United Airlines Holdings, Inc. — Q2 2023 Form 10-Q
Business context and period: United Airlines Holdings, Inc. (UAL) is a holding company whose wholly owned subsidiary, United Airlines, Inc., operates the airline. This combined, unaudited filing covers the quarter and six months ended June 30, 2023; unless noted, amounts are UAL consolidated and in U.S. dollars.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $14.178 billion | $12.112 billion | $25.607 billion | $19.678 billion |
| Operating income (loss) | $1.517 billion | $878 million | $1.474 billion | $(498) million |
| Net income (loss) | $1.075 billion | $329 million | $881 million | $(1.048) billion |
| UAL diluted EPS | $3.24 | $1.00 | $2.66 | $(3.22) |
| Operating cash flow | Not separately provided | Not separately provided | $6.941 billion | $4.167 billion |
Q2 operating margin was approximately 10.7%, compared with 7.2% a year earlier. Passenger revenue rose 20.1% in Q2; cargo revenue fell 36.9%. For the first half, passenger revenue increased 35.5%, while cargo revenue declined 36.7%. Q2 capacity (ASMs) grew 17.5%, traffic (RPMs) grew 17.0%, and load factor eased 0.3 percentage points to 86.4%.
Q2 operating expenses increased 12.7%. Lower fuel prices helped: average fuel cost per gallon fell 36.4%, although fuel consumption rose 16.4%. Salaries and related costs increased 30.8%, reflecting higher headcount, wage increases, pilot-contract accruals and profit sharing. Q2 CASM was 17.22 cents versus 17.94 cents; non-GAAP CASM-ex was 11.85 cents versus 11.62 cents.
Financial position and liquidity
- At June 30, 2023, cash and cash equivalents were $9.605 billion and short-term investments were $9.533 billion; management reported $19.1 billion of unrestricted cash, cash equivalents and short-term investments, up from $16.4 billion at year-end 2022.
- Six-month cash flow was $6.941 billion from operations, $3.427 billion used in investing and $1.054 billion used in financing. Capital expenditures were approximately $3.3 billion. Cash, cash equivalents and restricted cash ended the period at $9.881 billion.
- Long-term debt was $26.713 billion, with $3.580 billion of current maturities. The company reported approximately $37.3 billion of debt, finance-lease, operating-lease and other financial liabilities, including $4.4 billion due within 12 months.
- A $1.75 billion revolving credit facility was undrawn and available. UAL and United reported compliance with their debt covenants. Management said existing liquidity and expected operating cash flow should meet anticipated needs for the next 12 months.
- Aircraft and related capital commitments totaled $49.3 billion, including scheduled commitments of $6.8 billion for the second half of 2023 and $6.9 billion for 2024. This is a substantial future funding obligation.
Material changes, outlook and risks
- Q2 net income increased to $1.075 billion from $329 million; first-half results shifted from a $1.048 billion loss to $881 million of income. Management attributed the improvement principally to stronger travel demand and increased capacity.
- Q2 included $859 million of operating special charges, mainly $813 million related to labor-contract ratification and pilot-contract costs. The filing says $765 million related to the pilot agreement covered wages for 2022 and prior years; the charge also included IAM contract ratification costs. These items reduced reported earnings.
- In July, after quarter-end, United reached an agreement in principle with ALPA on a four-year contract that includes work-rule changes, pay increases and a one-time payment upon ratification. The agreement remained subject to ratification.
- United prepaid $1.0 billion of a 2021 term loan in Q2 and issued $1.3 billion of equipment notes bearing 5.80% interest to finance aircraft. Interest expense rose 17.4% in Q2, mainly due to higher rates on variable-rate debt.
- Management cited inflation, labor and supply-chain constraints, fuel-price volatility, aircraft delivery delays, third-party operational disruptions, competition, economic conditions, geopolitical conflict and the pace of business and international travel recovery as risks. It expects long-term travel-demand growth to offset higher costs if there are no significant, prolonged pandemic relapses or global economic disruptions. The filing provides no specific financial guidance figures.
- UAL and United had below-investment-grade credit ratings. The filing warns that downgrades could restrict financing availability or raise its cost. The company also disclosed $11.6 billion of floating-rate debt subject to increased-cost provisions and $8.5 billion of financing obligations exposed to certain non-U.S. withholding-tax changes.
Important facts for investors to verify
- Whether the ALPA agreement is ratified, its final cost and the impact of subsequent wage and benefit changes.
- Whether passenger demand, fares and load factors sustain earnings as capacity expands, and whether cargo revenue continues to weaken.
- Progress on aircraft deliveries and the timing, financing and affordability of the $49.3 billion capital commitment schedule.
- Debt maturities, interest-rate exposure, credit ratings, covenant compliance and the adequacy of liquidity against fixed obligations.
- The composition and recurrence of special charges, and the assumptions behind non-GAAP CASM-ex and other adjusted performance measures.
- Potential operational, labor, supplier, fuel, regulatory and geopolitical disruptions, and any changes in the company’s stated outlook.