United Airlines Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. UAL is the holding company for United Airlines, Inc.; the combined filing’s operating results are substantially those of United. The period was dominated by the COVID-19 pandemic and its effects on travel demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $1.475B | $11.402B | $9.454B | $20.991B |
| Operating income (loss) | ($1.637B) | $1.472B | ($2.609B) | $1.967B |
| Net income (loss), UAL | ($1.627B) | $1.052B | ($3.331B) | $1.344B |
| Diluted EPS, UAL | ($5.79) | $4.02 | ($12.59) | $5.07 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($67M) | $4.625B |
- Q2 revenue fell 87.1% year over year; passenger revenue fell 93.5% to $681M. Cargo revenue rose 36.3% to $402M, partly reflecting cargo-only charter flights.
- Q2 passenger traffic fell 95.3%, capacity fell 87.8%, and load factor dropped to 33.1% from 86.0%. Cost per available seat mile was 34.72 cents, versus 13.56 cents.
- Operating expenses fell 68.7% to $3.112B, including a $1.589B CARES Act grant credit recorded in special charges. Lower fuel, staffing, and capacity-related expenses partly offset the revenue collapse.
- At June 30, cash and cash equivalents were $6.505B and short-term investments were $958M, or $7.5B in unrestricted cash, equivalents, and short-term investments. The company also had $2.0B available under its revolving facility at quarter-end; it borrowed $1.0B on July 2.
- Long-term debt carrying value was $18.772B; debt and finance lease obligations totaled approximately $19.2B, including $4.5B due within 12 months. Current liabilities exceeded current assets by approximately $6.4B.
- Six-month capital expenditures were approximately $2.0B. Cash, cash equivalents, and restricted cash ended the period at $6.612B.
Material changes and unusual items
- Compared with Q2 2019, UAL moved from $1.052B net income to a $1.627B net loss as passenger demand and revenue contracted sharply. For the first half, it moved from $1.344B net income to a $3.331B net loss.
- By June 30, the company had received approximately $4.5B of roughly $5.0B in CARES Act Payroll Support Program funding. It recorded $1.6B as a grant credit against special charges and $1.5B as deferred credit; the remaining grant was expected by the end of July.
- UAL raised approximately $1.1B through a common-stock offering and sold additional shares through an at-the-market program. Shares outstanding increased to approximately 291.0M from 251.2M at year-end 2019. The share repurchase program was terminated.
- Nonoperating items included a $697M expected credit-loss allowance for the BRW/Avianca term loan and related guarantee, $310M of six-month net unrealized investment losses (including a $284M decline in the Azul investment), and $231M of pension settlement and voluntary separation costs. China route impairment charges totaled $130M in the first half.
- After quarter-end, the company arranged approximately $6.8B of MileagePlus-backed financing—$3.8B in 6.50% senior secured notes and a $3.0B term loan—and borrowed $1.0B under its revolving facility. These transactions add liquidity but increase leverage and encumber MileagePlus-related assets.
Outlook, risks, and contingencies
- Management expected a full-year 2020 net loss and materially impaired results. It forecast scheduled capacity down approximately 65% year over year in Q3, with Q4 generally consistent with Q3, and expected demand to remain suppressed until a widely accepted COVID-19 treatment or vaccine. The company cautioned that recovery would not be linear and planned rolling 60-day schedule reviews.
- Management forecast average daily cash burn of approximately $25M in Q3, using its stated measure that excludes specified financing, government support, equity issuance, investment-sale proceeds, and restricted-cash changes.
- United notified approximately 36,000 U.S.-based employees on July 8 of planned workforce reductions expected to begin on or after October 1 and potentially continue through year-end. At June 30, approximately 22% of employees were on voluntary unpaid leave.
- The company had approximately $24.9B of capital commitments, including aircraft and other commitments, and $13.3B of estimated future regional capacity-purchase agreement payments. Boeing 737 MAX delivery delays and COVID-related uncertainty could affect aircraft plans and costs.
- CARES Act support imposes restrictions, including limits on dividends and share repurchases, service obligations, employment levels through September 30, 2020, and executive compensation. The company reported compliance with debt covenants at June 30.
- Key risks include prolonged or renewed travel restrictions and weak demand, liquidity and refinancing needs, refund pressure and potential credit-card processor reserves, variable-rate debt and LIBOR transition, and MileagePlus financing covenants and collateral remedies. The BRW loan was in default; Avianca and affiliates were in Chapter 11 proceedings, and foreclosure proceedings were stayed. Recovery on the BRW and AVH exposures is uncertain.
- UAL and United reported disclosure controls and procedures were effective as of June 30, 2020.
Investor verification points
- Track passenger demand, load factor, revenue, and actual capacity versus management’s Q3/Q4 expectations.
- Reconcile cash burn to operating cash flow and assess liquidity after post-quarter borrowing, debt issuance, refunds, and government support.
- Review total debt, upcoming maturities, collateral pledged, financing covenants, and the cash-flow restrictions tied to MileagePlus financing.
- Verify employee-reduction costs, execution and timing, and whether further pension settlement or separation charges arise.
- Monitor CARES Act grant recognition and restrictions, credit-card reserve requirements, aircraft commitments and 737 MAX delivery timing, and recoveries from the BRW/Avianca exposures.