United Airlines Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. UAL is the holding company for United Airlines, Inc.; the combined filing reports substantially the same airline operations and financial position.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenue | $7.979 billion | $9.589 billion; down 16.8% |
| Passenger revenue | $7.065 billion | $8.725 billion; down 19.0% |
| Operating income (loss) | $(972) million | $495 million |
| Net income (loss) | $(1.704) billion | $292 million |
| Diluted earnings (loss) per share | $(6.86) | $1.09 |
| Operating cash flow | $63 million | $1.915 billion |
| Capital expenditures | $1.959 billion | $1.609 billion |
Operating margin was approximately negative 12.2%, versus positive 5.2% a year earlier; net margin was approximately negative 21.4%, versus positive 3.0%. Operating expenses fell only 1.6%, less than the revenue decline. Lower fuel expense (down 14.7%) partly offset higher salaries, regional capacity costs, depreciation and special charges. Traffic fell 18.6%, capacity 7.2%, and load factor fell to 70.9% from 80.9%.
At March 31, UAL had $3.442 billion cash and cash equivalents and $1.779 billion short-term investments, or $5.2 billion unrestricted liquidity. Operating cash generation weakened sharply. Long-term debt was $17.253 billion, including current maturities; debt plus finance-lease obligations totaled approximately $17.7 billion, with $4.1 billion due within 12 months. Current liabilities exceeded current assets by approximately $8.2 billion. The company reported $2.0 billion of available revolving credit capacity and compliance with debt covenants at quarter-end.
Material changes and unusual items
- COVID-19-related travel restrictions and demand deterioration drove the revenue decline and quarterly loss. Passenger traffic declined in every reported region; Pacific traffic was down 36.8%.
- Pre-tax special charges, credit losses and unrealized investment losses totaled approximately $1.079 billion. These included a $697 million expected credit loss allowance for the BRW loan and related guarantee, $319 million of investment losses (primarily the Azul investment and AVH derivatives), and a $50 million impairment of China route assets.
- Advance ticket sales were $5.309 billion at quarter-end, up from $4.819 billion at year-end. The company could not estimate how much prior-year ticket liabilities would become revenue versus refunds or travel credits.
- Share repurchases continued in January and February, totaling approximately 4.3 million shares for about $0.3 billion; the program was suspended February 24 and terminated April 24, 2020.
Outlook, management actions and risks
- Management expected full-year 2020 results to be materially affected and a full-year net loss. Its planning assumption was suppressed demand for the remainder of 2020 and likely into 2021; it said the outlook was highly uncertain.
- Scheduled capacity was cut approximately 80% for April and 90% for May, relative to 2019, with similar cuts expected for June. Management planned rolling 60-day schedule reviews. Expected average daily cash burn for Q2 was $40–$45 million, excluding specified new debt proceeds, CARES Act payroll grants and equity issuance.
- Actions included reducing planned capital and operating expenditures, grounding aircraft, workforce and executive compensation measures, and additional financing. The company reported approximately $9.6 billion of cash, short-term investments and undrawn amounts as of April 29, including the revolver.
- After quarter-end, United entered into a CARES Act Payroll Support Program agreement for about $5.0 billion: approximately $3.5 billion in grants and $1.5 billion in a 10-year note. It received about $2.5 billion on April 21. The assistance carries restrictions, including on dividends, share repurchases, scheduled service, employment levels through September 30, 2020, and executive compensation. UAL also applied to borrow up to approximately $4.5 billion under the CARES Act loan program.
- After quarter-end, UAL raised approximately $1.1 billion through an equity offering of 43.175 million shares. Additional risks include refund demands and possible credit-card processor collateral requirements, substantial fixed obligations and aircraft commitments ($25.1 billion total capital commitments reported), financing and covenant risks, the 737 MAX grounding and delivery uncertainty, and exposure to Avianca/BRW credit and foreclosure outcomes.
Most important facts for investors to verify
- Whether demand, load factor and revenue recover, and how actual capacity reductions and cash burn compare with management’s assumptions.
- Liquidity after refunds, operating cash use, debt maturities, collateral requirements and compliance with financing covenants.
- Terms and receipt of CARES Act support and any further borrowing, including associated restrictions, warrants and dilution.
- Realization of the BRW loan collateral and exposure to the related guarantee; valuation of Azul and other investments.
- Potential further asset impairments and the timing or cost effects of aircraft commitments and the 737 MAX grounding.