United Continental Holdings, Inc. (United Airlines, Inc.) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. The combined filing reports UAL and its wholly owned airline subsidiary, United; their operating results are substantially the same.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $9.878B | $9.913B | $28.298B | $27.504B |
| Operating income | $1.092B | $1.624B | $2.769B | $3.333B |
| Net income | $637M | $965M | $1.551B | $1.866B |
| UAL diluted EPS | $2.12 | $3.01 | $5.04 | $5.57 |
| Operating margin | 11.1% | 16.4% | 9.8% | 12.1% |
Margins are calculated from reported revenue and operating income. Q3 revenue slipped 0.4%, while operating expenses rose 6.0%; operating income fell 32.8% and net income fell 34.0%. For the first nine months, revenue grew 2.9%, but expenses increased 5.6%; operating income and net income each declined about 17%.
- Revenue and operations: Q3 passenger revenue declined 0.9% to $8.528B. Traffic rose 1.7%, capacity rose 3.0%, load factor fell 1.1 percentage points to 84.4%, and passenger revenue per available seat mile (PRASM) fell 3.7%. Cargo revenue increased 14.7% to $257M. For the nine months, passenger revenue rose 2.7% and cargo revenue rose 16.8%.
- Costs: Q3 fuel expense increased $206M (12.9%), with average fuel price per gallon up 11.8%. Salaries and related costs rose 7.1%; management cited higher pay and benefits and 2.6% more average full-time-equivalent employees. Nine-month fuel expense rose 18.3% and salaries rose 8.2%.
- Cash flow and investment: Nine-month operating cash flow was $2.685B, down from $4.884B. Capital expenditures were $2.900B versus $2.343B, leaving operating cash flow less capex of negative $215M versus positive $2.541B. Cash, cash equivalents and restricted cash totaled $1.979B at period-end.
- Liquidity and debt: Unrestricted liquidity was $6.3B, including $4.3B in cash, cash equivalents and short-term investments and the fully available $2.0B revolving facility. Reported debt and capital lease obligations were approximately $13.9B, including $1.6B due within 12 months. Current liabilities exceeded current assets by about $5.2B; management said much of the deficit reflects advance ticket sales and frequent-flyer deferred revenue, not near-term cash outlays. The company was in compliance with debt covenants.
- Capital returns: UAL repurchased about 8.3M shares for approximately $0.6B in Q3 and 18M shares for $1.3B in the first nine months. Approximately $0.6B remained under its share-repurchase authorization at September 30.
Material changes and unusual items
- Severe weather in southeast Texas, Florida and parts of the Caribbean led to approximately 8,300 canceled flights. Management estimated a $185M reduction in Q3 pretax income and a $210M impact on passenger revenue.
- Q3 operating income also faced lower passenger revenue per seat mile and higher fuel and labor costs. Domestic PRASM was down 4.4%; Pacific PRASM was down 10.4%, which the company attributed to unfavorable supply and demand in China. Management cited severe weather, Basic Economy pricing and ultra-low-cost-carrier competition as domestic pressures.
- Nine-month special charges were $145M versus $669M in 2016. The prior-year period included a $412M impairment of Newark slot-related intangible assets; 2017 included $101M of severance and benefit costs and a $15M intangible-asset impairment. Q3 special charges were $50M versus $45M.
- The company had no fuel-hedging contracts outstanding at September 30 and said its current strategy was not to hedge fuel, while continuing to review that strategy. It estimated that a $1-per-barrel change in crude oil would change 2017 annual fuel expense by about $95M.
Outlook, commitments and risks
- For full-year 2017, management expected consolidated capacity growth of approximately 3.5% year over year: 4.5% domestic and 2.0% international. The filing does not provide a clear full-year earnings or revenue forecast.
- Management’s longer-term initiatives include fleet renewal and upgauging, customer segmentation, revenue-management improvements, cost management, schedule quality and MileagePlus enhancements. It also emphasized reliability and operating efficiency.
- Aircraft and related capital commitments totaled approximately $22.0B, with deliveries scheduled through 2027. Future capacity-purchase-agreement payments totaled approximately $12.0B, excluding variable pass-through costs. These commitments, financing needs and fixed obligations are significant liquidity considerations.
- UAL and United had below-investment-grade credit ratings (BB- from S&P and BB from Fitch for both; Ba2 from Moody’s for UAL). The company cautioned that downgrades could limit financing availability or increase its cost.
- Other disclosed risks include volatile fuel prices, competitive pricing and demand, weather and operational disruptions, labor relations, financing and liquidity, aircraft commitments, regulatory or legal matters, technology and cybersecurity failures, and global economic or political conditions. The filing reported no material change in market risk from the 2016 Form 10-K.
- Accounting outlook: adoption of revenue standard Topic 606 was planned for January 1, 2018 using full retrospective application. The company expected about $2.0B of 2016 ancillary fees to be reclassified from other operating revenue to passenger revenue and did not expect a material earnings impact. Lease standard Topic 842 was expected to significantly increase recognized balance-sheet assets and obligations, but not materially affect results or cash flows.
Important facts for investors to verify
- Whether weather-related disruption and the estimated $185M pretax impact were isolated, and whether operating performance recovered afterward.
- Whether passenger yields, PRASM and load factor improved amid planned capacity growth and competitive pressure.
- How higher fuel, labor, maintenance and fleet costs affect margins and cash generation; the company had no outstanding fuel hedges.
- How the $22.0B capital commitment, debt maturities and aircraft financing affect liquidity, leverage and covenant headroom.
- Whether share repurchases continue to be appropriate given negative nine-month operating cash flow less capital expenditures and remaining commitments.