Business context and reporting period
United Continental Holdings, Inc. (UAL), the parent of United Airlines, Inc., filed this combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. United accounts for nearly all of UAL’s operating revenue, expenses, assets and operating cash flow. Unless indicated otherwise, amounts below are UAL consolidated and in U.S. dollars.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $10.228B | $9.909B | $28.950B | $28.450B |
| Operating income | $508M | $200M | $1.014B | $504M |
| Operating margin | 5.0% | 2.0% | 3.5% | 1.8% |
| Net income (loss) | $379M | $6M | $431M | ($103M) |
| Diluted EPS | $0.98 | $0.02 | $1.15 | ($0.31) |
| Operating cash flow | Not separately provided | Not separately provided | $1.778B | $845M |
Q3 passenger revenue grew 1.6% to $8.918B; other operating revenue rose 25.0% to $1.111B, while cargo revenue fell 19.1% to $199M. Fuel expense declined 4.2% to $3.262B, but salaries and related costs increased 8.4% to $2.209B. UAL reported Q3 adjusted net income of $590M, or $1.51 diluted EPS, excluding $211M of special charges; comparable 2012 adjusted net income was $520M, or $1.35 per diluted share.
At September 30, unrestricted cash, cash equivalents and short-term investments totaled $5.736B, down from $6.543B at December 31, 2012. Including the undrawn $1.0B revolving facility, management cited $6.7B of unrestricted liquidity. Long-term debt was $10.204B and current maturities were $957M at UAL; management described total debt and capital lease obligations of approximately $12.1B, including $1.1B due within 12 months. The company had $412M of restricted cash and reported compliance with debt covenants.
Nine-month capital expenditures and aircraft purchase deposits were $1.399B. Financing cash flows included $1.965B of long-term debt repayments and $819M of debt issuance. Cash and cash equivalents fell by $835M during the period to $3.935B. The filing does not provide a consolidated gross or net debt figure in the same format as management’s approximately $12.1B debt-and-lease estimate.
Changes versus the prior comparable period
- Q3 operating income increased $308M year over year as revenue rose 3.2% and operating expense was nearly flat. Q3 GAAP net income increased from $6M to $379M.
- For the first nine months, revenue increased 1.8%, while operating expenses were essentially unchanged; operating income doubled to $1.014B and results moved from a $103M net loss to $431M net income.
- Q3 consolidated traffic declined 0.3% and capacity declined 1.1%; load factor improved 0.7 percentage point to 85.9%. Passenger revenue per available seat mile (PRASM) rose 2.7% to 13.71 cents. For nine months, capacity declined 2.6%, load factor rose 1.3 points to 84.0%, and PRASM increased 3.0% to 13.54 cents.
- Fuel cost savings were partly offset by higher labor, depreciation and other operating expenses. Special charges fell to $211M in Q3 from $514M a year earlier and to $355M for nine months from $884M.
- Nine-month operating cash flow increased to $1.778B from $845M, while unrestricted cash and short-term investments declined from year-end.
Outlook, commentary and risks
- Management forecast full-year 2013 consolidated capacity to decline 1.2%–1.4% year over year, with domestic capacity down 1.2%–1.5% and international capacity down 1.1%–1.4%.
- Management expected full-year CASM, excluding profit sharing, third-party business expense, fuel and special charges, to increase 6.0%–6.5%. No earnings or revenue guidance was stated in the provided filing text.
- Fuel hedges covered approximately 45% of projected remaining-2013 fuel needs, 23% of 2014 needs and 1% of 2015 needs. The company noted hedge effectiveness, accounting qualification and counterparty performance risks.
- Capital commitments totaled approximately $24.0B, primarily for aircraft, engines, facilities and technology. Financing was not in place for most remaining firm aircraft orders; management cautioned that future financing might not be available on acceptable terms or at all.
- Other significant obligations include aircraft and facility leases, pension funding, and approximately $1.9B of guaranteed tax-exempt special-facility bonds. A substantial portion of assets, including aircraft and route authorities, was pledged as collateral. Credit ratings were below investment grade.
- Labor negotiations remained ongoing for some work groups. Tentative IAM agreements were subject to member ratification, and the company said labor costs could rise materially; it could not estimate the early-out program’s impact. The company recorded a $127M Q3 charge for anticipated lump-sum payments related to those tentative agreements.
- Other notable items: a $34M Q3 reserve adjustment for legal matters; $50M of Q3 merger-integration costs; and $31M of Q3 accelerated depreciation on Boeing 757-200 aircraft planned for sale. Management cited additional competitive capacity in China and a demand-forecasting shortfall that weakened passenger yield mix. Brazil’s antitrust authority issued a final determination of no liability for United in a cargo fuel-surcharge investigation.
- The filing identifies risks from demand and economic conditions, fuel prices and hedging, financing and liquidity, labor relations, competition, operations, regulation, insurance and the realization of merger synergies. The FAA’s authority to provide third-party war-risk insurance was scheduled to expire January 15, 2014, subject to congressional extension.
Important facts for investors to verify
- Reconcile the $590M Q3 adjusted earnings figure with $379M GAAP net income and review the nature and potential recurrence of the $211M special charges.
- Assess whether operating cash flow can support aircraft investment, debt service and lease obligations while unrestricted liquidity is declining.
- Verify the availability, cost and timing of financing for the $24.0B capital commitment schedule, including aircraft orders not yet financed.
- Track realization of capacity, CASM and labor-cost expectations, as well as ratification and completion of outstanding labor agreements.
- Review fuel-hedge exposure, deferred tax asset valuation allowances, pension assumptions and the sensitivity of results to competitive conditions and demand.