UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20162017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number | Exact Name of Registrant as Specified in its Charter, Principal Executive Office Address and Telephone Number | State of Incorporation | I.R.S. Employer Identification No. | |||
001-06033 | United Continental Holdings, Inc. 233 South Wacker Drive, Chicago, Illinois 60606 (872)825-4000 | Delaware | 36-2675207 | |||
001-10323 | United Airlines, Inc. 233 South Wacker Drive, Chicago, Illinois 60606 (872)825-4000 | Delaware | 74-2099724 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
United Continental Holdings, Inc. | Yes | |||||
United Airlines, Inc. | Yes |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
United Continental Holdings, Inc. | Yes | |||||
United Airlines, Inc. | Yes |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
United Continental Holdings, Inc. | Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company ☐ | |||||
United Airlines, Inc. | Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company ☐ |
IndicateIf an emerging growth company, indicate by check mark whetherif the registrant is a shell company (as defined in Rule 12b-2has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).Act.
United Continental Holdings, Inc. | Yes | |||||
United Airlines, Inc. | Yes |
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
United Continental Holdings, Inc. | Yes ☐ No ☒ | |||||
United Airlines, Inc. | Yes ☐ No ☒ |
The number of shares outstanding of each of the issuer’s classes of common stock as of April 11, 201612, 2017 is shown below:
United Continental Holdings, Inc. | 309,656,006 shares of common stock ($0.01 par value) | |||
United Airlines, Inc. | 1,000 (100% owned by United Continental Holdings, Inc.) There is no market for United Airlines, Inc. common stock. |
OMISSION OF CERTAIN INFORMATION
This combined Quarterly Report on Form10-Q is separately filed by United Continental Holdings, Inc. and United Airlines, Inc. United Airlines, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.
United Continental Holdings, Inc.
United Airlines, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 20162017
Page | ||||||
PART I. FINANCIAL INFORMATION | ||||||
Item 1. | ||||||
United Continental Holdings, Inc.: | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
7 | ||||||
United Airlines, Inc.: | ||||||
8 | ||||||
9 | ||||||
10 | ||||||
12 | ||||||
Combined Notes to Condensed Consolidated Financial Statements (United Continental Holdings, Inc. and United Airlines, Inc.) | 13 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
PART II. OTHER INFORMATION | ||||||
Item 1. | 31 | |||||
Item 1A. | 31 | |||||
Item 2. | ||||||
Item 6. | ||||||
ITEM 1. | FINANCIAL STATEMENTS. |
UNITED CONTINENTAL HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In millions, except per share amounts)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Operating revenue: | ||||||||||||||||
Passenger—Mainline | $ | 5,577 | $ | 5,938 | $ | 5,831 | $ | 5,577 | ||||||||
Passenger—Regional | 1,413 | 1,482 | 1,343 | 1,413 | ||||||||||||
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Total passenger revenue | 6,990 | 7,420 | 7,174 | 6,990 | ||||||||||||
Cargo | 194 | 242 | 220 | 194 | ||||||||||||
Other operating revenue | 1,011 | 946 | 1,026 | 1,011 | ||||||||||||
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8,195 | 8,608 | |||||||||||||||
Total operating revenue | 8,420 | 8,195 | ||||||||||||||
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Operating expense: | ||||||||||||||||
Salaries and related costs | 2,490 | 2,301 | 2,661 | 2,490 | ||||||||||||
Aircraft fuel | 1,218 | 1,864 | 1,560 | 1,218 | ||||||||||||
Landing fees and other rent | 525 | 543 | 544 | 525 | ||||||||||||
Regional capacity purchase | 522 | 570 | 536 | 522 | ||||||||||||
Depreciation and amortization | 479 | 429 | 518 | 479 | ||||||||||||
Aircraft maintenance materials and outside repairs | 402 | 397 | 454 | 402 | ||||||||||||
Distribution expenses | 303 | 312 | 307 | 303 | ||||||||||||
Aircraft rent | 178 | 201 | 179 | 178 | ||||||||||||
Special charges (Note 10) | 190 | 64 | 51 | 190 | ||||||||||||
Other operating expenses | 1,239 | 1,186 | 1,332 | 1,239 | ||||||||||||
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7,546 | 7,867 | |||||||||||||||
Total operating expenses | 8,142 | 7,546 | ||||||||||||||
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Operating income | 649 | 741 | 278 | 649 | ||||||||||||
Nonoperating income (expense): | ||||||||||||||||
Interest expense | (159) | (173) | (150) | (159) | ||||||||||||
Interest capitalized | 14 | 12 | 23 | 14 | ||||||||||||
Interest income | 8 | 5 | 11 | 8 | ||||||||||||
Miscellaneous, net (Note 10) | (18) | (74) | (17) | (18) | ||||||||||||
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(155) | (230) | |||||||||||||||
Total nonoperating expense, net | (133) | (155) | ||||||||||||||
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Income before income taxes | 494 | 511 | 145 | 494 | ||||||||||||
Income tax expense | 181 | 3 | 49 | 181 | ||||||||||||
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Net income | $ | 313 | $ | 508 | $ | 96 | $ | 313 | ||||||||
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Earnings per share, basic | $ | 0.88 | $ | 1.33 | $ | 0.31 | $ | 0.88 | ||||||||
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Earnings per share, diluted | $ | 0.88 | $ | 1.32 | $ | 0.31 | $ | 0.88 | ||||||||
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
UNITED CONTINENTAL HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Net income | $ | 313 | $ | 508 | $ | 96 | $ | 313 | ||||||||
Other comprehensive income (loss), net change related to: | ||||||||||||||||
Fuel derivative financial instruments | 78 | 86 | ||||||||||||||
Employee benefit plans | (24) | 2 | ||||||||||||||
Investments and other | — | 14 | ||||||||||||||
Fuel derivative financial instruments, net of taxes | 1 | 78 | ||||||||||||||
Employee benefit plans, net of taxes | (8) | (24) | ||||||||||||||
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54 | 102 | |||||||||||||||
Total other comprehensive income (loss), net | (7) | 54 | ||||||||||||||
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Total comprehensive income, net | $ | 367 | $ | 610 | $ | 89 | $ | 367 | ||||||||
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
UNITED CONTINENTAL HOLDINGS, INC.
(In millions, except shares)
(Unaudited) March 31, 2016 | December 31, 2015 | (Unaudited) March 31, 2017 | December 31, 2016 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,795 | $ | 3,006 | $ | 2,164 | $ | 2,179 | ||||||||
Short-term investments | 2,177 | 2,190 | 2,215 | 2,249 | ||||||||||||
Receivables, less allowance for doubtful accounts (2016—$11; 2015—$18) | 1,581 | 1,128 | ||||||||||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2016—$249; 2015—$235) | 759 | 738 | ||||||||||||||
Receivables, less allowance for doubtful accounts (2017—$10; 2016—$10) | 1,429 | 1,176 | ||||||||||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2017—$314; 2016—$295) | 900 | 873 | ||||||||||||||
Prepaid expenses and other | 912 | 766 | 1,016 | 832 | ||||||||||||
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7,224 | 7,828 | |||||||||||||||
Total current assets | 7,724 | 7,309 | ||||||||||||||
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Operating property and equipment: | ||||||||||||||||
Owned— | ||||||||||||||||
Flight equipment | 24,348 | 23,728 | 27,187 | 25,873 | ||||||||||||
Other property and equipment | 4,715 | 4,542 | 5,887 | 5,652 | ||||||||||||
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29,063 | 28,270 | |||||||||||||||
Total owned property and equipment | 33,074 | 31,525 | ||||||||||||||
Less—Accumulated depreciation and amortization | (8,743) | (8,339) | (10,403) | (9,975) | ||||||||||||
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20,320 | 19,931 | |||||||||||||||
Total owned property and equipment, net | 22,671 | 21,550 | ||||||||||||||
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Purchase deposits for flight equipment | 866 | 788 | 922 | 1,059 | ||||||||||||
Capital leases— | ||||||||||||||||
Flight equipment | 1,497 | 1,527 | 1,247 | 1,319 | ||||||||||||
Other property and equipment | 331 | 332 | 342 | 331 | ||||||||||||
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1,828 | 1,859 | |||||||||||||||
Total capital leases | 1,589 | 1,650 | ||||||||||||||
Less—Accumulated amortization | (1,008) | (998) | (941) | (941) | ||||||||||||
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Total capital leases, net | 648 | 709 | ||||||||||||||
820 | 861 |
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22,006 | 21,580 | |||||||||||||||
Total operating property and equipment, net | 24,241 | 23,318 | ||||||||||||||
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Other assets: | ||||||||||||||||
Goodwill | 4,523 | 4,523 | 4,523 | 4,523 | ||||||||||||
Intangibles, less accumulated amortization (2016—$1,167; 2015—$1,144) | 4,112 | 4,136 | ||||||||||||||
Intangibles, less accumulated amortization (2017—$1,254; 2016—$1,234) | 3,612 | 3,632 | ||||||||||||||
Deferred income taxes | 1,800 | 2,037 | 598 | 655 | ||||||||||||
Restricted cash | 162 | 204 | 129 | 124 | ||||||||||||
Other, net | 546 | 553 | 618 | 579 | ||||||||||||
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Total other assets | 9,480 | 9,513 | ||||||||||||||
11,143 | 11,453 |
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Total assets | $ | 41,445 | $ | 40,140 | ||||||||||||
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$ | 40,373 | $ | 40,861 | |||||||||||||
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(continued on next page)
UNITED CONTINENTAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) March 31, 2016 | December 31, 2015 | (Unaudited) March 31, 2017 | December 31, 2016 | |||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Advance ticket sales | $ | 4,958 | $ | 3,753 | $ | 5,001 | $ | 3,730 | ||||||||
Accounts payable | 2,135 | 2,139 | ||||||||||||||
Frequent flyer deferred revenue | 2,098 | 2,117 | 2,120 | 2,135 | ||||||||||||
Accounts payable | 2,065 | 1,869 | ||||||||||||||
Accrued salaries and benefits | 1,822 | 2,350 | 1,569 | 2,307 | ||||||||||||
Current maturities of long-term debt | 1,295 | 1,224 | 716 | 849 | ||||||||||||
Current maturities of capital leases | 114 | 135 | 113 | 116 | ||||||||||||
Fuel derivative instruments | 32 | 124 | ||||||||||||||
Other | 996 | 842 | 1,008 | 1,010 | ||||||||||||
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13,380 | 12,414 | |||||||||||||||
Total current liabilities | 12,662 | 12,286 | ||||||||||||||
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Long-term debt | 9,472 | 9,673 | 11,178 | 9,918 | ||||||||||||
Long-term obligations under capital leases | 725 | 727 | 836 | 822 | ||||||||||||
Other liabilities and deferred credits: | ||||||||||||||||
Frequent flyer deferred revenue | 2,884 | 2,826 | 2,806 | 2,748 | ||||||||||||
Postretirement benefit liability | 1,879 | 1,882 | 1,608 | 1,581 | ||||||||||||
Pension liability | 1,469 | 1,488 | 1,851 | 1,892 | ||||||||||||
Advanced purchase of miles | 871 | 1,010 | 326 | 430 | ||||||||||||
Lease fair value adjustment, net | 336 | 359 | 256 | 277 | ||||||||||||
Other | 1,517 | 1,516 | 1,473 | 1,527 | ||||||||||||
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8,956 | 9,081 | |||||||||||||||
Total other liabilities and deferred credits | 8,320 | 8,455 | ||||||||||||||
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Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock | — | — | — | — | ||||||||||||
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 339,304,625 and 364,609,108 shares at March 31, 2016 and December 31, 2015, respectively | 4 | 4 | ||||||||||||||
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 311,130,231 and 314,612,744 shares at March 31, 2017 and December 31, 2016, respectively | 3 | 3 | ||||||||||||||
Additional capital invested | 7,956 | 7,946 | 6,562 | 6,569 | ||||||||||||
Retained earnings | 3,770 | 3,457 | 3,536 | 3,427 | ||||||||||||
Stock held in treasury, at cost | (3,113) | (1,610) | (816) | (511) | ||||||||||||
Accumulated other comprehensive loss | (777) | (831) | (836) | (829) | ||||||||||||
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Total stockholders’ equity | 8,449 | 8,659 | ||||||||||||||
7,840 | 8,966 |
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Total liabilities and stockholders’ equity | $ | 41,445 | $ | 40,140 | ||||||||||||
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$ | 40,373 | $ | 40,861 | |||||||||||||
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
UNITED CONTINENTAL HOLDINGS, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net cash provided by operating activities | $ | 1,199 | $ | 1,825 | $ | 547 | $ | 1,199 | ||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Capital expenditures | (816) | (210) | (691) | (816) | ||||||||||||
Purchases of short-term and other investments | (638) | (633) | (774) | (638) | ||||||||||||
Proceeds from sale of short-term and other investments | 653 | 762 | 810 | 653 | ||||||||||||
Proceeds from sale of property and equipment | 4 | 17 | ||||||||||||||
Investment in and loans to affiliates | (40) | — | — | (40) | ||||||||||||
Decrease in restricted cash | 26 | 19 | ||||||||||||||
Proceeds from sale of property and equipment | 17 | 17 | ||||||||||||||
Other | 1 | — | 8 | 1 | ||||||||||||
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Net cash used in investing activities | (797) | (45) | (643) | (823) | ||||||||||||
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Cash Flows from Financing Activities: | ||||||||||||||||
Repurchases of common stock | (258) | (1,392) | ||||||||||||||
Payments of long-term debt | (227) | (296) | (315) | (227) | ||||||||||||
Repurchases of common stock | (1,392) | (195) | ||||||||||||||
Proceeds from issuance of long-term debt | 42 | 100 | 755 | 42 | ||||||||||||
Principal payments under capital leases | (34) | (24) | (31) | (34) | ||||||||||||
Other, net | (2) | (15) | (65) | (2) | ||||||||||||
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Net cash used in financing activities | (1,613) | (430) | ||||||||||||||
Net cash provided (used) in financing activities | 86 | (1,613) | ||||||||||||||
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Net (decrease) increase in cash and cash equivalents | (1,211) | 1,350 | ||||||||||||||
Cash and cash equivalents at beginning of the period | 3,006 | 2,002 | ||||||||||||||
Net decrease in cash, cash equivalents and restricted cash | (10) | (1,237) | ||||||||||||||
Cash, cash equivalents and restricted cash at beginning of the period | 2,303 | 3,212 | ||||||||||||||
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Cash and cash equivalents at end of the period | $ | 1,795 | $ | 3,352 | ||||||||||||
Cash, cash equivalents and restricted cash at end of the period (a) | $ | 2,293 | $ | 1,975 | ||||||||||||
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Investing and Financing Activities Not Affecting Cash: | ||||||||||||||||
Property and equipment acquired through the issuance of debt | $ | 59 | $ | 599 | $ | 711 | $ | 59 | ||||||||
Airport construction financing | 9 | — | 21 | 9 | ||||||||||||
Operating lease conversions to capital lease | 7 | — | — | 7 | ||||||||||||
Exchanges of certain convertible notes for common stock | — | 201 |
(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheet:
Reconciliation of cash, cash equivalents and restricted cash: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,164 | $ | 1,795 | ||||
Restricted cash included in Prepaid expenses and other | — | 18 | ||||||
Other assets: | ||||||||
Restricted cash | 129 | 162 | ||||||
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Total cash, cash equivalents and restricted cash | $ | 2,293 | $ | 1,975 | ||||
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In millions)
Three Months Ended March 31, | Three Months EndedMarch 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Operating revenue: | ||||||||||||||||
Passenger—Mainline | $ | 5,577 | $ | 5,938 | $ | 5,831 | $ | 5,577 | ||||||||
Passenger—Regional | 1,413 | 1,482 | 1,343 | 1,413 | ||||||||||||
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Total passenger revenue | 6,990 | 7,420 | 7,174 | 6,990 | ||||||||||||
Cargo | 194 | 242 | 220 | 194 | ||||||||||||
Other operating revenue | 1,011 | 946 | 1,026 | 1,011 | ||||||||||||
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8,195 | 8,608 | |||||||||||||||
Total operating revenue | 8,420 | 8,195 | ||||||||||||||
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Operating expense: | ||||||||||||||||
Salaries and related costs | 2,490 | 2,301 | 2,661 | 2,490 | ||||||||||||
Aircraft fuel | 1,218 | 1,864 | 1,560 | 1,218 | ||||||||||||
Landing fees and other rent | 525 | 543 | 544 | 525 | ||||||||||||
Regional capacity purchase | 522 | 570 | 536 | 522 | ||||||||||||
Depreciation and amortization | 479 | 429 | 518 | 479 | ||||||||||||
Aircraft maintenance materials and outside repairs | 402 | 397 | 454 | 402 | ||||||||||||
Distribution expenses | 303 | 312 | 307 | 303 | ||||||||||||
Aircraft rent | 178 | 201 | 179 | 178 | ||||||||||||
Special charges (Note 10) | 190 | 64 | 51 | 190 | ||||||||||||
Other operating expenses | 1,238 | 1,186 | 1,332 | 1,238 | ||||||||||||
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7,545 | 7,867 | |||||||||||||||
Total operating expense | 8,142 | 7,545 | ||||||||||||||
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Operating income | 650 | 741 | 278 | 650 | ||||||||||||
Nonoperating income (expense): | ||||||||||||||||
Interest expense | (159) | (173) | (150) | (159) | ||||||||||||
Interest capitalized | 14 | 12 | 23 | 14 | ||||||||||||
Interest income | 8 | 5 | 11 | 8 | ||||||||||||
Miscellaneous, net (Note 10) | (18) | (74) | (16) | (18) | ||||||||||||
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(155) | (230) | |||||||||||||||
Total nonoperating expense, net | (132) | (155) | ||||||||||||||
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Income before income taxes | 495 | 511 | 146 | 495 | ||||||||||||
Income tax expense | 181 | 2 | 49 | 181 | ||||||||||||
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Net income | $ | 314 | $ | 509 | $ | 97 | $ | 314 | ||||||||
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Net income | $ | 314 | $ | 509 | $ | 97 | $ | 314 | ||||||||
Other comprehensive income (loss), net change related to: | ||||||||||||||||
Fuel derivative financial instruments | 78 | 86 | ||||||||||||||
Employee benefit plans | (24) | 2 | ||||||||||||||
Investments and other | — | 14 | ||||||||||||||
Fuel derivative financial instruments, net of taxes | 1 | 78 | ||||||||||||||
Employee benefit plans, net of taxes | (8) | (24) | ||||||||||||||
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54 | 102 | |||||||||||||||
Total other comprehensive income (loss), net | (7) | 54 | ||||||||||||||
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Total comprehensive income, net | $ | 368 | $ | 611 | $ | 90 | $ | 368 | ||||||||
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
(In millions, except shares)
(Unaudited) | (Unaudited) | |||||||||||||||
March 31, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,789 | $ | 3,000 | $ | 2,158 | $ | 2,173 | ||||||||
Short-term investments | 2,177 | 2,190 | 2,215 | 2,249 | ||||||||||||
Receivables, less allowance for doubtful accounts (2016—$11; | 1,581 | 1,128 | ||||||||||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance | 759 | 738 | ||||||||||||||
Receivables, less allowance for doubtful accounts (2017—$10; 2016—$10) | 1,429 | 1,176 | ||||||||||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2017—$314; 2016—$295) | 900 | 873 | ||||||||||||||
Prepaid expenses and other | 961 | 813 | 1,017 | 832 | ||||||||||||
|
|
|
| |||||||||||||
7,267 | 7,869 | |||||||||||||||
Total current assets | 7,719 | 7,303 | ||||||||||||||
|
|
|
| |||||||||||||
Operating property and equipment: | ||||||||||||||||
Owned— | ||||||||||||||||
Flight equipment | 24,348 | 23,728 | 27,187 | 25,873 | ||||||||||||
Other property and equipment | 4,715 | 4,542 | 5,887 | 5,652 | ||||||||||||
|
|
|
| |||||||||||||
29,063 | 28,270 | |||||||||||||||
Total owned property and equipment | 33,074 | 31,525 | ||||||||||||||
Less—Accumulated depreciation and amortization | (8,743) | (8,339) | (10,403) | (9,975) | ||||||||||||
|
|
|
| |||||||||||||
20,320 | 19,931 | |||||||||||||||
Total owned property and equipment, net | 22,671 | 21,550 | ||||||||||||||
|
|
|
| |||||||||||||
Purchase deposits for flight equipment | 866 | 788 | 922 | 1,059 | ||||||||||||
Capital leases— | ||||||||||||||||
Flight equipment | 1,497 | 1,527 | 1,247 | 1,319 | ||||||||||||
Other property and equipment | 331 | 332 | 342 | 331 | ||||||||||||
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|
|
| |||||||||||||
1,828 | 1,859 | |||||||||||||||
Total capital leases | 1,589 | 1,650 | ||||||||||||||
Less—Accumulated amortization | (1,008) | (998) | (941) | (941) | ||||||||||||
|
|
|
| |||||||||||||
Total capital leases, net | 648 | 709 | ||||||||||||||
820 | 861 |
|
| |||||||||||||
|
| |||||||||||||||
22,006 | 21,580 | |||||||||||||||
Total operating property and equipment, net | 24,241 | 23,318 | ||||||||||||||
|
|
|
| |||||||||||||
Other assets: | ||||||||||||||||
Goodwill | 4,523 | 4,523 | 4,523 | 4,523 | ||||||||||||
Intangibles, less accumulated amortization (2016—$1,167; 2015—$1,144) | 4,112 | 4,136 | ||||||||||||||
Intangibles, less accumulated amortization (2017—$1,254; 2016—$1,234) | 3,612 | 3,632 | ||||||||||||||
Deferred income taxes | 1,759 | 1,995 | 555 | 612 | ||||||||||||
Restricted cash | 162 | 204 | 129 | 124 | ||||||||||||
Other, net | 544 | 554 | 616 | 579 | ||||||||||||
|
|
|
| |||||||||||||
Total other assets | 9,435 | 9,470 | ||||||||||||||
11,100 | 11,412 |
|
| |||||||||||||
Total assets | $ | 41,395 | $ | 40,091 | ||||||||||||
|
|
|
| |||||||||||||
$ | 40,373 | $ | 40,861 | |||||||||||||
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(continued on next page)
UNITED AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) | (Unaudited) | |||||||||||||||
March 31, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | |||||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Advance ticket sales | $ | 4,958 | $ | 3,753 | $ | 5,001 | $ | 3,730 | ||||||||
Accounts payable | 2,141 | 2,144 | ||||||||||||||
Frequent flyer deferred revenue | 2,098 | 2,117 | 2,120 | 2,135 | ||||||||||||
Accounts payable | 2,069 | 1,874 | ||||||||||||||
Accrued salaries and benefits | 1,822 | 2,350 | 1,569 | 2,307 | ||||||||||||
Current maturities of long-term debt | 1,295 | 1,224 | 716 | 849 | ||||||||||||
Current maturities of capital leases | 114 | 135 | 113 | 116 | ||||||||||||
Fuel derivative instruments | 32 | 124 | ||||||||||||||
Other | 996 | 840 | 1,007 | 1,009 | ||||||||||||
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| |||||||||||||
13,384 | 12,417 | |||||||||||||||
Total current liabilities | 12,667 | 12,290 | ||||||||||||||
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| |||||||||||||
Long-term debt | 9,472 | 9,673 | 11,178 | 9,918 | ||||||||||||
Long-term obligations under capital leases | 725 | 727 | 836 | 822 | ||||||||||||
Other liabilities and deferred credits: | ||||||||||||||||
Frequent flyer deferred revenue | 2,884 | 2,826 | 2,806 | 2,748 | ||||||||||||
Postretirement benefit liability | 1,879 | 1,882 | 1,608 | 1,581 | ||||||||||||
Pension liability | 1,469 | 1,488 | 1,851 | 1,892 | ||||||||||||
Advanced purchase of miles | 871 | 1,010 | 326 | 430 | ||||||||||||
Lease fair value adjustment, net | 336 | 359 | 256 | 277 | ||||||||||||
Other | 1,517 | 1,516 | 1,473 | 1,527 | ||||||||||||
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|
|
| |||||||||||||
8,956 | 9,081 | |||||||||||||||
Total other liabilities and deferred credits | 8,320 | 8,455 | ||||||||||||||
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| |||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholder’s equity: | ||||||||||||||||
Common stock at par, $0.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at both March 31, 2016 and December 31, 2015 | — | — | ||||||||||||||
Common stock at par, $0.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at both March 31, 2017 and December 31, 2016 | — | — | ||||||||||||||
Additional capital invested | 4,648 | 6,138 | 3,271 | 3,573 | ||||||||||||
Retained earnings | 3,987 | 3,673 | 6,048 | 5,937 | ||||||||||||
Accumulated other comprehensive loss | (777) | (831) | (836) | (829) | ||||||||||||
Receivable from related parties | (22) | (17) | (89) | (75) | ||||||||||||
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|
| |||||||||||||
Total stockholder’s equity | 8,394 | 8,606 | ||||||||||||||
7,836 | 8,963 |
|
| |||||||||||||
Total liabilities and stockholder’s equity | $ | 41,395 | $ | 40,091 | ||||||||||||
|
|
|
| |||||||||||||
$ | 40,373 | $ | 40,861 | |||||||||||||
|
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net cash provided by operating activities | $ | 1,195 | $ | 1,816 | $ | 535 | $ | 1,195 | ||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Capital expenditures | (816) | (210) | (691) | (816) | ||||||||||||
Purchases of short-term investments and other investments | (638) | (633) | (774) | (638) | ||||||||||||
Proceeds from sale of short-term and other investments | 653 | 762 | 810 | 653 | ||||||||||||
Proceeds from sale of property and equipment | 4 | 17 | ||||||||||||||
Investment in and loans to affiliates | (40) | — | — | (40) | ||||||||||||
Decrease in restricted cash | 26 | 19 | ||||||||||||||
Proceeds from sale of property and equipment | 17 | 17 | ||||||||||||||
Other | 1 | — | 8 | 1 | ||||||||||||
|
|
|
| |||||||||||||
Net cash used in investing activities | (797) | (45) | (643) | (823) | ||||||||||||
|
|
|
| |||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Dividend to UAL | (258) | (1,392) | ||||||||||||||
Payments of long-term debt | (227) | (296) | (315) | (227) | ||||||||||||
Dividend to UAL | (1,392) | (195) | ||||||||||||||
Proceeds from issuance of long-term debt | 42 | 100 | 755 | 42 | ||||||||||||
Principal payments under capital leases | (34) | (24) | (31) | (34) | ||||||||||||
Other, net | 2 | (6) | (53) | 2 | ||||||||||||
|
|
|
| |||||||||||||
Net cash used in financing activities | (1,609) | (421) | ||||||||||||||
Net cash provided (used) in financing activities | 98 | (1,609) | ||||||||||||||
|
|
|
| |||||||||||||
Net (decrease) increase in cash and cash equivalents | (1,211) | 1,350 | ||||||||||||||
Cash and cash equivalents at beginning of the period | 3,000 | 1,996 | ||||||||||||||
Net decrease in cash, cash equivalents and restricted cash | (10) | (1,237) | ||||||||||||||
Cash, cash equivalents and restricted cash at beginning of the period | 2,297 | 3,206 | ||||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at end of the period | $ | 1,789 | $ | 3,346 | ||||||||||||
Cash, cash equivalents and restricted cash at end of the period (a) | $ | 2,287 | $ | 1,969 | ||||||||||||
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| |||||||||||||||
|
| |||||||||||||||
Investing and Financing Activities Not Affecting Cash: | ||||||||||||||||
Property and equipment acquired through the issuance of debt | $ | 59 | $ | 599 | $ | 711 | $ | 59 | ||||||||
Airport construction financing | 9 | — | 21 | 9 | ||||||||||||
Operating lease conversions to capital lease | 7 | — | — | 7 |
(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheet:
Reconciliation of cash, cash equivalents and restricted cash: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,158 | $ | 1,789 | ||||
Restricted cash included in Prepaid expenses and other | — | 18 | ||||||
Other assets: | ||||||||
Restricted cash | 129 | 162 | ||||||
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|
| |||||
Total cash, cash equivalents and restricted cash | $ | 2,287 | $ | 1,969 | ||||
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|
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The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
UNITED CONTINENTAL HOLDINGS, INC. AND UNITED AIRLINES, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL” or the “Company”) is a holding company and its principal, wholly-owned subsidiary is United Airlines, Inc. (together with its consolidated subsidiaries, “United”). This Quarterly Report on Form10-Q is a combined report of UAL and United, including their respective consolidated financial statements. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United’s operating revenues and operating expenses comprise nearly 100% of UAL’s revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL’s assets, liabilities and operating cash flows. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained. We sometimes use the words “we,” “our,” “us,” and the “Company” in this report for disclosures that relate to all of UAL and United.
The UAL and United unaudited condensed consolidated financial statements shown here have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that comply with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC. The financial statements include all adjustments, including normal recurring adjustments and other adjustments, which are considered necessary for a fair presentation of the Company’s financial position and results of operations. The UAL and United financial statements should be read together with the information included in the Company’s Annual Report on Form10-K for the year ended December 31, 2015.2016. The Company’s quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results.
NOTE 1 - SIGNIFICANTRECENTLY ISSUED ACCOUNTING POLICIESSTANDARDS
Recently Issued Accounting Standards.In March 2016, theThe Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09,Improvements to Employee Share-Based Payment Accountingas part of its simplification initiative, which involves several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In February 2016, the FASB amended the FASB Accounting Standards Codification and created a new Topic 842,Leases. The final guidance requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their income statements similar to the current Topic 840,Leases. It is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.
The FASB amended the FASB Accounting Standards Codification and created a new Topic 606,Revenue from Contracts with CustomersCustomers.. This amendment prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment supersedes the revenue recognition requirements in Topic 605,Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Accounting Standards Codification, and is effective for annual and interim reporting periods beginning after December 15, 2017.Codification. The Company will use the full-retrospective approach in adopting this standard on January 1, 2018. Under the new standard, certain airline ancillary fees directly related to passenger revenue tickets, such as airline change fees and baggage fees, are likely to no longer be considered distinct performance obligations separate from the passenger travel component. In addition, the airline change fees which were previously recognized when received will likely be recognized when transportation is provided. The Company is evaluating other possible impacts from the new standard on its consolidated financial statements.
In February 2016, the FASB amended the FASB Accounting Standards Codification and created a new Topic 842,Leases(“Topic 842”). The guidance requires lessees to recognize aright-of-use asset and a lease liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their income statements similar to the current Topic 840,Leases. It is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. Lessees and lessors are required to adopt Topic 842 using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements and believes this standard will have a significant impact on its consolidated balance sheets.
TheIn January 2016, the FASB issued Accounting Standards UpdateNo. 2015-07,2016-01,Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)Financial Instruments—Overall (Subtopic825-10) (“ASU2016-01”).Under This standard makes several changes, including the standard,elimination of theavailable-for-sale classification of equity investments, for whichand requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is measured ateffective for interim and annual periods beginning after December 15, 2017. Based on its portfolio of investments as of March 31, 2017, the Company does not expect the adoption of ASU2016-01 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards UpdateNo. 2016-09,Improvements to Employee Share-Based Payment Accounting(“ASU2016-09”).The update requires excess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly through earnings as a component of income tax expense. Previously, these differences were generally recorded in additionalpaid-in capital and thus had no impact on net asset value (“NAV”)income. The change in treatment of excess tax benefits and tax deficiencies also impacts the computation of diluted
earnings per share, (or its equivalent) usingand the practical expedient will no longercash flows associated with those items are classified as operating activities on the condensed statements of consolidated cash flows. Additionally, ASU 2016-09 permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be categorizedestimated, as allowed under previous standards, or recognized when they occur. The amendments in this update became effective in the fair value hierarchy.first quarter of 2017. The Company adopted this standard on January 1, 2016. As2017 and the standard did not have a material impact on its consolidated financial statements.
In March 2017, the FASB issued Accounting Standards UpdateNo. 2017-07,Improving the Presentation of March 31, 2016,Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost(“ASU2017-07”). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement.ASU2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company had approximately $201 milliondoes not expect the adoption of such investments as part ofASU2017-07 to have a material impact on its Short-term investments balance sheet total. In addition, pension plan investments measured at NAV per share will no longer be categorized within the fair value hierarchy. As of March 31, 2016, the Company had approximately $1.6 billion of such investments.consolidated financial statements.
NOTE 2 - EARNINGS PER SHARE
The computations of UAL’s basic and diluted earnings per share are set forth below (in millions, except per share amounts):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Basic earnings per share: | ||||||||||||||||
Earnings available to common stockholders | $ | 313 | $ | 508 | $ | 96 | $ | 313 | ||||||||
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| |||||||||||||
Basic weighted-average shares outstanding | 354 | 382 | 313.7 | 354.3 | ||||||||||||
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| |||||||||||||||
Earnings per share, basic | $ | 0.88 | $ | 1.33 | ||||||||||||
|
| |||||||||||||||
Diluted earnings per share: | ||||||||||||||||
Earnings available to common stockholders including the effect of dilutive securities | $ | 313 | $ | 508 | ||||||||||||
|
| |||||||||||||||
Diluted shares outstanding: | ||||||||||||||||
Basic weighted-average shares outstanding | 354 | 382 | ||||||||||||||
Effect of convertible notes | — | 1 | ||||||||||||||
Effect of employee stock awards | 1 | 1 | 0.9 | 0.3 | ||||||||||||
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| |||||||||||||
Diluted weighted-average shares outstanding | 355 | 384 | 314.6 | 354.6 | ||||||||||||
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| |||||||||||||
Earnings per share, basic | $ | 0.31 | $ | 0.88 | ||||||||||||
Earnings per share, diluted | $ | 0.88 | $ | 1.32 | $ | 0.31 | $ | 0.88 | ||||||||
|
|
The number of antidilutive securities excluded from the computation of diluted earnings per share amounts was not material.
In the three months ended March 31, 2016,2017, UAL repurchased 27approximately 5 million shares of UAL common stock in open market transactions for $1.5 billion, of which $0.1 billion settled in April 2016.$0.3 billion. As of March 31, 2016,2017, the Company had $948 millionapproximately $1.5 billion remaining to purchase shares under its existing share repurchase program (the “2015 Program”). The Company expectsauthority. UAL may repurchase shares through the open market, privately negotiated transactions, block trades or accelerated share repurchase transactions from time to complete its repurchases under the 2015 Program by September 30, 2016.time in accordance with applicable securities laws. UAL will repurchase shares of UAL common stock subject to prevailing market conditions, and may discontinue such repurchases at any time. See Part II, Item 2, ���Unregistered“Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSSINCOME (LOSS)
The tables below present the components of the Company’s accumulated other comprehensive income (loss), net of tax (“AOCI”) (in millions):
Deferred Taxes | Deferred Taxes | |||||||||||||||||||||||||||||||||||||||||||||||
UAL | Pension and Other Postretirement Liabilities | Derivative Contracts | Investments and Other | Pension and Other Postretirement Liabilities | Derivative Contracts | Total | Pension and Other Postretirement Liabilities | Fuel Derivative Contracts | Investments and Other | Pension and Other Postretirement Liabilities | Fuel Derivative Contracts | Total | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | (854) | $ | (2) | $ | 2 | $ | 24 | $ | 1 | $ | (829) | ||||||||||||||||||||||||||||||||||||
Changes in value | (26) | — | — | 10 | — | (16) | ||||||||||||||||||||||||||||||||||||||||||
Amounts reclassified to earnings | 13 | 2 | — | (5) | (1) | 9 | ||||||||||||||||||||||||||||||||||||||||||
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Net change | (13) | 2 | — | 5 | (1) | (7) | ||||||||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2017 | $ | (867) | $ | — | $ | 2 | $ | 29 | $ | — | $ | (836) | ||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2015 | $ | (363) | $ | (215) | $ | 3 | $ | (154) | $ | (102) | $ | (831) | $ | (363) | $ | (215) | $ | 3 | $ | (154) | $ | (102) | $ | (831) | ||||||||||||||||||||||||
Changes in value | (43) | (16) | — | 16 | 6 | (37) | (43) | (16) | — | 16 | 6 | (37) | ||||||||||||||||||||||||||||||||||||
Amounts reclassified to earnings | 5 | 138 | — | (2) | (50) | 91 | 5 | 138 | — | (2) | (50) | 91 | ||||||||||||||||||||||||||||||||||||
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Net change | (38) | 122 | — | 14 | (44) | 54 | (38) | 122 | — | 14 | (44) | 54 | ||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2016 | $ | (401) | $ | (93) | $ | 3 | $ | (140) | $ | (146) | $ | (777) | $ | (401) | $ | (93) | $ | 3 | $ | (140) | $ | (146) | $ | (777) | ||||||||||||||||||||||||
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Balance at December 31, 2014 | $ | (472) | $ | (499) | $ | 7 | $ | (115) | $ | — | (b) | $ | (1,079) | |||||||||||||||||||||||||||||||||||
Changes in value (a) | (8) | (75) | 15 | — | — | (68) | ||||||||||||||||||||||||||||||||||||||||||
Amounts reclassified to earnings (a) | 10 | 161 | (1) | — | — | 170 | ||||||||||||||||||||||||||||||||||||||||||
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Net change | 2 | 86 | 14 | — | — | 102 | ||||||||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2015 | $ | (470) | $ | (413) | $ | 21 | $ | (115) | $ | — | $ | (977) | ||||||||||||||||||||||||||||||||||||
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Details about AOCI Components | Amount Reclassified from AOCI to Income | Affected Line Item in the Statements of Consolidated Operations | ||||||||
Three Months Ended March 31, | ||||||||||
2016 | 2015 | |||||||||
Derivatives designated as cash flow hedges | ||||||||||
Fuel contracts-reclassifications of losses into earnings | $ | 138 | $ | 161 | Aircraft fuel | |||||
Amortization of pension and post-retirement items | ||||||||||
Amortization of unrecognized losses and prior service cost (credit) (c) | 5 | 10 | Salaries and related costs | |||||||
Investments and other | ||||||||||
Available-for-sale securities-reclassifications of gains into earnings | — | (1) | Miscellaneous, net |
Details about AOCI Components | Amount Reclassified from AOCI to Income | Affected Line Item in the Statements of Consolidated Operations | ||||||||||
Three Months Ended March 31, | ||||||||||||
2017 | 2016 | |||||||||||
Fuel derivative contracts | ||||||||||||
Reclassifications of losses into earnings | $ 2 | $ 138 | Aircraft fuel | |||||||||
Pension and other postretirement liabilities | ||||||||||||
Amortization of unrecognized losses and prior service cost (credit) (a) | 13 | 5 | Salaries and related costs |
(a) Income tax expense for these items was offset by the Company’s valuation allowance.
(b) Deferred tax balance was offset by the Company’s valuation allowance.
(c) This AOCI component is included in the computation of net periodic pension and other postretirement costs (see Note 5 of this report for additional information).
NOTE 4 - INCOME TAXES
The Company’s effective tax rate for the three months ended March 31, 2017 and 2016 was 33.8% and 36.6%, respectively, which represented a blend of federal, state and foreign taxes and included the impact of certain nondeductible items. The effective tax rate for the three months ended March 31, 2015 was 0.5% due primarily2017 reflects the impact of discrete events including the recognition of excess tax benefits related to employee stock compensation as a result of the existing income tax valuation allowance against deferred income tax assets, primarily net operating losses. During 2015, after considering all positiveadoption of ASU2016-09, as well as a change in the mix of domestic and negative evidence, the Company concluded that its deferred income taxes would be more likely than not to be realized. The Company released substantially all of its valuation allowance in 2015.foreign earnings.
NOTE 5 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Other Postretirement Benefit Plans.The Company’s net periodic benefit cost includes the following components (in millions):
Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Service cost | $ | 28 | $ | 31 | $ | 4 | $ | 5 | $ | 49 | $ | 28 | $ | 2 | $ | 4 | ||||||||||||||||
Interest cost | 51 | 50 | 22 | 20 | 55 | 51 | 17 | 22 | ||||||||||||||||||||||||
Expected return on plan assets | (54) | (49) | — | — | (60) | (54) | — | — | ||||||||||||||||||||||||
Amortization of unrecognized (gain) loss and prior service cost (credit) | 18 | 22 | (13) | (13) | 31 | 18 | (18) | (13) | ||||||||||||||||||||||||
Settlement loss | 1 | 1 | — | — | 1 | 1 | — | — | ||||||||||||||||||||||||
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Total | $ | 44 | $ | 55 | $ | 13 | $ | 12 | $ | 76 | $ | 44 | $ | 1 | $ | 13 | ||||||||||||||||
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During the three months ended March 31, 2016,2017, the Company contributed $80 million to its U.S. domestictax-qualified defined benefit pension plans.
Share-Based Compensation. The Company generally grants incentive compensation awards, including long-term equity-based awards, during the first quarter of the calendar year. During the three months ended March 31, 2016,2017, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.3 million shares of restricted stock and 0.81.4 million restricted stock units (“RSUs”) that vest pro-rata over three years on the anniversary. A majority of the grant date. TheRSUs vestpro-rata, on February 28th of each year, over a three year period from the date of grant. These time-vested RSUs are generally stock-settled for domestic employees and cash-settled for international employees. The cash payments are based on the20-day average closing price of UAL common stock immediately prior to the vesting date for international employees.date. The Company also granted 0.6 millionremainder of the RSUs are performance-based RSUs that willand vest based on the Company’s return on invested capital and the Company’s relative improvement inpre-tax margin for the three years ending December 31, 2018.2019. If thesethis performance conditions arecondition is achieved, cash payments will be made after the end of the performance period based on the20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the stock-settled RSUs as equity awards and the cash-settledperformance-based RSUs as liability awards.
The table below presents information related to share-based compensation (in millions):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Share-based compensation expense | $ | 10 | $ | 17 | $ | 23 | $ | 10 | ||||||||
March 31, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | |||||||||||||
Unrecognized share-based compensation | $ | 93 | $ | 41 | $ | 127 | $ | 65 |
Profit Sharing Plans.Substantially all employees participate in profit sharing based on a percentage ofpre-tax earnings, excluding special items, profit sharing expense and share-based compensation. Profit sharing percentages range from 5% to 20% depending on the work group, and in some cases profit sharing percentages vary above and below certainpre-tax margin
thresholds. Eligible U.S.co-workers in each participating work group receive a profit sharing payout using a formula based on the ratio of each qualifiedco-worker’s annual eligible earnings to the eligible earnings of all qualifiedco-workers in all domestic work groups. Eligible non-U.S. co-workersnon-U.S.co-workers receive profit sharing based on the calculation under the U.S. profit sharing plan for management and administrative employees. Profit sharing expense is recorded as a component of Salaries and related costs in the Company’s statements of consolidated operations.
NOTE 6 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The table below presents disclosures about the financial assets and liabilities measured at fair value on a recurring basis in the Company’s financial statements (in millions):
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,795 | $ | 1,795 | $ | — | $ | — | $ | 3,006 | $ | 3,006 | $ | — | $ | — | ||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||||||
Corporate debt | 859 | — | 859 | — | 891 | — | 891 | — | ||||||||||||||||||||||||
Asset-backed securities | 725 | — | 725 | — | 710 | — | 710 | — | ||||||||||||||||||||||||
Certificates of deposit placed through an account registry service (“CDARS”) | 250 | — | 250 | — | 281 | — | 281 | — | ||||||||||||||||||||||||
U.S. government and agency notes | 105 | — | 105 | — | 72 | — | 72 | — | ||||||||||||||||||||||||
Auction rate securities | 9 | — | — | 9 | 9 | — | — | 9 | ||||||||||||||||||||||||
Other fixed-income securities | 28 | — | 28 | — | 26 | — | 26 | — | ||||||||||||||||||||||||
Other investments measured at NAV (a) | 201 | — | — | — | 201 | — | — | — | ||||||||||||||||||||||||
Enhanced equipment trust certificates (“EETC”) | 24 | — | — | 24 | 26 | — | — | 26 | ||||||||||||||||||||||||
Fuel derivatives liability, net | 32 | — | 32 | — | 124 | — | 124 | — | ||||||||||||||||||||||||
Foreign currency derivatives liability, net | 1 | — | 1 | — | — | — | — | — | ||||||||||||||||||||||||
Restricted cash | 180 | 180 | — | — | 206 | 206 | — | — |
Note: Amounts for UAL and United are substantially the same as of March 31, 2016 and December 31, 2015.
(a) In accordance with the relevant accounting standards, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The investments measured using NAV are shares of mutual funds that invest in fixed-income instruments including bonds, debt securities, and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. The Company can redeem its shares at any time at NAV subject to a three-day settlement period.
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,164 | $ | 2,164 | $ | — | $ | — | $ | 2,179 | $ | 2,179 | $ | — | $ | — | ||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||||||
Corporate debt | 804 | — | 804 | — | 835 | — | 835 | — | ||||||||||||||||||||||||
Asset-backed securities | 757 | — | 757 | — | 792 | — | 792 | — | ||||||||||||||||||||||||
Certificates of deposit placed through an account registry service (“CDARS”) | 224 | — | 224 | — | 246 | — | 246 | — | ||||||||||||||||||||||||
U.S. government and agency notes | 101 | — | 101 | — | 140 | — | 140 | — | ||||||||||||||||||||||||
Other fixed-income securities | 146 | — | 146 | — | 54 | — | 54 | — | ||||||||||||||||||||||||
Other investments measured at NAV | 183 | — | — | — | 182 | — | — | — | ||||||||||||||||||||||||
Restricted cash | 129 | 129 | — | — | 124 | 124 | — | — | ||||||||||||||||||||||||
Enhanced equipment trust certificates (“EETC”) | 22 | — | — | 22 | 23 | — | — | 23 |
Available-for-sale investment maturities - The short-term investments shown in the table above are classified asavailable-for-sale. As of March 31, 2016,2017, asset-backed securities have remaining maturities of less than one year to approximately 3419 years, corporate debt securities have remaining maturities of less than one year to approximately sixfive years and CDARS have maturities of less than one year. U.S. government and other securities have maturities of less than one year to approximately three years. The EETC securities mature in 2019.
Derivative instrumentsRestricted Cash - Restricted cash primarily includes cash collateral associated with workers’ compensation obligations and investmentscollateral for letters of credit.
Investments presented in the tablestable above have the same fair value as their carrying value. The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above (in millions):
Fair Value of Debt by Fair Value Hierarchy Level | ||||||||||||||||||||||||||||||||||||||||
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||
Long-term debt | $ | 10,767 | $ | 11,180 | $ | — | $ | 8,309 | $ | 2,871 | $ | 10,897 | $ | 11,371 | $ | — | $ | 8,646 | $ | 2,725 |
Fair Value of Debt by Fair Value Hierarchy Level | ||||||||||||||||||||||||||||||||||||||||
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||
Long-term debt | $ | 11,894 | $ | 12,321 | $ | — | $ | 9,040 | $ | 3,281 | $ | 10,767 | $ | 11,055 | $ | — | $ | 8,184 | $ | 2,871 |
Fair value of the financial instruments included in the tables above was determined as follows:
Description | Fair Value Methodology | |
Cash and cash equivalents | The carrying amounts approximate fair value because of the short-term maturity of these assets. | |
Short-term investments and Restricted cash | Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, | |
Debt | Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities. | |
Other investments measured at NAV | In accordance with the relevant accounting standards, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The investments measured using NAV are shares of mutual funds that invest in fixed-income instruments including bonds, debt securities, and other similar instruments issued by various U.S. andnon-U.S. public- or private-sector entities. The Company can redeem its shares at any time at NAV subject to athree-day settlement period. |
NOTE 7 - HEDGING ACTIVITIES
Fuel Derivatives
The Company may hedge a portion of its future fuel requirements to protect against increases in the price of fuel. The Company may restructure hedges in response to market conditions prior to their original settlement dates which may result in changes in hedge coverage levels and the potential recognition of gains or losses on such hedge contracts. As of March 31, 2016, the Company had hedged approximately 12% of its projected fuel requirements (378 million gallons) for the remainder of 2016 with commonly used financial hedge instruments based on aircraft fuel or crude oil. As of March 31, 2016, the Company had fuel hedges expiring through December 2016.
As required, the Company assesses the effectiveness of each of its individual hedges on a quarterly basis. The Company also examines the effectiveness of its entire hedging program on a quarterly basis utilizing statistical analysis. This analysis involves utilizing regression and other statistical analyses that compare changes in the price of aircraft fuel to changes in the prices of the commodities used for hedging purposes.
Upon proper qualification, the Company accounts for certain fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted hedge accounting treatment. The types of instruments the Company utilizes that qualify for hedge accounting treatment typically include swaps, call options, collars (which consist of a purchased call option and a sold put option), four-way collars (a collar with a higher strike sold call option and a lower strike purchased put option) and other combinations of options. Generally, utilizing hedge accounting, all periodic changes in the fair value of derivatives designated as hedges that are considered to be effective are recorded in AOCI until the underlying fuel is consumed and recorded in fuel expense. The Company is exposed to the risk that its hedges may not be effective in offsetting changes in the cost of fuel and that its hedges may not continue to qualify for hedge accounting. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is classified as Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.
The Company also uses certain combinations of derivative contracts that are economic hedges but do not qualify for hedge accounting under GAAP. Additionally, the Company may enter into contracts at different times and later combine those contracts into structures designated for hedge accounting. As with derivatives that qualify for hedge accounting, the economic hedges and individual contracts are part of the Company’s program to mitigate the adverse financial impact of potential increases in the price of fuel. The Company records changes in the fair value of these various contracts that are not designated for hedge accounting to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.
If the Company settles a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs. In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the condensed statements of consolidated cash flows.
In addition to cash flow hedges, the Company from time to time enters into fair value hedges related to its aircraft fuel inventory using derivatives such as swaps and futures contracts based on aircraft fuel. Under fair value hedge accounting, the Company records changes in the fair value of both the hedging derivative and the hedged aircraft fuel inventory as fuel expense. The Company records ineffectiveness on fair value hedges as Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations. As of March 31, 2016,2017, the Company did not have any fair value hedges in place.
fuel hedging contracts outstanding to hedge its fuel consumption. The Company records each derivative instrument as a derivative asset or liability (on a gross basis) in its consolidated balance sheets, and, accordingly, records any related collateral on a gross basis. The table below presents the fair value amountslast of fuel derivative assets and liabilities and the location of amounts recognized in the Company’s financial statements.
fuel hedge derivatives designated for cash flow hedge accounting expired in December 2016. The Company’s derivatives were reported incurrent strategy is to not enter into transactions to hedge its consolidated balance sheets as follows (in millions):
Classification | Balance Sheet Location | March 31, 2016 | December 31, 2015 | |||||||
Derivatives designated as cash flow hedges | ||||||||||
Liabilities: | ||||||||||
Fuel contracts due within one year | Fuel derivative instruments | $ | 32 | $ | 119 | |||||
Derivatives not designated for hedge accounting | ||||||||||
Liabilities: | ||||||||||
Fuel contracts due within one year | Fuel derivative instruments | $ | — | $ | 5 | |||||
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Total liabilities | $ | 32 | $ | 124 | ||||||
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Derivative Credit Risk and Fair Value
The Company is exposed to credit losses in the event of non-performance by counterparties to its derivative instruments. Whilefuel consumption, although the Company records derivative instrumentsregularly reviews its strategy based on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The Company did not hold or post collateral as of March 31, 2016. The Company had on deposit $26 million of collateral with fuel derivative counterparties as of December 31, 2015. The collateral is recorded as Prepaid expensesmarket conditions and other on the Company’s balance sheets.factors.
We have master trading agreements with all of our fuel hedging counterparties that allow us to net our fuel hedge derivative positions. We have elected not to net the fair value positions recorded on our consolidated balance sheets. The following table shows the potential net fair value positions (including fuel derivatives and related collateral) had we elected to offset. The table reflects offset at the counterparty level (in millions):
March 31, 2016 | December 31, 2015 | |||||||||||
Fuel derivative instruments, net of collateral | $ | 32 | $ | 98 |
The following tables presentpresents the impact of derivative instruments and their location within the Company’s unaudited statements of consolidated operations (in millions):
Derivatives designated as cash flow hedges
Amount of Loss Recognized in AOCI on Derivatives (Effective Portion) | Loss Reclassified from AOCI into Fuel Expense | Amount of Loss Recognized in Nonoperating income (expense): Miscellaneous, net (Ineffective Portion) | ||||||||||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | Three Months Ended March 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Fuel contracts | $ | (16 | ) | $ | (75 | ) | $ | (138 | ) | $ | (161 | ) | $ | — | $ | — |
Amount of Loss Recognized in AOCI on Derivatives (Effective Portion) | Loss Reclassified from AOCI into Fuel Expense (a) | |||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Fuel contracts | $ | — | $ | (16) | $ | (2) | $ | (138) |
Derivatives
(a) The 2017 loss reclassified from AOCI into fuel expense represents hedge losses on December 2016 settled trades, but for which the associated fuel purchased in December was not designated for hedge accountingconsumed until January 2017.
Fuel contracts
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Amount of loss recognized in Nonoperating income (expense): Miscellaneous, net | $ | — | $ | (43 | ) |
Foreign Currency Derivatives
The Company generates revenues and incurs expenses in numerous foreign currencies. Changes in foreign currency exchange rates impact the Company’s results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses. Some of the Company’s more significant foreign currency exposures include the Canadian dollar, Chinese renminbi, European euro, British pound and Japanese yen. At times, the Company uses derivative financial instruments, such as options, collars and forward contracts, to hedge its exposure to foreign currency. At March 31, 2016, the Company had foreign currency derivative contracts in place to hedge both European euro denominated sales and Japanese yen denominated sales. The notional amount of the hedges equates to 22% of the Company’s projected European euro denominated net cash inflows for the remainder of 2016; and 17% of the Company’s projected Japanese yen denominated net cash inflows for the remainder of 2016. Net cash relates primarily to passenger ticket sales inflows, partially offset by expenses paid in local currencies. At March 31, 2016, the fair value of the Company’s foreign currency derivatives was a liability of $1 million.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Commitments.As of March 31, 2016,2017, United had firm commitments and options to purchase aircraft from The Boeing Company (“Boeing”), Airbus S.A.S. (“Airbus”), and Embraer S.A. (“Embraer”) and Airbus S.A.S. (“Airbus”) presented in the table below:
Aircraft Type | Number of Firm Commitments (a) | |||
Airbus | 35 | |||
Boeing 737NG/737 MAX | ||||
Boeing777-300ER | 6 | |||
Boeing | ||||
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Embraer E175 | ||||
(a) United also has options and purchase rights for additional aircraft. |
The aircraft listed in the table above are scheduled for delivery through 2024.2027. To the extent the Company and the aircraft manufacturers with whom the Company has existing orders for new aircraft agree to modify the contracts governing those orders, the amount and timing of the Company’s future capital commitments could change. For the remainder of 2016,2017, United expects to take delivery of 13four Boeing 737NG aircraft, one Boeing 777-300ER787-9 aircraft, twosix Boeing 787-9777-300ER aircraft, and nine24 Embraer E175 aircraft. UnitedE175. Additionally, the Company also currently expects to assigntake delivery of five used Airbus A319s in 2017. During the nine Embraer E175three months ended March 31, 2017, the Company also purchased 12 Boeing 737NG aircraft immediately priorwhich were previously leased by United.
The table below summarizes United’s commitments as of March 31, 2017, which primarily relate to each aircraft’s delivery by Embraer to a designated United Express operator.
(in billions) | ||||
Last nine months of 2017 | $ | 2.9 | ||
2018 | 2.8 | |||
2019 | 3.5 | |||
2020 | 3.1 | |||
2021 | 2.2 | |||
After 2021 | 8.7 | |||
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$ | 23.2 | |||
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As of March 31, 2016,2017, United had $555 million in financing available through EETC transactions for the financing of all of its aircraft deliveries scheduled for the first half of 2017. See Note 9 of this report for additional information on aircraft financing. The Company has also secured backstop financing commitments from certain of its aircraft manufacturers for a limited number of its future aircraft deliveries, subject to certain customary conditions. Financing may be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures.
Regional CPAs.In February 2017, United entered into a five-year capacity purchase agreement (“CPA”) with Air Wisconsin Airlines for regional service under the United Express brand commencing no later than February 2018. Air Wisconsin will operate no less than 50 and up to 65 CRJ 200s.
The table below summarizes United’s commitments as of March 31, 2016, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and include other commitments primarily to acquire information technology services and assets. Any new firm aircraft orders, includingCompany’s future payments through the exercise of purchase options and purchase rights, will increase the total future capital commitments of the Company.
(in billions) | ||||
Last nine months of 2016 | $ | 2.9 | ||
2017 | 3.9 | |||
2018 | 3.9 | |||
2019 | 3.2 | |||
2020 | 2.4 | |||
After 2020 | 6.9 | |||
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$ | 23.2 | |||
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In March 2016, the Company announced that it will retire its fleet of Boeing 747 aircraft from scheduled service by the end of 2018. The Company does not expect there to be a material impact to depreciationthe terms of our CPAs, excluding variable pass-through costs such as fuel and amortization expense.landing fees, among others.
Last nine months of 2017 2018 2019 2020 2021 After 2021 (in billions) $ 1.3 1.9 1.4 1.1 1.0 4.0 $ 10.7
Guarantees.As of March 31, 2016,2017, United is the guarantor of approximately $1.9 billion in aggregate principal amount oftax-exempt special facilities revenue bonds and interest thereon. These bonds, issued by various airport municipalities, are payable solely from rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with $1.4 billion of these obligations are accounted for as operating leases with the associated expense recorded on a straight-line basis resulting in ratable accrual of the lease obligation over the expected lease term. The leasing arrangements associated with $316approximately $421 million of these obligations are accounted for as capital leases. All of these bonds are due between 2017 and 2038.
In the Company’s financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate (“LIBOR”), for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject, in most cases, to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs. At March 31, 2016,2017, the Company had $2.4$3.0 billion of floating rate debt and $111$83 million of fixed rate debt, with remaining terms of up to 12 years, that are subject to these increased cost provisions. In several financing transactions involving loans or leases fromnon-U.S. entities, with remaining terms of up to 12 years and an aggregate balance of $2.5$3.0 billion, the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder tonon-U.S. entities to withholding taxes, subject to customary exclusions.
As of March 31, 2017, United is the guarantor of $166 million of aircraft mortgage debt issued by one of United’s regional carriers. The aircraft mortgage debt is subject to similar increased cost provisions as described above for the Company’s debt and the Company would potentially be responsible for those costs under the guarantees.
Labor Negotiations. As of March 31, 2016,2017, United had approximately 86,00088,400 active employees, of whom approximately 80% were represented by various U.S. labor organizations.
In January 2016, United’s pilots, represented by the Air Line Pilots Association, International, agreed to extend their contract through January 31, 2019. In March 2016, the Company’s dispatchers, represented by the Professional Airline Flight Control Association, agreed to extend their current contract through 2021. In April 2016, the fleet service, passenger service, storekeeper and other employees represented by the Int’l Association of Machinists and Aerospace Workers (“IAM”) ratified seven new contracts with the Company which extended the contracts through 2021. The Company continues to negotiate in mediation for a joint flight attendant collective bargaining agreement and a joint technician and related employees’ collective bargaining agreement. See Note 10 of this report for additional information.
NOTE 9 - DEBT
As of March 31, 2016,2017, a substantial portion of the Company’s assets, principally aircraft, route authorities, airport slots and loyalty program intangible assets, was pledged under various loan and other agreements. As of March 31, 2016,2017, UAL and United were in compliance with their debt covenants. As
2017 Credit and Guaranty Agreement. On March 29, 2017, United and UAL, as borrower and guarantor, respectively, entered into an Amended and Restated Credit and Guaranty Agreement (the “2017 Credit Agreement”). The 2017 Credit Agreement consists of a $1.5 billion term loan due April 1, 2024, which (i) was used to retire the entire principal balance of the term loans under the credit and guaranty agreement, dated March 31, 2016, United had its entire27, 2013 (as amended, the “2013 Credit Agreement”), and (ii) increased the term loan balance by approximately $440 million, and a $2.0 billion revolving credit facility available for drawing until April 1, 2022, which increased the available capacity of $1.35 billion available under the revolving credit facility of the Company’s 2013 Credit Agreement. As of March 31, 2017, United had its entire capacity of $2.0 billion available under the revolving credit facility. The obligations of United under the 2017 Credit Agreement are secured by liens on certain international route authorities, certaintake-offand Guarantylanding rights and related assets of United.
Borrowings under the 2017 Credit Agreement (the “Credit Agreement”).
4.5% Convertible Notes due 2015.At December 31, 2014, the remaining balancebear interest at a variable rate equal to LIBOR, subject to a 0% floor, plus a margin of these notes was $202 million. In January 2015, the holders2.25% per annum, or another rate based on certain market interest rates, plus a margin of substantially all of the remaining $202 million1.25% per annum. The principal amount of the 4.5% Convertible Notesterm loan must be repaid in consecutive quarterly installments of 0.25% of the original principal amount thereof, commencing on June 30, 2017, with any unpaid balance due 2015 exercised their conversion option resulting in the issuance of 11 million shares of UAL common stock.
6% Notes due 2026.In the first quarter of 2015, UAL used cash to repurchase $18 million par value 6% Notes due 2026 (the “2026 Notes”) in market transactions. Onon April 1, 2015, UAL used cash2024. United may prepay all or a portion of the loan from time to redeem,time, at par plus accrued and unpaid interest. United pays a commitment fee equal to 0.75% per annum on the remaining $303 million balanceundrawn amount available under the revolving credit facility.
The 2017 Credit Agreement includes covenants that, among other things, require the Company to maintain at least $2.0 billion of unrestricted liquidity and a minimum ratio of appraised value of collateral to the outstanding obligations under the Credit Agreement of 1.60 to 1.0. The 2017 Credit Agreement contains events of default customary for this type of financing, including a cross default and cross acceleration provision to certain other material indebtedness of the 2026 Notes.
6% Notes due 2028.InCompany. Under the first quarter of 2015, UAL used cash to repurchase $13 million par value 6% Notes due 2028 (the “2028 Notes”) in market transactions. On May 1, 2015, UAL used cash to redeem, at par, the remaining $298 million balanceprovisions of the 2028 Notes.2017 Credit Agreement, UAL’s ability to make investments and to pay dividends on, or repurchase, UAL’s common stock is restricted.
EETCs. In September 2016 and June 2016, United created EETC pass-through trusts, each of which issued pass-through certificates. The proceeds of the first quarterissuance of 2015,the pass-through certificates are used to purchase equipment notes issued by United and secured by its aircraft. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The pass-through certificates represent fractional undivided interests in the respective pass-through trusts and are not obligations of United. The payment obligations under the equipment notes are those of United. Proceeds received from the sale of pass-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by United and are not reported as debt on our consolidated balance sheet because the proceeds held by the depositary are not United’s assets. Certain details of the pass-through trusts with proceeds received from issuance of debt in 2017 are as follows (in millions, except stated interest rate):
EETC Date | Class | Principal | Final expected | Stated interest rate | Total debt recorded as of March 31, 2017 | Proceeds received from issuance of debt during 2017 | Remaining proceeds from issuance of debt to be received in future periods | |||||||||||||||||
September 2016 | AA | $ 637 | October 2028 | 2.875% | $ 253 | $ 173 | $ 384 | |||||||||||||||||
September 2016 | A | 283 | October 2028 | 3.10% | 112 | 76 | 171 | |||||||||||||||||
June 2016 | AA | 729 | July 2028 | 3.10% | 729 | 319 | — | |||||||||||||||||
June 2016 | A | 324 | July 2028 | 3.45% | 324 | 142 | — | |||||||||||||||||
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$ 1,973 | $ 1,418 | $ 710 | $ 555 | |||||||||||||||||||||
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5% Senior Notes due 2024.In January 2017, United issued $0.7 billion$300 million aggregate principal amount of 5% Senior Notes due February 1, 2024 (the “5% Senior Notes due 2024”). These notes are fully and unconditionally guaranteed and recorded by United on its balance sheet as debt. The indenture for the 5% Senior Notes due 2024 requires UAL to offer to repurchase the notes for cash at a purchase price equal to 101% of the principal amount of notes repurchased plus accrued and unpaid interest if certain changes of control of UAL occur.
The table below presents the Company’s contractual principal payments at March 31, 2017 under then-outstanding long-term debt related to a 2014 EETC offering to finance new aircraft.agreements in each of the next five calendar years (in millions):
Last nine months of 2017 | $ | 537 | ||
2018 | 1,466 | |||
2019 | 1,054 | |||
2020 | 1,058 | |||
2021 | 1,043 | |||
After 2021 | 6,873 | |||
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NOTE 10 - SPECIAL CHARGESITEMS
For the three months ended March 31, special chargesitems consisted of the following (in millions):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
Operating: | 2016 | 2015 | 2017 | 2016 | ||||||||||||
Severance and benefit costs | $ | 37 | $ | 8 | ||||||||||||
Labor agreement costs | $ | 100 | $ | — | — | 100 | ||||||||||
Cleveland airport lease restructuring | 74 | — | — | 74 | ||||||||||||
Severance and benefit costs | 8 | 50 | ||||||||||||||
(Gains) losses on sale of assets and other special charges | 8 | 14 | 14 | 8 | ||||||||||||
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Special charges | 190 | 64 | 51 | 190 | ||||||||||||
Nonoperating and income taxes: | ||||||||||||||||
Loss on extinguishment of debt and other | 8 | 6 | ||||||||||||||
Income tax benefit related to special charges | (72) | — | ||||||||||||||
Nonoperating: | ||||||||||||||||
Foreign currency loss | — | 8 | ||||||||||||||
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Total special charges, net of tax | $ | 126 | $ | 70 | ||||||||||||
Special items before income taxes | 51 | 198 | ||||||||||||||
Income tax benefit related to special items | (18) | (72) | ||||||||||||||
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Total special items, net of tax | $ | 33 | $ | 126 | ||||||||||||
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During the three months ended March 31, 2017, the Company recorded $21 million ($14 million net of taxes) of severance and benefit costs primarily related to a voluntaryearly-out program for its technicians and related employees represented by the International Brotherhood of Teamsters. In the first quarter of 2017, approximately 1,000 technicians and related employees elected to voluntarily separate from the Company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through early 2019. The Company also recorded $16 million ($10 million net of taxes) of severance related to its management reorganization initiative.
During the three months ended March 31, 2016, the Company recorded $8 million ($5 million net of taxes) of severance and benefit costs primarily related to a voluntaryearly-out program for its flight attendants.
In April 2016, the fleet service, passenger service, storekeeper and other employees represented by the IAMInternational Association of Machinists and Aerospace Workers (the “IAM”) ratified seven new contracts with the Company which extended the contracts through 2021. TheDuring the three months ended March 31, 2016, the Company recorded a $100 million ($64 million net of taxes) of special chargecharges primarily for bonus payments to be made in conjunction with the ratification of these contracts.IAM agreements.
During the three months ended March 31, 2016, the City of Cleveland agreed to amend the Company’s lease, which runs through 2029, associated with certain excess airport terminal space (principally Terminal D) and related facilities at Hopkins International Airport (“Cleveland”).Airport. The Company recorded an accrual for remaining payments under the lease for facilities that the Company no longer uses and will continue to incur costs under the lease without economic benefit to the Company. This liability was measured and recorded at its fair value when the Company ceased its right to use such facilities leased to it pursuant to the lease. The Company reduced its flight operations at Cleveland in 2014 and had been evaluating its options for the excess space. The Company recorded a net charge of $74 million ($47 million net of taxes) related to the amended lease.
During the three months ended March 31, 20162017 and 2015,2016, the Company recorded gains and losses on sale of assets and other special charges of $14 million ($9 million net of taxes) and $8 million ($5 million net of taxes) and $50 million, respectively, of severance and benefit costs primarily related to a voluntary early-out program for its flight attendants. In 2014, more than 2,500 flight attendants elected to voluntarily separate from the Company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through the end of 2016.respectively.
During the three months ended March 31, 2016, the Company recorded $8 million ($5 million net of taxes) of losses due to exchange rate changes in Venezuela applicable to funds held in local currency.
During the three months ended March 31, 2015, the Company recorded $18 million of integration-related charges, $5 million of other charges, and approximately $9 million of gains on the sale of assets.
During the three months ended March 31, 2015, the Company recorded $6 million of losses as part of Nonoperating income (expense): Miscellaneous, net due to the write-off of the debt discount related to the redemption of the 2026 Notes and 2028 Notes.
In April 2016, the Federal Aviation Administration (“FAA”) announced that it will designate Newark Liberty International Airport (“Newark”) as a Level 2 schedule-facilitated airport under the International Air Transport Association Worldwide Slot Guidelines effective October 30, 2016. Newark is currently designated as a Level 3 slot-controlled airport. The Company is evaluating the impact, if any, of the change in designation on its $412 million intangible asset related to its Newark slots. Further, the Newark slots serve as part of the collateral for the term loans under the Credit Agreement and under the security agreements related to the Second Amended and Restated Co-Branded Card Marketing Services Agreement with Chase Bank USA, N.A.The Company is evaluating the impact of the FAA’s action on the Newark slot collateral for the term loans and to the extent necessary, the Company will substitute other collateral.
Accruals
The accrual balance for severance and benefits was $28 million as of March 31, 2017, compared to $29 million as of March 31, 2016, compared to $96 million as of March 31, 2015.2016. The severance-related accrual as of March 31, 20162017 is expected to be mostly paid through 2017. The accrual balance for future lease payments on permanently grounded aircraft was $40 million as of March 31, 2017, compared to $49 million as of March 31, 2016. The grounded aircraft related accrual as of March 31, 2017 is expected to be mostly paid through 2025. The following is a reconciliation of severance and permanently grounded aircraft accrual activity for the period:
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Overview
United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL” or the “Company”) is a holding company and its principal, wholly-owned subsidiary is United Airlines, Inc. (together with its consolidated subsidiaries, “United”). This Quarterly Report on Form10-Q is a combined report of UAL and United including their respective consolidated financial statements. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United’s operating revenues and operating expenses comprise nearly 100% of UAL’s revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL’s assets, liabilities and operating cash flows. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained. We sometimes use the words “we,” “our,” “us,” and the “Company” in this report for disclosures that relate to all of UAL and United.
The Company transports people and cargo through its mainline operations, which utilize jet aircraft with at least 118 seats, and regional operations, which utilize smaller aircraft that are operated under contract by United Express carriers. The Company serves virtually every major market around the world, either directly or through participation in Star Alliance®, the world’s largest airline alliance. UAL, through United and its regional carriers, operates an average of 5,000approximately 4,500 flights a day to 336337 airports across sixfive continents.
First Quarter Financial Highlights
First quarter 20162017 net income was $313$96 million, or $0.88 diluted earnings per share. First quarter 2016 Non-GAAP net income was $435 million, or $1.23$0.31 diluted earnings per share, which excludes $126as compared to net income of $313 million, or diluted earnings per share of special charges and reflects $4 million$0.88, in the first quarter of “Hedge Program Adjustments.” See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information regarding special charges.2016.
Passenger revenue decreased 5.8%increased 2.6% to $7.0$7.2 billion during the first quarter of 20162017 as compared to the first quarter of 2015.2016.
First quarter 20162017 aircraft fuel cost including the impact of fuel hedges designated for hedge accounting, decreased 34.7%increased $342 million, 28.1% year-over-year.
Unrestricted liquidity at March 31, 20162017 was $5.3$6.4 billion, including $1.35$2.0 billion of undrawn commitments under itsthe Company’s revolving credit facility.
In the three months ended March 31, 2017, UAL repurchased 27approximately 5 million shares of UALits common stock in open market transactions for $1.5 billion, of which $0.1 billion settled in April 2016.$0.3 billion. As of March 31, 2016,2017, the Company had $948 million$1.5 billion remaining to purchase shares under its existing share repurchase program (the “2015 Program”). The Company expects to complete its repurchases under the 2015 Program by September 30, 2016. UAL will repurchase shares of UAL common stock subject to prevailing market conditions, and may discontinue such repurchases at any time. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.authority.
First Quarter Operational Highlights
United reported a consolidated on-time arrival rate (domestic and international) of 66.5%, up more than 12 points from the same quarter last year.achieved 25zero-cancellation days for mainline operations.
Consolidated traffic increased 0.3%2.2% and consolidated capacity increased 1.8%2.6% during the first quarter of 20162017 as compared to the first quarter of 2015.2016. The Company’s load factor for the first quarter of 20162017 was 79.9%79.6%.
The Company took delivery of two Boeing 737-900ER787-9 aircraft, threesix Boeing 787-9 aircraft777-300ER and one used Airbus A319 aircraft during the first quarter of 2016.2017.
Outlook
The Company expects full-year 20162017 consolidated capacity to increase between 2.5% and 3.5% year-over-year. Domestic capacity is expected to increase between 3.5% and 4.5% year-over-year and international capacity is expected to increase between 1.0% and 2.0% year-over-year. The
As outlined at our November 2016 Investor Day presentation, the Company expects to drive significant incremental value by 2020 relative to 2015. United anticipates capturing this value through a variety of initiatives including are-fleeting and upgauge program, additional customer choice through segmentation, improvements to the revenue management systems, ongoing sensible cost management, realizing our full year 2016 cost per available seat mile (“CASM”) excluding profit sharing, third-party business expense, fuelnetwork potential through improved schedule quality and special chargesenhancements to be up between 2.0% and 3.0% year-over-year. Second quarter 2016 pre-tax margin is expectedthe MileagePlus program. In addition, the Company will continue to be between 13.0% and 15.0%, excluding special charges. We are unable to project CASM or pre-tax marginfocus on a GAAP basis, as defined below, asimproving reliability while increasing the nature and amount of special charges are not determinable at this time.
In the first quarter of 2016, United reached contract extensions with its pilots and dispatchers, and in April 2016, United also reached amended collective bargaining agreements with its Int’l Association of Machinists and Aerospace Workers (“IAM”) represented employees and continues to negotiate in mediation for a joint flight attendant collective bargaining agreement and a joint technician and related employees’ collective bargaining agreement. The cost associated with the ratificationefficiency of the pilots’ agreement added an additional approximate 1.5 points of non-fuel unit costs in the first-quarter and full-year 2016. There is no material impact to non-fuel unit costs in 2016 associated with the ratification of the dispatchers’ or IAM’s respective agreements. The Company cannot predict the outcome of negotiations with its unionized employee groups, although significant increases in the pay and benefits resulting from new collective bargaining agreements would have a material financial impact on the Company.operation.
Since the summer of 2014, theThe price of jet fuel declined and remains volatile. Based on projected fuel consumption in 2016,2017, a one dollar change in the price of a barrel of crude oil would change the Company’s annual fuel expense by approximately $93$95 million. To protect against increases in the prices of aircraft fuel, the Company may hedge a portion of its future fuel requirements.
RESULTS OF OPERATIONS
The following discussion provides an analysis of results of operations and reasons for material changes therein for the three months ended March 31, 20162017 as compared to the corresponding period in 2015. See “Reconciliation of GAAP to Non-GAAP Financial Measures” at the end of this item for additional information related to accounting principles generally accepted in the United States (“GAAP”) and Non-GAAP financial measures used in this report.2016.
First Quarter 20162017 Compared to First Quarter 20152016
The Company recorded net income of $96 million in the first quarter of 2017 as compared to net income of $313 million in the first quarter of 2016 as compared to net income of $508 million in the first quarter of 2015. First quarter 2016 net income reflects $181 million of income tax expense primarily due to the release of the income tax valuation allowance in the third quarter of 2015. Excluding special charges and with Hedge Program Adjustments, the Company had net income of $435 million in the first quarter of 2016 as compared to net income of $582 million in the first quarter of 2015.2016. The Company considers a key measure of its performance to be operating income, which was $278 million for the first quarter of 2017, as compared to $649 million for the first quarter of 2016, as compared to $741 million for the first quarter of 2015, a $92$371 million decrease year-over-year. Significant components of the Company’s operating results for the three months ended March 31 are as follows (in millions, except percentage changes):
2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Operating revenue | $ | 8,195 | $ | 8,608 | $ | (413 | ) | (4.8 | ) | |||||||
Operating expense | 7,546 | 7,867 | (321 | ) | (4.1 | ) | ||||||||||
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Operating income | 649 | 741 | (92 | ) | (12.4 | ) | ||||||||||
Nonoperating expense | (155 | ) | (230 | ) | (75 | ) | (32.6 | ) | ||||||||
Income tax expense | 181 | 3 | 178 | NM | ||||||||||||
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Net income | $ | 313 | $ | 508 | $ | (195 | ) | (38.4 | ) | |||||||
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NM - Not meaningful
2017 | 2016 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Operating revenue | $ | 8,420 | $ | 8,195 | $ | 225 | 2.7 | |||||||||
Operating expense | 8,142 | 7,546 | 596 | 7.9 | ||||||||||||
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Operating income | 278 | 649 | (371) | (57.2) | ||||||||||||
Nonoperating expense | (133) | (155) | (22) | (14.2) | ||||||||||||
Income tax expense | 49 | 181 | (132) | (72.9) | ||||||||||||
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Net income | $ | 96 | $ | 313 | $ | (217) | (69.3) | |||||||||
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Certain consolidated statistical information for the Company’s operations for the three months ended March 31 is as follows:
2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | 2017 | 2016 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||
Passengers (thousands) (a) | 32,087 | 31,522 | 565 | 1.8 | 33,105 | 32,087 | 1,018 | 3.2 | ||||||||||||||||||||||||
Revenue passenger miles (“RPMs”) (millions) (b) | 46,582 | 46,444 | 138 | 0.3 | 47,611 | 46,582 | 1,029 | 2.2 | ||||||||||||||||||||||||
Available seat miles (“ASMs”) (millions) (c) | 58,273 | 57,269 | 1,004 | 1.8 | 59,808 | 58,273 | 1,535 | 2.6 | ||||||||||||||||||||||||
Passenger load factor (d) | 79.9 % | 81.1 % | (1.2 | ) | N/A | 79.6 % | 79.9 % | (0.3) pts. | N/A | |||||||||||||||||||||||
Passenger revenue per available seat mile (“PRASM”) (cents) | 12.00 | 12.96 | (0.96 | ) | (7.4 | ) | 12.00 | 12.00 | — | — | ||||||||||||||||||||||
Average yield per revenue passenger mile (“Yield”) (cents) (e) | 15.01 | 15.98 | (0.97 | ) | (6.1 | ) | 15.07 | 15.01 | 0.06 | 0.4 | ||||||||||||||||||||||
CASM (cents) | 12.95 | 13.74 | (0.79 | ) | (5.7 | ) | ||||||||||||||||||||||||||
Cost per available seat mile (“CASM”) (cents) | 13.61 | 12.95 | 0.66 | 5.1 | ||||||||||||||||||||||||||||
Average price per gallon of fuel, including fuel taxes | $ | 1.37 | $ | 2.08 | $ | (0.71 | ) | (34.1 | ) | $ | 1.71 | $ | 1.37 | $ | 0.34 | 24.8 | ||||||||||||||||
Fuel gallons consumed (millions) | 890 | 896 | (6 | ) | (0.7 | ) | 910 | 890 | 20 | 2.2 | ||||||||||||||||||||||
Average full-time equivalent employees | 82,500 | 81,700 | 800 | 1.0 | 85,200 | 82,500 | 2,700 | 3.3 |
(a) The number of revenue passengers measured by each flight segment flown.
(b) The number of scheduled miles flown by revenue passengers.
(c) The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
(d) Revenue passenger miles divided by available seat miles.
(e) The average passenger revenue received for each revenue passenger mile flown.
Operating Revenue
The table below shows year-over-year comparisons by type of operating revenue for the three months ended March 31 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Passenger—Mainline | $ | 5,577 | $ | 5,938 | $ | (361 | ) | (6.1 | ) | |||||||
Passenger—Regional | 1,413 | 1,482 | (69 | ) | (4.7 | ) | ||||||||||
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Total passenger revenue | 6,990 | 7,420 | (430 | ) | (5.8 | ) | ||||||||||
Cargo | 194 | 242 | (48 | ) | (19.8 | ) | ||||||||||
Other operating revenue | 1,011 | 946 | 65 | 6.9 | ||||||||||||
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$ | 8,195 | $ | 8,608 | $ | (413 | ) | (4.8 | ) | ||||||||
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Passenger—Mainline Passenger—Regional Total passenger revenue Cargo Other operating revenue 2017 2016 Increase
(Decrease) % Change $ 5,831 $ 5,577 $ 254 4.6 1,343 1,413 (70) (5.0) 7,174 6,990 184 2.6 220 194 26 13.4 1,026 1,011 15 1.5 $ 8,420 $ 8,195 $ 225 2.7
The table below presents selected first quarter passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes:
Domestic | Pacific | Atlantic | Latin | Total Mainline | Regional | Consolidated | Domestic | Atlantic | Pacific | Latin | Total Consolidated | Mainline | Regional | |||||||||||||||||||||||||||||||||||||||||||
Increase (decrease) from 2015: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase (decrease) from 2016: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Passenger revenue (in millions) | $ | (83) | $ | (107) | $ | (141) | $ | (30) | $ | (361) | $ | (69) | $ | (430) | $ | 126 | $ | 8 | $ | 35 | $ | 15 | $ | 184 | $ | 254 | $ | (70) | ||||||||||||||||||||||||||||
Passenger revenue | (2.8)% | (10.1)% | (11.9)% | (4.0)% | (6.1)% | (4.7)% | (5.8)% | 3.0 % | 0.8 % | 3.7 % | 2.0 % | 2.6 % | 4.6 % | (5.0)% | ||||||||||||||||||||||||||||||||||||||||||
Average fare per passenger | (7.0)% | (7.9)% | (4.0)% | (15.9)% | (9.9)% | (1.4)% | (7.5)% | (1.0)% | 4.1 % | 3.3 % | 1.3 % | (0.5)% | (2.2)% | 0.5 % | ||||||||||||||||||||||||||||||||||||||||||
Yield | (4.3)% | (7.8)% | (4.1)% | (15.1)% | (6.5)% | (3.7)% | (6.1)% | (0.6)% | 3.7 % | (0.1)% | 2.3 % | 0.4 % | 1.2 % | 0.2 % | ||||||||||||||||||||||||||||||||||||||||||
PRASM | (5.5)% | (9.4)% | (8.9)% | (14.5)% | (8.0)% | (4.1)% | (7.4)% | (0.1)% | 2.1 % | (3.5)% | 2.8 % | — % | 0.8 % | — % | ||||||||||||||||||||||||||||||||||||||||||
Passengers | 4.5 % | (2.4)% | (8.2)% | 14.2 % | 4.2 % | (3.3)% | 1.8 % | 4.0 % | (3.2)% | 0.4 % | 0.6 % | 3.2 % | 6.9 % | (5.4)% | ||||||||||||||||||||||||||||||||||||||||||
RPMs (traffic) | 1.6 % | (2.5)% | (8.2)% | 13.0 % | 0.5 % | (1.0)% | 0.3 % | 3.6 % | (2.8)% | 3.8 % | (0.3)% | 2.2 % | 3.2 % | (5.2)% | ||||||||||||||||||||||||||||||||||||||||||
ASMs (capacity) | 2.8 % | (0.8)% | (3.3)% | 12.3 % | 2.1 % | (0.5)% | 1.8 % | 3.1 % | (1.3)% | 7.4 % | (0.8)% | 2.6 % | 3.7 % | (5.0)% | ||||||||||||||||||||||||||||||||||||||||||
Passenger load factor (points) | (1.0) | (1.4) | (3.7) | 0.5 | (1.2) | (0.4) | (1.2) | 0.4 | (1.1) | (2.8) | 0.4 | (0.3) | (0.4) | (0.1) |
Consolidated passenger revenue in the first quarter of 2016 decreased 5.8%2017 increased $184 million, or 2.6% as compared to theyear-ago period due to a decrease in period. First quarter 2017 consolidated yield of 6.1% year-over-year. Yields were impacted by a competitive domestic fare environment, unfavorable foreign currency results duePRASM remained flat compared to the strengthening of the U.S. dollar, international surcharge declines and a larger than anticipated decrease in close-in business travel during the weeks surrounding the Easter holiday and spring break. The decline in yields was partially offset by a 0.3% and 1.8% year-over-year increase in traffic and capacity, respectively.
Cargo revenue decreased $48 million, or 19.8%, in the first quarter of 2016, as compared to the year-ago period due to lower yields,higherclose-in business travel in March 2017 was partially offset by higher freight and mail volumes year-over-year. Yields were negatively impacted as air freighter competitors increased capacity in response to lower fuel prices. Another contributing factor to the year-over-year decrease was a U.S. West Coast port labor dispute that helped increase air freight resultsgrowth in the first quarter of 2015. The labor dispute was resolved during the first quarter of 2015.
Other operating revenue in the first quarter of 2016 increased $65 million, or 6.9%, as compared to the year-ago period primarily due to the impact of the Second Amended and Restated Co-Branded Card Marketing Services Agreement with Chase Bank USA, N.A., which became effective in the third quarter of 2015.quarter.
Operating Expenses
The table below includes data related to the Company’s operating expenses for the three months ended March 31 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | 2017 | 2016 | Increase (Decrease) | % Change | |||||||||||||||||||||||||
Salaries and related costs | $ | 2,490 | $ | 2,301 | $ | 189 | 8.2 | $ | 2,661 | $ | 2,490 | $ | 171 | 6.9 | ||||||||||||||||||
Aircraft fuel | 1,218 | 1,864 | (646) | (34.7) | 1,560 | 1,218 | 342 | 28.1 | ||||||||||||||||||||||||
Landing fees and other rent | 525 | 543 | (18) | (3.3) | 544 | 525 | 19 | 3.6 | ||||||||||||||||||||||||
Regional capacity purchase | 522 | 570 | (48) | (8.4) | 536 | 522 | 14 | 2.7 | ||||||||||||||||||||||||
Depreciation and amortization | 479 | 429 | 50 | 11.7 | 518 | 479 | 39 | 8.1 | ||||||||||||||||||||||||
Aircraft maintenance materials and outside repairs | 402 | 397 | 5 | 1.3 | 454 | 402 | 52 | 12.9 | ||||||||||||||||||||||||
Distribution expenses | 303 | 312 | (9) | (2.9) | 307 | 303 | 4 | 1.3 | ||||||||||||||||||||||||
Aircraft rent | 178 | 201 | (23) | (11.4) | 179 | 178 | 1 | 0.6 | ||||||||||||||||||||||||
Special charges | 190 | 64 | 126 | NM | 51 | 190 | (139) | NM | ||||||||||||||||||||||||
Other operating expenses | 1,239 | 1,186 | 53 | 4.5 | 1,332 | 1,239 | 93 | 7.5 | ||||||||||||||||||||||||
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$ | 7,546 | $ | 7,867 | $ | (321) | (4.1) | $ | 8,142 | $ | 7,546 | $ | 596 | 7.9 | |||||||||||||||||||
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Salaries and related costs increased $189$171 million, or 8.2%6.9%, in the first quarter of 20162017 as compared to theyear-ago period primarily due to higher pay rates and benefit expenses driven by the extension of the currentnew and extended collective bargaining agreement with the pilots, an increase in profit sharing primarily due to increased profitabilityagreements, and a 1.0%3.3% increase in average full-time equivalent employees.employees, partially offset by a decrease in profit sharing expense and other employee incentive programs expense.
Aircraft fuel expense decreased $646increased $342 million, or 34.7%28.1%, year-over-year primarily due to a 34.1% decrease24.8% increase in the average price per gallon of aircraft fuel in the first quarter of 20162017 compared to theyear-ago period. The table below presents the significant changes in aircraft fuel cost per gallon in the three month period ended March 31, 20162017 as compared to theyear-ago period:
(In millions) | Average price per gallon | (In millions) | Average price per gallon | |||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | % Change | 2016 | 2015 | % Change | 2017 | 2016 | % Change | 2017 | 2016 | % Change | |||||||||||||||||||||||||||||||||||||
Total aircraft fuel purchase cost excluding fuel hedge impacts | $ | 1,080 | $ | 1,703 | (36.6) | $ | 1.21 | $ | 1.90 | (36.3) | $ | 1,558 | $ | 1,080 | 44.3 | $ | 1.71 | $ | 1.21 | 41.3 | ||||||||||||||||||||||||||||
Hedge losses reported in fuel expense | (138) | (161) | NM | (0.16) | (0.18) | NM | 2 | 138 | NM | — | 0.16 | NM | ||||||||||||||||||||||||||||||||||||
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Fuel expense as reported | 1,218 | 1,864 | (34.7) | 1.37 | 2.08 | (34.1) | ||||||||||||||||||||||||||||||||||||||||||
Cash paid on settled hedges that did not qualify for hedge accounting | (5) | (39) | NM | — | (0.04) | NM | ||||||||||||||||||||||||||||||||||||||||||
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Fuel expense including all gains (losses) from settled hedges | $ | 1,223 | $ | 1,903 | (35.7) | $ | 1.37 | $ | 2.12 | (35.4) | ||||||||||||||||||||||||||||||||||||||
Fuel expense | $ | 1,560 | $ | 1,218 | 28.1 | $ | 1.71 | $ | 1.37 | 24.8 | ||||||||||||||||||||||||||||||||||||||
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Total fuel consumption (gallons) | 890 | 896 | (0.7) | 910 | 890 | 2.2 |
Regional capacity purchase decreased $48 million or 8.4% in the first quarter of 2016 as compared to the year-ago period primarily due to a decrease in regional capacity, a decrease in one-time start-up and exit costs and timing of pass-through maintenance costs, partially offset by contractual rate increases.
Depreciation and amortization increased $50$39 million, or 11.7%8.1%, in the first quarter of 20162017 as compared to theyear-ago period, primarily due to additions inof new aircraft, aircraft improvements, accelerated depreciation of assets related to certain fleet types and conversions of operating leases to capital leases.increases in information technology assets.
Aircraft rent decreased $23maintenance materials and outside repairs increased $52 million, or 11.4%12.9%, in the first quarter of 20162017 as compared to theyear-ago period, primarily due to an increase in airframe maintenance visits.
Other operating expenses increased $93 million, or 7.5%, in the purchase or capital lease conversionfirst quarter of several operating leased aircraft, lower lease renewal rates for certain aircraft2017 as compared to theyear-ago period primarily due to increases in food and lease expirations.other amenities associated with the Company’s customer experience initiatives and increases in other purchased services and technology initiatives’ contractor costs.
Details of the Company’s special charges include the following for the three months ended March 31 (in millions):
2016 | 2015 | 2017 | 2016 | |||||||||||||
Severance and benefit costs | $ | 37 | $ | 8 | ||||||||||||
Labor agreement costs | $ | 100 | $ | — | — | 100 | ||||||||||
Cleveland airport lease restructuring | 74 | — | — | 74 | ||||||||||||
Severance and benefit costs | 8 | 50 | ||||||||||||||
(Gains) losses on sale of assets and other special charges | 8 | 14 | 14 | 8 | ||||||||||||
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Special charges | $ | 190 | $ | 64 | $ | 51 | $ | 190 | ||||||||
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See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information.
Other operating expenses increased $53 million, or 4.5%, in the first quarter of 2016 as compared to the year-ago period primarily due to food and technology costs associated with the Company’s enhanced customer experience initiatives, increases in ground handling costs due to higher rates at certain stations, and rate-driven increases in personnel-related expenses.
Nonoperating Income (Expense).The following table illustrates the year-over-year dollar and percentage changes in the Company’s nonoperating income (expense) for the three months ended March 31 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Interest expense | $ | (159) | $ | (173) | $ | (14) | (8.1) | |||||||||
Interest capitalized | 14 | 12 | 2 | 16.7 | ||||||||||||
Interest income | 8 | 5 | 3 | 60.0 | ||||||||||||
Miscellaneous, net | (18) | (74) | (56) | (75.7) | ||||||||||||
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Total | $ | (155) | $ | (230) | $ | (75) | (32.6) | |||||||||
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In the first quarter of 2016, Miscellaneous, net did not include any gains or losses from derivatives not qualifying for hedge accounting as compared to losses of $43 million in the year-ago period. Foreign currency losses were approximately $15 million and $26 million in the first quarters of 2016 and 2015, respectively. The 2016 foreign currency loss includes $8 million of losses due to exchange rate changes in Venezuela applicable to funds held in local currency. See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information.
2017 | 2016 | Increase (Decrease) | % Change | |||||||||||||
Interest expense | $ | (150) | $ | (159) | $ | (9) | (5.7) | |||||||||
Interest capitalized | 23 | 14 | 9 | 64.3 | ||||||||||||
Interest income | 11 | 8 | 3 | 37.5 | ||||||||||||
Miscellaneous, net | (17) | (18) | (1) | (5.6) | ||||||||||||
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Total | $ | (133) | $ | (155) | $ | (22) | (14.2) | |||||||||
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Income Taxes.See Note 4 to the financial statements included in Part I, Item 1 of this report for additional information related to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Current Liquidity
As of March 31, 2017 and at December 31, 2016, the Company had $4.0$4.4 billion in unrestricted cash, cash equivalents and short-term investments, as compared to $5.2 billion at December 31, 2015.investments. At March 31, 2016,2017, the Company also had $180$129 million of restricted cash and cash equivalents, which is primarily collateral for performance bonds, letters of credit and estimated future workers’ compensation claims and credit card processing agreements.claims. As of March 31, 2016,2017, the Company had its entire commitment capacity of $1.35$2 billion under the revolving credit facility of the Company’s 2013Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017 (the “Credit“2017 Credit Agreement”) available for letters of credit or borrowings.
As is the case with many of our principal competitors, we have a high proportion of debt compared to capital and a deficit in working capital. We have a significant amount of fixed obligations, including debt, aircraft leases and financings, leases of airport property and other facilities, and pension funding obligations. At March 31, 2016,2017, the Company had approximately $11.6$12.8 billion of debt and capital lease obligations, including $1.4 billion$829 million that will become due in the next 12 months. In addition, we have substantial noncancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. As of March 31, 2016,2017, our current liabilities exceeded our current assets by approximately $6.2$5 billion. However, approximately $7.1$7 billion of our current liabilities are related to our Advanceadvance ticket sales and Frequentfrequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel in the near future and not actual cash outlays. The deficit in working capital does not have an adverse impact to our cash flows, liquidity or operations.
The Company will continue to evaluate opportunities to prepay its debt, including open market repurchases, to reduce its indebtedness and related interest.
As of March 31, 2016,2017, United had firm commitments and options to purchase aircraft from The Boeing Company (“Boeing”), Airbus S.A.S. (“Airbus”) and Embraer S.A. (“Embraer”) and Airbus S.A.S. (“Airbus”) presented in the table below:
Aircraft Type | Number of Firm Commitments (a) | |||
Airbus | 35 | |||
Boeing 737NG/737 MAX | ||||
Boeing777-300ER | 6 | |||
Boeing | ||||
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Embraer E175 | ||||
(a) United also has options and purchase rights for additional aircraft. |
The aircraft listed in the table above are scheduled for delivery through 2024.2027. To the extent the Company and the aircraft manufacturers with whom the Company has existing orders for new aircraft agree to modify the contracts governing those orders, the amount and timing of the Company’s future capital commitments could change. For the remainder of 2016,2017, United expects to take delivery of 13four Boeing 737NG aircraft, one Boeing 777-300ER787-9 aircraft, twosix Boeing 787-9777-300ER aircraft, and nine24 Embraer E175 aircraft. UnitedE175. Additionally, the Company also currently expects to assigntake delivery of five used A319s in 2017. During the nine Embraer E175three months ended March 31, 2017, the Company also purchased 12 Boeing 737NG aircraft immediately prior to each aircraft’s deliverywhich were previously leased by Embraer to a designated United Express operator.United.
As of March 31, 2016,2017, UAL and United have total capital commitments primarily related to the acquisition of aircraft and related spare engines, aircraft improvements and include other capital purchase commitments for approximately $23.2 billion, of which approximately $2.9 billion, $2.8 billion, $3.5 billion, $3.1 billion, $2.2 billion and $8.7 billion are due in the last nine months of 2017 and for the full year for 2018, 2019, 2020, 2021 and thereafter, respectively. Any new firm aircraft orders, including through the exercise of purchase options and purchase rights, will increase the total future capital commitments of the Company.
As of March 31, 2017, United has $0.6 billion in financing available through enhanced equipment trust certificates (“EETC”) transactions for the financing of all of its aircraft deliveries scheduled for the first half of 2017. See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on aircraft financing. The Company has also secured backstop financing commitments from certain of its aircraft manufacturers for a limited number of its future aircraft deliveries, subject to certain customary conditions. Financing may be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures.
As of March 31, 2016, UAL and United have total capital commitments primarily related to the acquisition of aircraft and related spare engines, aircraft improvements and acquisition of information technology services and assets of approximately $23.2 billion, of which approximately $2.9 billion, $3.9 billion, $3.9 billion, $3.2 billion, $2.4 billion and $6.9 billion are due in the last nine months of 2016 and for the full year for 2017, 2018, 2019, 2020 and thereafter, respectively. Any new firm aircraft orders, including through the exercise of purchase options and purchase rights, will increase the total future capital commitments of the Company.
As of March 31, 2016, a substantial portion of the Company’s assets, principally aircraft, route authorities, airport slots and loyalty program intangible assets, was pledged under various loan and other agreements. We must sustain our profitability and/or access the capital markets to meet our significant long-term debt and capital lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines.
Credit Ratings.As of the filing date of this report, UAL and United had the following corporate credit ratings:
S&P | Moody’s | Fitch | ||||
UAL | BB- | |||||
United | BB- | * | ||||
* The credit agency does not issue corporate credit ratings for subsidiary entities. |
These credit ratings are below investment grade levels. Downgrades from these rating levels, among other things, could restrict the availability or increase the cost of future financing for the Company.
Sources and Uses of Cash
Operating Activities.Cash flow provided by operations was $0.5 billion for the three months ended March 31, 2016 was $1.2 billion2017 compared to $1.8$1.2 billion in the same period in 2015. The decrease is primarily attributable to differences2016. Operating income for the first three months of 2017 decreased approximately $0.4 billion versus theyear-ago period. Changes in working capital changes in the first quarter of 2016 versus the prior year. The following were significant working capital items in 2016: Cash flows decreased as the company paid approximately $0.7 billion in profit sharing to qualified employees in 2016 (as compared toincluded an approximately $0.2 billion decrease in 2015). Further, credit card receivables increased by approximately $0.2 billion as a result of a temporary cash transfer issue with a credit card company, which was resolved in April 2016. Frequent flyer deferred revenue and advanced purchase of miles decreased by approximately $0.1 billion due to increased utilization ofpre-purchased miles. These decreases from working capital items were partially offset by $0.1 billion in lower pension obligation funding.
Investing Activities.Capital expenditures were $0.8$0.7 billion and $0.2$0.8 billion in the three months ended March 31, 20162017 and 2015,2016, respectively. Capital expenditures for the three months ended March 31, 20162017 were primarily attributable to the purchase of aircraft, facility and fleet-related costs. In addition to capital expenditures during the three months ended March 31, 2016, we acquired one aircraft through the issuance of debt.
Financing Activities.During the three months ended March 31, 2016,2017, the Company made debt and capital lease payments of $261 million.$0.3 billion.
In January 2015,On March 29, 2017, United and UAL, as borrower and guarantor, respectively, entered into the holders2017 Credit Agreement. The 2017 Credit Agreement consists of substantially all of the remaining $202 million principal amount of United’s 4.5% Convertible Notesa $1.5 billion term loan due 2015 exercised their conversion option resulting in the issuance of 11 million shares of UAL common stock.
In the first quarter of 2015, UAL used cash to repurchase $18 million par value 6% Notes due 2026 (the “2026 Notes”) in market transactions. On April 1, 2015, UAL2024, which (i) was used cash to redeem, at par,retire the remaining $303 millionentire principal balance of the 2026 Notes.
Interm loans under the first quarter of 2015, UAL used cash to repurchase $13credit and guaranty agreement, dated March 27, 2013 (as amended, the “2013 Credit Agreement”), and (ii) increased the term loan balance by approximately $440 million, par value 6% Notes due 2028 (the “2028 Notes”) in market transactions. On Mayand a $2.0 billion revolving credit facility available for drawing until April 1, 2015, UAL used cash to redeem, at par,2022, which increased the remaining $298 million balance of the 2028 Notes.
In the first quarter of 2015, United issued $0.7 billion of debt related to a 2014 enhanced equipment trust certificates offering to finance new aircraft.
As of March 31, 2016, United had its entireavailable capacity of $1.35 billion available under the revolving credit facility of the Company’s2013 Credit Agreement. See Note 11 inAs of March 31, 2017, United had its entire capacity of $2.0 billion available under the Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”) for additional information on the terms of the Credit Agreement.
revolving credit facility. The obligations of United under the 2017 Credit Agreement are secured by liens on certain international route authorities, between certain specified cities, certain take-off and landing rights and related assets of United. Certain
Borrowings under the 2017 Credit Agreement bear interest at a variable rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a 0% floor, plus a margin of 2.25% per annum, or another rate based on certain market interest rates, plus a margin of 1.25% per annum. The principal amount of the term loan must be repaid in consecutive quarterly installments of 0.25% of the original principal amount thereof, commencing on June 30, 2017, with any unpaid balance due on April 1, 2024. United may prepay all or a portion of the loan from time to time, at par plus accrued and unpaid interest. United pays a commitment fee equal to 0.75% per annum on the undrawn amount available under the revolving credit facility.
The 2017 Credit Agreement includes covenants inthat, among other things, require the Company to maintain at least $2.0 billion of unrestricted liquidity and a minimum ratio of appraised value of collateral to the outstanding obligations under the Credit Agreement of 1.60 to 1.0. The 2017 Credit Agreement contains events of default customary for this type of financing, including a cross default and in the Company’s indentures are summarized in Note 11cross acceleration provision to certain other material indebtedness of the 2015 Annual Report. The Company was in compliance with allCompany. Under the provisions of these covenants as ofthe 2017 Credit Agreement, UAL’s ability to make investments and to pay dividends on, or repurchase, UAL’s common stock is restricted.
In the three months ended March 31, 2017, United received and recorded $710 million of proceeds as debt from the two EETC pass-through trusts established in 2016. United expects to receive all proceeds from the pass-through trusts by the end of the second quarter of 2017. See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information.
In the three months ended March 31, 2017, United received and recorded $300 million proceeds of the 5% Senior Notes.
Share Repurchase Program.Programs.In the three months ended March 31, 2016,2017, UAL repurchased 27approximately 5 million shares of UAL common stock in open market transactions, for $1.5 billion, of which $0.1 billion settled in April 2016.$0.3 billion. As of March 31, 2016,2017, the Company had $948 millionapproximately $1.5 billion remaining to purchase shares under its existing share repurchase authority.
UAL may repurchase shares through the 2015 Program. The Company expectsopen market, privately negotiated transactions, block trades or accelerated share repurchase transactions from time to complete its repurchases under the 2015 Program by September 30, 2016.time in accordance with applicable securities laws. UAL will repurchase shares of UAL common stock subject to prevailing market conditions, and may discontinue such repurchases at any time. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.
Commitments, Contingencies and Liquidity Matters.As described in the 2015Company’s Annual Report on Form10-K for the year ended December 31, 2016 (“2016 Annual Report”), the Company’s liquidity may be adversely impacted by a variety of factors, including, but not limited to, obligations associated with fuel hedge settlements and related collateral requirements, pension funding obligations, reserve requirements associated with credit card processing agreements, guarantees, commitments and contingencies.
See the 20152016 Annual Report and Notes 5, 7, 8 and 9 to the financial statements contained in Part I, Item 1 of this report for additional information.
Other.In April 2016, the Federal Aviation Administration (“FAA”) announced that it will designate Newark Liberty International Airport (“Newark”) as a Level 2 schedule-facilitated airport under the International Air Transport Association Worldwide Slot Guidelines effective October 30, 2016. Newark is currently designated as a Level 3 slot-controlled airport. The Company is evaluating the impact, if any, of the change in designation on its $412 million intangible asset related to its Newark slots. Further, the Newark slots serve as part of the collateral for the term loans under the Credit Agreement and under the Second Amended and Restated Co-Branded Card Marketing Services Agreement with Chase Bank USA, N.A.The Company is evaluating the impact of the FAA’s action on the Newark slot collateral for the term loans and to the extent necessary, the Company will substitute other collateral.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
The Company evaluates its financial performance utilizing various GAAP and Non-GAAP financial measures, including CASM and Non-GAAP net income (net income excluding special charges and reflecting Hedge Program Adjustments). CASM is a common metric used in the airline industry to measure an airline’s cost structure and efficiency. The Non-GAAP financial measures in this report are presented because they provide management and investors the ability to measure and monitor the
Company’s performance on a consistent basis. The Company believes that adjusting for special charges is useful to investors because they are nonrecurring charges not indicative of UAL’s ongoing performance. In addition, the Company believes that reflecting Hedge Program Adjustments is useful because the adjustments allow investors to better understand the cash impact of settled fuel derivative contracts in a given period. Reconciliations of net income and diluted earnings per share to the Non-GAAP financial measures of net income and diluted earnings per share, excluding special charges and reflecting Hedge Program Adjustments, for the three months ended March 31 are as follows in the tables below (in millions, except per share amounts):
Three Months Ended March 31, | ||||||||||||||||
Net Income 2016 | Diluted Earnings per Share 2016 | Net Income 2015 | Diluted Earnings per Share 2015 | |||||||||||||
Net income—GAAP | $ | 313 | $ | 0.88 | $ | 508 | $ | 1.32 | ||||||||
Special charges, net of tax (a) | 126 | 0.36 | 70 | 0.18 | ||||||||||||
Mark-to-market losses from fuel derivative contracts settling in future periods | — | — | 36 | 0.10 | ||||||||||||
Prior period losses on fuel derivative contracts settled in the current period | (4) | (0.01) | (32) | (0.08) | ||||||||||||
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Net income excluding special charges, net and reflecting Hedge Program Adjustments—Non-GAAP | $ | 435 | $ | 1.23 | $ | 582 | $ | 1.52 | ||||||||
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(a) See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information related to special charges, net.
CRITICAL ACCOUNTING POLICIES
See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20152016 Annual Report and Note 1 to the financial statements contained in Part I, Item 1 of this report for a discussion of the Company’s critical accounting policies.
FORWARD-LOOKING INFORMATION
Certain statements throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward-looking and thus reflect our current expectations and beliefs with respect to certain current and future events and anticipated financial and operating performance. Such forward-looking statements are and will be subject to many risks and uncertainties relating to our operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward-looking statements. Words such as “expects,” “will,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook,” “goals” and similar expressions are intended to identify forward-looking statements.
Additionally, forward-looking statements include statements that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law.
Our actual results could differ materially from these forward-looking statements due to numerous factors including, without limitation, the following: our ability to comply with the terms of our various financing arrangements; the costs and availability of financing; itsour ability to maintain adequate liquidity; our ability to execute our operational plans and revenue-generating initiatives, including optimizing itsour revenue; our ability to control our costs, including realizing benefits from our resource optimization efforts, cost reduction initiatives and fleet replacement programs; costs associated with any modification or termination of our aircraft orders; our ability to utilize our net operating losses; our ability to attract and retain customers; potential reputational or other impact from adverse events in our operations; demand for transportation in the markets in which we operate; an outbreak of a disease that affects travel demand or travel behavior; demand for travel and the impact that global economic and political conditions have on customer travel patterns; excessive taxation and the inability to offset future taxable income; general economic conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices, costs of
aircraft fuel and energy refining capacity in relevant markets); economic and political instability and other risks of doing business globally; itsour ability to cost-effectively hedge against increases in the price of aircraft fuel;fuel if we decide to do so; any potential realized or unrealized gains or losses related to fuel or currency hedging programs; the effects of any hostilities, act of war or terrorist attack; the ability of other air carriers with whom we have alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; the effects of any technology failures or cybersecurity breaches; disruptions to our regional network; the costs and availability of aviation and other insurance; industry consolidation or changes in airline alliances; the success of our investments in airlines in other parts of the world; competitive pressures on pricing and on demand; itsour capacity decisions and the capacity decisions of our competitors; U.S. or foreign governmental legislation, regulation and other actions (including open skiesOpen Skies agreements and environmental regulations); the impact of regulatory, investigative and legal proceedings and legal compliance risks; the impact of any management changes; labor costs; our ability to maintain satisfactory labor relations and the results of theany collective bargaining agreement process with our union groups; any disruptions to operations due to any potential actions by our labor groups; weather conditions; and other risks and uncertainties set forth under Part I, Item 1A., “Risk Factors” of UAL’sour 2016 Annual Report, on Form 10-K, as well as other risks and uncertainties set forth from time to time in the reports we file with the U.S. Securities and Exchange Commission (the “SEC”).
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
There have been no material changes in market risk from the information provided in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our 20152016 Annual Report except as follows:
Aircraft Fuel. As of March 31, 2016, the Company had hedged approximately 12% of its projected fuel requirements (378 million gallons) for the remainder of 2016 with commonly used financial hedge instruments based on aircraft fuel or crude oil. As of March 31, 2016, the Company had fuel hedges expiring through December 2016.
At March 31, 2016, fuel derivatives were in a net liability position of $32 million. See Note 7 to the financial statements included in Part I, Item 1 of this report for additional information related to fuel hedges.
The fuel derivative portfolio is comprised of many individual derivative contracts (primarily option contracts) on multiple underlying commodities and entered into at various points in time, resulting in a wide range of strike prices with several hedge counterparties. The table below provides a view of the economic impact of the fuel derivative portfolio on the Company’s fuel costs given significant moves (up to +/-30%) in market fuel prices from March 31, 2016 (in millions).
Period from April 1, 2016 to December 31, 2016 | ||||||||||||
Change in | (Increase) decrease to unhedged fuel cost (b) | Fuel derivative gain (c) | Net (increase) decrease to fuel cost | |||||||||
30% | $ | (1,060 | ) | $ | 47 | $ | (1,013 | ) | ||||
20% | (707 | ) | 44 | (663 | ) | |||||||
10% | (353 | ) | 15 | (338 | ) | |||||||
(10)% | 353 | — | 353 | |||||||||
(20)% | 707 | — | 707 | |||||||||
(30)% | 1,060 | — | 1,060 |
(a) Projected using equal shifts in spot and forward prices for aircraft fuel and crude oil underlying hedge contracts at March 31, 2016 levels.
(b) Projections based on an average forward price of $1.16 per gallon, excluding taxes and other delivery costs and estimated consumption of 3.0 billion gallons for the nine months ending December 31, 2016.
(c) Change in projected cash gain/(loss) on existing fuel derivatives as of March 31, 2016. Includes all fuel derivatives whether or not the fuel derivatives are designated for hedge accounting. Within these price ranges, the Company would neither receive nor post collateral.Report.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Control and Procedures
The Company maintains controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted to the SEC is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive Officer and acting Chief Financial Officer, performed an evaluation to conclude with reasonable assurance that UAL’s and United’s disclosure controls and procedures were designed and operating effectively to report the information each company is required to disclose in the reports they file with the SEC on a timely basis. Based on that evaluation, the Chief Executive Officer and the acting Chief Financial Officer of UAL and United have concluded that as of March 31, 2016,2017, disclosure controls and procedures of each of UAL and United were effective.
Changes in Internal Control over Financial Reporting during the Quarter Ended March 31, 20162017
During the three months ended March 31, 2016,2017, there were no changes in UAL’s or United’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, their internal control over financial reporting (as defined inrules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934).
ITEM 1. | LEGAL PROCEEDINGS |
See Part I, Item 3., “Legal Proceedings” of the 2016 Annual Report for a description of legal proceedings.
ITEM 1A. | RISK FACTORS |
See Part I, Item 1A., “Risk Factors,” of the 2016 Annual Report for a detailed discussion of the risk factors affecting UAL and United.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
(a) None
(b) None
(c) The following table presents repurchases of UAL common stock made in the first quarter of fiscal year 2016:2017:
Period | Total number of shares purchased (a) | Average price paid per share (b) | Total number of shares purchased as part of publicly announced plans or programs (a) | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (a) | ||||||||||||
January 1, 2016 through January 31, 2016 | 3,312,112 | $ | 48.28 | 3,312,112 | $ | 2,288 | ||||||||||
February 1, 2016 through February 29, 2016 | 9,316,774 | 51.17 | 9,316,774 | 1,812 | ||||||||||||
March 1, 2016 through March 31, 2016 | 14,753,555 | 58.52 | 14,753,555 | 948 | ||||||||||||
|
|
|
| |||||||||||||
Total | 27,382,441 | 27,382,441 | ||||||||||||||
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|
|
|
|
Period | Total number of shares purchased (a)(b) | Average price paid per share (b)(c) | Total number of shares purchased as part of publicly announced plans or programs (a) | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (a) | ||||||||||||
January 1, 2017 through January 31, 2017 | — | $ | — | — | $ | 1,844 | ||||||||||
February 1, 2017 through February 28, 2017 | — | — | — | 1,844 | ||||||||||||
March 1, 2017 through March 31, 2017 | 4,578,448 | 68.41 | 4,578,448 | 1,531 | ||||||||||||
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|
| |||||||||||||
Total | 4,578,448 | 4,578,448 | ||||||||||||||
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|
|
|
|
(a) OnIn the three months ended March 31, 2017, UAL repurchased approximately 5 million shares of UAL common stock in open market transactions, for $0.3 billion. In July 21, 2015,2016, UAL’s Board of Directors authorized a new $3$2 billion share repurchase program. As of March 31, 2017, the Company had approximately $1.5 billion remaining to purchase shares under its share repurchase program. UAL may repurchase shares through the open market, privately negotiated transactions, block trades or accelerated share repurchase transactions from time to time in accordance with applicable securities laws. In the three months ended March 31, 2016, UAL repurchased 27 million shares of UAL common stock in open market transactions for $1.5 billion, of which $0.1 billion settled in April 2016. As of March 31, 2016, the Company had $948 million remaining to purchase shares under the 2015 Program. The Company expects to complete its repurchases under the 2015 Program by September 30, 2016. UAL will repurchase shares of UAL common stock subject to prevailing market conditions, and may discontinue such repurchases at any time.
(b) The table does not include shares withheld from employees to satisfy certain tax obligations due upon the vesting of restricted stock.stock awards and restricted stock units. The United Continental Holdings, Inc. 2008 Incentive Compensation Plan provides for the withholding of shares to satisfy tax obligations due upon the vesting of restricted stock. However, this plan does not specify a maximum number of shares that may be withheld for this purpose. A total of 60,275169,556 shares were withheld under this plan in the first quarter of 20162017 at an average share price of $55.35.$74.28. These shares of common stock withheld to satisfy tax withholding obligations may be deemed to be “issuer purchases” of shares that are required to be disclosed pursuant to this Item.
(b)(c) Average price paid per share is calculated on a settlement basis and excludes commission.
ITEM 6. | EXHIBITS. |
A list of exhibits included as part of this Form10-Q is set forth in an Exhibit Index that immediately precedes the exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
United Continental Holdings, Inc. | ||||||
(Registrant) | ||||||
Date: April | By: | /s/ | ||||
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Date: April | By: | /s/ Chris Kenny | ||||
Chris Kenny | ||||||
Vice President and Controller | ||||||
(principal accounting officer) | ||||||
United Airlines, Inc. | ||||||
(Registrant) | ||||||
Date: April | By: | /s/ | ||||
| ||||||
| ||||||
Date: April | By: | /s/ Chris Kenny | ||||
Chris Kenny | ||||||
Vice President and Controller | ||||||
(principal accounting officer) |
Exhibit No. | Registrant | Exhibit | ||
| UAL United | |||
^10.1 | UAL United | |||
UAL
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UAL
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UAL
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, as parent and a guarantor, the subsidiaries of UAL
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12.1 | UAL | United Continental Holdings, Inc. and Subsidiary Companies Computation of Ratio of Earnings to Fixed Charges | ||
12.2 | United | United Airlines, Inc. and Subsidiary Companies Computation of Ratio of Earnings to Fixed Charges | ||
31.1 | UAL | Certification of the Principal Executive Officer of United Continental Holdings, Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) | ||
31.2 | UAL | Certification of the Principal Financial Officer of United Continental Holdings, Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) | ||
31.3 | United | Certification of the Principal Executive Officer of United Airlines, Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) | ||
31.4 | United | Certification of the Principal Financial Officer of United Airlines, Inc. Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) | ||
32.1 | UAL | Certification of the Chief Executive Officer and Chief Financial Officer of United Continental Holdings, Inc. Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) | ||
32.2 | United | Certification of the Chief Executive Officer and Chief Financial Officer of United Airlines, Inc. Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) | ||
101.1 | UAL United | XBRL Instance Document | ||
101.2 | UAL United | XBRL Taxonomy Extension Schema Document | ||
101.3 | UAL United | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.4 | UAL United | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.5 | UAL United | XBRL Taxonomy Extension Labels Linkbase Document | ||
101.6 | UAL United | XBRL Taxonomy Extension Presentation Linkbase Document |
^ Confidential portion of this exhibit has been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
* Previously filed.
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