United Airlines Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. This combined filing covers United Airlines Holdings, Inc. (UAL) and its wholly owned operating subsidiary, United Airlines, Inc.; their results are substantially the same. Amounts below are in U.S. dollars unless otherwise stated.
Financial performance and liquidity
- Q3 revenue: $7.75 billion, up 211% from $2.49 billion in Q3 2020, but 31.9% below Q3 2019. Passenger revenue was $6.64 billion; cargo revenue was $519 million.
- Q3 earnings: Operating income was $1.04 billion versus an operating loss of $1.62 billion a year earlier. Net income was $473 million, or $1.44 diluted EPS, compared with a net loss of $1.84 billion. The calculated operating margin was about 13.4%; it includes substantial government grant credits described below.
- First nine months: Revenue was $16.44 billion, up 37.7% year over year. Operating loss was $614 million and net loss was $1.32 billion, versus losses of $4.22 billion and $5.17 billion, respectively, in 2020. Calculated operating margin was about negative 3.7%.
- Costs and operating metrics: Q3 operating expenses were $6.71 billion, including $1.71 billion of fuel expense; fuel cost per gallon rose 63.4% year over year. Q3 capacity was 28% below Q3 2019, load factor was 76.1%, and cost per available seat mile (CASM) was 12.46 cents. Nine-month CASM was 13.77 cents.
- Cash flow: Operating cash flow was $2.34 billion for the first nine months, compared with cash used of $1.96 billion in 2020. Investing cash outflow was $1.32 billion and financing cash inflow was $6.97 billion. The operating cash flow figure includes government support.
- Liquidity: At September 30, UAL reported $19.4 billion of unrestricted cash, cash equivalents and short-term investments; cash, cash equivalents and restricted cash totaled $19.73 billion. Management said available liquidity and expected operating cash generation should meet anticipated needs for the next 12 months.
- Debt and obligations: Balance-sheet long-term debt, including current maturities, was approximately $33.8 billion. The company separately reported approximately $41.6 billion of debt, lease and sale-leaseback obligations, including $3.3 billion due within 12 months. It had $1.75 billion available under its revolving facility and no borrowings outstanding under it.
Material changes and unusual items
- Recovery in passenger demand drove the sharp year-over-year improvement, though revenue remained below 2019 levels. Q3 passengers increased 230% versus the pandemic-affected 2020 quarter; management attributed the recovery partly to vaccination availability and easing travel restrictions.
- Q3 operating results included $1.13 billion of CARES Act grant credits; the first nine months included $4.02 billion. These credits materially affect reported operating income and margins. The company also received about $5.8 billion of PSP2 and PSP3 funding, comprising grants and approximately $1.7 billion of notes.
- In 2021, the company issued $4.0 billion of secured notes and borrowed $5.0 billion under a new term-loan facility, while repaying prior credit facilities and the CARES Act loan. It also issued $600 million of equipment trust certificates and raised about $532 million from stock sales. Q3 interest expense was $449 million, up 30% year over year.
- Q3 special items included $46 million of aircraft impairment charges and $5 million of severance and benefit costs, partly offset by $17 million of gains on asset sales and other items. The company recorded $34 million of Q3 unrealized investment losses.
- Advance ticket sales were $6.36 billion, including $3.0 billion of electronic travel certificates and future flight credits. Their future use or expiration is uncertain; unused credits may ultimately be recognized as revenue under the company’s breakage estimates.
Outlook, commentary and risks
- Management expected Q4 2021 scheduled capacity to be about 23% below Q4 2019 and revenue to be 25%–30% below Q4 2019. The company said it would adjust capacity as booking trends change; actual results remain uncertain.
- The company identified approximately $2.2 billion of annual permanent structural cost reductions. Its recovery and near-term performance remain exposed to COVID-19 developments, variants and travel restrictions, demand volatility, fuel prices and changing customer behavior.
- United Next includes orders for 200 Boeing 737 MAX and 70 Airbus A321neo aircraft. The company expects the plan to increase seats per domestic departure by nearly 30% by 2026 and improve fuel efficiency; these are forward-looking expectations.
- Capital commitments were approximately $34.5 billion, including aircraft, aircraft improvements and other capital expenditures. Estimated future regional capacity-purchase agreement payments were $13.7 billion. The company also disclosed labor, financing, operational, regulatory and litigation risks; it reported compliance with debt covenants at quarter-end.
Important facts for investors to verify
- How much of reported operating income and cash generation reflects temporary government grants versus sustainable airline operations.
- Whether demand, capacity, revenue and cost trends meet the stated Q4 outlook, particularly as fuel prices and travel restrictions change.
- The company’s ability to service its substantial debt, lease obligations and aircraft commitments while returning to sustained profitability.
- Potential use, expiration and revenue recognition of the $3.0 billion in customer flight credits, and the effect of credit-card reserve requirements on liquidity.
- Execution, financing and delivery timing for United Next, and exposure to labor, aircraft-supplier, operational and other disclosed risks.