United Airlines Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The combined filing covers UAL and wholly owned United Airlines; United accounts for nearly all consolidated revenue, expenses, assets, liabilities and operating cash flows. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $11,380 | $11,003 | $32,371 | $30,812 |
| Operating income | $1,473 | $1,187 | $3,440 | $2,594 |
| Net income | $1,024 | $833 | $2,368 | $1,661 |
| Diluted EPS | $3.99 | $3.05 | $9.04 | $5.98 |
| Operating margin | 12.9% | 10.8% | 10.6% | 8.4% |
Q3 passenger revenue rose 3.6% to $10.5 billion; cargo revenue declined 4.7%, while other operating revenue increased 5.1%. Traffic and capacity each increased 1.9%, load factor was 86.1%, and passenger revenue per available seat mile (PRASM) rose 1.7%. For the first nine months, passenger revenue increased 5.5%, traffic 4.4%, and load factor was 84.5%.
Q3 operating expenses increased 0.9%, slower than revenue growth. Fuel expense fell 10.7% as average fuel price per gallon declined 12.9%, partly offset by 2.1% higher consumption; the company also received a $35 million state fuel-tax refund. Salaries and related costs rose 4.5% in Q3 and 5.4% year to date, while other operating expenses rose 8.5% and 8.2%, respectively. Q3 CASM was 13.20 cents, down 0.9%.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $5.7 billion, capital expenditures were $3.3 billion, and cash flow after capital expenditures was approximately $2.4 billion. Cash, cash equivalents and restricted cash increased $1.3 billion to $3.1 billion.
- At September 30, UAL had $5.1 billion of unrestricted cash, cash equivalents and short-term investments, plus the full $2.0 billion revolving-credit capacity available.
- Long-term debt was $14.1 billion, including current maturities; debt and finance-lease obligations together were approximately $14.4 billion, of which $1.3 billion was due within 12 months. Long-term debt fair value was reported at $14.8 billion versus $14.1 billion carrying amount.
- Total assets were $52.2 billion and stockholders’ equity was $11.3 billion. Current liabilities exceeded current assets by approximately $7.2 billion; management said about $8.1 billion of current liabilities were advance-ticket and frequent-flyer deferred revenue, largely to be recognized as near-term travel rather than paid as cash.
- Debt and finance-lease payments totaled $831 million in the first nine months. Capital commitments were $23.6 billion, including $6.1 billion scheduled for 2020. The company was in compliance with debt covenants; credit ratings were below investment grade.
Material changes and unusual items
- Compared with Q3 2018, operating income rose 24.1% and net income rose 22.9%. Nine-month operating income increased 32.6% and net income 42.6%.
- UAL repurchased 16.8 million shares for $1.4 billion in the first nine months and authorized a new $3.0 billion repurchase program in July. Approximately $3.3 billion remained available under its programs at September 30.
- Nine-month special charges were $116 million, down from $186 million a year earlier. 2019 included a $47 million impairment of aircraft engines removed from operations and other asset and contract-related charges. Q3 also included $18 million for legal settlements and $15 million for a contract termination, partly offset by an $8 million asset-sale gain.
- A retiree medical plan change reduced the projected benefit obligation by $421 million, with the offset recorded in accumulated other comprehensive loss. The company contributed $635 million to U.S. qualified pension plans year to date.
- Adoption of the new lease standard in 2019 recognized operating lease right-of-use assets and liabilities; comparative 2018 figures were adjusted. At September 30, operating lease liabilities were $5.7 billion in total, including $4.9 billion long term.
Outlook, commentary and risks
The filing provides no specific numerical earnings or revenue guidance. Management’s 2019 priorities were operational reliability and customer service, domestic network growth, and investment in employees and the product. Management noted that airline results are seasonal, with historically stronger second and third quarters.
- Boeing 737 MAX grounding: All 14 United 737 MAX 9 aircraft were grounded under the FAA order, and Boeing deliveries were suspended. The filing identifies uncertain timing and operational and financial effects. United had 171 firm MAX orders; delivery timing and related financing may change.
- Fuel sensitivity: A $1 change in crude oil price per barrel was estimated to change annual 2019 fuel expense by approximately $102 million, based on projected consumption.
- Avianca-related exposure: BRW was in default on United’s $456 million term loan; the loan’s carrying value was $494 million and management concluded collateral was sufficient at quarter-end. United and Kingsland separately committed, subject to conditions, to provide AVH at least a $250 million secured convertible loan, with United’s portion capped at $150 million. A foreclosure process and restructuring-related conditions remain relevant.
- Other disclosed risks include substantial aircraft and lease commitments, labor negotiations (including with pilots), below-investment-grade ratings and financing costs, fuel-price volatility, operational and regulatory disruption, and risks tied to investments and partnerships with other airlines.
- Disclosure controls were deemed effective. The company converted to a new revenue-accounting system during Q3 and established related controls.
Important facts for investors to verify
- Subsequent 737 MAX return-to-service timing, aircraft deliveries, replacement capacity and any financial recovery or disruption.
- Execution and funding of the $23.6 billion capital program, particularly the 2020 delivery schedule and aircraft financing availability.
- Fuel-price exposure and whether revenue, fares and cost controls can offset changes in fuel, labor and other operating costs.
- Recovery prospects, collateral values and conditional new lending related to BRW, AVH and the proposed restructuring.
- Cash generation and leverage trends alongside continued share repurchases and pension contributions.
- Progress in labor negotiations and the operational and financial effects of the revenue-accounting system conversion.