United Continental Holdings, Inc. (United Airlines) — Q3 2015 Form 10-Q
Business context and reporting period
Combined quarterly filing for United Continental Holdings, Inc. (UAL) and its wholly owned subsidiary United Airlines, Inc. for the quarter ended September 30, 2015. United accounts for nearly all of UAL’s revenue, expenses, assets, liabilities, and operating cash flows. Unless noted, financial figures below are UAL consolidated amounts in millions of dollars.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Operating revenue | $10,306 | $10,563 | $28,828 | $29,588 |
| Operating income | $1,899 | $1,191 | $4,085 | $1,748 |
| Operating margin | 18.4% | 11.3% | 14.2% | 5.9% |
| Net income | $4,816 | $924 | $6,517 | $1,104 |
| Diluted EPS | $12.82 | $2.37 | $17.15 | $2.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4,877 | $2,732 |
- GAAP net income included a $3.2 billion income tax benefit, principally from releasing almost all of the deferred-tax-asset valuation allowance. Excluding special items and reflecting hedge-program adjustments, management reported non-GAAP net income of $1.7 billion ($4.53 diluted EPS) in Q3 and $3.5 billion ($9.32 diluted EPS) for the first nine months.
- Passenger revenue fell 3.8% in Q3 to $8.96 billion; total operating revenue declined 2.4%. Aircraft fuel expense fell 38.2% in Q3 and 35.4% year to date, while salaries and related costs increased 8.1% and 9.1%, respectively.
- Q3 traffic rose 2.0% and capacity 2.1%; load factor was 85.6%, down 0.2 percentage points. Passenger revenue per available seat mile fell 5.8% in Q3. For the first nine months, traffic increased 1.0%, capacity 1.6%, and PRASM declined 3.9%.
- Cash and cash equivalents were $3.427 billion and short-term investments $2.172 billion at September 30. Unrestricted liquidity was $6.9 billion, including $1.35 billion available under the revolving credit facility. The company reported $208 million of restricted cash.
- Long-term debt was $9.910 billion; current debt maturities were $1.312 billion. Debt and capital lease obligations totaled approximately $12.1 billion, including $1.4 billion due within 12 months. The company was in compliance with debt covenants.
- Current liabilities exceeded current assets by approximately $3.4 billion. UAL noted that about $6.6 billion of current liabilities represented advance ticket sales and frequent-flyer deferred revenue, generally associated with future travel rather than immediate cash payments.
Material changes versus the prior comparable period
- Q3 operating income rose $708 million, or 59.4%, despite revenue declining $257 million; the principal operating cost reduction was lower fuel expense. For the first nine months, operating income increased $2.337 billion.
- Passenger revenue and yields weakened amid competitive fares, stronger U.S. dollar effects, lower international surcharges, reduced energy-sector corporate travel, and increased industry capacity in some regions. Q3 consolidated yield declined 5.6%.
- Operating cash flow for the first nine months increased by $2.145 billion year over year. Cash and cash equivalents increased $1.425 billion from year-end 2014.
- Long-term debt declined from $10.121 billion at December 31, 2014, while capital lease obligations increased. The company redeemed its remaining 6% notes due 2026 and 2028; the early extinguishment generated a $134 million noncash debt-discount write-off included in year-to-date nonoperating expense.
Outlook, commentary, risks, and unusual items
- 2015 guidance: consolidated capacity growth of 1.4%–1.7%; CASM excluding profit sharing, third-party business expense, fuel, and special items expected to decline 0.4%–0.7%; and full-year pre-tax margin of 11.7%–12.1%, excluding special items. Management said it could not project these measures on a GAAP basis because future special items were not determinable.
- Management estimated that a $1-per-barrel change in crude oil would change annual fuel expense by approximately $93 million. At September 30, fuel hedges covered about 23% of projected remaining-2015 fuel needs and 17% of 2016 needs. Fuel-price movements can affect costs, hedge effectiveness, collateral requirements, and cash flow.
- Special items included severance, integration expenses, asset impairments and sale losses, and a $61 million Venezuela foreign-exchange loss in Q3. Venezuela currency controls and restrictions on repatriation contributed to the loss; the reported value of bolivar cash holdings was approximately $15 million.
- UAL authorized a new $3 billion share repurchase program in July 2015, expected to run through December 31, 2017. It repurchased approximately 11.9 million shares for $712 million during the first nine months and had $2.97 billion remaining under the new program at September 30. A roughly $300 million accelerated repurchase was expected to begin in October.
- Capital commitments totaled approximately $22.0 billion, primarily for aircraft and related expenditures, with substantial amounts due in 2016 and thereafter. The company also reported aircraft lease and capacity-purchase commitments, and said future capital needs may require financing.
- About 80% of approximately 84,000 active employees were represented by labor organizations; negotiations for joint agreements with technicians and flight attendants were ongoing. Risks also include competition, demand, fuel prices and hedging, financing access, foreign exchange, operational disruptions, and labor relations.
- The Department of Justice sought information in an investigation concerning airline capacity statements and decisions. Multiple consolidated class actions allege airline collusion affecting capacity and fares; UAL said it would defend them and could not predict outcomes. The company also reported a continuing government investigation concerning former Port Authority associates and related company operations.
Important facts for investors to verify
- Separate recurring operating performance from the $3.2 billion tax valuation-allowance benefit; review the reconciliation supporting the reported non-GAAP results.
- Track yield and PRASM trends against capacity growth, particularly given lower passenger revenue despite increased traffic.
- Assess liquidity against debt maturities, aircraft commitments, lease obligations, and potential fuel-hedge collateral needs.
- Review the assumptions behind deferred tax asset recoverability and management’s expected approximately 37% normalized effective tax rate after 2015.
- Monitor the DOJ investigation, antitrust litigation, and other legal matters for developments, potential costs, or operational consequences.
- Consider the scale and pace of share repurchases alongside capital spending, debt repayment, and financing requirements.