United Continental Holdings, Inc. (United Airlines, Inc.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The filing is a combined report for United Continental Holdings, Inc. (UAL) and its principal subsidiary, United Airlines, Inc. On March 31, 2013, the airline entities were legally combined under the United Airlines, Inc. name. Unless noted, financial figures below are UAL consolidated and in U.S. dollars.
Financial results and operating performance
- Revenue: Operating revenue was $8.721 billion, up 1.4%. Passenger revenue rose 0.7% to $7.559 billion; cargo revenue fell 14.0% to $227 million, while other operating revenue increased 12.7% to $935 million.
- Profitability: Operating loss was $264 million versus $271 million a year earlier. Net loss was $417 million, or $1.26 per diluted share, compared with $448 million, or $1.36 per share. Excluding special charges, management reported a non-GAAP net loss of $325 million ($0.98 per share), versus $286 million ($0.87 per share) in Q1 2012.
- Costs and margins: Operating expenses increased 1.3% to $8.985 billion. Fuel expense declined 5.5% to $3.050 billion, but salaries and related costs rose 12.1% to $2.127 billion. CASM increased 6.5% to 15.66 cents; passenger load factor improved to 81.1% from 78.1%, and PRASM rose 5.9% to 13.18 cents.
- Cash flow: Operating cash flow was $393 million, versus $124 million. Capital expenditures and aircraft deposits were $375 million. Financing activities used $1.194 billion, and cash and cash equivalents decreased $1.232 billion to $3.538 billion.
- Liquidity: Unrestricted cash, cash equivalents and short-term investments totaled $5.390 billion at March 31, down from $6.543 billion at year-end. Including $1.0 billion of undrawn revolving capacity, management cited $6.4 billion of unrestricted liquidity. Restricted cash was $435 million.
- Debt and obligations: UAL reported $11.261 billion of debt carrying value; management cited approximately $12.1 billion of debt and capital lease obligations, including $1.2 billion due within 12 months. A substantial portion of assets is pledged as collateral. The company reported compliance with debt covenants.
Changes, financing and unusual items
- Traffic declined 1.2% and capacity declined 4.9% year over year; passengers fell 0.5%. Fuel consumption was down 4.4%. Revenue growth was supported by higher fares and yields and a 12.7% increase in other operating revenue, which management attributed to third-party fuel sales.
- Special charges were $92 million, down from $164 million in Q1 2012. They included $70 million of merger integration costs, $14 million for voluntary severance and benefits, and $11 million for temporarily grounded Boeing 787 aircraft, partly offset by gains and other items.
- On March 27, United entered a credit agreement with a $900 million term loan due 2019 and a $1.0 billion revolving facility; the term loan proceeds and about $300 million of cash repaid a $1.2 billion loan due 2014. The agreement requires at least $3.0 billion of unrestricted liquidity and includes collateral and other covenants.
- United redeemed certain notes ahead of maturity. Contractual long-term debt principal payments were $859 million for the remainder of 2013, $958 million in 2014 and $2.044 billion in 2015.
- Capital commitments totaled approximately $17.7 billion, primarily for aircraft and related assets. Financing is not yet in place for some firm aircraft orders; management cautioned that additional financing may not be available on acceptable terms, or at all.
Outlook, commentary and risks
- Management expected full-year 2013 consolidated capacity to decline 0.75%–1.75% year over year and forecast CASM, excluding profit sharing, third-party business expense, fuel and special charges, to increase 5.5%–6.5%.
- The FAA announced controller furloughs beginning April 21, 2013. Management said resulting delays or cancellations could affect capacity, revenue, costs and customer relationships; the possible impact was not included in the company’s Q2 or full-year outlook.
- Approximately 80% of United’s 88,000 active employees were represented by labor organizations. IAM tentative agreements were not ratified, and negotiations with several employee groups continued. Labor disruption, higher labor costs and delays in merger integration were identified as risks.
- Fuel-price exposure remains material: the company had hedged about 32% of projected 2013 fuel needs and 11% of 2014 needs. Management noted possible hedge ineffectiveness and counterparty credit exposure.
- Other risks cited include high leverage and fixed obligations, pension funding, fuel and financing costs, competition and travel demand, and the potential impact of changes to Star Alliance membership on frequent-flyer mile valuation. The company was evaluating the possible effect of US Airways’ announced merger with AMR and intended Star Alliance departure.
Most important facts for investors to verify
- Whether capacity and unit-cost guidance was achieved, particularly given FAA disruption and the expected CASM increase.
- Whether operating performance improved beyond a still-substantial quarterly loss, and whether revenue gains can offset rising labor and other costs.
- Liquidity, debt maturities, covenant headroom and financing availability for the $17.7 billion of capital commitments.
- Progress and costs of labor negotiations, merger integration, and any effects on operations or expected synergies.
- Whether the Boeing 787 grounding, fuel hedges and frequent-flyer program valuation caused material subsequent-period impacts.