United Continental Holdings, Inc. — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014. Filed jointly by United Continental Holdings, Inc. (UAL) and its principal subsidiary, United Airlines, Inc. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and financial performance
UAL is a holding company whose airline subsidiary generates nearly all consolidated revenue and operating activity. The company operated more than 5,300 daily flights serving over 360 airports across six continents.
- Revenue: $8.696 billion, down 0.3% year over year. Passenger revenue was $7.384 billion, down 2.3%; cargo revenue fell 7.9% to $209 million. Other operating revenue rose 18.0% to $1.103 billion.
- Profitability: Operating loss was $349 million versus $264 million a year earlier; operating margin was approximately negative 4.0%, compared with negative 3.0%. Net loss was $609 million, or $1.66 per diluted share, versus a $417 million loss, or $1.26 per share. Excluding specified special charges and fuel-hedge adjustments, the company reported a non-GAAP net loss of $489 million, or $1.33 per share, versus $358 million, or $1.08 per share.
- Costs and operating metrics: Operating expenses rose 0.7% to $9.045 billion. Fuel expense declined 4.4% to $2.917 billion, reflecting lower fuel prices and consumption; salaries rose 1.2%, and other operating expenses rose 13.6%. CASM was 15.81 cents, up 1.0%; PRASM was 12.91 cents, down 2.0%. Load factor was 81.1%, unchanged.
- Cash flow: Operating cash flow was $694 million, up from $393 million. Capital expenditures were $364 million. Cash and cash equivalents decreased $211 million during the quarter.
- Liquidity and debt: Unrestricted cash, cash equivalents and short-term investments totaled $5.024 billion at quarter-end, down from $5.121 billion at year-end; the company also reported $1.0 billion of undrawn revolving-credit availability and described total unrestricted liquidity as $6.0 billion. Debt and capital-lease obligations totaled approximately $12.1 billion, including $1.3 billion due within 12 months. Long-term debt was $10.098 billion and long-term capital leases were $736 million on UAL’s balance sheet.
Material changes versus Q1 2013
- Net loss widened by $192 million. Lower passenger and cargo revenue and higher operating costs contributed; nonoperating expense also increased, largely reflecting a swing in miscellaneous items.
- Passenger revenue fell despite an unchanged consolidated load factor. Yield declined 2.0%, while traffic and capacity each declined 0.3%. Management said winter-weather cancellations reduced quarterly capacity by about two percentage points and PRASM by approximately 1.5 percentage points.
- Fuel expense decreased $133 million. Interest expense also declined, by $14 million, while special charges fell to $52 million from $92 million, primarily due to lower integration costs and no comparable 787 grounding charges.
- Operating cash flow improved, while the quarter-end unrestricted cash and investment balance was slightly below December 31, 2013.
Outlook, commentary and risks
- 2014 guidance: Consolidated capacity growth of 0.5%–1.5% year over year; CASM excluding profit sharing, third-party business expense, fuel and special charges expected to increase 1%–2%. Management said capacity plans may change if fuel prices rise significantly or economic growth weakens substantially.
- Revenue accounting: Following US Airways’ exit from Star Alliance, the company changed its estimated selling price for frequent-flyer miles prospectively from April 1, 2014. It expected the change to increase 2014 consolidated revenue by approximately $75 million.
- Weather and network: Winter storms contributed to approximately 35,000 cancellations, around 30,000 on regional flights. Regional operations represented approximately 13% of capacity; management cited pilot availability and third-party regional-carrier performance as risks.
- Venezuela: The company recorded a $21 million foreign-exchange loss and held approximately $100 million of unrestricted cash in Venezuelan bolivars. It had been unable to repatriate funds since January 2013 and said timing, amount and exchange rate of any repatriation were uncertain.
- Capital commitments and financing: Approximately $23.4 billion of commitments, primarily for aircraft and related items, remained, including $2.5 billion due in the last nine months of 2014. Financing was arranged for 2014 aircraft deliveries except eight Embraer EMB175 aircraft; future financing may not be available on acceptable terms.
- Other unusual items: Nonoperating miscellaneous expense included $40 million of losses on derivatives not qualifying for hedge accounting, versus $50 million of gains in Q1 2013. The company had hedged 22% of projected remaining-2014 fuel needs, 16% of 2015 needs and less than 1% of 2016 needs.
- Debt and labor: UAL redeemed $400 million of 8% notes in January and holders converted substantially all remaining $156 million of 4.5% notes into shares. The company reported compliance with debt covenants. Negotiations continued with employee groups, including technicians, flight attendants and dispatchers; approximately 80% of active employees were represented by labor organizations.
- UAL reported a $1.0 billion revolving facility available and was required to maintain at least $3.0 billion of unrestricted liquidity under its credit agreement. Its disclosed corporate credit ratings were below investment grade. Cleveland capacity reductions could result in significant charges related to contractual commitments.
Most important facts for investors to verify
- Whether passenger yields and PRASM recover, and how actual capacity and CASM compare with 2014 guidance.
- Whether operating cash flow and liquidity remain adequate given debt maturities, aircraft commitments and financing needs.
- Whether Venezuelan funds can be repatriated and whether additional currency losses occur.
- The effects of regional pilot availability, weather disruptions, Cleveland capacity reductions and labor negotiations on operations and costs.
- The composition and recurrence of special charges and fuel-hedge gains or losses; the reported adjusted loss is a company-defined non-GAAP measure.