United Airlines Holdings, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited quarter ended March 31, 2019. United Airlines, Inc. is UAL’s wholly owned principal subsidiary and accounts for nearly all consolidated revenue, expenses, assets, liabilities, and operating cash flow. The company operates domestic and international passenger and cargo services. Comparisons below are with Q1 2018; prior-period figures were adjusted for adoption of the lease accounting standard.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $9.589 billion | $9.032 billion | +6.2% |
| Passenger revenue | $8.725 billion | $8.149 billion | +7.1% |
| Operating income | $495 million | $262 million | +88.9% |
| Net income | $292 million | $145 million | +101.4% |
| Diluted EPS | $1.09 | $0.51 | +114% |
| Operating cash flow | $1.915 billion | $1.709 billion | +$206 million |
| Capital expenditures | $1.609 billion | $944 million | +$665 million |
- Operating margin was approximately 5.2%, versus 2.9%; net margin was approximately 3.0%, versus 1.6%.
- Operating expenses rose 3.7% to $9.094 billion, slower than revenue growth. Salaries and related costs increased 5.4%, fuel expense 3.0%, and regional capacity purchase costs 9.2%; maintenance and aircraft rent declined.
- Traffic increased 6.5% and capacity 5.9%; load factor was 80.9%, up 0.5 percentage points. PRASM rose 1.1%. Average fuel price fell 2.8% to $2.05 per gallon.
- Net cash used in investing activities was $1.580 billion and net cash used in financing activities was $183 million. Cash, cash equivalents, and restricted cash ended the quarter at $1.951 billion.
Balance sheet and liquidity
- At March 31, 2019, UAL reported $4.1 billion of unrestricted cash, cash equivalents, and short-term investments, plus $103 million of restricted cash. The full $2.0 billion revolving credit facility was available.
- Long-term debt was $13.935 billion; finance lease obligations were $369 million. Management cited approximately $14.3 billion of debt and finance lease obligations, including $1.3 billion due within 12 months. Operating lease liabilities totaled $5.784 billion.
- Current liabilities exceeded current assets by approximately $7.7 billion. Management said this working-capital deficit was not expected to adversely affect liquidity or operations, noting about $8.4 billion of advance-ticket and frequent-flyer deferred revenue that largely represents future travel obligations rather than cash outlays.
- Q1 capital spending was funded alongside $646 million of long-term debt issuance; United recorded $738 million of proceeds from newly established equipment trust certificate financing. UAL repurchased 6.3 million shares for approximately $527 million, with about $1.2 billion remaining under its repurchase authorization.
Material changes, outlook, and risks
- Revenue and earnings: Passenger revenue growth was supported principally by higher domestic traffic and higher yield and traffic in Pacific and Latin markets. Operating income increased by $233 million. Higher interest expense, partly associated with aircraft financing and lease reclassification, and lower mark-to-market gains offset some operating improvement.
- 737 MAX grounding: Following the FAA’s March 13, 2019 emergency order, United grounded its 14 737 MAX 9 aircraft. The company described the impact through quarter-end as modest, but the duration of the grounding, replacement-aircraft availability, return-to-service conditions, and potential effects on deliveries could increase operational and financial impacts. The filing says planned 737 MAX deliveries could be affected.
- Plans and sensitivity: Management’s stated 2019 priorities were operational reliability and customer service, domestic network growth, and investment in employees and the product. No specific earnings or revenue guidance is provided in the filing text. A $1-per-barrel change in crude oil price was estimated to change annual fuel expense by approximately $104 million, based on projected 2019 consumption.
- Commitments and labor: Capital commitments totaled approximately $23.7 billion, including aircraft, related engines, improvements, and other capital items. Financing may be needed to meet these commitments. The pilots’ collective bargaining agreement became amendable February 1, 2019, and negotiations were ongoing; negotiations with catering employees began in March.
- Other notable items: The company adopted ASC 842 leases on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; 2018 comparisons were adjusted. Q1 operating special charges were $18 million, down from $40 million. The filing also discloses a $456 million Synergy term loan and a guarantee with a maximum possible combined put and guarantee amount of $217 million. Credit ratings were below investment grade; the company was in compliance with debt covenants.
- Risks: Management identified fuel-price volatility, economic and geopolitical conditions, travel demand, competition, labor relations, operational and technology disruptions, aircraft and supplier availability, financing access, and liquidity among factors that could cause actual results to differ. It stated that there had been no material changes in market risk from its 2018 annual report.
Important facts for investors to verify
- Subsequent updates on the 737 MAX grounding, replacement capacity, return-to-service timing, and aircraft delivery schedule.
- Whether passenger revenue, load factor, and unit revenue trends persisted as capacity expanded.
- Fuel prices and expense sensitivity, alongside labor-cost increases and unresolved contract negotiations.
- Liquidity and financing needs relative to aircraft commitments, debt maturities, lease obligations, and below-investment-grade ratings.
- The continued pace of share repurchases relative to capital spending and debt issuance.
- Potential valuation and credit exposure associated with the Synergy loan, AVH-related assets, and related guarantee.