United Continental Holdings, Inc. (now United Airlines Holdings, Inc.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing is a combined report for United Continental Holdings, Inc. (UAL) and its wholly owned subsidiary, United Airlines, Inc. UAL’s results largely reflect United’s airline operations. Financial amounts below are in U.S. dollars; unless noted, in millions.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenue | $8,608 | $8,696 |
| Operating income (loss) | $741 | $(349) |
| Operating margin, approximately | 8.6% | (4.0)% |
| Net income (loss), UAL | $508 | $(609) |
| Diluted EPS, UAL | $1.32 | $(1.66) |
| Operating cash flow | $1,825 | $694 |
| Capital expenditures | $210 | $364 |
- Passenger revenue was $7.42 billion, up 0.5%; cargo revenue increased 15.8% to $242 million, while other operating revenue fell 14.2% to $946 million.
- Operating expenses fell 13.0% to $7.87 billion, driven chiefly by a 36.1% reduction in aircraft fuel expense to $1.86 billion. Average fuel price fell 34.6% to $2.08 per gallon and fuel consumption declined 2.2%.
- Salaries and related costs increased 6.9% to $2.30 billion, reflecting higher pay, profit-sharing accruals, medical and pension costs, partly offset by a 1.8% decline in average FTEs.
- UAL reported $582 million of non-GAAP net income, or $1.52 diluted EPS, excluding $70 million of special charges and $4 million of economic hedge adjustments. This is a company-defined non-GAAP measure.
- At March 31, cash and cash equivalents were $3.35 billion and short-term investments were $2.26 billion. Unrestricted cash, cash equivalents and short-term investments totaled $5.6 billion; reported unrestricted liquidity was $7.0 billion including the undrawn $1.35 billion revolving facility.
- Debt and capital lease obligations were approximately $12.3 billion, including $1.8 billion due within 12 months. Long-term debt was $9.9 billion; debt fair value was reported at $12.2 billion. The company was in compliance with debt covenants.
Changes versus the prior-year quarter
- UAL moved from a $609 million net loss to $508 million net income; operating results improved by approximately $1.09 billion.
- Total revenue declined 1.0% despite passenger revenue growth. Consolidated traffic and capacity each increased 0.1%, while load factor remained 81.1%. PRASM rose 0.4% to 12.96 cents.
- Cash from operations rose to $1.83 billion from $694 million, which management attributed principally to improved operating income and a $179 million decrease in fuel-hedge collateral.
- Fuel savings were partly offset by increased compensation costs and fuel-hedge losses. Cargo benefited in part from a U.S. West Coast port labor dispute; lower other revenue reflected reduced third-party fuel sales and MileagePlus revenue.
Outlook, risks and unusual items
- Guidance: Full-year 2015 consolidated capacity growth of 1%–2%. CASM excluding profit sharing, third-party business expense, fuel and special charges was expected to be flat to up 1% year over year. Management said it could not project GAAP CASM because future special charges were not determinable.
- Fuel and hedging: Approximately 15% of projected remaining-2015 fuel needs and 1% of 2016 needs were hedged. Fuel derivatives were in a net liability position of $641 million, and $398 million of collateral was posted. Management cautioned that fuel-price volatility, industry capacity, fares and competitive responses could affect results; a $1-per-barrel crude-oil price change was estimated to affect annual fuel expense by about $93 million.
- Special charges and debt actions: Q1 special charges totaled $70 million, including $50 million for a flight-attendant voluntary early-out program and $18 million of integration costs, partly offset by $4 million of gains. UAL redeemed $303 million of 2026 notes on April 1 and planned to redeem $298 million of 2028 notes on May 1; a $129 million nonoperating charge was expected in Q2 for debt discounts written off.
- Commitments and contingencies: Future capital commitments totaled approximately $22.3 billion, primarily for aircraft and related items. United guaranteed approximately $2.0 billion of airport special-facility bonds. About 80% of approximately 84,000 active employees were represented by labor organizations; negotiations with technicians and flight attendants were ongoing.
- Other risks and items: The company had a $4.6 billion valuation allowance against deferred tax assets. Approximately $90 million of cash was held in Venezuelan bolivars, with repatriation limited by local law. Management cited substantial fixed obligations, capital spending needs, below-investment-grade credit ratings, and risks from fuel prices, financing access, labor relations, demand, competition, foreign exchange and operations. The MileagePlus program changed in March 2015 to award miles primarily based on ticket price.
- UAL repurchased approximately 2.9 million shares for $200 million in Q1; $480 million remained under its $1 billion authorization. Holders converted substantially all remaining $202 million of 4.5% convertible notes into 11 million UAL shares in January.
- Management concluded disclosure controls were effective as of March 31, 2015. Payroll-related internal control changes were made during the quarter; their operating effectiveness was to be evaluated in the annual assessment.
Investor verification priorities
- Assess whether the operating and net-income improvement is sustainable after separating the benefit of lower fuel prices, hedge effects and special items from underlying revenue and cost trends.
- Review the definition and reconciliation of non-GAAP net income and economic hedge adjustments against GAAP results.
- Verify liquidity availability and cash needs against near-term debt maturities, aircraft commitments, lease obligations, pension funding and posted fuel collateral.
- Monitor fuel-hedge exposure, potential collateral requirements, and the effects of changes in fuel prices and fares.
- Track execution of aircraft financing and deliveries, the planned debt redemptions and the expected Q2 charge, as well as labor negotiations and any further severance costs.