United Continental Holdings, Inc. (United Airlines Holdings) — Q2 2014 Form 10-Q
Business context and reporting period. The combined filing covers the quarter and six months ended June 30, 2014, with comparisons to 2013. United Airlines, Inc. is UAL’s principal wholly owned subsidiary and accounts for nearly all of UAL’s revenue, expenses, assets, liabilities and operating cash flow. The company operates a global passenger and cargo airline. Results are seasonal, with the second and third quarters historically stronger.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $10.329B | $10.001B | $19.025B | $18.722B |
| Operating income | $906M | $770M | $557M | $506M |
| Operating margin | 8.8% | 7.7% | 2.9% | 2.7% |
| Net income | $789M | $469M | $180M | $52M |
| Diluted EPS | $2.01 | $1.21 | $0.47 | $0.15 |
| Operating cash flow | Not separately reported for the quarter | $2.158B | $1.541B |
Q2 net margin was approximately 7.6%, versus 4.7% a year earlier; six-month net margin was approximately 0.9%, versus 0.3%. UAL reported adjusted Q2 net income of $919M and diluted EPS of $2.34, excluding special charges and adjusting for specified fuel-hedge timing effects. These are non-GAAP measures; reported GAAP results are shown above.
- Revenue and operating performance: Q2 passenger revenue rose 3.6% to $8.981B, with yield up 3.0%, traffic up 0.6%, capacity down 0.1%, and load factor at 85.3% (up 0.6 percentage points). Cargo revenue fell 1.7%. Q2 total operating expenses increased 2.1% to $9.423B.
- Fuel and costs: Q2 fuel expense increased 1.1% to $3.101B as the average fuel price rose 2.3%, partly offset by 1.2% lower consumption. Landing fees and rent rose 11.8%, partly reflecting a change in how regional landing fees are paid and recorded; regional capacity purchase expense declined 5.9%.
- Liquidity: At June 30, UAL had $5.796B of unrestricted cash, cash equivalents and short-term investments, plus $351M of restricted cash. The $1.0B revolving credit facility was fully available. Management reported total unrestricted liquidity of $6.8B, including that undrawn facility.
- Debt and obligations: Long-term debt was $10.354B and capital lease obligations totaled $798M, including current maturities; management described approximately $12.3B of debt and capital lease obligations, with about $1.3B due within 12 months. UAL reported compliance with debt covenants. Approximately $23.3B of capital commitments, primarily aircraft and related expenditures, were scheduled across the remainder of 2014 and later years.
- Cash flows and investment: First-half capital expenditures were $953M. Net cash used in investing activities was $1.332B and net cash used in financing activities was $622M. Cash and cash equivalents increased $204M during the half to $3.424B.
Material changes versus prior comparable periods
- Q2 revenue increased 3.3%, operating income rose 17.7%, and GAAP net income increased 68.2% year over year. Higher passenger revenue and improved nonoperating results contributed; nonoperating expense improved to $115M from $299M, notably reflecting fuel-derivative gains versus losses in the prior-year quarter.
- First-half revenue rose 1.6% and operating income increased 10.1%; GAAP net income was $180M versus $52M. First-half passenger revenue rose 0.9%, while cargo revenue declined 4.8% and other operating revenue increased 9.2%.
- Special charges were $169M in Q2 2014 versus $52M in Q2 2013, and $221M in the first half versus $144M. Q2 included $66M for permanently grounding 21 Embraer ERJ 135 aircraft, $38M of severance and benefits, $32M of asset impairment, $17M of integration costs and $16M of asset-sale and other losses.
- Cash flow from operations rose to $2.158B from $1.541B for the first half, primarily due to higher operating income and advance ticket sales. Debt payments and capital lease payments totaled approximately $1.0B during the half.
Outlook, management commentary and risks
- Management expected full-year 2014 consolidated capacity to be flat to up 1% year over year, and CASM excluding profit sharing, third-party business expense, fuel and special charges to rise 1% to 2%. It could not project CASM including those excluded items because special charges were not determinable.
- Management said capacity plans could change if fuel prices rose significantly or economic growth weakened substantially. It emphasized balancing capacity with expected travel demand.
- Fuel hedges covered approximately 21% of projected requirements for the remainder of 2014, 19% for 2015 and less than 1% for 2016. Management cautioned that hedges may not fully offset fuel-price movements or qualify for hedge accounting. Fuel derivatives had a net asset position of $116M.
- Approximately $100M of unrestricted cash was held in Venezuelan bolivars; the company recorded $21M of first-half losses related to Venezuelan currency exchange-rate changes and negotiations over those funds.
- UAL’s board authorized repurchases of up to $1B of common stock. On July 24, 2014, UAL agreed to repurchase approximately $200M through an accelerated share repurchase program.
- The company changed its MileagePlus mile valuation estimate prospectively from April 1, 2014, following US Airways’ Star Alliance exit. It expected the change to increase 2014 consolidated revenue by approximately $75M.
- Risks include substantial debt, leases and aircraft commitments; uncertain availability or cost of future financing; fuel prices and hedging; demand, competition and economic conditions; labor negotiations and potential disruptions; operational and weather disruptions; and global political and currency risks. The company was negotiating agreements with employee groups, and approximately 80% of its 86,000 active employees were represented by labor organizations.
- The filing highlighted a new insurance risk: after ending participation in the FAA-administered terrorism insurance program in May 2014, the company returned to commercial markets for third-party war-risk coverage. Unavailable or inadequate coverage could materially harm results or financial condition.
Most important facts for investors to verify
- Whether operating and passenger-revenue gains continue, and whether reported profitability is sustainable after special charges and fuel-hedge adjustments.
- Whether the $6.8B reported liquidity, including the revolving facility, is sufficient given near-term maturities, aircraft commitments and other fixed obligations.
- How aircraft financing, deliveries and the approximately $23.3B capital commitment schedule evolve, including availability and terms of financing not yet secured.
- Whether cost guidance is achieved, particularly fuel, labor, airport fees, integration and regional-network costs; and whether Cleveland-related contractual commitments lead to further significant charges.
- The realized value and repatriation prospects of Venezuelan cash, the effect of the MileagePlus accounting estimate, and execution and dilution implications of the share repurchase program.
- Developments in labor negotiations, fuel-hedge exposure and terrorism insurance coverage, as well as any changes to risks described in the company’s annual and prior quarterly filings.