Business context and reporting period
United Continental Holdings, Inc. (UAL), the parent of wholly owned United Airlines, Inc., filed this combined Form 10-K for the fiscal year ended December 31, 2015. United accounts for nearly all of UAL’s revenue, expenses, assets and operating cash flows. The filing is annual; selected fourth-quarter results are also summarized below.
United operates a global passenger and cargo network through mainline and regional carriers, with approximately 5,000 daily flights to 342 airports across six continents. The figures below are UAL consolidated unless otherwise noted; dollar amounts are in billions except per-share and unit data.
Financial and operating results
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Operating revenue | $37.864 | $38.901 |
| Operating income | $5.166 | $2.373 |
| Operating margin | 13.6% | 6.1% |
| Net income | $7.340 | $1.132 |
| Diluted EPS | $19.47 | $2.93 |
| Cash provided by operating activities | $5.992 | $2.634 |
| Capital expenditures | $2.747 | $2.005 |
| Debt and capital lease obligations at year-end | $11.759 | $11.947 |
| Unrestricted cash, cash equivalents and short-term investments | $5.196 | $4.384 |
FY 2015 consolidated passenger revenue fell 2.9% to $32.785 billion. Passenger yield declined 4.3% and PRASM fell 4.4%, while traffic rose 1.5% and capacity increased 1.6%; consolidated load factor was 83.4%, versus 83.6% in 2014. Total operating expenses declined 10.5% to $32.698 billion, primarily as aircraft fuel expense fell 35.6% to $7.522 billion. Salaries and related costs rose 8.7% to $9.713 billion, including higher profit sharing and pay and benefit costs.
Operating margin above is calculated from reported operating income and revenue. GAAP net income included a $3.1 billion income tax benefit, primarily from releasing most of the deferred-tax valuation allowance. Excluding special items and reflecting the company’s hedge adjustments, management reported non-GAAP net income of $4.478 billion and diluted EPS of $11.88. These non-GAAP figures are not substitutes for GAAP results.
Fourth quarter: Revenue was $9.036 billion, operating income $1.081 billion, net income $823 million and diluted EPS $2.24. In Q4 2014, revenue was $9.313 billion, operating income $625 million, net income $28 million and diluted EPS $0.07.
Year-end unrestricted liquidity, including available revolving-credit capacity, was $6.5 billion. UAL had $1.35 billion of revolving capacity available; $1.4 billion of debt and capital lease obligations was due within 12 months. Current liabilities exceeded current assets by about $4.6 billion, which management said was not detrimental to liquidity because about $5.9 billion related to advance ticket sales and frequent-flyer deferred revenue. The company generated $6.0 billion of operating cash flow and used $1.2 billion for share repurchases in 2015. Its S&P and Fitch ratings were BB- and Moody’s rating Ba3, all below investment grade.
Material changes versus the prior comparable period
- Revenue declined 2.7%, but operating income more than doubled as lower fuel expense outweighed lower passenger revenue and higher labor costs.
- GAAP net income rose sharply, chiefly because of the valuation-allowance release; non-GAAP net income was $4.478 billion, compared with $1.966 billion in 2014.
- Operating cash flow increased by $3.4 billion to $6.0 billion. Year-end unrestricted cash, cash equivalents and short-term investments increased by $0.8 billion.
- Debt and capital lease obligations declined by approximately $0.2 billion. The company made $2.3 billion of principal payments and issued debt to finance aircraft.
- Fuel expense fell substantially, while salaries and related costs and profit sharing increased. Consolidated CASM, including fuel and other items, decreased 11.9%; management’s adjusted non-fuel CASM measure, excluding special charges, third-party expenses, fuel and profit sharing, decreased 0.7%.
Outlook, management commentary, risks and unusual items
For 2016, management expected consolidated capacity growth of 1.5%–2.5%, gross capital expenditures of $2.7–$2.9 billion and an effective tax rate of approximately 37%. It forecast adjusted CASM, excluding fuel, third-party business expense, profit sharing, special charges and the impact of the ratified pilot agreement, to increase 0.5%–1.5% year over year. Management did not provide a GAAP CASM forecast because future special charges were not determinable. A $1-per-barrel change in crude oil was estimated to affect annual fuel expense by about $94 million.
The company’s cost initiative targeted $2 billion of annual cost reductions and $700 million of incremental ancillary revenue by the end of 2017. In 2015, it reported approximately $555 million in fuel savings and $851 million in non-fuel savings. Management cited modest expected travel-demand growth, but noted economic uncertainty, a stronger U.S. dollar and political and socioeconomic tensions as potential headwinds. Priorities included operational reliability, customer handling during disruptions, aircraft refurbishment, airport investment and new aircraft deliveries.
- Fuel and revenue: Fuel prices, hedging outcomes and supply disruptions can materially affect results. Passenger yields were pressured by competition, foreign exchange, lower international surcharges, reduced energy-sector corporate travel and added capacity in some markets.
- Labor and operations: Approximately 80% of employees were union-represented. Flight-attendant and technician bargaining remained unresolved, and pilot agreement costs were expected to add about 1.5 percentage points to non-fuel unit costs in both Q1 and full-year 2016. Regional operations faced pilot-availability constraints.
- Leverage and commitments: Total contractual obligations were $73.9 billion, including $23.2 billion of capital purchase obligations and $12.6 billion of estimated regional capacity-purchase commitments. The company warned that financing access, liquidity and covenant compliance could be affected by adverse conditions. A $3.0 billion minimum unrestricted-liquidity covenant applies under the Credit Agreement.
- Legal and governance matters: DOJ investigations concerned airline capacity statements and decisions, and United’s mail-delivery scan data. UAL and United also faced consolidated antitrust class actions alleging airline capacity collusion; the company said it would vigorously defend them. Separate federal and SEC investigations concerning former Port Authority-related matters continued; the company said it could not predict outcomes. Executives stepped down in connection with the internal investigation, and Oscar Munoz became CEO in September 2015.
- Other exposures: Risks include intense competition, economic and geopolitical shocks, foreign currency movements, technology and cybersecurity failures, severe weather, regulation, environmental requirements, aircraft incidents and regional-carrier disruption. UAL reported about $8.0 billion in federal NOL carryforwards, whose use could be restricted by a future ownership change.
Unusual 2015 items included the tax valuation-allowance release; $326 million of operating special charges, including severance, impairments, integration and labor-agreement costs; and $202 million of nonoperating special charges, primarily debt-extinguishment-related. The company also recorded a $61 million foreign-exchange loss related to Venezuelan cash holdings and reduced their reported value after changes in currency access and exchange-rate assumptions. The 2015 filing states that financial statements received unqualified audit opinions; UAL’s auditor also gave an unqualified opinion on its internal controls.
Important facts for investors to verify
- How much of reported earnings and EPS growth reflects recurring operations versus the $3.1 billion tax benefit; review the non-GAAP reconciliation and deferred-tax assumptions.
- Whether passenger yield and PRASM stabilize, especially across international markets, and whether capacity growth is matched by demand.
- Whether lower fuel costs persist and how hedging losses, hedge coverage and collateral needs affect cash fuel costs.
- Progress on labor negotiations, pilot availability, regional flying and the expected cost of the ratified pilot agreement.
- Liquidity, debt maturities, covenant headroom, below-investment-grade ratings, aircraft commitments and planned share repurchases.
- Developments and potential financial effects of the DOJ investigations, antitrust litigation and Port Authority-related investigations.