United Continental Holdings, Inc. (United Airlines), Form 10-Q
Reporting period: Three months ended March 31, 2018. The combined filing covers United Continental Holdings, Inc. (UAL) and its wholly owned subsidiary United Airlines, Inc.; their operating results are substantially the same. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $9,032 | $8,426 | +7.2% |
| Operating income | $276 | $320 | -13.8% |
| Operating margin | 3.1% | 3.8% | -0.7 percentage points |
| Net income | $147 | $99 | +48.5% |
| Diluted EPS, UAL | $0.52 | $0.32 | +$0.20 |
| Net cash from operations | $1,733 | $547 | +$1,186 |
- Passenger revenue rose 6.5% to $8,149; cargo revenue increased 23.1% to $293, and other operating revenue increased 10.3% to $590. Total revenue growth was outpaced by operating expense growth of 8.0%, to $8,756.
- Fuel expense increased $405, or 26.0%, to $1,965, primarily reflecting a 23.4% increase in average fuel price per gallon. Salaries and related costs rose 3.4%; regional capacity purchase expense rose 15.5%.
- Net income improved despite lower operating income, aided by lower net nonoperating expense ($92 versus $170) and lower income tax expense. The 2018 effective tax rate was 20.3%, versus 33.6% in 2017.
- At March 31, cash and cash equivalents were $2,404 and short-term investments were $2,071. Management reported $4.5 billion of unrestricted cash, cash equivalents and short-term investments, plus the full $2.0 billion revolving credit facility available, for $6.5 billion of unrestricted liquidity.
- Debt was $13,821, including current maturities; capital lease obligations were approximately $1,143. The company reported approximately $15.0 billion of debt and capital lease obligations, including $1.8 billion due within 12 months. It was in compliance with debt covenants and had $2.0 billion available under its revolver.
- Operating cash flow was $1,733 and capital expenditures were $979. Cash from operations less capital expenditures was approximately $754, a derived measure. Cash and cash equivalents increased from $1,482 at year-end to $2,404.
- Current liabilities exceeded current assets by approximately $5.9 billion; management stated that about $7.7 billion of current liabilities represented advance ticket sales and frequent flyer deferred revenue, largely to be recognized through future travel rather than paid as cash.
Operating trends and changes versus prior period
- Traffic (revenue passenger miles) increased 4.7%, capacity (available seat miles) increased 3.6%, and load factor improved to 80.4% from 79.6%. PRASM rose 2.7% and yield rose 1.7%.
- Revenue growth reflected higher traffic and load factor; cargo growth reflected higher yield and volume. Other operating revenue included an approximately $50 million one-time MileagePlus-related payment.
- Operating income declined as expense growth, especially fuel, exceeded revenue growth. Nonoperating expense improved year over year, including a $45 million gain from the change in market value of the company’s Azul investment.
- UAL repurchased approximately 8.4 million shares for about $0.6 billion during the quarter. Approximately $2.4 billion remained under the repurchase authorization at quarter-end.
- Comparisons reflect retrospective adoption of revenue-recognition and retirement-benefit presentation standards. Revenue adoption principally reclassified certain ancillary fees into passenger revenue and changed recognition timing for ticket-change fees; it did not affect cash flows. The filing’s adjusted 2017 figures are the comparable figures shown here.
Outlook, risks, contingencies and unusual items
- For 2018, management expected consolidated available seat miles to grow 4.5%–5.5% year over year, with most growth in the domestic network, particularly mid-continent hubs. The filing provides no earnings or margin guidance.
- Management stated that a $1 change in crude oil price per barrel would change 2018 fuel expense by approximately $97 million, based on projected consumption; jet fuel prices remained volatile.
- Capital commitments, primarily aircraft and related equipment, totaled approximately $22.4 billion, including $2.4 billion due in the last nine months of 2018. The company also disclosed $13.095 billion in future minimum facility and other operating lease payments. Aircraft orders include 45 Airbus A350s, 161 Boeing 737 MAXs, two Boeing 777-300ERs and 14 Boeing 787s; commitments extend through 2027.
- Special charges were $40 million, including $23 million for aircraft fair-value adjustment and impairments related to fleet types and international slots, and $14 million of severance and benefit costs. Severance accruals are expected to be paid mostly through early 2019.
- United guaranteed approximately $2.0 billion of tax-exempt special-facilities bonds and $154 million of a regional carrier’s aircraft mortgage debt. The filing also describes floating-rate debt and non-U.S. financing subject to increased-cost or withholding-tax provisions.
- Credit ratings were below investment grade: UAL was rated BB by S&P and Fitch and Ba2 by Moody’s. The company cautioned that downgrades could increase financing costs or limit financing access. Substantial assets are pledged under financing agreements.
- Approximately 79% of United’s roughly 90,800 employees were represented by labor organizations; UNITE HERE sought to organize catering employees. Risks identified include fuel-price volatility, demand and competition, operational disruptions, labor relations, financing and liquidity, cybersecurity, regulation, weather, and geopolitical events.
- The company had not completed its assessment of the new lease standard, effective for periods beginning after December 15, 2018, but expected a significant balance-sheet impact from recognizing operating-lease assets and liabilities; it did not expect a material impact on results or cash flows.
Key facts for investors to verify
- Whether passenger revenue, fares and load factor continue to offset rapidly rising fuel and other operating costs, and whether operating margins recover.
- Whether the $1.733 billion operating cash flow is repeatable, given management’s description of substantial year-over-year working-capital timing effects.
- How fuel prices, planned capacity growth and hub expansion affect full-year profitability relative to the 4.5%–5.5% capacity outlook.
- How the $22.4 billion capital commitment schedule, lease obligations and debt maturities will be funded while sustaining liquidity and share repurchases.
- The recurring nature of the $50 million MileagePlus-related payment and $45 million Azul fair-value gain, and the significance of the quarter’s impairment charges.
- Potential effects of labor negotiations, below-investment-grade ratings, pledged assets and financing-related cost provisions on operating flexibility and funding costs.