such claims will be limited to the amount of United's insurance coverage.  In addition, approximately 98% of families of the victims of the September 11 terrorist attacks have opted to seek relief from a forum created under federal law to provide an alternative to litigation and as a consequence will not be seeking compensation from United. United has stipulated that the automatic stay under the U.S. Bankruptcy Code applicable to the lawsuits filed against United will be modified for these claims.

        See also "Industry Regulation - - Environmental Regulations" above and Note 13, "Commitments, Contingent Liabilities and Uncertainties - Legal and Environmental Contingencies" in the Notes to Consolidated Financial Statements.
 
 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        No matter was submitted to a vote of security holders of the Company during 2003.
 
 

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        United Air Lines, Inc. is a wholly owned subsidiary of UAL Corporation and there is no market for United's common stock.
 

ITEM 6. SELECTED FINANCIAL DATA AND OPERATING STATISTICS.
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

        The airline industry is a highly competitive, capital- and labor-intensive industry. In 1994, UAL created the largest employee-owned company in the U.S., primarily as a means to reduce labor costs. As a result, for the initial six-year period of the Employee Stock Ownership Plan ("ESOP"), we experienced costs that were significantly below the industry average. However, once the union contracts that were negotiated as part of the ESOP arrangement became amendable in 2000, the renegotiated labor contracts provided United employees with industry-leading wages and as a result, our cost structure went from industry competitive to uncompetitive.

        Additionally, beginning in early 2001, the weakening U.S. economy had a significant impact on the airline industry as corporations reduced their business travel budgets and changed their travel behavior. The terrorist attacks of 2001 and their direct impact on the airline industry further reduced our chances of successfully weathering the downturn in the economy. Throughout 2002, we continued to suffer from the weakened revenue environment resulting from the events of September 11 and the flagging U.S. economy, combined with uncompetitive labor contracts. Industry revenues remained below 1995 levels and negative media coverage of our financial situation caused United's unit revenue to under-perform the industry. Consequently, passenger revenues declined from $16.9 billion in 2000 to $11.9 billion in 2002.

        While we made efforts to bring costs into line with the reduced revenue environment, including delaying or canceling capital investments, retiring aircraft, reducing schedules, closing stations and reservations centers, eliminating travel agency commissions and furloughing employees, we were unable to stop burning cash. Because we were unable to obtain any meaningful out-of-court financing in the public or private capital markets, we applied to the Air Transportation Stabilization Board ("ATSB") for a $1.8 billion federal loan guarantee. However, on December 4, 2002, the ATSB decided not to approve our application. As a result, on December 9, 2002 ("Petition Date"), UAL, United and 26 of its direct and indirect subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. For further details regarding the Chapter 11 cases, see "Bankruptcy Proceedings" below and Note 1, "Voluntary Reorganization Under Chapter 11" in the Notes to Consolidated Financial Statements.

        When we filed for Chapter 11 reorganization, we had an uncompetitive cost structure, over-leveraged balance sheet, cumbersome corporate governance structure, excess fleet capacity, and limited flexibility to meet changing market demands.  To address these challenges, in 2003 we significantly reduced costs; gained the flexibility to expand our portfolio of products to meet market demands; and created a more streamlined and effective corporate governance structure.

        Restructuring for lower costs and greater flexibility. Using the tools available through Chapter 11 and by implementing internal processes for improvement, we have significantly reduced costs and improved cash flow in a variety of ways:

        Labor costs - We consensually negotiated new six-year contracts with our unions which combined with wage and benefit reductions for salaried and management employees resulted in average annual savings of $2.5 billion (as compared to the previous contracts) by 2005. Changes in work rules and scope have helped us achieve greater flexibility to offer competitive products to meet market demand.

        Productivity and Efficiency - - We created an internal organization called the Business Transformation Office to initiate and implement profit improvements through increased productivity, strategic sourcing, marketing alliances, distribution changes and other initiatives. During 2003, we achieved $1.2 billion of profit improvements and anticipate being able to achieve our goal of $1.4 billion in profit improvements in 2004.

        Fleet cost and composition - - We are using the Chapter 11 process to significantly reduce aircraft ownership costs, while bringing the airline's capacity and fleet composition into better alignment with current market demand.

        In total, the restructuring process is expected to generate approximately $5 billion in annual cash savings by 2005 as compared to our pre-bankruptcy projections, resulting in a transformed cost structure that we expect will make us cost competitive with other network carriers.

        Improving revenue performance. We improved our revenue performance in 2003, achieving a 10% improvement in unit revenue for the fourth quarter compared to fourth quarter 2002, outperforming the industry. The improvement was driven by aggressive marketing and sales activities, enhanced inventory management and route and capacity adjustments.

        Improving corporate governance. Over the past year, UAL's governance structure has been streamlined and we strengthened management accountability. The ESOP termination in 2003 eliminated the existing complex governance structure and returned us to a more typical structure, focused on maintaining a balance between management, employees and all other stakeholders and providing us the flexibility to meet business demands.

Bankruptcy Considerations

        To successfully exit Chapter 11, we must obtain confirmation by the Bankruptcy Court of a plan of reorganization. A plan of reorganization would, among other things, resolve our pre-petition obligations, set forth a revised capital structure and establish our corporate governance subsequent to exit from bankruptcy. Although we are working towards emerging from Chapter 11 in the first half of 2004, that timing is dependent on, among other things, the timely and successful confirmation and implementation of a plan of reorganization. The decision as to when we will file a plan of reorganization depends on the timing and outcome of numerous ongoing matters in the Chapter 11 process. We expect to file a plan of reorganization that provides for UAL's emergence from bankruptcy, but there can be no assurance that the Bankruptcy Court will confirm a plan of reorganization or that the plan will be implemented successfully.

        We are currently operating under an "exclusive period" which expires April 7, 2004, during which we are the only party permitted to file a plan of reorganization. We believe the additional time will ensure that our plan of reorganization reflects the actual outcome of issues critical to our restructuring, including our pending application for a federal loan guarantee from the Air Transportation Stabilization Board ("ATSB"), pension obligations, proposed changes to retiree medical benefits, Section 1110 aircraft restructuring efforts, municipal bond obligations, United Express contracts and the claims resolution process.

        Federal Loan Guarantee. In December 2003, we submitted an updated application for a federal loan guarantee from the ATSB after receiving conditional commitments from J.P. Morgan Chase Bank and Citicorp USA, Inc., for $2 billion in exit financing. Based on our future liquidity needs, we believe this is the amount needed to run our operations at an optimum level, by attaining and maintaining a level of liquidity comparable to that of the rest of the industry to effectively compete in today's marketplace. Without an ATSB loan guarantee, we might be unable to obtain optimal or even sufficient funding to meet our future liquidity needs and reorganize successfully. As of the date of this filing, the ATSB has not yet decided on our application. See "Capital Resources" below for further details.

        Pension Obligations. The combination of 45-year low interest rates and volatile stock market returns have caused many U.S. pension funds, including ours, to become underfunded. As a result, we would expect to make cash contributions to the qualified defined benefit pension plan trusts in future years. In addition, government funding requirements obligate us to pay, on a going-forward basis, a special funding surcharge, referred to as a "deficit reduction contribution" ("DRC"), that is generally imposed when a pension plan's funding status drops below 90%. This would require us to make significant accelerated contributions to our pension plans over the next few years. As described below in "Liquidity and Capital Resources," we currently estimate that we could be required to contribute approximately $4.1 billion to the qualified defined benefit pension plan trusts by the end of 2008. As part of our bankruptcy reorganization, we must address the underfunded status of United's U.S. pension plans. We are working in several areas to address this issue. On October 10, 2003, we filed with the IRS multiple applications for pension funding waivers for all of our U.S. qualified defined benefit pension plans. The waiver applications must be approved by the IRS and such approval, if granted, is expected to take six to eight months. If approved, the waivers would allow us to smooth out the required contributions over a five-year period.

        In addition, we continue to work closely with other airlines, airline unions and the AFL-CIO in support of a pension reform proposal that would allow companies affected by the DRC requirements to defer certain accelerated pension funding contributions and smooth out minimum funding requirements over a longer period of time than provided by the current law. In January 2004, the U.S. Senate passed legislation that would require United and other companies to meet pension obligations, but over a longer period of time. At the same time, this legislation adopts a corporate bond rate for calculating pension liabilities for 2004 and 2005 used to determine minimum funding requirements. This legislation must now be reconciled with a version passed by the U.S. House of Representatives before it is sent to the President for his signature. There is no guarantee that this legislation will be enacted into law. In the event that these steps are not successful or are insufficient to address the funding issues in planning for exit from bankruptcy, we may need to take additional measures designed to help stabilize United's financial condition.

        Retiree Medical Benefits. As part of the Chapter 11 process, we are also seeking modifications under Section 1114 of the Bankruptcy Code to the medical benefits we currently provide to our 35,000 retired employees. We plan to propose modifications which would make the medical benefit plan and contributions of those who retired before July 1, 2003 comparable to the medical benefit plan and contributions now provided to employees who retire after that date. While we plan to negotiate with our retiree representatives for consensual modifications, there can be no assurance that we can achieve such agreements. If we do not reach consensual agreements, we will seek court approval of such modifications. There can be no assurance that the Bankruptcy Court will approve such modifications.

        Section 1110 Aircraft Restructuring. Under Section 1110 of the Bankruptcy Code we have negotiated with lessors and lenders to restructure existing financings to reduce aircraft ownership costs to better reflect current market rates. To date, we have reached agreements in principle with respect to a substantial majority of our financed aircraft. There can be no assurance, however, that those tentative arrangements will be successfully converted to final contracts. To the extent we are unable to finalize these agreements, there can be no assurance that we will be able to reach new agreements at comparable economics or that financiers will not repossess aircraft. Either of these outcomes, although unlikely, could have a material adverse affect on our financial and operational performance.

        In accordance with Section 1110 of the Bankruptcy Code, we have also rejected or abandoned certain surplus aircraft to adjust our fleet size and composition to more closely match market demand. In addition, we have converted many longer-term deals into short-term operating leases. Through this process, we expect to achieve cash savings of approximately $900 million annually over the next five years. (See Note 1, "Voluntary Reorganization Under Chapter 11" of the Notes to Consolidated Financial Statements for details on Section 1110 of the Bankruptcy Code.)

        Municipal Bond Obligations.   At December 31, 2003, we had approximately $1.7 billion in special facilities revenue bonds ("municipal bonds") outstanding that were issued on behalf of United to build or improve airport-related facilities. The Company leases facilities at airports pursuant to lease agreements where municipal bonds funded at least some of the airport-related projects. In connection with the financing agreements entered into by United with the issuance of these bonds, we are required to make payments in amounts sufficient to cover the interest semi-annually, with principal payable upon maturity.

         Under the Bankruptcy Code, we are not permitted to make payments on unsecured pre-petition debt without first notifying our creditors and receiving the approval of the Bankruptcy Court. Since we have been advised that our municipal bonds may be unsecured (or in certain instances, partially secured) pre-petition debt, we cannot make payments on these bonds without first meeting the requirements outlined above. For this reason, we have classified all of the municipal bonds on our balance sheet as liabilities subject to compromise.

         Section 365 of the Bankruptcy Code requires that we meet all of our post-petition obligations for unexpired leases of non-residential real property in a timely manner. We believe that we are in compliance with all payment obligations under our lease agreements relating to airports where we have not rejected our lease and have municipal bonds outstanding. However, we have not made and do not intend to make debt service payments or any other payment on account of any of the municipal bonds issued on behalf of the Company relating to domestic airport financings. As a result, under certain of our airport lease agreements, we may be considered in default due to non-payment of the debt and therefore subject to the default provisions of our lease agreements with the airports. Possible consequences could include loss of our status as a signatory airline (resulting in increased rents and landing fees) and loss of our exclusive space agreements.

        We have taken a number of steps to reduce the risks associated with non-payment on the municipal bonds. Previously, we filed four complaints for declaratory judgment and corresponding motions for temporary restraining order concerning municipal bonds issued for facilities at the Denver International Airport, the New York City - John F. Kennedy International Airport, the San Francisco International Airport, and the Los Angeles International Airport. In each case, we are seeking clarification of our obligations under the applicable municipal bonds, and the protection of our rights concerning related airport lease agreements at the applicable airport until the Bankruptcy Court decides the merits of the complaints.

        Subsequently, the Bankruptcy Court entered an order that requires each of the defendants in these actions to give us a 15-day notice and cure period before taking any action to terminate any of our rights concerning these airport leases until such time as the Bankruptcy Court enters final orders on United's declaratory judgment actions. The Bankruptcy Court has conducted a hearing on motions for summary judgment filed by various parties.

        On September 18, 2003, we filed a complaint for declaratory judgment for all seven municipal bond issues relating to our facilities at the Chicago O'Hare International Airport ("O'Hare"), seeking, among other things, a declaration that a certain cross-default provision in the O'Hare airport lease is unenforceable.

         Pending the Bankruptcy Court's ruling, we are unable to predict what, if any, action might be taken in the future by either the bondholders or the airport authorities as a result of United's failure to pay these obligations as contractually required. However, we believe that the Bankruptcy Court's orders substantially reduce the risk of any declared default by providing us an opportunity to make required payments and preserve our rights under the leases.

        United Express Contracts.During 2003, we reached new cost-competitive agreements with several of our United Express carriers, including Air Wisconsin, Mesa Air Group, SkyWest and Trans States, to operate select portions of our United Express service.

        Despite our efforts to negotiate a similar cost-competitive agreement with Atlantic Coast Airlines, Inc. ("ACA"), we have been unable to do so. Although our existing agreement with ACA (currently our largest United Express carrier) is effective until 2010, ACA announced on July 28, 2003, that it intends to establish a new, independent low-fare airline based at Washington Dulles International Airport.

        It is therefore unlikely that a new cost-competitive agreement with ACA can be achieved. However, we remain committed to providing our Washington-based, and Washington-connecting customers with the kind of regional schedule convenience they enjoy today. In this regard, we are currently working, among other things, to finalize arrangements for replacement service at Dulles provided by certain current United Express carriers and another carrier to ensure we maintain our current passenger capacity without ACA, if we conclude to reject our current agreement with ACA. Also, in January 2004, we reached an agreement with the Metropolitan Washington Airport Authority to permit an expansion plan for a new United Express facility at Dulles. The expansion plan is expected to provide our customers with convenient connections and a seamless travel experience overall. However, failure to achieve a cost-competitive alternative to our current ACA agreement could have an adverse impact on our future financial and operational results.

        Claims Resolution Process. As permitted under the bankruptcy process, our creditors have filed proofs of claim with the Bankruptcy Court. The total amount of such claims filed far exceeds our estimate of ultimate liability. We believe that many of these claims are invalid because they are duplicative, are based upon contingencies which have not occurred, have been amended or superseded by later filed claims, or are otherwise overstated. Differences in amount between claims filed by creditors and liabilities shown in our records are being investigated and resolved in connection with our claims resolution process. While we have made significant progress to date, we expect this process to continue for some time and believe that further reductions to the claims register will enable us to determine with more precision the likely range of creditor distributions under a proposed plan of reorganization. At this time, the ultimate number and allowed amount of such claims cannot be determined.

Results of Operations

        Summary of Results. The air travel business is subject to seasonal fluctuations. United's operations are often adversely affected by winter weather and our first- and fourth-quarter results normally reflect reduced travel demand. Historically, financial results are better in the second and third quarters. The events of September 11 and the downturn in the U.S economy distorted the normal seasonal relationships in 2001 and 2002. Further weak economic conditions, as well as the U.S war with Iraq and the outbreak of the SARS epidemic, continued to distort these relationships in 2003.

        For the past several years, we have experienced greater fluctuations in unit revenue than the rest of the industry. Beginning in early 2001, the weakening U.S. economy had a significant impact on the airline industry as corporations reduced their business travel budgets and changed their travel behavior. Thus, the industry experienced significant declines in revenue during the first six months of 2001, particularly in U.S. markets. United's domestic passenger revenue was down $728 million (12%) in the first six months of 2001 compared to the same period in 2000, partially driven from a 4% domestic capacity reduction and a 15% decline in business revenues. Domestic unit revenue was down 8% from 2000. Domestic business revenue was down $631 million (15%) in the first six months of 2001, driven by a 13% decline in volume and a 2% decline in yield. During this period, approximately 65% to 75% of United's domestic revenues were derived from business travelers, which resulted in United being disproportionately affected by the industry-wide decline in business travel, as compared to competitors who rely less heavily on business travelers.

       The terrorist attacks of September 11, 2001 had a significant and immediate negative impact on passenger and cargo demand for air travel. In a direct response to the adverse impact on air travel, we reduced our capacity by 23% and began the process of furloughing 20,000 employees and changing the size and composition of our fleet. United's decline in unit revenue exceeded that of the industry overall in the wake of the September 11 terrorist attacks. In early 2002, our year-over-year unit revenues began improving each month, rising from a 14% decline in January to a 4% decline in May. However, these gains stalled during 2002's third and fourth quarters as demand continued to be weak and yields declined, particularly as we began discussing the possibility of filing for bankruptcy protection. Industry revenues continued to remain below 1995 levels and, as is typical with a company in bankruptcy, our revenue performance lagged that of our peers following the Chapter 11 filings in December of 2002. United's unit revenue for 2002 decreased 4% from the prior year and yields declined 8% year over year.

        This under-performance in revenues accelerated in the first quarter of 2003. Overall weak demand for air travel, lingering customer concerns about our financial stability, the outbreak of war in Iraq and aggressive fare competition with low-cost competitors contributed to a 9% drop in passenger unit revenue in the first quarter of 2003 as compared to the same period of 2002.

        These factors continued into the second quarter of 2003, and were exacerbated by the outbreak of the SARS epidemic, particularly given our focus on Trans- and Intra-Pacific traffic. Therefore, we reduced our April schedule by 8% and our May schedule by another 4%, compared to what we had previously planned, with reductions concentrated in the Pacific and Atlantic regions. Simultaneously, we instituted a number of pricing and inventory actions to maximize yield in this environment of reduced capacity. As concerns over the Iraq war and SARS abated, we introduced initiatives to improve our value to our core market of business customers, such as a "Fly Three, Fly Free" promotion in which passengers who buy three tickets get a fourth ticket free (plus applicable taxes and fees). As a result of these actions, we began to see positive trends in May and June, and passenger unit revenues went from a 17% year-over-year decline in April to a modest year-over-year improvement in June. Overall, we experienced a 4% decrease in passenger unit revenue in the second quarter of 2003 versus the same period of 2002. By comparison, unit revenue for the industry was flat quarter over quarter.

        As we approached the third quarter of 2003, advance bookings indicated that summer demand would be strong and industry capacity would fall short of this demand. To capitalize on this situation, we took additional actions to ensure we would capture a revenue premium. We also reviewed and restructured many of our business fares to increase revenue by stimulating traffic and we continued our aggressive marketing campaign to reengage leisure customers by introducing additional promotions such as "Go, Go, Stay." As a result, passenger unit revenues increased by as much as 15% in August of 2003, with a year-over-year increase of 12% for the third quarter, as compared to an industry average increase of 7%. We continued to see strong unit revenue growth in the fourth quarter of 2003, with unit revenues increasing 10% over the fourth quarter of 2002, compared to an industry average increase of only 6% for the same period.

        United's loss from operations was $(1.6) billion in 2003, compared to $(3.0) billion in 2002. United's net loss for 2003 was $(3.1) billion, compared to $(3.3) billion in 2002.

        The 2003 results include special charges of $178 million in operating expense (including curtailment charges) and $251 million in non-operating expense. Additionally, non-operating income (expense) includes $300 million in government compensation and $78 million in gains from the sale of investments, as well as $1.2 billion in reorganization expenses related to our bankruptcy filing.

        The 2002 results include a total of $67 million in special charges in operating expense. Additionally, non-operating income (expense) includes $130 million in government compensation and $46 million in gains from the sale of investments, as well as $10 million in reorganization costs.

        Each of the above items are described more fully in Note 1, "Voluntary Reorganization Under Chapter 11," Note 3, "Special Charges," and Note 7 "Investments" in the Notes to Consolidated Financial Statements.

        During the third quarter of 2003, we began recording revenues and expenses related to certain United Express carriers at gross, rather than net. See Note 2(i), "Summary of Significant Accounting Policies - United Express" in the Notes to Consolidated Financial Statements.

2003 Compared with 2002 -

        Operating Revenues. Operating revenues decreased $518 million (4%) and United's revenue per available seat mile (unit revenue) excluding regional affiliates increased 1% from 9.35 cents to 9.43 cents. Passenger revenues decreased $738 million (6%) due to a 5% decrease in revenue passenger miles and a 2% decrease in yield. United's available seat miles across the system decreased 8% from 2002; however, passenger load factor increased 3.0 points to 76.5%. The following analysis by market is based on information reported to the DOT:
 

        Cargo revenues decreased $43 million (6%) as a 17% decrease in cargo ton miles was offset by a 13% increase in cargo yield. Other operating revenues decreased $245 million (18%) primarily due to a $209 million decrease in fuel sales to third parties.

        Operating Expenses. Operating expenses decreased $1.9 billion (11%) and United's cost per available seat mile (unit cost) decreased 7.5% from 11.37 cents to 10.52 cents. Salaries and related costs decreased $1.7 billion (25%) primarily as the result of lower capacity and new labor agreements for all employee groups which both lowered wage and benefit levels and enabled significant enhanced productivity levels. The 2003 amount also includes a one-time benefit of $102 million for the reversal of a contractual payment to certain employees and changes in vacation accruals as a result of new lower pay rates for all union groups. Aircraft fuel increased $151 million (8%) as a 10% decrease in consumption was more than offset by a 20% increase in the average cost of fuel. Aircraft rent decreased $240 million (28%) due to the restructuring and rejections of aircraft financings under Section 1110. Commissions decreased $131 million (30%) primarily due to a decrease in commissionable revenues. Cost of sales decreased $231 million (19%) primarily due to lower fuel sales to third parties. Other operating expenses decreased $278 million (18%) due to volume-driven decreases in crew layover expenses and food and beverage costs.

        Other income (expense). Other non-operating expense amounted to $421 million in 2003 compared to $481 million in 2002, excluding special charges, reorganization items, gains on sales and government compensation. Interest expense decreased $59 million (10%) as we have discontinued recording interest expense on all unsecured pre-petition debt. Interest capitalized decreased $22 million (88%) as we discontinued capitalizing interest on advance payments for aircraft while we are in discussions with the aircraft manufacturers regarding the status of future deliveries.

2002 Compared with 2001 -

        Operating Revenues. Operating revenues decreased $2.2 billion (13%) and United's revenue per available seat mile (unit revenue) decreased 4% from 9.76 cents to 9.35 cents. Passenger revenues decreased $1.9 billion (14%) due to a 6% decrease in revenue passenger miles and an 8% decrease in yield. United's available seat miles across the system decreased 10% from 2001; however, passenger load factor increased 2.7 points to 73.5%. The following analysis by market is based on information reported to the DOT:
 

        Cargo revenues decreased $31 million (4%) due primarily to a 5% decrease in cargo ton miles, as cargo yields remained flat year over year. Other operating revenues decreased $224 million (14%) primarily due to the transfer of revenues from the sale of Mileage Plus miles to ULS as well as a decrease in fuel sales to th