United Continental Holdings, Inc. (United Airlines Holdings)
Business context and reporting period. This combined Form 10-Q covers United Continental Holdings, Inc. (UAL) and its wholly owned operating subsidiary, United Airlines, Inc. The quarter ended September 30, 2016; comparisons are with Q3 2015. Unless noted, amounts below are UAL consolidated and in U.S. dollars.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Operating revenue | $9.913 billion | $10.306 billion | Down 3.8% |
| Passenger revenue | $8.603 billion | $8.960 billion | Down 4.0% |
| Operating income | $1.624 billion | $1.899 billion | Down 14.5% |
| Operating margin | 16.4% | 18.4% | About 2.0 percentage points lower |
| Net income | $965 million | $4.816 billion | Down 80.0% |
| Diluted EPS | $3.01 | $12.82 | Down |
Profit comparison: Q3 2015 net income included a $3.2 billion income-tax valuation allowance release. In Q3 2016, UAL recorded $545 million of income-tax expense. The reported year-over-year net income decline is therefore substantially affected by this tax comparison; operating income also declined.
- Revenue and operating trends: Passenger revenue fell as PRASM declined 5.8% and yield declined 5.7%, amid a strong U.S. dollar, lower surcharges, reduced energy-related corporate travel and weaker yields. Traffic rose 1.8%, capacity rose 2.0%, and load factor was 85.5%, down 0.1 point.
- Costs and margins: Operating expenses decreased 1.4% to $8.289 billion. Fuel expense fell 17.1% to $1.603 billion as average fuel price per gallon declined 18.7%, partially offset by higher consumption. Salaries and related costs rose 3.6%, while depreciation and maintenance costs also increased.
- Cash flow, nine months ended September 30: Operating cash flow was $4.884 billion, compared with $4.877 billion in 2015. Capital expenditures were $2.343 billion, and cash used in investing activities was $2.282 billion. Cash used in financing activities was $2.978 billion, including $2.442 billion of share repurchases. Cash and cash equivalents declined $376 million to $2.630 billion.
- Liquidity and debt: Cash and short-term investments totaled about $4.9 billion at September 30; reported unrestricted liquidity was $6.2 billion, including the undrawn $1.35 billion revolving facility. Debt and capital lease obligations were approximately $11.5 billion, including $1.1 billion due within 12 months. UAL reported compliance with debt covenants and full availability under its revolver.
- Balance-sheet considerations: Current liabilities exceeded current assets by about $5.3 billion. UAL said about $6.7 billion of current liabilities related to advance ticket sales and frequent-flyer deferred revenue, which largely represent future travel rather than cash outlays. The company reported below-investment-grade credit ratings.
Material changes and unusual items
- For the first nine months of 2016, revenue declined 4.6% to $27.504 billion and operating income fell 18.4% to $3.333 billion. Net income was $1.866 billion versus $6.517 billion, with the prior-year comparison again including the $3.2 billion tax valuation allowance release.
- Nine-month special charges were $669 million, including a $412 million impairment of Newark airport slot intangibles after the FAA changed Newark’s scheduling designation, a $74 million Cleveland airport lease restructuring charge, labor agreement costs and other items. Q3 special charges totaled $45 million.
- A flight-attendant postretirement medical-plan amendment triggered a one-time $47 million curtailment gain in Q3. The related plan remeasurement increased the projected benefit obligation by $49 million and other comprehensive loss by $96 million.
- UAL repurchased 48 million shares for $2.4 billion in the first nine months, including 5 million shares for $255 million in Q3. Approximately $2 billion remained under the share-repurchase authorization at quarter-end.
Outlook, management commentary and risks
- Management expected full-year 2016 consolidated capacity growth of 1.2%–1.4%. It targeted $3.1 billion of incremental value by 2018 through operational improvements, premium-customer initiatives, product enhancements, MileagePlus initiatives and cost measures; this is a target, not a specific earnings forecast.
- Management estimated labor agreements would add approximately 2.3 points to full-year 2016 non-fuel unit costs and 1.5–2.0 points in 2017, excluding the potential impact of the tentative technicians’ agreement. The technicians’ agreement still required union-member ratification.
- Fuel prices remain volatile. UAL estimated that a $1-per-barrel change in crude oil would change annual fuel expense by approximately $93 million. About 13% of projected fuel needs for the remainder of 2016 was hedged at September 30; the company cautioned that hedges may be ineffective or fail to qualify for hedge accounting.
- Capital commitments totaled approximately $22.6 billion, primarily for aircraft and related items, scheduled through and beyond 2020. Financing may be needed to meet these commitments. The filing also describes substantial lease commitments and guarantees, including approximately $1.9 billion of airport special-facility revenue bonds.
- Other cited risks include labor disruption and bargaining outcomes, maintaining liquidity and access to financing, fare and demand pressure, operational execution, foreign-exchange exposure, fuel costs, and regulatory or legal matters.
Important facts for investors to verify
- How much of the earnings decline reflects underlying operating performance versus the unusually large 2015 tax benefit, and how recurring are the Q3 2016 special items?
- Whether passenger yields and PRASM stabilize, particularly given capacity growth and continued fare pressure.
- Whether labor agreements, including the technicians’ tentative agreement, result in the projected cost increases or operational disruption.
- How UAL will finance its aircraft commitments while sustaining liquidity, repurchases, pension funding and debt service.
- Whether fuel-price movements, hedge settlements and currency exposure materially change costs or cash requirements.