United Continental Holdings, Inc. (now United Airlines Holdings, Inc.) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. This combined filing covers the holding company, United Continental Holdings, Inc. (UAL), and its principal wholly owned subsidiary, United Airlines, Inc. Amounts below are generally UAL consolidated and in U.S. dollars; the filing states United accounts for nearly all consolidated operations and assets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $10.001B | $9.939B | $18.722B | $18.541B |
| Operating income | $770M | $575M | $506M | $304M |
| Net income (loss) | $469M | $339M | $52M | $(109)M |
| Diluted EPS | $1.21 | $0.89 | $0.15 | $(0.33) |
| Operating margin | 7.7% | 5.8% | 2.7% | 1.6% |
- Excluding special charges, Q2 net income was $521M and diluted EPS was $1.35, compared with $545M and $1.41 in Q2 2012. For the first half, adjusted net income was $196M versus $259M.
- Q2 passenger revenue declined 1.1% to $8.668B; cargo revenue fell 10.9% to $236M, while other operating revenue rose 21.1% to $1.097B, mainly reflecting third-party fuel sales and MileagePlus/marketing revenue.
- Q2 operating expenses decreased 1.4% to $9.231B. Fuel expense fell 10.0% to $3.068B, primarily from lower fuel prices and reduced consumption. Salaries and related costs rose 7.5%; maintenance rose 11.1%; depreciation and amortization rose 12.4%.
- Q2 passenger load factor was 84.7% versus 84.3%; traffic fell 1.7% and capacity fell 2.1%. Passenger revenue per available seat mile increased 1.0%.
- Six-month operating cash flow was $1.541B, compared with $1.083B. Capital expenditures and aircraft purchase deposits were $821M; debt payments were $1.737B and new long-term debt proceeds were $520M. Cash and cash equivalents declined $627M to $4.143B.
- At June 30, unrestricted cash, cash equivalents and short-term investments totaled $5.964B; including the fully undrawn $1.0B revolver, reported unrestricted liquidity was $7.0B. Restricted cash was $435M.
- UAL reported $11.123B of long-term debt carrying value, plus capital lease obligations; management described total debt and capital lease obligations as approximately $12.0B, with $1.0B due within 12 months. A substantial portion of assets was pledged as collateral.
Material changes and notable items
- Q2 GAAP net income increased 38.3% year over year, while adjusted net income declined from $545M to $521M. Lower fuel costs and fewer special charges helped operating results; rising labor, maintenance and depreciation costs were offsets.
- First-half GAAP results swung to $52M net income from a $109M loss, although adjusted net income decreased year over year. Passenger revenue was nearly flat, as higher fares and yield partly offset lower passenger volumes and capacity; cargo remained weaker.
- Special charges were $52M in Q2 and $144M for the first half, chiefly merger-integration costs ($45M and $115M, respectively), plus $7M/$18M of Boeing 787 grounding costs. The comparable 2012 periods included $206M/$370M of special charges.
- In June, the company froze management and administrative benefits under one pension plan, effective at year-end. Plan remeasurement and related actions reduced projected benefit obligations by $434M and generated a $442M actuarial gain in other comprehensive income, not operating income; management expected about $30M lower pension cost for the rest of 2013.
- UAL issued about 22 million shares in exchange for $189M principal amount of 6% convertible notes. It also issued $300M of 6.375% senior notes due 2018. The company refinanced a $1.2B term loan and redeemed several notes due in 2013.
- Q2 miscellaneous nonoperating expense included an $81M loss on derivatives not qualifying for hedge accounting. Fuel derivatives were in a net liability position of $23M at quarter-end.
Outlook, commitments and risks
- Management forecast full-year 2013 consolidated capacity down 0.75%–1.75% year over year (domestic down 0.8%–1.8%; international down 0.7%–1.7%). It expected full-year CASM, excluding profit sharing, third-party business expense, fuel and special charges, to rise 5.5%–6.5%.
- The company had approximately $23.5B in capital commitments, primarily aircraft, spare engines, aircraft improvements and IT, including $1.2B due in the last six months of 2013. It warned that financing was not yet arranged for many future aircraft orders and might not be available on acceptable terms or at all.
- Fuel-price exposure remains significant: hedges covered approximately 47% of projected 2013 fuel needs and 18% of 2014 needs. Hedges may be ineffective, may fail to qualify for hedge accounting, and may require collateral.
- The $1.0B revolving facility was fully available, but its covenants require at least $3.0B of unrestricted liquidity and specified collateral coverage; it also restricts additional debt, investments, dividends and share repurchases. The company said it was in compliance with debt covenants.
- Other risks include high fixed obligations and below-investment-grade credit ratings; labor negotiations (about 80% of active employees were represented); airline demand, fuel prices and competition; integration execution; regulation, airport capacity and environmental requirements; and operational disruption. United’s 787 aircraft returned to service in May after a temporary grounding. The filing also reports ongoing ADA-related litigation and an appeal in a remaining September 11-related property claim; UAL stated it expected no financial exposure from September 11 claims.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s adjusted results and review the nature and recurrence of special charges.
- Assess the company’s ability to fund the $23.5B capital program, aircraft deliveries and other fixed obligations, including the availability and cost of future financing.
- Track unrestricted liquidity against the $3.0B credit-facility covenant and upcoming debt, lease and capital-payment schedules.
- Monitor whether cost growth—especially labor, maintenance and depreciation—outpaces revenue and productivity improvements.
- Review fuel-hedge positions, mark-to-market exposure, collateral requirements and the sensitivity of results to fuel prices.
- Follow pension assumptions and obligations, labor negotiations, aircraft reliability and the legal and regulatory matters described in the filing.