United Airlines Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Filed July 17, 2019. United Airlines, Inc. is the wholly owned operating subsidiary and accounts for nearly all of Holdings’ operating results. Holdings changed its name from United Continental Holdings, Inc. on June 27, 2019. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Operating revenue | $11.402 billion | $10.777 billion | +5.8% |
| Operating income | $1.472 billion | $1.145 billion | +28.6% |
| Operating margin | 12.9% | 10.6% | +2.3 percentage points |
| Net income | $1.052 billion | $683 million | +54.0% |
| Diluted EPS | $4.02 | $2.48 | +62.1% |
- Passenger revenue rose 6.1% to $10.486 billion; traffic increased 5.1%, capacity 3.6%, and load factor reached 86.0% versus 84.8%. Passenger revenue per available seat mile (PRASM) increased 2.5% to 14.32 cents.
- Total operating expenses rose 3.1% to $9.930 billion. Salaries and related costs increased 6.2%, while fuel expense was nearly flat: lower fuel prices per gallon offset increased consumption. CASM declined 0.4% to 13.56 cents.
- Nonoperating expense was $118 million, improved from $290 million in Q2 2018, primarily reflecting mark-to-market movements in financial instruments. Interest expense rose $28 million to $191 million.
- For the first six months, revenue was $20.991 billion (+6.0%), operating income $1.967 billion (+39.8%), net income $1.344 billion (+62.3%), and diluted EPS $5.07 versus $2.95. Operating cash flow was $4.625 billion versus $4.152 billion.
Cash, debt and liquidity
- At June 30, unrestricted cash, cash equivalents and short-term investments totaled $5.4 billion, compared with $4.0 billion at year-end 2018. The full $2.0 billion revolving credit facility was available; restricted cash was $105 million.
- Cash from operations for the first half was $4.625 billion. Capital expenditures were $2.467 billion, compared with $1.671 billion a year earlier. Cash and cash equivalents increased by $1.527 billion during the period.
- Long-term debt, including current maturities, was approximately $14.2 billion; debt and finance lease obligations together were approximately $14.5 billion, of which $1.4 billion was due within 12 months. Long-term operating lease obligations were a further $5.034 billion, with $637 million current.
- Current liabilities exceeded current assets by about $7.2 billion. Management noted that approximately $8.6 billion of current liabilities related to advance ticket sales and frequent-flyer deferred revenue, largely to be recognized as future travel revenue rather than paid out as cash.
- First-half financing included $865 million of debt proceeds recorded from equipment trust certificates and $350 million of 4.875% senior notes due 2025. The company repurchased $1.062 billion of shares in the first half.
Material changes, outlook and risks
- Management cited stronger traffic and demand, including close-in domestic demand and improved Atlantic and Latin markets, as key revenue drivers. Operating income growth exceeded revenue growth; expenses increased more slowly than revenue.
- Management’s stated 2019 priorities were operational reliability and customer service, strategic domestic network growth, and investment in employees and the product. The filing provides no specific forward financial guidance. A $1-per-barrel change in crude oil price was estimated to change annual fuel expense by approximately $103 million, based on projected 2019 consumption.
- The FAA grounding of United’s 14 Boeing 737 MAX 9 aircraft disrupted planned flying and deliveries. Before grounding, the aircraft operated about 50 flights daily; United had expected to reach about 110 daily flights by year-end. The duration and financial and operational effects were uncertain, and delivery timing could change.
- United’s $456 million BRW term loan to affiliates of Avianca’s majority shareholder was in default. United began exercising remedies in May after credit downgrades. The loan’s $489 million carrying value was assessed as recoverable based on collateral and was not considered impaired at June 30; this valuation depends on estimates of collateral value.
- Aircraft, aircraft-related and other capital commitments totaled $24.3 billion. Separately, expected future payments under regional capacity purchase agreements totaled $12.5 billion. The company also disclosed approximately $570 million of leases not yet commenced.
- Approximately 84% of employees were represented by U.S. labor organizations. The pilots’ agreement became amendable in February 2019, and negotiations were ongoing; catering employee contract negotiations had also begun.
- Operating special charges were $71 million in Q2, including $61 million of asset impairments. Q2 2019 also included a $38 million gain on the Azul investment’s market value, compared with a $135 million loss in Q2 2018, contributing to the year-over-year improvement in miscellaneous nonoperating results. Prior-year comparisons were adjusted for adoption of the new lease accounting standard.
- The company stated that its S&P, Moody’s and Fitch ratings were below investment grade. It also identified fuel-price volatility, demand and competitive conditions, financing access, labor relations, operational disruption, and risks involving partner airlines and investments as factors that could affect results.
Important facts for investors to verify
- Progress and potential costs or capacity effects from the 737 MAX grounding, including the timing of aircraft deliveries and return to service.
- BRW loan collateral valuation, default remedies, and any subsequent developments affecting recoverability.
- Execution of the $24.3 billion capital program and $12.5 billion regional agreement commitments, alongside aircraft financing needs and debt maturities.
- Whether revenue and margin improvements persist as capacity, labor costs, fuel prices and other operating expenses change.
- Share repurchase activity: about $687 million remained under the existing authorization at quarter-end; the board approved a new $3.0 billion program on July 15, 2019.