United Airlines Reports First-Quarter 2017 Performance

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

Three Months Ended
March 31,

%

Increase/

(Decrease)

(In millions, except per share data)

2017

2016

Operating revenue:

Passenger – Mainline

$

5,831

$

5,577

4.6

Passenger – Regional

1,343

1,413

(5.0)

Total passenger revenue (B)

7,174

6,990

2.6

Cargo

220

194

13.4

Other operating revenue

1,026

1,011

1.5

Total operating revenue

8,420

8,195

2.7

Operating expense:

Salaries and related costs

2,661

2,490

6.9

Aircraft fuel (C)

1,560

1,218

28.1

Landing fees and other rent

544

525

3.6

Regional capacity purchase

536

522

2.7

Depreciation and amortization

518

479

8.1

Aircraft maintenance materials and outside repairs

454

402

12.9

Distribution expenses

307

303

1.3

Aircraft rent

179

178

0.6

Special charges (D)

51

190

NM

Other operating expenses

1,332

1,239

7.5

Total operating expense

8,142

7,546

7.9

Operating income

278

649

(57.2)

Operating margin

3.3

%

7.9

%

(4.6)

pts.

Operating margin, excluding special charges (A) (Non-GAAP)

3.9

%

10.2

%

(6.3)

pts.

Nonoperating income (expense):

Interest expense

(150)

(159)

(5.7)

Interest capitalized

23

14

64.3

Interest income

11

8

37.5

Miscellaneous, net (D)

(17)

(18)

(5.6)

Total nonoperating expense

(133)

(155)

(14.2)

Income before income taxes

145

494

(70.6)

Pre-tax margin

1.7

%

6.0

%

(4.3)

pts.

Pre-tax margin, excluding special items (A) (Non-GAAP)

2.3

%

8.4

%

(6.1)

pts.

Income tax expense (E)

49

181

(72.9)

Net income

$

96

$

313

(69.3)

Earnings per share, diluted

$

0.31

$

0.88

(64.8)

Weighted average shares, diluted

315

355

(11.3)

NM Not meaningful

UNITED CONTINENTAL HOLDINGS, INC.

STATISTICS

Three Months Ended
March 31,

%

Increase/

(Decrease)

2017

2016

Mainline:

Passengers (thousands)

23,825

22,277

6.9

Revenue passenger miles (millions)

42,183

40,856

3.2

Available seat miles (millions)

53,054

51,165

3.7

Cargo ton miles (millions)

748

622

20.3

Passenger revenue per available seat mile (cents)

10.99

10.90

0.8

Average yield per revenue passenger mile (cents)

13.82

13.65

1.2

Aircraft in fleet at end of period

743

719

3.3

Average stage length (miles)

1,802

1,859

(3.1)

Average daily utilization of each aircraft (hours)

9:45

  9:36

1.6

Regional:

Passengers (thousands)

9,280

9,810

(5.4)

Revenue passenger miles (millions)

5,428

5,726

(5.2)

Available seat miles (millions)

6,754

7,108

(5.0)

Passenger revenue per available seat mile (cents)

19.88

19.88

—

Average yield per revenue passenger mile (cents)

24.74

24.68

0.2

Aircraft in fleet at end of period

478

503

(5.0)

Average stage length (miles)

573

575

(0.3)

Consolidated (Mainline and Regional):

Passengers (thousands)

33,105

32,087

3.2

Revenue passenger miles (millions)

47,611

46,582

2.2

Available seat miles (millions)

59,808

58,273

2.6

Passenger load factor:

Consolidated

79.6

%

79.9

%

(0.3)

pts.

Domestic

83.3

%

82.9

%

0.4

pts.

International

75.2

%

76.4

%

(1.2)

pts.

Passenger revenue per available seat mile (cents)

12.00

12.00

—

Total revenue per available seat mile (cents)

14.08

14.06

0.1

Average yield per revenue passenger mile (cents)

15.07

15.01

0.4

Aircraft in fleet at end of period

1,221

1,222

(0.1)

Average stage length (miles)

1,451

1,461

(0.7)

Average full-time equivalent employees (thousands)

85.2

82.5

3.3

Note: See Part II, Item 6 Selected Financial Data of the company’s annual report on Form 10-K for the year ended December 31, 2016 for the definition of these statistics.   

UNITED CONTINENTAL HOLDINGS, INC.

SUMMARY FINANCIAL METRICS

Note (A) provides a reconciliation of non-GAAP financial metrics to the comparable GAAP financial metrics and provides the reasons UAL management believes these financial metrics are useful.

Three Months Ended
March 31,

%

Increase/

(Decrease)

2017

2016

(In millions, except per share data)

Operating income (GAAP)

$

278

$

649

(57.2)

Operating margin (GAAP)

3.3

%

7.9

%

(4.6)

pts.

Operating income, excluding Special charges (Non-GAAP)

329

839

(60.8)

Operating margin, excluding Special charges (Non-GAAP)

3.9

%

10.2

%

(6.3)

pts.

Adjusted EBITDA, excluding special items  (Non-GAAP)

$

830

$

1,304

(36.3)

Adjusted EBITDA margin, excluding special items (Non-GAAP)

9.9

%

15.9

%

(6.0)

pts.

Adjusted EBITDAR, excluding special items (Non-GAAP)

1,009

1,482

(31.9)

Adjusted EBITDAR margin, excluding special items (Non-GAAP)

12.0

%

18.1

%

(6.1)

pts.

Pre-tax income (GAAP)

$

145

$

494

(70.6)

Pre-tax margin (GAAP)

1.7

%

6.0

%

(4.3)

pts.

Pre-tax income, excluding special items (Non-GAAP)

196

688

(71.5)

Pre-tax margin, excluding special items (Non-GAAP)

2.3

%

8.4

%

(6.1)

pts.

Net income (GAAP)

$

96

$

313

(69.3)

Net income, excluding special items (Non-GAAP)

129

435

(70.3)

Diluted earnings per share (GAAP)

$

0.31

$

0.88

(64.8)

Diluted earnings per share, excluding special items (Non-GAAP)

0.41

1.23

(66.7)

Net cash provided by operating activities

$

547

$

1,199

(54.4)

Capital expenditures

$

691

$

816

(15.3)

Adjusted capital expenditures

1,354

823

64.5

Free cash flow, net of financings (Non-GAAP)

$

(144)

$

383

NM

Free cash flow (Non-GAAP)

(807)

376

NM

UNITED CONTINENTAL HOLDINGS, INC.

RETURN ON INVESTED CAPITAL (ROIC)

ROIC is a Non-GAAP financial measure that we believe provides useful supplemental information for management and investors by measuring the effectiveness of our operations’ use of invested capital to generate profits. ROIC is calculated as the company’s net operating profit after tax (“NOPAT”) divided by the company’s average invested capital.

(in millions)

Twelve Months Ended
March 31, 2017

Net Operating Profit After Tax (NOPAT)

Pre-tax income excluding special items (a)

$

3,970

NOPAT adjustments (b)

975

NOPAT

$

4,945

Effective cash tax rate (c)

0.5

%

Invested Capital (five-quarter average)

Total assets

$

40,552

Invested capital adjustments (d)

12,271

Average Invested Capital

$

28,281

Return on Invested Capital

17.5

Notes:

Twelve Months Ended
March 31, 2017

(a) Non-GAAP Financial Reconciliation

      Pre-tax income

$

3,470

      Add: Special items

500

      Pre-tax income excluding special items

$

3,970

(b)

NOPAT adjustments include: adding back (net of tax shield) interest expense, the interest component of capitalized aircraft rent, net interest on pension and subtracting cash taxes paid.

(c)

Effective cash tax rate is calculated by dividing cash taxes paid by adjusted pre-tax income.

(d)

Invested capital adjustments include: adding back capital aircraft rent (at 7.0X) and deferred income taxes, less advance ticket sales, frequent flyer deferred revenue, tax valuation allowance and other non-interest bearing liabilities.

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION

(A)   UAL evaluates its financial performance utilizing various accounting principles generally accepted in the United States of America (GAAP) and Non-GAAP financial measures, including operating income (loss) excluding special charges, income (loss) before income taxes excluding special items, net income (loss) excluding special items, net earnings (loss) per share excluding special items, and CASM, as adjusted, among others.

CASM is a common metric used in the airline industry to measure an airline’s cost structure and efficiency. UAL reports CASM excluding special charges, third-party business expenses, fuel and profit sharing. UAL believes that adjusting for special charges is useful to investors because special charges are non-recurring charges not indicative of UAL’s ongoing performance. UAL also believes that excluding third-party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and non-air mileage redemptions, provides more meaningful disclosure because these expenses are not directly related to UAL’s core business. UAL also believes that excluding fuel costs from certain measures is useful to investors because it provides an additional measure of management’s performance excluding the effects of a significant cost item over which management has limited influence. UAL excludes profit sharing because this exclusion allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry. In addition, the company believes that adjusting for prior period gains and losses on fuel derivative contracts settled in the current period is useful because the adjustments allow investors to better understand the cash impact of settled fuel derivative contracts in a given period.

Pursuant to SEC Regulation G, UAL has included the following reconciliations of reported Non-GAAP financial measures to comparable financial measures reported on a GAAP basis.

Three Months Ended
March 31,

%

Increase/

(Decrease)

2017

2016

CASM Mainline Operations (cents)

Cost per available seat mile (CASM)

13.22

12.47

6.0

Less: Special charges (D)

0.09

0.37

NM

Less: Third-party business expenses

0.13

0.13

—

Less: Fuel expense

2.44

2.00

22.0

CASM, excluding special charges, third-party business expenses and fuel

10.56

9.97

5.9

Less: Profit sharing per available seat mile

0.03

0.18

(83.3)

CASM, excluding special charges, third-party business expenses, fuel, and profit sharing

10.53

9.79

7.6

CASM Consolidated Operations (cents)

Cost per available seat mile (CASM)

13.61

12.95

5.1

Less: Special charges (D)

0.08

0.33

NM

Less: Third-party business expenses

0.12

0.11

9.1

Less: Fuel expense

2.60

2.09

24.4

CASM, excluding special charges, third-party business expenses and fuel

10.81

10.42

3.7

Less: Profit sharing per available seat mile

0.04

0.16

(75.0)

CASM, excluding special charges, third-party business expenses, fuel, and profit sharing

10.77

10.26

5.0

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended
March 31,

$

Increase/

(Decrease)

%

Increase/

(Decrease)

(in millions)

2017

2016

Operating expenses

$

8,142

$

7,546

$

596

7.9

Less: Special charges (D)

51

190

(139)

NM

Operating expenses, excluding special charges

8,091

7,356

735

10.0

Less: Third-party business expenses

68

67

1

1.5

Less: Fuel expense

1,560

1,218

342

28.1

Less: Profit sharing, including taxes

20

93

(73)

(78.5)

Operating expenses, excluding fuel, profit sharing, special charges and third-party business expenses

$

6,443

$

5,978

$

465

7.8

Operating income

$

278

$

649

$

(371)

(57.2)

Less: Special charges (D)

51

190

(139)

NM

Operating income, excluding special charges

$

329

$

839

$

(510)

(60.8)

 Income before income taxes

$

145

$

494

$

(349)

(70.6)

Less: special items before income taxes (D)

51

194

(143)

NM

Income before income taxes and excluding special items

$

196

$

688

$

(492)

(71.5)

 Net income

$

96

$

313

$

(217)

(69.3)

Less: special items, net of tax (D)

33

122

(89)

NM

Net income, excluding special items

129

435

(306)

(70.3)

 Diluted earnings per share

$

0.31

$

0.88

$

(0.57)

(64.8)

Less: special items

0.16

0.55

NM

Less: tax effect related to special items

(0.06)

(0.20)

NM

Diluted earnings per share, excluding special items

$

0.41

$

1.23

$

(0.82)

(66.7)

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

UAL provides financial metrics, including earnings before interest, taxes, depreciation and amortization (EBITDA) as well as earnings before interest, taxes, depreciation and amortization, and aircraft rent (EBITDAR), that we believe provides useful supplemental information for management and investors by measuring profit and profit as a percentage of total operating revenues. These financial metrics are adjusted for special items that are non-recurring and that management believes are not indicative of UAL’s ongoing performance.

Three Months Ended
March 31,

EBITDA and EBITDAR

2017

2016

(In millions)

Net income

$

96

$

313

Adjusted for:

Depreciation and amortization

518

479

Interest expense

150

159

Interest capitalized

(23)

(14)

Interest income

(11)

(8)

Income tax expense

49

181

Special items before income taxes (D)

51

194

Adjusted EBITDA, excluding special items

830

1,304

Aircraft rent

179

178

Adjusted EBITDAR, excluding special items

$

1,009

$

1,482

UAL believes that adjusting capital expenditures for assets acquired through the issuance of debt, airport construction financing and excluding fully reimbursable projects is useful to investors in order to appropriately reflect the non-reimbursable funds spent on capital expenditures.

Three Months Ended
March 31,

Capital Expenditures (in millions)

2017

2016

Capital expenditures – GAAP

$

691

$

816

Property and equipment acquired through the issuance of debt

711

59

Airport construction financing

21

9

Fully reimbursable projects

(69)

(61)

Adjusted capital expenditures – Non-GAAP

$

1,354

$

823

Free Cash Flow (in millions)

Net cash provided by operating activities

$

547

$

1,199

Less capital expenditures – GAAP

691

816

Free cash flow, net of financings – Non-GAAP

$

(144)

$

383

Net cash provided by operating activities

$

547

$

1,199

Less adjusted capital expenditures – Non-GAAP

1,354

823

Free cash flow – Non-GAAP

$

(807)

$

376

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(B)     Select passenger revenue information is as follows (in millions):

1Q 2017

Passenger

Revenue

(millions)

Passenger

Revenue

vs.

1Q 2016

PRASM

vs.

1Q 2016

Yield

vs.

1Q 2016

Available

Seat Miles

vs.

1Q 2016

Domestic

$

4,358

3.0%

(0.1%)

(0.6%)

3.1%

Atlantic

1,048

0.8%

2.1%

3.7%

(1.3%)

Pacific

987

3.7%

(3.5%)

(0.1%)

7.4%

Latin America

781

2.0%

2.8%

2.3%

(0.8%)

International

2,816

2.1%

0.0%

1.6%

2.1%

Consolidated

$

7,174

2.6%

0.0%

0.4%

2.6%

Mainline

$

5,831

4.6%

0.8%

1.2%

3.7%

Regional

1,343

(5.0%)

0.0%

0.2%

(5.0%)

Consolidated

$

7,174

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(C)     UAL’s results of operations include fuel expense for both mainline and regional operations.

Three Months Ended
March 31,

%

Increase/

(Decrease)

(In millions, except per gallon)

2017

2016

Mainline fuel expense excluding hedge impacts

$

1,290

$

885

45.8

Hedge losses reported in fuel expense (a)

(2)

(138)

NM

Total mainline fuel expense

1,292

1,023

26.3

Regional fuel expense

268

195

37.4

Consolidated fuel expense

$

1,560

$

1,218

28.1

Mainline fuel consumption (gallons)

761

734

3.7

Mainline average aircraft fuel price per gallon

$

1.70

$

1.39

22.3

Mainline average aircraft fuel price per gallon excluding hedge losses recorded in fuel expense

$

1.70

$

1.21

40.5

Regional fuel consumption (gallons)

149

156

(4.5)

Regional average aircraft fuel price per gallon

$

1.80

$

1.25

44.0

Consolidated fuel consumption (gallons)

910

890

2.2

Consolidated average aircraft fuel price per gallon

$

1.71

$

1.37

24.8

Consolidated average aircraft fuel price per gallon excluding hedge losses recorded in fuel expense

$

1.71

$

1.21

41.3

(a)

Includes losses from settled hedges that were designated for hedge accounting. UAL allocates 100 percent of hedge accounting gains (losses) to mainline fuel expense.

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(D)     Special items include the following:

Three Months Ended
March 31,

(In millions)

2017

2016

Operating:

Severance and benefit costs

$

37

$

8

Labor agreement costs

—

100

Cleveland airport lease restructuring

—

74

(Gains) losses on sale of assets and other special charges

14

8

Special charges

51

190

Nonoperating and income taxes:

Foreign currency loss

—

8

Income tax benefit related to special charges

(18)

(72)

Total operating and nonoperating special charges, net of income taxes

33

126

Prior period losses on fuel derivative contracts settled in the current period

—

(4)

Total special items, net of income taxes

$

33

$

122

Special items

Severance and benefit costs: 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 voluntary early-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 voluntary early-out program for its flight attendants.

Labor agreement costs: In April 2016, the fleet service, passenger service, storekeeper and other employees represented by the International Association of Machinists and Aerospace Workers ratified seven new contracts with the company which extended the contracts through 2021. The company recorded a $100 million ($64 million net of taxes) special charge for bonus payments in conjunction with the ratification of these contracts.

Cleveland airport lease restructuring: During the three months ended March 31, 2016, the City of Cleveland agreed to amend the lease, which runs through 2029, associated with certain excess airport terminal space (principally Terminal D) and related facilities at Hopkins International Airport (“Cleveland“). 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 recorded a net charge of $74 million ($47 million net of taxes) related to the amended lease.

Foreign currency loss: During the three months ended March 31, 2016, the company recorded $8 million of losses ($5 million net of taxes) due to exchange rate changes in Venezuela applicable to funds held in local currency.

Prior period losses on fuel derivative contracts settled in the current period: Prior to 2017, the company used certain combinations of derivative contracts that were economic hedges but did not qualify for hedge accounting under U.S. generally accepted accounting principles.  As with derivatives that qualified for hedge accounting, the economic hedges and individual contracts were part of the company’s program to mitigate the adverse financial impact of potential increases in the price of fuel. The company recorded changes in the fair value of the various contracts that were not designated for hedge accounting to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations. For fuel derivative contracts that settled in the three months ended March 31, 2016, the company recorded mark-to-market losses of $4 million in prior periods.

(E) Effective tax rate: 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, 2017 reflects the impact of discrete events including the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of ASU 2016-09, as well as a change in the mix of domestic and foreign earnings.