United Continental Holdings, Inc. (United Airlines), Q2 2017 Form 10-Q
Business context and reporting period. The combined, unaudited filing covers the quarter and six months ended June 30, 2017, compared with the same 2016 periods. United Airlines is UAL’s principal wholly owned subsidiary and accounts for nearly all of UAL’s revenue, expenses, assets, liabilities and operating cash flows. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $10.000B | $9.396B | $18.420B | $17.591B |
| Operating income | $1.399B | $1.060B | $1.677B | $1.709B |
| Net income | $818M | $588M | $914M | $901M |
| Diluted EPS | $2.66 | $1.78 | $2.94 | $2.63 |
| Operating margin | 14.0% | 11.3% | 9.1% | 9.7% |
Q2 revenue rose 6.4% year over year, led by passenger revenue, up 6.4% to $8.622B, and cargo revenue, up 22.1% to $254M. Mainline passenger revenue increased 8.1%; regional passenger revenue declined 0.8%. Consolidated traffic rose 4.3%, capacity 4.2%, and load factor was unchanged at 83.5%. Passenger revenue per available seat mile increased 2.1% to 12.78 cents.
Q2 operating expenses increased 3.2% to $8.601B. Salaries and related costs rose 10.6% to $2.868B, primarily reflecting higher pay and benefits and 3.4% more average full-time equivalent employees. Fuel expense increased 16.1% to $1.669B, mainly due to higher fuel prices. Lower special charges than in 2016 also contributed to the Q2 operating income increase of 32.0% and net income increase of 39.1%.
For the first six months, revenue increased 4.7%, while expenses increased 5.4%; operating income declined 1.9% and net income rose 1.4%. Six-month PRASM rose 1.1%, but CASM increased 1.9% to 13.15 cents. Average fuel price per gallon increased 18.4%. The Pacific region experienced weaker PRASM, which management attributed to unfavorable supply and demand dynamics in China.
Cash flow, liquidity and debt
- Six-month operating cash flow was $2.108B, down from $3.746B in 2016. Investing cash outflow was $1.678B, including $1.780B of capital expenditures; financing cash outflow was $232M. Cash, cash equivalents and restricted cash ended the period at $2.501B.
- At June 30, unrestricted cash, cash equivalents and short-term investments totaled approximately $4.6B; reported unrestricted liquidity was $6.6B, including the fully undrawn $2.0B revolving credit facility. Restricted cash was $130M.
- Debt and capital lease obligations totaled approximately $13.2B, including $1.6B due within 12 months. The company reported approximately $12.1B of long-term debt, including current maturities, and $1.059B of capital lease obligations. Debt carrying amounts and obligations should be checked against the detailed debt note.
- Current liabilities exceeded current assets by approximately $5.3B. Management said about $7.2B of current liabilities represented advance ticket sales and frequent flyer deferred revenue, generally associated with future travel rather than cash outlays. The company stated this working-capital deficit did not adversely affect cash flows, liquidity or operations.
- The company reported compliance with debt covenants. Its credit agreement requires at least $2.0B of unrestricted liquidity and a minimum collateral-value ratio of 1.60 to 1.0. Credit ratings were below investment grade.
Material changes, outlook and risks
- Special charges: Q2 2017 operating special charges were $44M, versus $434M in Q2 2016; six-month charges were $95M versus $624M. The prior-year period included a $412M write-off of Newark slot-related intangible assets, as well as labor-agreement and Cleveland airport lease restructuring costs. 2017 charges mainly included severance: approximately 1,000 technicians and related employees elected a voluntary separation program, with associated costs expected to be paid mostly through early 2019.
- Capital plans: Capital commitments, primarily for aircraft and related items, totaled approximately $22.0B, including $2.1B due in the second half of 2017. Firm aircraft orders extend through 2027. Financing may be required to meet aircraft and other capital commitments.
- Guidance: Management expected full-year 2017 consolidated capacity growth of 2.5% to 3.5% year over year; domestic capacity growth of 3.5% to 4.5% and international growth of 1.0% to 2.0%. The filing did not provide a specific earnings forecast. Management described initiatives aimed at incremental value by 2020 versus 2015, including fleet renewal and upgauging, revenue management, cost control, schedule improvements and MileagePlus enhancements.
- Fuel exposure: The company had no fuel hedging contracts outstanding at June 30 and said its current strategy was not to hedge fuel consumption. It estimated that a $1 per barrel change in crude oil would change 2017 fuel expense by approximately $95M.
- Other risks and contingencies: The filing identifies significant fixed obligations, pension funding needs, aircraft and lease commitments, labor relations, fuel and financing costs, demand and competitive pressures, operational disruption, cybersecurity, regulatory matters and global economic and political conditions as risks. United guaranteed approximately $1.9B of tax-exempt special facilities revenue bonds and $163M of regional-carrier aircraft mortgage debt. It also disclosed non-U.S. tax-change and lender increased-cost provisions on certain financings.
- Accounting changes: The company expected revenue standard Topic 606 adoption in 2018 to change classification of certain ancillary fees and timing of ticket change-fee recognition, without a material earnings impact. It expected lease standard Topic 842 to significantly increase balance-sheet assets and obligations, but not materially affect earnings or cash flow.
Important facts for investors to verify
- Whether Q2 revenue and margin improvement is sustainable after accounting for the prior-year Newark impairment and other unusually high 2016 special charges.
- How higher fuel prices, labor costs, maintenance spending and planned capacity growth affect future unit costs and profitability.
- Whether the $6.6B liquidity figure, including the undrawn revolver, remains sufficient alongside $13.2B of debt and capital lease obligations and the $22.0B capital commitment schedule.
- The drivers of the sharp year-over-year decline in six-month operating cash flow, including working-capital movements and pension contributions.
- Exposure to China market conditions, labor negotiations, below-investment-grade ratings, aircraft financing needs and the company’s decision not to hedge fuel.
- Details of pending legal proceedings and risk factors referenced from the 2016 Form 10-K; this filing text refers investors to that report rather than reproducing them.