United Continental Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The filing is a combined report for United Continental Holdings, Inc. (UAL) and its wholly owned subsidiary, United Airlines, Inc.; United accounts for nearly all of UAL’s operations. The filing’s registrant name is United Continental Holdings, not United Airlines Holdings.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $8.195 billion | $8.608 billion | Down 4.8% |
| Passenger revenue | $6.990 billion | $7.420 billion | Down 5.8% |
| Operating income | $649 million | $741 million | Down 12.4% |
| Operating margin | 7.9% | 8.6% | Down 0.7 percentage points |
| Net income | $313 million | $508 million | Down 38.4% |
| Diluted EPS | $0.88 | $1.32 | Down $0.44 |
| Non-GAAP net income and diluted EPS | $435 million; $1.23 | $582 million; $1.52 | Down year over year |
| Operating cash flow | $1.199 billion | $1.825 billion | Down $626 million |
Amounts are in U.S. dollars. Non-GAAP results exclude special charges and reflect hedge program adjustments; they are not GAAP measures.
- Fuel expense fell 34.7% to $1.218 billion, largely reflecting a 34.1% decrease in average fuel price per gallon. Salaries and related costs rose 8.2% to $2.490 billion, depreciation and amortization increased 11.7% to $479 million, and special charges increased to $190 million from $64 million.
- Passenger traffic increased 0.3%, while capacity increased 1.8%; load factor declined to 79.9% from 81.1%. PRASM fell 7.4% and yield fell 6.1%. Cargo revenue declined 19.8%; other operating revenue rose 6.9%, primarily reflecting the updated Chase co-branded card agreement.
- Operating cash flow was $1.2 billion; capital expenditures were $816 million. Cash and cash equivalents were $1.795 billion at quarter end, down from $3.006 billion at December 31, 2015. Cash plus short-term investments totaled about $4.0 billion, and reported unrestricted liquidity, including the undrawn revolver, was $5.3 billion.
- Debt and capital lease obligations totaled approximately $11.6 billion, including $1.4 billion due within 12 months. Long-term debt was $9.472 billion and long-term capital lease obligations were $725 million. The $1.35 billion revolving credit facility was fully available; the company reported compliance with debt covenants.
- Current liabilities exceeded current assets by approximately $6.2 billion. Management noted that about $7.1 billion of current liabilities were advance ticket sales and frequent flyer deferred revenue, generally associated with future travel rather than equivalent near-term cash payments.
Material changes and notable items
- Net income included $181 million of income tax expense, versus $3 million a year earlier. The 2015 effective tax rate was unusually low following the valuation allowance against deferred tax assets; the allowance was substantially released in 2015. The 2016 effective tax rate was 36.6%, compared with 0.5% in Q1 2015.
- Q1 2016 special charges included $100 million for labor agreement-related bonus payments and $74 million for restructuring the Cleveland airport lease, plus $8 million of severance and benefit costs and other charges. Total special charges were $126 million net of tax.
- UAL repurchased 27 million shares for approximately $1.5 billion during the quarter; $948 million remained under its repurchase program at March 31. The repurchases contributed to the decline in reported cash and stockholders’ equity.
- Operating cash flow declined partly because of approximately $700 million in profit-sharing payments (versus about $200 million a year earlier) and a temporary increase in credit card receivables of approximately $200 million, resolved in April 2016.
Outlook, risks and contingencies
- Management expected full-year 2016 consolidated capacity growth of 1%–2%, and full-year CASM excluding profit sharing, third-party business expense, fuel and special charges to rise 2%–3%. Q2 2016 pre-tax margin guidance, excluding special charges, was 13%–15%. The company said it could not project these measures on a GAAP basis because future special charges were not determinable.
- Management said pilots’ contract extension costs added approximately 1.5 percentage points to non-fuel unit costs in Q1 and for full-year 2016. Negotiations continued for joint flight attendant and technician agreements; significant pay and benefit increases could materially affect results.
- Fuel prices remain volatile. Management estimated that a $1-per-barrel crude oil price change would alter 2016 annual fuel expense by approximately $93 million. The company had hedged about 12% of projected remaining 2016 fuel requirements, or 378 million gallons; fuel derivatives were a net liability of $32 million at quarter end.
- Aircraft and related capital commitments totaled approximately $23.2 billion, including $2.9 billion for the last nine months of 2016. United expected to retire its Boeing 747 fleet from scheduled service by the end of 2018.
- In April 2016, the FAA announced Newark would move from Level 3 slot-controlled status to Level 2 schedule-facilitated status effective October 30, 2016. The company was assessing possible effects on its $412 million Newark slots intangible asset and on slots pledged as collateral; the impact was not yet determined.
- The filing identifies substantial fixed obligations, below-investment-grade credit ratings, labor negotiations, fuel and currency exposure, capital commitments, and financing access as risks. It also reports approximately $1.9 billion of guarantees on tax-exempt airport revenue bonds.
Important facts for investors to verify
- Whether subsequent passenger yields and PRASM stabilize after their Q1 declines, and whether capacity growth supports returns.
- How actual non-fuel unit costs and pre-tax margins compare with management’s guidance, including labor agreement costs and any additional special charges.
- Whether operating cash flow and unrestricted liquidity remain sufficient amid share repurchases, aircraft investment, debt obligations and capital commitments.
- The eventual financial, asset-valuation and collateral effects of the Newark slot designation change.
- Fuel-price movements, hedge coverage and settlements, and the outcome and cost of outstanding labor negotiations.