United Airlines Holdings, Inc. annual report, FY2013

Full document

Business context and reporting period

This is United Continental Holdings, Inc.’s combined Form 10-K, filed February 20, 2014, for the fiscal year ended December 31, 2013; it also includes United Airlines, Inc. financial statements. United Airlines is the wholly owned operating subsidiary and accounts for nearly all consolidated operations. The company merged United Air Lines, Inc. into Continental on March 31, 2013, with the surviving entity renamed United Airlines, Inc. The filing is annual, not a standalone fourth-quarter report.

United operates a global mainline and regional airline network, averaging more than 5,300 daily flights to over 360 airports. The following financial amounts are UAL consolidated figures unless stated otherwise, in U.S. dollars.

Financial performance and position

  • Full-year revenue: $38.279 billion, up 3.0% from $37.152 billion in 2012. Passenger revenue rose 1.7% to $33.122 billion; cargo revenue fell 13.4% to $882 million. Other operating revenue increased 20.4% to $4.275 billion, including approximately $400 million from third-party fuel sales.
  • Profit and margins: Operating income was $1.249 billion, compared with $39 million in 2012; operating margin was approximately 3.3%, versus 0.1%. Net income was $571 million, or $1.53 diluted EPS, versus a $723 million net loss, or $(2.18) diluted EPS. Excluding special items, net income was $1.084 billion in 2013 and $589 million in 2012; this is a company-defined non-GAAP measure.
  • Fourth quarter: Revenue was $9.329 billion, operating income $235 million, and net income $140 million, compared with $8.702 billion, an operating loss of $465 million, and a net loss of $620 million, respectively, in Q4 2012. Q4 2013 included $165 million of special items before tax.
  • Operating metrics: Consolidated passenger load factor rose to 83.6% from 82.6%; passenger revenue per available seat mile increased 3.1%. Traffic declined 0.2% and capacity declined 1.4%. Consolidated CASM increased 1.2%; CASM excluding special charges, third-party business expense, fuel, and profit sharing increased to 9.49 cents from 8.93 cents.
  • Cash flow and capital spending: Cash from operations was $1.444 billion, up from $935 million. Capital expenditures were $2.164 billion, and cash used in investing activities was $2.022 billion. Cash and cash equivalents declined $1.550 billion during the year.
  • Liquidity and debt: Unrestricted cash, cash equivalents, and short-term investments were $5.121 billion at year-end, down from $6.543 billion; restricted cash was $395 million. Debt and capital lease obligations totaled $12.409 billion, including $1.5 billion due within 12 months. The $1.0 billion revolving facility was undrawn and available. A key credit agreement requires at least $3.0 billion of unrestricted liquidity, including qualifying undrawn revolver capacity. Ratings were below investment grade: UAL was rated B by S&P, B2 by Moody’s, and B by Fitch.
  • Fuel and obligations: Fuel expense was $12.345 billion, 34% of operating expense, down 6.0% year over year as average fuel price declined. The company had hedged approximately 24% of projected 2014 fuel needs and 8% of 2015 needs. Total contractual obligations were reported as $73.6 billion, including debt, leases, regional capacity purchase agreements, pensions, and capital purchase commitments.

Material changes versus the prior comparable period

  • Profitability improved substantially from 2012, while reported operating expenses were nearly flat at $37.030 billion versus $37.113 billion. Lower fuel expense and fewer special charges helped; special charges fell to $520 million from $1.323 billion.
  • Passenger revenue improved despite slightly lower traffic and capacity, supported by higher fares and yield. Regional passenger revenue rose 5.1%; mainline passenger revenue rose 0.7%.
  • Cost pressures included salaries and related costs up 8.6% to $8.625 billion, reflecting higher pay, profit sharing, incentives, and pension costs. Depreciation and amortization rose 11.0%, including $89 million of accelerated depreciation on 30 Boeing 757-200 aircraft planned for sale.
  • Operating cash flow improved by $509 million. However, year-end unrestricted liquidity fell by $1.422 billion, and debt and capital lease obligations decreased to $12.409 billion from $13.166 billion.
  • 2013 special items included $205 million of merger and integration costs, $127 million of labor-agreement costs, $105 million of severance and benefits, $33 million of asset impairments, and $18 million related to the temporary grounding of Boeing 787 aircraft.

Outlook, commentary, risks, and contingencies

  • 2014 outlook: Management expected modest growth in air-travel demand and consolidated capacity growth of 1%–2%, subject to changes in fuel prices and economic conditions. It expected adjusted CASM—excluding fuel, third-party business expense, profit sharing, and special charges—to rise 1%–2% year over year. Gross capital expenditures were forecast at $2.9–$3.1 billion.
  • Cost and revenue program: The company targeted $2 billion of annual cost reductions and $700 million of incremental ancillary revenue by the end of 2017, including stated annual savings goals of $1 billion each for fuel and non-fuel costs.
  • Cleveland reduction: Announced in February 2014, the staged plan was to reduce average daily Cleveland departures by about 60% by June, primarily by cutting regional flying. Up to 470 airport operations and catering positions could be eliminated. The company expected a 2014 special charge but could not estimate its amount or timing; it said the charge could be significant.
  • Operations and investment: Management highlighted customer-experience initiatives, including Wi-Fi on more than 300 additional mainline aircraft, a new website, cabin refurbishments, airport investment, and delivery of more than 50 new aircraft in 2014. It expected delivery of 30 Boeing 737-900ERs and six Boeing 787s.
  • Principal risks: Fuel-price volatility and hedge collateral/performance; intense fare and capacity competition; economic weakness and international currency exposure; substantial fixed obligations, refinancing needs, and covenant requirements; labor negotiations and wage increases; pilot availability and regulatory changes; operational disruption, technology and cybersecurity failures, and dependence on third parties; government regulation, airport access, and environmental costs; and shocks such as severe weather, terrorism, or disease outbreaks.
  • Other exposures: Approximately $80 million of unrestricted cash was held in Venezuelan bolivars, with repatriation timing and exchange rate uncertain. The company guaranteed approximately $1.9 billion of airport special-facility bonds and reported about $250 million of contingent exposure to fuel-consortia bonds. It also reported a $1.6 billion underfunded pension position and estimated minimum 2014 pension funding of approximately $288 million.
  • Legal and reporting matters: The Ninth Circuit affirmed dismissal of merger-related antitrust claims in January 2014; plaintiffs petitioned for rehearing, and the company recorded no reserve for potential liability. Management said other ordinary-course claims were not expected to materially affect consolidated results. Ernst & Young issued unqualified opinions on UAL’s financial statements and internal control; management reported effective disclosure controls.

Most important facts for investors to verify

  • Whether operating cash generation and the $5.1 billion unrestricted liquidity balance can support near-term maturities, aircraft commitments, and the credit agreement’s liquidity covenant.
  • Actual progress on the 2014 CASM and capacity outlook, the $2.7 billion cost-and-ancillary-revenue targets, and the Cleveland restructuring charge and savings.
  • Whether higher labor costs, pilot shortages, and continued workforce integration affect schedules, regional capacity, and margins.
  • Fuel prices, hedge performance and collateral terms, and whether lower fuel expense persists or is offset by fare competition.
  • Cash repatriation from Venezuela, financing availability for aircraft commitments, and material changes in pension assumptions, environmental matters, or litigation.