Business context and reporting period
Combined unaudited Form 10-Q for the quarter ended March 31, 2012, filed by United Continental Holdings, Inc. (then named United Continental Holdings), United Air Lines, Inc. and Continental Airlines, Inc. UAL is the parent and consolidates the two airlines. Unless noted, financial amounts below are UAL consolidated and in millions of dollars. The filing reports that the airlines moved to a single passenger service system and loyalty program during March 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Operating revenue | $8,602 | $8,202; +4.9% |
| Passenger revenue | $7,508 | $7,117; +5.5% |
| Operating expenses | $8,873 | $8,168; +8.6% |
| Operating income (loss) | $(271); operating margin (3.2%) | $34 |
| Net income (loss), GAAP | $(448); diluted loss per share $(1.36) | $(213); diluted loss per share $(0.65) |
| Net loss excluding special charges (non-GAAP) | $(286); diluted loss per share $(0.87) | $(136) |
| Operating cash flow | $124 | $1,005 |
| Cash and cash equivalents | $5,606 | $6,246 at Dec. 31, 2011 |
| Unrestricted cash, cash equivalents and short-term investments | $7,273 | $7,762 at Dec. 31, 2011 |
| Debt and capital lease obligations | Approximately $12,400, including $1,100 due within 12 months |
Fuel expense rose 20.8% to $3,229; the average fuel price increased 20.1% to $3.34 per gallon. CASM increased 8.3% to 14.70 cents, while PRASM increased 5.2% to 12.44 cents. Traffic and capacity each rose 0.3%, and load factor was 78.1%. UAL held $571 of restricted cash and had the full $500 revolving credit facility available. The company reported compliance with debt covenants; its B/B2/B credit ratings were below investment grade.
Material changes versus the prior comparable period
- Revenue growth did not keep pace with expense growth: revenue increased $400 while expenses rose $705, swinging operating income from $34 profit to a $271 loss.
- Higher fares supported passenger revenue: consolidated average fare per passenger increased 5.7% and yield 5.2%. Cargo revenue declined 6.7%.
- Fuel cost was the principal expense pressure, reflecting higher market prices and a shift from fuel-hedge gains in Q1 2011 to losses in Q1 2012.
- Special charges rose to $164 from $77, including $134 of integration costs and $49 of voluntary severance and benefits, partly offset by asset-sale gains and other items.
- Operating cash flow fell to $124 from $1,005, reflecting the larger net loss and working-capital movements. Cash and short-term investments declined $489 from year-end.
Outlook, management commentary and risks
- In response to fuel prices, management expected 2012 consolidated capacity to decline 0.5%–1.5% year over year: domestic capacity down 1.7%–2.7% and international capacity up 0.2%–1.2%. Planned actions included reducing frequencies, postponing some market launches, exiting less profitable markets and evaluating less fuel-efficient aircraft for removal.
- Aircraft purchase commitments totaled $12,538, primarily for aircraft, engines and improvements. Financing was not yet arranged for all Continental aircraft orders; management cautioned that additional financing might not be available on acceptable terms. The company was discussing possible compensation with Boeing for 787 delivery delays but could not estimate any recovery.
- UAL cited substantial fixed obligations, pledged assets, and potential liquidity pressures from fuel-hedge collateral, pensions and credit-card processing reserves. Additional card reserves may be required if specified liquidity falls below $3.5 billion.
- Fuel hedges covered portions of projected fuel needs; UAL reported a net derivative asset of $206 at quarter-end. Hedge effectiveness, counterparty performance and fuel-price movements remain risks.
- Management continued to maintain a valuation allowance on deferred tax assets, citing recent losses and uncertainty about future taxable income. A material change could depend on sustained profitability.
- Labor negotiations continued across several employee groups. The filing also describes environmental and regulatory exposure, including the EU Emissions Trading Scheme, and ongoing litigation; management said ordinary-course legal and environmental contingencies were not expected to materially affect consolidated results.
- Management identified integration execution, demand, competition, fuel costs, financing access, labor relations, regulation and the ability to realize merger synergies among factors that could cause actual results to differ from forward-looking statements.
Important facts for investors to verify
- Whether fare and revenue gains can offset fuel and other cost inflation, and whether capacity reductions support margins.
- Whether cash generation improves from the weak first-quarter operating cash flow and how liquidity evolves against debt maturities and reserve requirements.
- Financing availability and funding needs for aircraft commitments, especially Continental deliveries, and the outcome of Boeing delay discussions.
- Integration progress and costs following the passenger-system and loyalty-program transition, including the effectiveness of changed revenue-accounting controls.
- Future fuel prices, hedge results and collateral needs; labor-contract developments; and any material changes in tax-asset valuation allowances or legal and regulatory exposures.