United Continental Holdings, Inc. (now United Airlines Holdings, Inc.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The combined filing covers United Continental Holdings, Inc. (UAL) and wholly owned United Airlines, Inc.; United accounts for nearly all of UAL’s operations and financial position. Dollar amounts are in U.S. dollars.
Financial performance
- Q2 revenue: $10.777 billion, up 7.7% year over year. Passenger revenue rose 8.0% to $9.880 billion; cargo revenue rose 15.0% to $314 million.
- Q2 profitability: Operating income was $1.161 billion, down 19.2%; net income was $684 million, down 16.7%; diluted EPS was $2.48 versus $2.67. Operating margin was approximately 10.8% versus 14.4% a year earlier.
- Six-month results: Revenue was $19.809 billion, up 7.5%; operating income was $1.437 billion, down 18.2%; net income was $831 million, down 9.7%; diluted EPS was $2.96, unchanged from 2017.
- Costs and operating metrics: Q2 operating expenses rose 12.2% to $9.616 billion. Fuel expense increased 43.2% to $2.390 billion, reflecting higher fuel prices and capacity. Traffic rose 6.4%, capacity 4.8%, and load factor improved 1.3 points to 84.8%. PRASM rose 3.0%; CASM rose 7.1% to 13.60 cents.
- Cash flow: Six-month operating cash flow was $4.175 billion versus $2.108 billion. Capital expenditures were $1.734 billion, implying operating cash flow less capex of about $2.441 billion. Management attributed much of the cash-flow increase to a $2.3 billion year-over-year working-capital benefit.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $5.1 billion at June 30; the $2.0 billion revolving facility was fully available. Long-term debt, including current maturities, was about $13.3 billion; capital-lease obligations totaled about $1.2 billion. Management reported approximately $14.5 billion of debt and lease obligations, including $1.0 billion due within 12 months. Current liabilities exceeded current assets by approximately $5.2 billion, largely due to advance ticket sales and frequent-flyer deferred revenue.
Changes versus prior comparable period
- Revenue growth did not keep pace with expense growth: Q2 revenue increased 7.7%, while expenses rose 12.2%, reducing operating income by $276 million.
- Fuel was the largest cost headwind: Q2 fuel expense increased $721 million; average fuel price per gallon rose 38.7%.
- Q2 passenger revenue gains reflected higher traffic and load factor, with stronger domestic close-in demand and Atlantic demand. Latin American passenger revenue declined 5.2%.
- Nonoperating expense increased to $304 million from $160 million, including a $135 million Q2 loss from changes in the fair value of the Azul equity investment.
- Comparative 2017 figures were adjusted retrospectively for adoption of revenue-recognition and retirement-benefit presentation standards. The revenue standard primarily reclassified certain ancillary fees into passenger revenue and changed the timing of ticket-change-fee recognition; it did not affect cash flows.
Outlook, commentary and notable items
- For 2018, the company expected consolidated available seat miles to grow 4.5%–5.0% year over year, concentrated mainly in the domestic network and mid-continent hubs. Management cited hub connectivity, rebanking and expansion in off-peak periods as priorities.
- Management stated that a $1-per-barrel change in crude oil would change annual fuel expense by approximately $98 million, based on projected 2018 consumption. Fuel prices remained volatile.
- Special charges were $129 million in Q2 and $169 million for the first half. These included a $105 million write-off of Brazil route-authority intangibles following ratification of the U.S.–Brazil open-skies agreement, plus aircraft, slot and severance-related charges.
- Aircraft and related capital commitments totaled approximately $22.4 billion, including $1.7 billion due in the second half of 2018. The company also disclosed a July 2018 agreement to buy 25 new Embraer E175 aircraft and an agreement for 20 used Airbus A319 aircraft.
- UAL repurchased 5.9 million shares for $407 million in Q2; approximately $2.0 billion remained under its repurchase authorization. The company held below-investment-grade credit ratings and noted that downgrades could raise financing costs or restrict access to financing.
- Other disclosed exposures include substantial aircraft, facility and lease commitments; guarantees of airport special-facility bonds and regional-carrier aircraft debt; labor relations; and risks from fuel prices, demand, competition, operations, regulation, financing access and global conditions. Management said it was in compliance with debt covenants.
Important facts for investors to verify
- Whether revenue and unit-revenue growth can offset fuel, labor, regional-capacity and other cost inflation.
- How much of first-half operating cash flow reflected timing and working-capital movements, and whether that level is sustainable.
- The financial and competitive effects of the $105 million Brazil route-authority impairment and the Azul investment’s fair-value volatility.
- Funding plans and liquidity capacity for aircraft commitments, lease payments and debt maturities, particularly given below-investment-grade ratings.
- Whether the planned 2018 capacity growth and hub initiatives deliver the expected demand, connectivity and profitability benefits.
- The effect of revenue-recognition estimates, including ticket breakage and frequent-flyer mile redemption assumptions, on deferred revenue and reported results.