United Airlines Holdings, Inc. (UAL) — Q3 2018 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2018; filed October 17, 2018. UAL is the holding company for United Airlines, Inc. (United). The combined filing reports substantially the same operating results for both entities. Unless noted, financial amounts below are in millions of dollars. Airline results are seasonal, with the second and third quarters historically stronger.
Financial and operating highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $11,003 | $9,899 | $30,812 | $28,333 |
| Operating income | $1,203 | $1,138 | $2,640 | $2,895 |
| Net income | $836 | $645 | $1,667 | $1,565 |
| UAL diluted EPS | $3.06 | $2.15 | $5.99 | $5.09 |
| Operating margin | 10.9% | 11.5% | 8.6% | 10.2% |
Q3 revenue rose 11.2%; passenger revenue increased 11.6% to $10.1 billion. Traffic grew 7.2%, capacity 5.1%, and load factor rose 1.6 points to 86.0%. PRASM increased 6.1% and yield 4.1%. Nine-month revenue increased 8.7%, while operating income fell 8.8%; traffic rose 6.2%, capacity 4.6%, and load factor improved 1.3 points to 83.9%.
Fuel was the principal cost pressure: Q3 expense increased $763 million (42.2%) to $2.572 billion, reflecting a 36.5% increase in average fuel price per gallon and higher capacity. Nine-month fuel expense rose $1.889 billion (37.5%). Q3 operating expenses increased 11.9%, slightly faster than revenue. Q3 net income benefited from income tax expense declining to $225 million from $348 million; effective tax rates were 21.2% and 35.0%, respectively.
For the first nine months, operating cash flow was $5.080 billion versus $2.685 billion. The filing attributes much of the increase to a $2.6 billion year-over-year working-capital benefit. Capital expenditures were $2.592 billion; net cash used in investing activities was $2.603 billion and net cash used in financing activities was $1.342 billion. Cash, cash equivalents and restricted cash ended at $2.726 billion.
At September 30, UAL reported $4.9 billion of unrestricted cash, cash equivalents and short-term investments and had its $2.0 billion revolving facility fully available. Debt was $13.128 billion, with $1.0 billion of debt and capital-lease obligations due within 12 months; total debt and capital-lease obligations were approximately $14.4 billion. Current liabilities exceeded current assets by approximately $5.0 billion, largely because of advance ticket sales and frequent-flyer deferred revenue, which the company says are principally obligations to provide future travel rather than cash payments.
Material changes and unusual items
- Q3 operating income increased $65 million year over year, but nine-month operating income decreased $255 million as expense growth exceeded revenue growth. Nine-month net income nevertheless rose 6.5%, supported in part by lower income tax expense.
- UAL repurchased 14.8 million shares for $1.0 billion during the first nine months; approximately $2.0 billion remained under its repurchase authorization at quarter-end.
- The company recorded a $105 million impairment charge to write off the value of Brazil route-authority intangibles after ratification of the U.S.–Brazil open-skies agreement. Nine-month asset impairments totaled $145 million. It also recorded a $61 million nine-month mark-to-market loss on certain equity investments, including its Azul investment; Q3 included a $29 million gain.
- The company adopted revenue-recognition and pension-cost presentation standards retrospectively. Revenue-standard adoption primarily reclassified certain ancillary fees into passenger revenue and deferred ticket-change fees until travel; the company said adoption did not affect cash flows. Comparatives are adjusted.
Outlook, management commentary and risks
Management expected 2018 consolidated available seat miles to grow approximately 4.9% year over year, mainly in domestic markets and mid-continent hubs. It cited hub connectivity and use of non-peak periods as initiatives intended to support profitability. A $1 change in crude oil price per barrel was estimated to change annual fuel expense by approximately $98 million, based on projected 2018 consumption.
United had approximately $23.8 billion of capital commitments, primarily for aircraft and related expenditures, extending beyond 2022; financing may be required. It had firm commitments for aircraft deliveries through 2027. The company also had approximately $12.9 billion of scheduled future minimum facility and other operating-lease payments. The new lease accounting standard, planned for adoption January 1, 2019, was expected to significantly increase reported balance-sheet assets and liabilities, but not materially affect results or cash flows.
Key risks highlighted include volatile fuel prices, travel demand and competition, labor costs and labor relations, operational and regional-network disruptions, financing availability and costs, substantial debt and capital commitments, regulatory and legal matters, cybersecurity and technology failures, and global political or economic conditions. UAL and United reported compliance with debt covenants and effective disclosure controls. Their credit ratings were below investment grade. The filing states there were no material changes in market risk from the 2017 Form 10-K.
Most important facts for investors to verify
- Whether revenue and operating performance can keep pace with fuel, labor, regional flying and other cost increases.
- How much of the increase in nine-month operating cash flow is repeatable, given the disclosed working-capital contribution.
- Fuel-price exposure and the effect of changes in crude prices on expense and margins.
- Funding plans and financing needs for aircraft commitments, lease obligations, and scheduled debt maturities.
- Execution of planned capacity growth and hub initiatives, and the realized returns from share repurchases.
- Potential further effects of the Brazil route-authority impairment, investment valuation changes, and the transition to the new lease accounting standard.