United Airlines Holdings, Inc. (UAL) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. UAL is the holding company for United Air Lines, Inc.; the filing presents both companies’ consolidated results, which are substantially similar.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $5.161 billion | $4.018 billion | $9.402 billion | $7.709 billion |
| Operating income (loss) | $434 million | $107 million | $503 million | $(175) million |
| Net income (loss) | $273 million | $28 million | $191 million | $(354) million |
| Operating margin | 8.4% | 2.7% | 5.3% | (2.3)% |
| UAL diluted EPS | $1.29 | $0.19 | $0.96 | $(2.44) |
| Operating cash flow | Not separately provided for Q2 | $1.356 billion | $822 million |
- Q2 revenue rose 28.4%; first-half revenue rose 22.0%. Passenger revenue, cargo and regional affiliate revenue all increased. Management cited improved economic conditions, stronger business and premium-cabin demand, higher yields, and capacity discipline.
- For the first half, consolidated traffic increased 3% while capacity declined 1%; yield increased 18%. Q2 traffic rose 4% on 1% higher capacity, with yield up 24%.
- Higher fuel costs were a major offset: Q2 aircraft fuel expense rose 80.2% to $1.198 billion; first-half expense rose 47.3% to $2.156 billion. Interest expense also increased, to $171 million in Q2 and $349 million in the first half.
- Q2 results included $106 million of impairment, merger-related and special charges. First-half charges were $124 million. Q2 included a $73 million aircraft impairment and $28 million of merger costs.
Liquidity, debt and balance sheet
- At June 30, UAL reported $4.906 billion in cash and cash equivalents and $250 million in restricted cash, versus $3.042 billion and $341 million, respectively, at year-end 2009. First-half cash increased $1.864 billion.
- First-half cash flow: $1.356 billion provided by operations, $95 million used in investing, and $603 million provided by financing. Operating cash flow benefited partly from an $808 million increase in advance ticket sales.
- UAL reported $7.696 billion of debt, including $1.415 billion maturing within one year, plus $1.478 billion of capital lease obligations. United’s corresponding debt was $7.351 billion, including current maturities.
- Current assets were $6.983 billion and current liabilities were $8.573 billion; UAL reported a $2.756 billion stockholders’ deficit. Debt fair value was $8.234 billion versus a $7.696 billion carrying amount.
- The company was in compliance with its credit-facility covenants at June 30, including the required 1.4-to-1.0 fixed-charge coverage ratio. Management warned future compliance depends on revenue, fuel costs and other factors. Ratings remained below investment grade, and only about $200 million of assets were unencumbered.
Material changes, outlook and risks
- UAL and Continental agreed to a merger of equals on May 2, 2010, with UAL expecting completion in Q4 2010, subject to shareholder approvals, regulatory clearances and other conditions. Continental shareholders would receive 1.05 UAL shares per share. Merger-related costs and integration risks remain; the agreement provides for a potential $175 million termination fee under specified circumstances.
- A change in frequent-flyer breakage estimates and accounting methodology increased passenger revenue by an estimated $75 million in Q2 and $140 million in the first half; management expected similar amounts in the second half of 2010. This is a material contributor to reported earnings and revenue growth.
- Fuel hedges covered approximately 72% of expected remaining 2010 fuel consumption and 14% of expected 2011 consumption at June 30. Fuel price swings, hedge settlements, collateral requirements and hedge-accounting effectiveness could affect earnings and liquidity.
- Management stated it expected operating cash flows and unrestricted cash to meet near-term needs, but identified fuel prices, demand, financing access, debt covenants and liquidity as risks. The filing provides no specific earnings or revenue guidance.
- Capital purchase commitments totaled $7.8 billion, primarily for aircraft, with $7.2 billion payable after 2014. The company also disclosed a potential claim exceeding $100 million under a multiyear services agreement, labor negotiations that could materially affect results, and an unresolved European air-cargo competition investigation for which no reserve was recorded.
- Controls and disclosure procedures were deemed effective as of June 30. The filing notes new internal controls for fuel-hedge accounting, whose operating effectiveness was to be assessed at year-end.
Important facts for investors to verify
- How much of the earnings improvement reflects durable passenger demand and pricing versus the frequent-flyer accounting estimate change.
- Fuel-price sensitivity, hedge settlements and collateral needs, and the company’s ability to preserve covenant compliance and liquidity.
- Merger approval and closing conditions, expected transaction and integration costs, and the potential effects of labor and merger-related litigation.
- Funding and timing for the $7.8 billion of capital commitments, alongside debt maturities and the company’s limited unencumbered collateral.
- Developments in the services-agreement claim, European competition investigation, and other legal, labor and environmental contingencies.