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 June 30, 2016March 31, 2017
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 JulyApril 12, 20162017 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 June 30, 2016March 31, 2017
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. | ||||||
Item 1A. | ||||||
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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Operating revenue: | ||||||||||||||||||||||||
Passenger—Mainline | $ | 6,525 | $ | 6,961 | $ | 12,102 | $ | 12,899 | $ | 5,831 | $ | 5,577 | ||||||||||||
Passenger—Regional | 1,578 | 1,715 | 2,991 | 3,197 | 1,343 | 1,413 | ||||||||||||||||||
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Total passenger revenue | 8,103 | 8,676 | 15,093 | 16,096 | 7,174 | 6,990 | ||||||||||||||||||
Cargo | 208 | 229 | 402 | 471 | 220 | 194 | ||||||||||||||||||
Other operating revenue | 1,085 | 1,009 | 2,096 | 1,955 | 1,026 | 1,011 | ||||||||||||||||||
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9,396 | 9,914 | 17,591 | 18,522 | |||||||||||||||||||||
Total operating revenue | 8,420 | 8,195 | ||||||||||||||||||||||
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Operating expense: | ||||||||||||||||||||||||
Salaries and related costs | 2,592 | 2,454 | 5,082 | 4,755 | 2,661 | 2,490 | ||||||||||||||||||
Aircraft fuel | 1,437 | 2,106 | 2,655 | 3,970 | 1,560 | 1,218 | ||||||||||||||||||
Landing fees and other rent | 544 | 525 | ||||||||||||||||||||||
Regional capacity purchase | 551 | 583 | 1,073 | 1,153 | 536 | 522 | ||||||||||||||||||
Landing fees and other rent | 541 | 553 | 1,066 | 1,096 | ||||||||||||||||||||
Depreciation and amortization | 491 | 445 | 970 | 874 | 518 | 479 | ||||||||||||||||||
Aircraft maintenance materials and outside repairs | 448 | 431 | 850 | 828 | 454 | 402 | ||||||||||||||||||
Distribution expenses | 339 | 348 | 642 | 660 | 307 | 303 | ||||||||||||||||||
Aircraft rent | 175 | 194 | 353 | 395 | 179 | 178 | ||||||||||||||||||
Special charges (Note 10) | 434 | 55 | 624 | 119 | 51 | 190 | ||||||||||||||||||
Other operating expenses | 1,328 | 1,300 | 2,567 | 2,486 | 1,332 | 1,239 | ||||||||||||||||||
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8,336 | 8,469 | 15,882 | 16,336 | |||||||||||||||||||||
Total operating expenses | 8,142 | 7,546 | ||||||||||||||||||||||
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Operating income | 1,060 | 1,445 | 1,709 | 2,186 | 278 | 649 | ||||||||||||||||||
Nonoperating income (expense): | ||||||||||||||||||||||||
Interest expense | (157) | (167) | (316) | (340) | (150) | (159) | ||||||||||||||||||
Interest capitalized | 14 | 13 | 28 | 25 | 23 | 14 | ||||||||||||||||||
Interest income | 9 | 6 | 17 | 11 | 11 | 8 | ||||||||||||||||||
Miscellaneous, net (Note 10) | 5 | (100) | (13) | (174) | (17) | (18) | ||||||||||||||||||
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(129) | (248) | (284) | (478) | |||||||||||||||||||||
Total nonoperating expense, net | (133) | (155) | ||||||||||||||||||||||
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Income before income taxes | 931 | 1,197 | 1,425 | 1,708 | 145 | 494 | ||||||||||||||||||
Income tax expense | 343 | 4 | 524 | 7 | 49 | 181 | ||||||||||||||||||
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Net income | $ | 588 | $ | 1,193 | $ | 901 | $ | 1,701 | $ | 96 | $ | 313 | ||||||||||||
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Earnings per share, basic | $ | 1.78 | $ | 3.14 | $ | 2.63 | $ | 4.46 | $ | 0.31 | $ | 0.88 | ||||||||||||
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Earnings per share, diluted | $ | 1.78 | $ | 3.14 | $ | 2.63 | $ | 4.45 | $ | 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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Net income | $ | 588 | $ | 1,193 | $ | 901 | $ | 1,701 | $ | 96 | $ | 313 | ||||||||||||
Other comprehensive income (loss), net change related to: | ||||||||||||||||||||||||
Fuel derivative financial instruments | 33 | 147 | 111 | 233 | ||||||||||||||||||||
Employee benefit plans | 10 | 28 | (14) | 30 | ||||||||||||||||||||
Investments and other | — | (10) | — | 4 | ||||||||||||||||||||
Fuel derivative financial instruments, net of taxes | 1 | 78 | ||||||||||||||||||||||
Employee benefit plans, net of taxes | (8) | (24) | ||||||||||||||||||||||
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43 | 165 | 97 | 267 | |||||||||||||||||||||
Total other comprehensive income (loss), net | (7) | 54 | ||||||||||||||||||||||
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Total comprehensive income, net | $ | 631 | $ | 1,358 | $ | 998 | $ | 1,968 | $ | 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.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) June 30, 2016 | December 31, 2015 | (Unaudited) March 31, 2017 | December 31, 2016 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,483 | $ | 3,006 | $ | 2,164 | $ | 2,179 | ||||||||
Short-term investments | 2,202 | 2,190 | 2,215 | 2,249 | ||||||||||||
Receivables, less allowance for doubtful accounts (2016—$12; 2015—$18) | 1,450 | 1,128 | ||||||||||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2016—$261; 2015—$235) | 798 | 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 | 911 | 766 | 1,016 | 832 | ||||||||||||
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7,844 | 7,828 | |||||||||||||||
Total current assets | 7,724 | 7,309 | ||||||||||||||
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Operating property and equipment: | ||||||||||||||||
Owned— | ||||||||||||||||
Flight equipment | 24,853 | 23,728 | 27,187 | 25,873 | ||||||||||||
Other property and equipment | 4,947 | 4,542 | 5,887 | 5,652 | ||||||||||||
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29,800 | 28,270 | |||||||||||||||
Total owned property and equipment | 33,074 | 31,525 | ||||||||||||||
Less—Accumulated depreciation and amortization | (9,148) | (8,339) | (10,403) | (9,975) | ||||||||||||
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20,652 | 19,931 | |||||||||||||||
Total owned property and equipment, net | 22,671 | 21,550 | ||||||||||||||
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Purchase deposits for flight equipment | 919 | 788 | 922 | 1,059 | ||||||||||||
Capital leases— | ||||||||||||||||
Flight equipment | 1,511 | 1,527 | 1,247 | 1,319 | ||||||||||||
Other property and equipment | 331 | 332 | 342 | 331 | ||||||||||||
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1,842 | 1,859 | |||||||||||||||
Total capital leases | 1,589 | 1,650 | ||||||||||||||
Less—Accumulated amortization | (1,025) | (998) | (941) | (941) | ||||||||||||
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Total capital leases, net | 648 | 709 | ||||||||||||||
817 | 861 |
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22,388 | 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—$1,190; 2015—$1,144) | 3,677 | 4,136 | ||||||||||||||
Intangibles, less accumulated amortization (2017—$1,254; 2016—$1,234) | 3,612 | 3,632 | ||||||||||||||
Deferred income taxes | 1,392 | 2,037 | 598 | 655 | ||||||||||||
Restricted cash | 124 | 204 | 129 | 124 | ||||||||||||
Other, net | 528 | 553 | 618 | 579 | ||||||||||||
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Total other assets | 9,480 | 9,513 | ||||||||||||||
10,244 | 11,453 |
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Total assets | $ | 41,445 | $ | 40,140 | ||||||||||||
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$ | 40,476 | $ | 40,861 | |||||||||||||
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(continued on next page)
UNITED CONTINENTAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) June 30, 2016 | December 31, 2015 | (Unaudited) March 31, 2017 | December 31, 2016 | |||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Advance ticket sales | $ | 5,323 | $ | 3,753 | $ | 5,001 | $ | 3,730 | ||||||||
Accounts payable | 2,240 | 1,869 | 2,135 | 2,139 | ||||||||||||
Frequent flyer deferred revenue | 2,132 | 2,117 | 2,120 | 2,135 | ||||||||||||
Accrued salaries and benefits | 1,969 | 2,350 | 1,569 | 2,307 | ||||||||||||
Current maturities of long-term debt | 1,272 | 1,224 | 716 | 849 | ||||||||||||
Current maturities of capital leases | 128 | 135 | 113 | 116 | ||||||||||||
Fuel derivative instruments | 7 | 124 | ||||||||||||||
Other | 911 | 842 | 1,008 | 1,010 | ||||||||||||
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13,982 | 12,414 | |||||||||||||||
Total current liabilities | 12,662 | 12,286 | ||||||||||||||
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Long-term debt | 9,275 | 9,673 | 11,178 | 9,918 | ||||||||||||
Long-term obligations under capital leases | 740 | 727 | 836 | 822 | ||||||||||||
Other liabilities and deferred credits: | ||||||||||||||||
Frequent flyer deferred revenue | 2,830 | 2,826 | 2,806 | 2,748 | ||||||||||||
Postretirement benefit liability | 1,880 | 1,882 | 1,608 | 1,581 | ||||||||||||
Pension liability | 1,409 | 1,488 | 1,851 | 1,892 | ||||||||||||
Advanced purchase of miles | 725 | 1,010 | 326 | 430 | ||||||||||||
Lease fair value adjustment, net | 317 | 359 | 256 | 277 | ||||||||||||
Other | 1,534 | 1,516 | 1,473 | 1,527 | ||||||||||||
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8,695 | 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 322,932,096 and 364,609,108 shares at June 30, 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 | 7,965 | 7,946 | 6,562 | 6,569 | ||||||||||||
Retained earnings | 4,358 | 3,457 | 3,536 | 3,427 | ||||||||||||
Stock held in treasury, at cost | (3,809) | (1,610) | (816) | (511) | ||||||||||||
Accumulated other comprehensive loss | (734) | (831) | (836) | (829) | ||||||||||||
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Total stockholders’ equity | 8,449 | 8,659 | ||||||||||||||
7,784 | 8,966 |
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Total liabilities and stockholders’ equity | $ | 41,445 | $ | 40,140 | ||||||||||||
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$ | 40,476 | $ | 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)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net cash provided by operating activities | $ | 3,746 | $ | 3,577 | $ | 547 | $ | 1,199 | ||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Capital expenditures | (1,654) | (1,311) | (691) | (816) | ||||||||||||
Purchases of short-term and other investments | (1,273) | (1,202) | (774) | (638) | ||||||||||||
Proceeds from sale of short-term and other investments | 1,264 | 1,397 | 810 | 653 | ||||||||||||
Proceeds from sale of property and equipment | 4 | 17 | ||||||||||||||
Investment in and loans to affiliates | (8) | (130) | — | (40) | ||||||||||||
Decrease in restricted cash | 39 | 37 | ||||||||||||||
Proceeds from sale of property and equipment | 19 | 36 | ||||||||||||||
Other | (6) | — | 8 | 1 | ||||||||||||
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Net cash used in investing activities | (1,619) | (1,173) | (643) | (823) | ||||||||||||
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Cash Flows from Financing Activities: | ||||||||||||||||
Repurchases of common stock | (258) | (1,392) | ||||||||||||||
Payments of long-term debt | (453) | (1,319) | (315) | (227) | ||||||||||||
Repurchases of common stock | (2,182) | (445) | ||||||||||||||
Proceeds from issuance of long-term debt | 75 | 228 | 755 | 42 | ||||||||||||
Principal payments under capital leases | (66) | (53) | (31) | (34) | ||||||||||||
Other, net | (24) | (21) | (65) | (2) | ||||||||||||
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Net cash used in financing activities | (2,650) | (1,610) | ||||||||||||||
Net cash provided (used) in financing activities | 86 | (1,613) | ||||||||||||||
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Net (decrease) increase in cash and cash equivalents | (523) | 794 | ||||||||||||||
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 | $ | 2,483 | $ | 2,796 | ||||||||||||
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 | $ | 776 | $ | 711 | $ | 59 | ||||||||
Airport construction financing | 35 | — | 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 June 30, | Six Months Ended June 30, | Three Months EndedMarch 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Operating revenue: | ||||||||||||||||||||||||
Passenger—Mainline | $ | 6,525 | $ | 6,961 | $ | 12,102 | $ | 12,899 | $ | 5,831 | $ | 5,577 | ||||||||||||
Passenger—Regional | 1,578 | 1,715 | 2,991 | 3,197 | 1,343 | 1,413 | ||||||||||||||||||
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Total passenger revenue | 8,103 | 8,676 | 15,093 | 16,096 | 7,174 | 6,990 | ||||||||||||||||||
Cargo | 208 | 229 | 402 | 471 | 220 | 194 | ||||||||||||||||||
Other operating revenue | 1,085 | 1,009 | 2,096 | 1,955 | 1,026 | 1,011 | ||||||||||||||||||
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9,396 | 9,914 | 17,591 | 18,522 | |||||||||||||||||||||
Total operating revenue | 8,420 | 8,195 | ||||||||||||||||||||||
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Operating expense: | ||||||||||||||||||||||||
Salaries and related costs | 2,592 | 2,454 | 5,082 | 4,755 | 2,661 | 2,490 | ||||||||||||||||||
Aircraft fuel | 1,437 | 2,106 | 2,655 | 3,970 | 1,560 | 1,218 | ||||||||||||||||||
Landing fees and other rent | 544 | 525 | ||||||||||||||||||||||
Regional capacity purchase | 551 | 583 | 1,073 | 1,153 | 536 | 522 | ||||||||||||||||||
Landing fees and other rent | 541 | 553 | 1,066 | 1,096 | ||||||||||||||||||||
Depreciation and amortization | 491 | 445 | 970 | 874 | 518 | 479 | ||||||||||||||||||
Aircraft maintenance materials and outside repairs | 448 | 431 | 850 | 828 | 454 | 402 | ||||||||||||||||||
Distribution expenses | 339 | 348 | 642 | 660 | 307 | 303 | ||||||||||||||||||
Aircraft rent | 175 | 194 | 353 | 395 | 179 | 178 | ||||||||||||||||||
Special charges (Note 10) | 434 | 55 | 624 | 119 | 51 | 190 | ||||||||||||||||||
Other operating expenses | 1,328 | 1,299 | 2,566 | 2,485 | 1,332 | 1,238 | ||||||||||||||||||
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8,336 | 8,468 | 15,881 | 16,335 | |||||||||||||||||||||
Total operating expense | 8,142 | 7,545 | ||||||||||||||||||||||
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Operating income | 1,060 | 1,446 | 1,710 | 2,187 | 278 | 650 | ||||||||||||||||||
Nonoperating income (expense): | ||||||||||||||||||||||||
Interest expense | (157) | (167) | (316) | (340) | (150) | (159) | ||||||||||||||||||
Interest capitalized | 14 | 13 | 28 | 25 | 23 | 14 | ||||||||||||||||||
Interest income | 9 | 6 | 17 | 11 | 11 | 8 | ||||||||||||||||||
Miscellaneous, net (Note 10) | 5 | (101) | (13) | (175) | (16) | (18) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
(129) | (249) | (284) | (479) | |||||||||||||||||||||
Total nonoperating expense, net | (132) | (155) | ||||||||||||||||||||||
|
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|
|
| |||||||||||||||||||
Income before income taxes | 931 | 1,197 | 1,426 | 1,708 | 146 | 495 | ||||||||||||||||||
Income tax expense | 343 | 4 | 524 | 6 | 49 | 181 | ||||||||||||||||||
|
|
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|
|
| |||||||||||||||||||
Net income | $ | 588 | $ | 1,193 | $ | 902 | $ | 1,702 | $ | 97 | $ | 314 | ||||||||||||
|
|
|
|
|
|
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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Net income | $ | 588 | $ | 1,193 | $ | 902 | $ | 1,702 | $ | 97 | $ | 314 | ||||||||||||
Other comprehensive income (loss), net change related to: | ||||||||||||||||||||||||
Fuel derivative financial instruments | 33 | 147 | 111 | 233 | ||||||||||||||||||||
Employee benefit plans | 10 | 28 | (14) | 30 | ||||||||||||||||||||
Investments and other | — | (9) | — | 5 | ||||||||||||||||||||
Fuel derivative financial instruments, net of taxes | 1 | 78 | ||||||||||||||||||||||
Employee benefit plans, net of taxes | (8) | (24) | ||||||||||||||||||||||
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| |||||||||||||||||||
43 | 166 | 97 | 268 | |||||||||||||||||||||
Total other comprehensive income (loss), net | (7) | 54 | ||||||||||||||||||||||
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|
|
|
|
| |||||||||||||||||||
Total comprehensive income, net | $ | 631 | $ | 1,359 | $ | 999 | $ | 1,970 | $ | 90 | $ | 368 | ||||||||||||
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|
|
The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) | (Unaudited) | |||||||||||||||
June 30, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,477 | $ | 3,000 | $ | 2,158 | $ | 2,173 | ||||||||
Short-term investments | 2,202 | 2,190 | 2,215 | 2,249 | ||||||||||||
Receivables, less allowance for doubtful accounts (2016—$12; | 1,450 | 1,128 | ||||||||||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance | 798 | 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 | 960 | 813 | 1,017 | 832 | ||||||||||||
|
|
|
| |||||||||||||
7,887 | 7,869 | |||||||||||||||
Total current assets | 7,719 | 7,303 | ||||||||||||||
|
|
|
| |||||||||||||
Operating property and equipment: | ||||||||||||||||
Owned— | ||||||||||||||||
Flight equipment | 24,853 | 23,728 | 27,187 | 25,873 | ||||||||||||
Other property and equipment | 4,947 | 4,542 | 5,887 | 5,652 | ||||||||||||
|
|
|
| |||||||||||||
29,800 | 28,270 | |||||||||||||||
Total owned property and equipment | 33,074 | 31,525 | ||||||||||||||
Less—Accumulated depreciation and amortization | (9,148) | (8,339) | (10,403) | (9,975) | ||||||||||||
|
|
|
| |||||||||||||
20,652 | 19,931 | |||||||||||||||
Total owned property and equipment, net | 22,671 | 21,550 | ||||||||||||||
|
|
|
| |||||||||||||
Purchase deposits for flight equipment | 919 | 788 | 922 | 1,059 | ||||||||||||
Capital leases— | ||||||||||||||||
Flight equipment | 1,511 | 1,527 | 1,247 | 1,319 | ||||||||||||
Other property and equipment | 331 | 332 | 342 | 331 | ||||||||||||
|
|
|
| |||||||||||||
1,842 | 1,859 | |||||||||||||||
Total capital leases | 1,589 | 1,650 | ||||||||||||||
Less—Accumulated amortization | (1,025) | (998) | (941) | (941) | ||||||||||||
|
|
|
| |||||||||||||
Total capital leases, net | 648 | 709 | ||||||||||||||
817 | 861 |
|
| |||||||||||||
|
| |||||||||||||||
22,388 | 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—$1,190; 2015—$1,144) | 3,677 | 4,136 | ||||||||||||||
Intangibles, less accumulated amortization (2017—$1,254; 2016—$1,234) | 3,612 | 3,632 | ||||||||||||||
Deferred income taxes | 1,351 | 1,995 | 555 | 612 | ||||||||||||
Restricted cash | 124 | 204 | 129 | 124 | ||||||||||||
Other, net | 527 | 554 | 616 | 579 | ||||||||||||
|
|
|
| |||||||||||||
Total other assets | 9,435 | 9,470 | ||||||||||||||
10,202 | 11,412 |
|
| |||||||||||||
Total assets | $ | 41,395 | $ | 40,091 | ||||||||||||
|
|
|
| |||||||||||||
$ | 40,477 | $ | 40,861 | |||||||||||||
|
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(continued on next page)
UNITED AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) | (Unaudited) | |||||||||||||||
June 30, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | |||||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Advance ticket sales | $ | 5,323 | $ | 3,753 | $ | 5,001 | $ | 3,730 | ||||||||
Accounts payable | 2,245 | 1,874 | 2,141 | 2,144 | ||||||||||||
Frequent flyer deferred revenue | 2,132 | 2,117 | 2,120 | 2,135 | ||||||||||||
Accrued salaries and benefits | 1,969 | 2,350 | 1,569 | 2,307 | ||||||||||||
Current maturities of long-term debt | 1,272 | 1,224 | 716 | 849 | ||||||||||||
Current maturities of capital leases | 128 | 135 | 113 | 116 | ||||||||||||
Fuel derivative instruments | 7 | 124 | ||||||||||||||
Other | 911 | 840 | 1,007 | 1,009 | ||||||||||||
|
|
|
| |||||||||||||
13,987 | 12,417 | |||||||||||||||
Total current liabilities | 12,667 | 12,290 | ||||||||||||||
|
|
|
| |||||||||||||
Long-term debt | 9,275 | 9,673 | 11,178 | 9,918 | ||||||||||||
Long-term obligations under capital leases | 740 | 727 | 836 | 822 | ||||||||||||
Other liabilities and deferred credits: | ||||||||||||||||
Frequent flyer deferred revenue | 2,830 | 2,826 | 2,806 | 2,748 | ||||||||||||
Postretirement benefit liability | 1,880 | 1,882 | 1,608 | 1,581 | ||||||||||||
Pension liability | 1,409 | 1,488 | 1,851 | 1,892 | ||||||||||||
Advanced purchase of miles | 725 | 1,010 | 326 | 430 | ||||||||||||
Lease fair value adjustment, net | 317 | 359 | 256 | 277 | ||||||||||||
Other | 1,534 | 1,516 | 1,473 | 1,527 | ||||||||||||
|
|
|
| |||||||||||||
8,695 | 9,081 | |||||||||||||||
Total other liabilities and deferred credits | 8,320 | 8,455 | ||||||||||||||
|
|
|
| |||||||||||||
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 June 30, 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 | 3,964 | 6,138 | 3,271 | 3,573 | ||||||||||||
Retained earnings | 4,575 | 3,673 | 6,048 | 5,937 | ||||||||||||
Accumulated other comprehensive loss | (734) | (831) | (836) | (829) | ||||||||||||
Receivable from related parties | (25) | (17) | (89) | (75) | ||||||||||||
|
|
|
| |||||||||||||
Total stockholder’s equity | 8,394 | 8,606 | ||||||||||||||
7,780 | 8,963 |
|
| |||||||||||||
Total liabilities and stockholder’s equity | $ | 41,395 | $ | 40,091 | ||||||||||||
|
|
|
| |||||||||||||
$ | 40,477 | $ | 40,861 | |||||||||||||
|
|
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)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net cash provided by operating activities | $ | 3,740 | $ | 3,568 | $ | 535 | $ | 1,195 | ||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Capital expenditures | (1,654) | (1,311) | (691) | (816) | ||||||||||||
Purchases of short-term investments and other investments | (1,273) | (1,202) | (774) | (638) | ||||||||||||
Proceeds from sale of short-term and other investments | 1,264 | 1,397 | 810 | 653 | ||||||||||||
Proceeds from sale of property and equipment | 4 | 17 | ||||||||||||||
Investment in and loans to affiliates | (8) | (130) | — | (40) | ||||||||||||
Decrease in restricted cash | 39 | 37 | ||||||||||||||
Proceeds from sale of property and equipment | 19 | 36 | ||||||||||||||
Other | (6) | — | 8 | 1 | ||||||||||||
|
|
|
| |||||||||||||
Net cash used in investing activities | (1,619) | (1,173) | (643) | (823) | ||||||||||||
|
|
|
| |||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Dividend to UAL | (258) | (1,392) | ||||||||||||||
Payments of long-term debt | (453) | (1,319) | (315) | (227) | ||||||||||||
Dividend to UAL | (2,182) | (445) | ||||||||||||||
Proceeds from issuance of long-term debt | 75 | 228 | 755 | 42 | ||||||||||||
Principal payments under capital leases | (66) | (53) | (31) | (34) | ||||||||||||
Other, net | (18) | (12) | (53) | 2 | ||||||||||||
|
|
|
| |||||||||||||
Net cash used in financing activities | (2,644) | (1,601) | ||||||||||||||
Net cash provided (used) in financing activities | 98 | (1,609) | ||||||||||||||
|
|
|
| |||||||||||||
Net (decrease) increase in cash and cash equivalents | (523) | 794 | ||||||||||||||
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 | ||||||||||||||
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|
| |||||||||||||
Cash and cash equivalents at end of the period | $ | 2,477 | $ | 2,790 | ||||||||||||
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 | $ | 776 | $ | 711 | $ | 59 | ||||||||
Airport construction financing | 35 | — | 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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|
|
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 - RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (“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.
In January 2016, the FASB issued Accounting Standards UpdateNo. 2016-01,Financial Instruments—Overall (Subtopic825-10) (“ASU2016-01”). This standard makes several changes, including the elimination of theavailable-for-sale classification of equity investments, and 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 effective 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.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. Under current GAAP,Previously, these differences arewere generally recorded in additionalpaid-in capital and thus havehad no impact on net income. The change in treatment of excess tax benefits and tax deficiencies will also impactimpacts the computation of diluted
earnings per share, and the cash flows associated with those items will beare classified as operating activities on the condensed statements of consolidated cash flows. Additionally, ASU 2016-09 permits entities will be permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as requiredallowed under current GAAP,previous standards, or recognized when they occur. The amendments in this update arebecame 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 update will have on its consolidated financial statements and whether to early adopt the standard update.
The FASB issued Accounting Standards Update No. 2015-07,Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).Under the standard, investments for which fair value is measured at net asset value (“NAV”) per share (or its equivalent) using the practical expedient will no longer be categorized 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 June 30, 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 June 30, 2016, the Company had approximately $1.7 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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||
Earnings available to common stockholders | $ | 588 | $ | 1,193 | $ | 901 | $ | 1,701 | $ | 96 | $ | 313 | ||||||||||||
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Basic weighted-average shares outstanding | 331 | 380 | 342 | 381 | ||||||||||||||||||||
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Earnings per share, basic | $ | 1.78 | $ | 3.14 | $ | 2.63 | $ | 4.46 | ||||||||||||||||
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Diluted earnings per share: | ||||||||||||||||||||||||
Earnings available to common stockholders including the effect of dilutive securities | $ | 588 | $ | 1,193 | $ | 901 | $ | 1,701 | ||||||||||||||||
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Diluted shares outstanding: | ||||||||||||||||||||||||
Basic weighted-average shares outstanding | 331 | 380 | 342 | 381 | 313.7 | 354.3 | ||||||||||||||||||
Effect of employee stock awards | — | — | 1 | 1 | 0.9 | 0.3 | ||||||||||||||||||
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Diluted weighted-average shares outstanding | 331 | 380 | 343 | 382 | 314.6 | 354.6 | ||||||||||||||||||
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| |||||||||||||||||||
Earnings per share, basic | $ | 0.31 | $ | 0.88 | ||||||||||||||||||||
Earnings per share, diluted | $ | 1.78 | $ | 3.14 | $ | 2.63 | $ | 4.45 | $ | 0.31 | $ | 0.88 | ||||||||||||
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|
|
The number of antidilutive securities excluded from the computation of diluted earnings per share amounts was not material.
In the three and six months ended June 30, 2016,March 31, 2017, UAL repurchased 15 million and 42approximately 5 million shares of UAL common stock in open market transactions respectively, for $694 million and $2.2 billion, respectively.$0.3 billion. As of June 30, 2016,March 31, 2017, the Company had $255 millionapproximately $1.5 billion remaining to purchase shares under its 2015 $3 billionexisting share repurchase authorization.
In July 2016, UAL’s Board of Directors authorized a new $2 billion share repurchase program to acquire UAL’s common stock.
authority. 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. 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.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The tables below present the components of the Company’s accumulated other comprehensive income (loss), net of tax (“AOCI”) (in millions):
Deferred Taxes | ||||||||||||||||||||||||
UAL (a) | Pension and Other Postretirement Liabilities | Fuel Derivative Contracts | Investments and Other | Pension and Other Postretirement Liabilities | Fuel Derivative Contracts | Total | ||||||||||||||||||
Balance at March 31, 2016 | $ | (401) | $ | (93) | $ | 3 | $ | (140) | $ | (146) | $ | (777) | ||||||||||||
Changes in value | 10 | 17 | — | (4) | (6) | 17 | ||||||||||||||||||
Amounts reclassified to earnings | 6 | 35 | — | (2) | (13) | 26 | ||||||||||||||||||
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Net change | 16 | 52 | — | (6) | (19) | 43 | ||||||||||||||||||
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Balance at June 30, 2016 | $ | (385) | $ | (41) | $ | 3 | $ | (146) | $ | (165) | $ | (734) | ||||||||||||
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Balance at December 31, 2015 | $ | (363) | $ | (215) | $ | 3 | $ | (154) | $ | (102) | $ | (831) | ||||||||||||
Changes in value | (33) | 1 | — | 12 | — | (20) | ||||||||||||||||||
Amounts reclassified to earnings | 11 | 173 | — | (4) | (63) | 117 | ||||||||||||||||||
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Net change | (22) | 174 | — | 8 | (63) | 97 | ||||||||||||||||||
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Balance at June 30, 2016 | $ | (385) | $ | (41) | $ | 3 | $ | (146) | $ | (165) | $ | (734) | ||||||||||||
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Deferred Taxes | ||||||||||||||||||||||||
UAL (a) | Pension and Other Postretirement Liabilities | Fuel Derivative Contracts | Investments and Other | Pension and Other Postretirement Liabilities | Fuel Derivative Contracts | Total | ||||||||||||||||||
Balance at March 31, 2015 | $ | (470) | $ | (413) | $ | 21 | $ | (115) | $ | — | (c) | $ | (977) | |||||||||||
Changes in value (b) | 20 | 29 | (10) | — | — | 39 | ||||||||||||||||||
Amounts reclassified to earnings (b) | 8 | 118 | — | — | — | 126 | ||||||||||||||||||
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Net change | 28 | 147 | (10) | — | — | 165 | ||||||||||||||||||
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Balance at June 30, 2015 | $ | (442) | $ | (266) | $ | 11 | $ | (115) | $ | — | (c) | $ | (812) | |||||||||||
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Balance at December 31, 2014 | $ | (472) | $ | (499) | $ | 7 | $ | (115) | $ | — | (c) | $ | (1,079) | |||||||||||
Changes in value (b) | 12 | (46) | 5 | — | — | (29) | ||||||||||||||||||
Amounts reclassified to earnings (b) | 18 | 279 | (1) | — | — | 296 | ||||||||||||||||||
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Net change | 30 | 233 | 4 | — | — | 267 | ||||||||||||||||||
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Balance at June 30, 2015 | $ | (442) | $ | (266) | $ | 11 | $ | (115) | $ | — | (c) | $ | (812) | |||||||||||
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Deferred Taxes | ||||||||||||||||||||||||
UAL | 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) | ||||||||||||
Changes in value | (43) | (16) | — | 16 | 6 | (37) | ||||||||||||||||||
Amounts reclassified to earnings | 5 | 138 | — | (2) | (50) | 91 | ||||||||||||||||||
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Net change | (38) | 122 | — | 14 | (44) | 54 | ||||||||||||||||||
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Balance at March 31, 2016 | $ | (401) | $ | (93) | $ | 3 | $ | (140) | $ | (146) | $ | (777) | ||||||||||||
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Details about AOCI Components | Amount Reclassified from AOCI to Income | Affected Line Item in the Statements of Consolidated Operations | Amount Reclassified from AOCI to Income | Affected Line Item in the Statements of Consolidated Operations | ||||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||
Fuel derivative contracts | ||||||||||||||||||||||||||||||
Reclassifications of losses into earnings | $ | 35 | $ | 118 | $ | 173 | $ | 279 | Aircraft fuel | $ 2 | $ 138 | Aircraft fuel | ||||||||||||||||||
Pension and other postretirement liabilities | ||||||||||||||||||||||||||||||
Amortization of unrecognized losses and prior service cost (credit) | 6 | 8 | 11 | 18 | Salaries and related costs | 13 | 5 | Salaries and related costs | ||||||||||||||||||||||
Investments and other | ||||||||||||||||||||||||||||||
Available-for-sale securities-reclassifications of gains into earnings | — | — | — | (1) | Miscellaneous, net |
(a) UAL and United amounts are substantially the same except for additional gains related to investments and other of $1 million at United for the three and six months ended June 30, 2015.
(b) Income tax expense for these items was offset by the Company’s valuation allowance.
(c) Deferred tax balance was offset by the Company’s valuation allowance.
(d) 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 and six months ended June 30,March 31, 2017 and 2016 was 36.9%33.8% and 36.8%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 sixthree months ended June 30, 2015 was 0.4% due primarilyMarch 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 existing income tax valuation allowance against net operating losses and other deferred income tax assets. During 2015, after considering all positive and negative evidence, the Company concluded that its deferred income taxes would more likely than not be realized. The Company released substantially alladoption of its valuation allowanceASU2016-09, as well as a change in the third quartermix of 2015.domestic and 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 | |||||||||||||||||||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Service cost | $ | 27 | $ | 31 | $ | 6 | $ | 5 | ||||||||||||||||||||||||
Interest cost | 50 | 50 | 22 | 21 | ||||||||||||||||||||||||||||
Expected return on plan assets | (54) | (49) | (1) | (1) | ||||||||||||||||||||||||||||
Amortization of unrecognized (gain) loss and prior service cost (credit) | 20 | 22 | (14) | (14) | ||||||||||||||||||||||||||||
Settlement loss | 1 | — | — | — | ||||||||||||||||||||||||||||
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Total | $ | 44 | $ | 54 | $ | 13 | $ | 11 | ||||||||||||||||||||||||
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Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||
Six Months Ended June 30, 2016 | Six Months Ended June 30, 2016 | Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Service cost | $ | 55 | $ | 62 | $ | 10 | $ | 10 | $ | 49 | $ | 28 | $ | 2 | $ | 4 | ||||||||||||||||
Interest cost | 101 | 100 | 44 | 41 | 55 | 51 | 17 | 22 | ||||||||||||||||||||||||
Expected return on plan assets | (108) | (98) | (1) | (1) | (60) | (54) | — | — | ||||||||||||||||||||||||
Amortization of unrecognized (gain) loss and prior service cost (credit) | 38 | 44 | (27) | (27) | 31 | 18 | (18) | (13) | ||||||||||||||||||||||||
Settlement loss | 2 | 1 | — | — | 1 | 1 | — | — | ||||||||||||||||||||||||
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Total | $ | 88 | $ | 109 | $ | 26 | $ | 23 | $ | 76 | $ | 44 | $ | 1 | $ | 13 | ||||||||||||||||
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During the three and six months ended June 30, 2016,March 31, 2017, the Company contributed $80 million and $160 million, respectively, to its U.S. domestictax-qualified defined benefit pension plans.
Share-Based Compensation. During 2016,the three months ended March 31, 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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Share-based compensation expense | $ | 3 | $ | 16 | $ | 13 | $ | 33 | $ | 23 | $ | 10 | ||||||||||||
June 30, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | |||||||||||||||||||||
Unrecognized share-based compensation | $ | 71 | $ | 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):
June 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,483 | $ | 2,483 | $ | — | $ | — | $ | 3,006 | $ | 3,006 | $ | — | $ | — | ||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||||||
Corporate debt | 872 | — | 872 | — | 891 | — | 891 | — | ||||||||||||||||||||||||
Asset-backed securities | 710 | — | 710 | — | 710 | — | 710 | — | ||||||||||||||||||||||||
Certificates of deposit placed through an account registry service (“CDARS”) | 261 | — | 261 | — | 281 | — | 281 | — | ||||||||||||||||||||||||
U.S. government and agency notes | 106 | — | 106 | — | 72 | — | 72 | — | ||||||||||||||||||||||||
Auction rate securities | 9 | — | — | 9 | 9 | — | — | 9 | ||||||||||||||||||||||||
Other fixed-income securities | 43 | — | 43 | — | 26 | — | 26 | — | ||||||||||||||||||||||||
Other investments measured at NAV (a) | 201 | — | — | — | 201 | — | — | — | ||||||||||||||||||||||||
Enhanced equipment trust certificates (“EETC”) | 24 | — | — | 24 | 26 | — | — | 26 | ||||||||||||||||||||||||
Fuel derivatives liability, net | 7 | — | 7 | — | 124 | — | 124 | — | ||||||||||||||||||||||||
Foreign currency derivatives liability, net | 1 | — | 1 | — | — | — | — | — | ||||||||||||||||||||||||
Restricted cash | 167 | 167 | — | — | 206 | 206 | — | — |
(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 June 30, 2016,March 31, 2017, asset-backed securities have remaining maturities of less than one year to approximately 3319 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 | ||||||||||||||||||||||||||||||||||||||||
June 30, 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 | $ | 10,547 | $ | 11,141 | $ | — | $ | 8,425 | $ | 2,716 | $ | 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 June 30, 2016,March 31, 2017, the Company had hedged approximately 12% ofdid not have any fuel hedging contracts outstanding to hedge its projected fuel requirements (252 million gallons) for the remainder of 2016 with commonly used financial hedge instruments based on aircraft fuel or crude oil. As of June 30, 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.consumption. 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 valuelast of the Company’s expected futurefuel hedge derivatives designated for 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 forflow hedge accounting under GAAP. Additionally,expired in December 2016. The Company’s current strategy is to not enter into transactions to hedge its fuel consumption, although 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 toregularly reviews 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 contractsstrategy 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 June 30, 2016, fair value hedges related to aircraft fuel were not material to the Company’s financial statements.
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 amounts of fuel derivative assets and liabilities and the location of amounts recognized in the Company’s financial statements.
The Company’s derivatives were reported in its consolidated balance sheets as follows (in millions):
Classification | Balance Sheet Location | June 30, 2016 | December 31, 2015 | |||||||
Derivatives designated as cash flow hedges | ||||||||||
Liabilities: | ||||||||||
Fuel contracts due within one year | Fuel derivative instruments | $ | 7 | $ | 119 | |||||
Derivatives not designated for hedge accounting | ||||||||||
Liabilities: | ||||||||||
Fuel contracts due within one year | Fuel derivative instruments | $ | — | $ | 5 | |||||
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Total derivatives | ||||||||||
Total liabilities | $ | 7 | $ | 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. While the Company records derivative instruments 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 June 30, 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):
June 30, 2016 | December 31, 2015 | |||||||||||
Fuel derivative instruments, net of collateral | $ | 7 | $ | 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 Gain 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 June 30, | Three Months Ended June 30, | Three Months Ended June 30, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Fuel contracts | $ | 17 | $ | 29 | $ | (35 | ) | $ | (118 | ) | $ | — | $ | — |
Derivatives designated as cash flow hedges
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) |
Amount of Gain (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) | ||||||||||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Fuel contracts | $ | 1 | $ | (46 | ) | $ | (173 | ) | $ | (279 | ) | $ | — | $ | — |
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Amount of gain/(loss) recognized in Nonoperating income (expense): Miscellaneous, net | $ | — | $ | 41 | $ | — | $ | (2 | ) |
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 June 30, 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 21% of the Company’s projected European euro denominated net cash inflows for the remainder of 2016; and 26% 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 June 30, 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 June 30, 2016,March 31, 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 11four Boeing 737NG aircraft, one Boeing787-9 aircraft, six Boeing777-300ER aircraft, and five24 Embraer E175 aircraft. UnitedE175. Additionally, the Company also currently expects to assigntake delivery of five used Airbus A319s in 2017. During the five 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.the acquisition of aircraft and related spare engines, aircraft improvements and include other capital purchase commitments. 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.
(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 June 30, 2016,March 31, 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. See Note 9 of this report
Regional CPAs.In February 2017, United entered into a five-year capacity purchase agreement (“CPA”) with Air Wisconsin Airlines for additional information on aircraft financing.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 June 30, 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 commitmentsend of the Company.terms of our CPAs, excluding variable pass-through costs such as fuel and landing fees, among others.
(in billions) | (in billions) | |||||||
Last six months of 2016 | $ | 2.3 | ||||||
2017 | 4.3 | |||||||
Last nine months of 2017 | $ | 1.3 | ||||||
2018 | 4.3 | 1.9 | ||||||
2019 | 3.3 | 1.4 | ||||||
2020 | 2.6 | 1.1 | ||||||
After 2020 | 6.9 | |||||||
2021 | 1.0 | |||||||
After 2021 | 4.0 | |||||||
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$ | 23.7 | $ | 10.7 | |||||
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Guarantees.As of June 30, 2016,March 31, 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 $342approximately $421 million of these obligations are accounted for as capital leases. All of these bonds are due between 2017 and 2038.
As of June 30, 2016, United is the guarantor of $43 million of aircraft mortgage debt issued by one of United’s regional carriers and is expected to be the guarantor of up to an additional $129 million of aircraft mortgage debt the regional carrier plans to issue in 2016.
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 June 30, 2016,March 31, 2017, the Company had $2.4$3.0 billion of floating rate debt and $104$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 $2.4$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 June 30, 2016,March 31, 2017, United had approximately 87,50088,400 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. In June 2016, United and The Association of Flight Attendants (“AFA”) reached a tentative agreement. The AFA Joint Master Executive Council approved the agreement and will submit it to AFA members for ratification. The Company continues to negotiate in mediation for a joint technician and related employees’ collective bargaining agreement.
NOTE 9 - DEBT
As of June 30, 2016,March 31, 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 June 30, 2016,March 31, 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 June 30, 2016, United had itsa $1.5 billion term loan due April 1, 2024, which (i) was used to retire the entire capacityprincipal balance of $1.35the term loans under the credit and guaranty agreement, dated March 27, 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 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”).bear interest at a variable rate equal to 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 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 Company. Under the provisions of the 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 issuance of 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 20162017 are as follows (in millions, except stated interest rate):
EETC Date | Class | Principal | Final expected distribution date | Stated interest rate | Total debt recorded as of June 30, 2016 | Remaining proceeds from issuance of debt to be received in future periods | 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 | March 2017 | 3.10% | $ — | $ 729 | AA | 729 | July 2028 | 3.10% | 729 | 319 | — | |||||||||||||||||||||||||||||||
June 2016 | A | 324 | March 2017 | 3.45% | — | 324 | A | 324 | July 2028 | 3.45% | 324 | 142 | — | |||||||||||||||||||||||||||||||
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$ 1,053 | $ — | $ 1,053 | $ 1,973 | $ 1,418 | $ 710 | $ 555 | ||||||||||||||||||||||||||||||||||||||
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4.5% Convertible5% Senior Notes due 2015.2024.In the first quarter of 2015, the holders of substantially all of the remaining $202January 2017, United issued $300 million aggregate principal amount of the 4.5% Convertible5% Senior Notes due 2015 exercised their conversion option resulting inFebruary 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 issuance5% Senior Notes due 2024 requires UAL to offer to repurchase the notes for cash at a purchase price equal to 101% of 11 million sharesthe principal amount of notes repurchased plus accrued and unpaid interest if certain changes of control of UAL common stock.occur.
6% Notes due 2026.InThe table below presents the first quarter of 2015, UAL used cash to repurchase $18 million par value 6% Notes due 2026 (the “2026 Notes”)Company’s contractual principal payments at March 31, 2017 under then-outstanding long-term debt agreements in market transactions. On April 1, 2015, UAL used cash to redeem, at par, the remaining $303 million balanceeach of the 2026 Notes.next five calendar years (in millions):
6% Notes due 2028.In 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 balance of the 2028 Notes.
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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$ | 12,031 | |||
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NOTE 10 - SPECIAL CHARGESITEMS
For the three and six months ended June 30,March 31, special chargesitems consisted of the following (in millions):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
Operating: | 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||
Impairment of intangible asset related to Newark Liberty International Airport (“Newark”) slots | $ | 412 | $ | — | $ | 412 | $ | — | ||||||||||||||||
Severance and benefit costs | $ | 37 | $ | 8 | ||||||||||||||||||||
Labor agreement costs | 10 | — | 110 | — | — | 100 | ||||||||||||||||||
Severance and benefit costs | 6 | 25 | 14 | 75 | ||||||||||||||||||||
Cleveland airport lease restructuring | — | — | 74 | — | — | 74 | ||||||||||||||||||
(Gains) losses on sale of assets and other special charges | 6 | 30 | 14 | 44 | 14 | 8 | ||||||||||||||||||
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Special charges | 434 | 55 | 624 | 119 | 51 | 190 | ||||||||||||||||||
Nonoperating and income taxes: | ||||||||||||||||||||||||
(Gain) loss on extinguishment of debt and other | (9) | 128 | (1) | 134 | ||||||||||||||||||||
Income tax benefit related to special charges | (153) | — | (225) | — | ||||||||||||||||||||
Nonoperating: | ||||||||||||||||||||||||
Foreign currency loss | — | 8 | ||||||||||||||||||||||
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Total special charges, net of tax | $ | 272 | $ | 183 | $ | 398 | $ | 253 | ||||||||||||||||
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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In April 2016,During the Federal Aviation Administration (“FAA”) announced that it will designate Newark as a Level 2 schedule-facilitated airport under the International Air Transport Association Worldwide Slot Guidelines effective October 30, 2016. The designation was associated with an updated demand and capacity analysis of Newark by the FAA. In the second quarter of 2016, the Company has determined that the FAA’s action has impaired the entire value of its Newark slots because the slots will no longer be the mechanism that governs take-off and landing rights. Accordingly,three months ended March 31, 2017, the Company recorded a $412$21 million special charge ($26414 million net of taxes) to write off the intangible asset. The Newark slots served as part of the collateral for the term loans under the Company’s Credit Agreement and under the Second Amended and Restated Co-Branded Card Marketing Services Agreement with Chase Bank USA, N.A. (the “Chase Agreement”). The Credit Agreement and the Chase Agreement have been amended to remove the Newark slots as collateral with no replacement collateral required.
The fleet service, passenger service, storekeeper and other employees represented by the IAM ratified seven new contracts with the Company which extended the contracts through 2021. During the three and six months ended June 30, 2016, the Company recorded $10 million ($6 million net of taxes) and $110 million ($70 million net of taxes), respectively, of special charges primarily for bonus payments to be made in conjunction with the ratification of these contracts.
During the three and six months ended June 30, 2016, the Company recorded $6 million ($4 million net of taxes) and $14 million ($9 million net of taxes), respectively, of severance and benefit costs. During the three and six months ended June 30, 2015, the Company recorded $25 million and $75 million, respectively, of severance and benefit costs. The severance and benefit costs primarily related to a voluntaryearly-out program for its flight attendants.technicians and related employees represented by the International Brotherhood of Teamsters. In 2014, more than 2,500 flight attendantsthe 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 endthree months ended March 31, 2016, the Company recorded $8 million ($5 million net of 2016.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 International Association of Machinists and Aerospace Workers (the “IAM”) ratified seven new contracts with the Company which extended the contracts through 2021. During the three months ended March 31, 2016, the Company recorded $100 million ($64 million net of taxes) of special charges primarily for bonus payments in conjunction with the IAM agreements.
During the sixthree months ended June 30,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. 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.
During the three and six months ended June 30,March 31, 2017 and 2016, the Company recorded gains and losses on sale of assets and other special charges of $6 million ($4 million net of taxes) and $14 million ($9 million net of taxes), and $8 million ($5 million net of taxes) respectively.
During the sixthree months ended June 30,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, and the Company recorded a $9 million ($6 million net of taxes) gain on the sale of an affiliate.
During the three and six months ended June 30, 2015, the Company recorded $30 million and $44 million, respectively, for integration costs, impairment of assets and other special gains and losses.
During the three and six months ended June 30, 2015, the Company recorded $128 million and $134 million, respectively, of losses as part of Nonoperating income (expense): Miscellaneous, net due to the write-off of the unamortized non-cash debt discount related to the extinguishment of the 6% Notes due 2026 and 6% Notes due 2028.currency.
Accruals
The accrual balance for severance and benefits was $30$28 million as of June 30, 2016,March 31, 2017, compared to $104$29 million as of June 30, 2015.March 31, 2016. The severance-related accrual as of June 30, 2016March 31, 2017 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 more thanapproximately 4,500 flights a day to 339337 airports across five continents.
SecondFirst Quarter Financial Highlights
SecondFirst quarter 20162017 net income was $588$96 million, or $1.78$0.31 diluted earnings per share, as compared to net income of $1.2 billion and$313 million, or diluted earnings per share of $3.14$0.88, in the secondfirst quarter of 2015.2016.
Passenger revenue decreased 6.6%increased 2.6% to $8.1$7.2 billion during the secondfirst quarter of 20162017 as compared to the secondfirst quarter of 2015.2016.
SecondFirst quarter 20162017 aircraft fuel cost decreased 31.8%increased $342 million, 28.1% year-over-year.
The Company recorded $425 million of special charges and $343 million of income taxes.
Unrestricted liquidity at June 30, 2016March 31, 2017 was $6.0$6.4 billion, including $1.35$2.0 billion of undrawn commitments under the Company’s revolving credit facility.
In the three and six months ended June 30, 2016,March 31, 2017, UAL repurchased 15 million and 42approximately 5 million shares of its common stock in open market transactions for $694 million and $2.2 billion, respectively.$0.3 billion. As of June 30, 2016,March 31, 2017, the Company had $255 million$1.5 billion remaining to purchase shares under its 2015 $3 billionexisting share repurchase authorization. In July 2016, UAL’s Board of Directors authorized a new $2 billion share repurchase program to acquire UAL’s common stock.authority.
SecondFirst Quarter Operational Highlights
United reported a consolidated on-time arrival rate (domestic and international) of 67.9%, up more than 11 points from the same quarter last year.achieved 25zero-cancellation days for mainline operations.
Consolidated traffic decreased 0.5%increased 2.2% and consolidated capacity increased 0.1%2.6% during the secondfirst quarter of 20162017 as compared to the secondfirst quarter of 2015.2016. The Company’s load factor for the secondfirst quarter of 20162017 was 83.5%79.6%.
The Company took delivery of two Boeing 737-800787-9 aircraft, six Boeing777-300ERand two Boeing 787-9one used Airbus A319 aircraft during the secondfirst 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 1.5%2.0% year-over-year.
The
As outlined at our November 2016 Investor Day presentation, the Company expects to drive $3.1 billion ofsignificant incremental value by 2018.2020 relative to 2015. United anticipates to capturecapturing this value through benefits froma 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 network potential through improved operations by focusing on re-attracting premium customers, reducing cost of irregular operations, reducing re-accommodationsschedule quality and improving schedule quality.enhancements to the MileagePlus program. In addition, the Company will introduce new productscontinue to its industry-leading existing portfolio of products such as our recently announced Polaris business class seats and enhance revenue through various MileagePlus program initiatives. Finally,focus on improving reliability while increasing the Company plans to improve its costs structure through an upgauge and slimline seat program and ongoing sensible cost management.
In the first quarter of 2016, United reached contract extensions with its pilots and dispatchers. In the second quarter, United also reached amended collective bargaining agreements with its Int’l Association of Machinists and Aerospace Workers (“IAM”) represented employees and reached a tentative agreement for a joint flight attendant collective bargaining agreement. United continues to negotiate in mediation for a joint technician and related employees’ collective bargaining agreement. The cost associated with the ratificationefficiency of the pilots’ agreement, the dispatchers and the IAM will add an additional approximate 1.5 points of non-fuel unit costs for full-year 2016, primarily due to the pilots’ agreement, and will add an additional approximate 0.75 points of non-fuel unit costs for full-year 2017, primarily due to the IAM agreement. The Company cannot predict the outcome of ongoing and future negotiations with its unionized employee groups. Significant increases in the pay and benefits resulting from new collective bargaining agreements would have a material financial impact on the Company.operation.
The price of jet fuel 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 June 30, 2016March 31, 2017 as compared to the corresponding period in 2015.2016.
SecondFirst Quarter 20162017 Compared to SecondFirst Quarter 20152016
The Company recorded net income of $588$96 million in the secondfirst quarter of 20162017 as compared to net income of $1.2 billion$313 million in the secondfirst quarter of 2015. Second quarter 2016 net income reflects $343 million of income tax expense primarily due to the release of the income tax valuation allowance in the third quarter of 2015.2016. The Company considers a key measure of its performance to be operating income, which was $1.1 billion$278 million for the secondfirst quarter of 2017, as compared to $649 million for the first quarter of 2016, as compared to $1.4 billion for the second quarter of 2015, a $385$371 million decrease year-over-year. Significant components of the Company’s operating results for the three months ended June 30March 31 are as follows (in millions, except percentage changes):
2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Operating revenue | $ | 9,396 | $ | 9,914 | $ | (518 | ) | (5.2 | ) | |||||||
Operating expense | 8,336 | 8,469 | (133 | ) | (1.6 | ) | ||||||||||
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Operating income | 1,060 | 1,445 | (385 | ) | (26.6 | ) | ||||||||||
Nonoperating expense | (129 | ) | (248 | ) | (119 | ) | (48.0 | ) | ||||||||
Income tax expense | 343 | 4 | 339 | NM | ||||||||||||
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Net income | $ | 588 | $ | 1,193 | $ | (605 | ) | (50.7 | ) | |||||||
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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 June 30March 31 is as follows:
2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | 2017 | 2016 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||
Passengers (thousands) (a) | 36,416 | 36,231 | 185 | 0.5 | 33,105 | 32,087 | 1,018 | 3.2 | ||||||||||||||||||||||||
Revenue passenger miles (“RPMs”) (millions) (b) | 54,017 | 54,289 | (272 | ) | (0.5 | ) | 47,611 | 46,582 | 1,029 | 2.2 | ||||||||||||||||||||||
Available seat miles (“ASMs”) (millions) (c) | 64,725 | 64,685 | 40 | 0.1 | 59,808 | 58,273 | 1,535 | 2.6 | ||||||||||||||||||||||||
Passenger load factor (d) | 83.5 % | 83.9 % | (0.4) pts. | N/A | 79.6 % | 79.9 % | (0.3) pts. | N/A | ||||||||||||||||||||||||
Passenger revenue per available seat mile (“PRASM”) (cents) | 12.52 | 13.41 | (0.89 | ) | (6.6 | ) | 12.00 | 12.00 | — | — | ||||||||||||||||||||||
Average yield per revenue passenger mile (“Yield”) (cents) (e) | 15.00 | 15.98 | (0.98 | ) | (6.1 | ) | 15.07 | 15.01 | 0.06 | 0.4 | ||||||||||||||||||||||
Cost per available seat mile (“CASM”) (cents) | 12.88 | 13.09 | (0.21 | ) | (1.6 | ) | 13.61 | 12.95 | 0.66 | 5.1 | ||||||||||||||||||||||
Average price per gallon of fuel, including fuel taxes | $ | 1.44 | $ | 2.10 | $ | (0.66 | ) | (31.4 | ) | $ | 1.71 | $ | 1.37 | $ | 0.34 | 24.8 | ||||||||||||||||
Fuel gallons consumed (millions) | 995 | 1,004 | (9 | ) | (0.9 | ) | 910 | 890 | 20 | 2.2 | ||||||||||||||||||||||
Average full-time equivalent employees | 83,200 | 82,300 | 900 | 1.1 | 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 June 30March 31 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Passenger—Mainline | $ | 6,525 | $ | 6,961 | $ | (436 | ) | (6.3 | ) | |||||||
Passenger—Regional | 1,578 | 1,715 | (137 | ) | (8.0 | ) | ||||||||||
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Total passenger revenue | 8,103 | 8,676 | (573 | ) | (6.6 | ) | ||||||||||
Cargo | 208 | 229 | (21 | ) | (9.2 | ) | ||||||||||
Other operating revenue | 1,085 | 1,009 | 76 | 7.5 | ||||||||||||
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$ | 9,396 | $ | 9,914 | $ | (518 | ) | (5.2 | ) | ||||||||
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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 secondfirst quarter passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes:
Domestic | Atlantic | Pacific | 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) | $ | (130) | $ | (129) | $ | (95) | $ | (82) | $ | (436) | $ | (137) | $ | (573) | $ | 126 | $ | 8 | $ | 35 | $ | 15 | $ | 184 | $ | 254 | $ | (70) | ||||||||||||||||||||||||||||
Passenger revenue | (3.7)% | (7.9)% | (8.6)% | (11.8)% | (6.3)% | (8.0)% | (6.6)% | 3.0 % | 0.8 % | 3.7 % | 2.0 % | 2.6 % | 4.6 % | (5.0)% | ||||||||||||||||||||||||||||||||||||||||||
Average fare per passenger | (8.0)% | (5.0)% | (6.8)% | (13.1)% | (9.1)% | (2.9)% | (7.1)% | (1.0)% | 4.1 % | 3.3 % | 1.3 % | (0.5)% | (2.2)% | 0.5 % | ||||||||||||||||||||||||||||||||||||||||||
Yield | (4.7)% | (4.8)% | (8.0)% | (13.5)% | (6.2)% | (4.2)% | (6.1)% | (0.6)% | 3.7 % | (0.1)% | 2.3 % | 0.4 % | 1.2 % | 0.2 % | ||||||||||||||||||||||||||||||||||||||||||
PRASM | (4.6)% | (10.3)% | (7.6)% | (10.5)% | (6.9)% | (3.4)% | (6.6)% | (0.1)% | 2.1 % | (3.5)% | 2.8 % | — % | 0.8 % | — % | ||||||||||||||||||||||||||||||||||||||||||
Passengers | 4.7 % | (3.1)% | (1.9)% | 1.5 % | 3.1 % | (5.2)% | 0.5 % | 4.0 % | (3.2)% | 0.4 % | 0.6 % | 3.2 % | 6.9 % | (5.4)% | ||||||||||||||||||||||||||||||||||||||||||
RPMs (traffic) | 1.1 % | (3.2)% | (0.7)% | 2.0 % | — % | (4.0)% | (0.5)% | 3.6 % | (2.8)% | 3.8 % | (0.3)% | 2.2 % | 3.2 % | (5.2)% | ||||||||||||||||||||||||||||||||||||||||||
ASMs (capacity) | 0.9 % | 2.7 % | (1.1)% | (1.5)% | 0.7 % | (4.8)% | 0.1 % | 3.1 % | (1.3)% | 7.4 % | (0.8)% | 2.6 % | 3.7 % | (5.0)% | ||||||||||||||||||||||||||||||||||||||||||
Passenger load factor (points) | 0.2 | (4.6) | 0.3 | 2.8 | (0.6) | 0.7 | (0.4) | 0.4 | (1.1) | (2.8) | 0.4 | (0.3) | (0.4) | (0.1) |
Consolidated passenger revenue in the secondfirst quarter of 2016 decreased 6.6%2017 increased $184 million, or 2.6% as compared to theyear-ago period primarily due period. First quarter 2017 consolidated PRASM remained flat compared to a decrease in consolidated yield of 6.1% year-over-year. Yields were impacted by a strong U.S. dollar, lower surcharges, travel reductions from customers impacted by declining oil prices, competitive actions and higher yielding demand not keeping pace with industry capacity.
Cargo revenue decreased $21 million, or 9.2%, in the secondfirst quarter of 2016, as compared to the year-ago period due to lower freight yields,higherclose-in business travel in March 2017 was partially offset by higher freight volume year-over-year. Yields were negatively impacted as air freighter competitors increased capacity in response to lower fuel prices.
Other operating revenuegrowth in the second quarter of 2016 increased $76 million, or 7.5%, 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. (the “Chase Agreement”), 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 June 30March 31 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | 2017 | 2016 | Increase (Decrease) | % Change | |||||||||||||||||||||||||
Salaries and related costs | $ | 2,592 | $ | 2,454 | $ | 138 | 5.6 | $ | 2,661 | $ | 2,490 | $ | 171 | 6.9 | ||||||||||||||||||
Aircraft fuel | 1,437 | 2,106 | (669) | (31.8) | 1,560 | 1,218 | 342 | 28.1 | ||||||||||||||||||||||||
Landing fees and other rent | 544 | 525 | 19 | 3.6 | ||||||||||||||||||||||||||||
Regional capacity purchase | 551 | 583 | (32) | (5.5) | 536 | 522 | 14 | 2.7 | ||||||||||||||||||||||||
Landing fees and other rent | 541 | 553 | (12) | (2.2) | ||||||||||||||||||||||||||||
Depreciation and amortization | 491 | 445 | 46 | 10.3 | 518 | 479 | 39 | 8.1 | ||||||||||||||||||||||||
Aircraft maintenance materials and outside repairs | 448 | 431 | 17 | 3.9 | 454 | 402 | 52 | 12.9 | ||||||||||||||||||||||||
Distribution expenses | 339 | 348 | (9) | (2.6) | 307 | 303 | 4 | 1.3 | ||||||||||||||||||||||||
Aircraft rent | 175 | 194 | (19) | (9.8) | 179 | 178 | 1 | 0.6 | ||||||||||||||||||||||||
Special charges | 434 | 55 | 379 | NM | 51 | 190 | (139) | NM | ||||||||||||||||||||||||
Other operating expenses | 1,328 | 1,300 | 28 | 2.2 | 1,332 | 1,239 | 93 | 7.5 | ||||||||||||||||||||||||
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$ | 8,336 | $ | 8,469 | $ | (133) | (1.6) | $ | 8,142 | $ | 7,546 | $ | 596 | 7.9 | |||||||||||||||||||
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Salaries and related costs increased $138$171 million, or 5.6%6.9%, in the secondfirst quarter of 20162017 as compared to theyear-ago period primarily due to higher pay rates and benefit expenses driven by the extension of currentnew and extended collective bargaining agreements, an increase in employee incentive expenses due to improvements in operational performance and a 1.1%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 $669increased $342 million, or 31.8%28.1%, year-over-year primarily due to a 31.4% decrease24.8% increase in the average price per gallon of aircraft fuel in the secondfirst quarter of 20162017 compared to theyear-ago period. Second quarter 2016 fuel expense includes the benefit of a $20 million fuel tax refund. The table below presents the significant changes in aircraft fuel cost per gallon in the three month period ended June 30, 2016March 31, 2017 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 | $ | 1,402 | $ | 1,988 | (29.5) | $ | 1.41 | $ | 1.98 | (28.8) | $ | 1,558 | $ | 1,080 | 44.3 | $ | 1.71 | $ | 1.21 | 41.3 | ||||||||||||||||||||||||||||
Hedge losses reported in fuel expense | (35) | (118) | NM | (0.03) | (0.12) | NM | 2 | 138 | NM | — | 0.16 | NM | ||||||||||||||||||||||||||||||||||||
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Fuel expense as reported | $ | 1,437 | $ | 2,106 | (31.8) | $ | 1.44 | $ | 2.10 | (31.4) | ||||||||||||||||||||||||||||||||||||||
Fuel expense | $ | 1,560 | $ | 1,218 | 28.1 | $ | 1.71 | $ | 1.37 | 24.8 | ||||||||||||||||||||||||||||||||||||||
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Total fuel consumption (gallons) | 995 | 1,004 | (0.9) | 910 | 890 | 2.2 |
Regional capacity purchase decreased $32Depreciation and amortization increased $39 million, or 5.5%8.1%, in the secondfirst quarter of 20162017 as compared to theyear-ago period primarily due to a decrease in regional capacity and a decrease in one-time start-up and exit costs, partially offset by an increase in Embraer 170 maintenance costs and certain contractual rate increases.
Depreciation and amortization increased $46 million, or 10.3%, in the second quarter of 2016 as compared to the year-ago period, primarily due to additions of new aircraft, conversions of operating leases to capital leases, aircraft improvements, and accelerated depreciation of certain assets related to severalcertain fleet types.types and increases in information technology assets.
Aircraft maintenance materials and outside repairs increased $52 million, or 12.9%, in the first quarter of 2017 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 first quarter of 2017 as compared to theyear-ago period primarily due to increases in food and 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 June 30March 31 (in millions):
2016 | 2015 | 2017 | 2016 | |||||||||||||
Impairment of intangible asset related to Newark Liberty International Airport (“Newark”) slots | $ | 412 | $ | — | ||||||||||||
Severance and benefit costs | $ | 37 | $ | 8 | ||||||||||||
Labor agreement costs | 10 | — | — | 100 | ||||||||||||
Severance and benefit costs | 6 | 25 | ||||||||||||||
Cleveland airport lease restructuring | — | 74 | ||||||||||||||
(Gains) losses on sale of assets and other special charges | 6 | 30 | 14 | 8 | ||||||||||||
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Special charges | $ | 434 | $ | 55 | $ | 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.
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 June 30March 31 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Interest expense | $ | (157) | $ | (167) | $ | (10) | (6.0) | |||||||||
Interest capitalized | 14 | 13 | 1 | 7.7 | ||||||||||||
Interest income | 9 | 6 | 3 | 50.0 | ||||||||||||
Miscellaneous, net | 5 | (100) | (105) | NM | ||||||||||||
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Total | $ | (129) | $ | (248) | $ | (119) | (48.0) | |||||||||
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In the second quarter of 2016, Miscellaneous, net did not include any gains or losses from derivatives not qualifying for hedge accounting as compared to gains of $41 million in the year-ago period. Foreign currency losses were approximately $12 million in the second quarters of 2016 and 2015. Second quarter 2016 Miscellaneous, net includes a $9 million special gain on the sale of an affiliate. Second quarter 2015 Miscellaneous, net includes a $128 million special charge related to the write off of unamortized non-cash debt discounts for the early redemption of the 6% Notes due 2026 (the “2026 Notes”) and the 6% Notes due 2028 (the “2028 Notes”). 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.
RESULTS OF OPERATIONS
First Six Months 2016 Compared to First Six Months 2015
The Company recorded net income of $901 million in the first six months of 2016 as compared to net income of $1.7 billion in the first six months of 2015. The first six months 2016 net income reflects $524 million of income tax expense primarily due to the release of the income tax valuation allowance in the third quarter of 2015. The Company considers a key measure of its performance to be operating income, which was $1.7 billion for the first six months of 2016, as compared to $2.2 billion for the first six months of 2015, a $0.5 billion decrease year-over-year. Significant components of the Company’s operating results for the six months ended June 30 are as follows (in millions, except percentage changes):
2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Operating revenue | $ | 17,591 | $ | 18,522 | $ | (931 | ) | (5.0 | ) | |||||||
Operating expense | 15,882 | 16,336 | (454 | ) | (2.8 | ) | ||||||||||
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Operating income | 1,709 | 2,186 | (477 | ) | (21.8 | ) | ||||||||||
Nonoperating expense | (284 | ) | (478 | ) | (194 | ) | (40.6 | ) | ||||||||
Income tax expense | 524 | 7 | 517 | NM | ||||||||||||
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Net income | $ | 901 | $ | 1,701 | $ | (800 | ) | (47.0 | ) | |||||||
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NM - Not meaningful
Certain consolidated statistical information for the Company’s operations for the six months ended June 30 is as follows:
2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Passengers (thousands) (a) | 68,503 | 67,753 | 750 | 1.1 | ||||||||||||
RPMs (millions) (b) | 100,599 | 100,733 | (134 | ) | (0.1 | ) | ||||||||||
ASMs (millions) (c) | 122,998 | 121,954 | 1,044 | 0.9 | ||||||||||||
Passenger load factor (d) | 81.8 % | 82.6 % | (0.8) pts. | N/A | ||||||||||||
PRASM (cents) | 12.27 | 13.20 | (0.93 | ) | (7.0 | ) | ||||||||||
Yield (cents) (e) | 15.00 | 15.98 | (0.98 | ) | (6.1 | ) | ||||||||||
CASM (cents) | 12.91 | 13.40 | (0.49 | ) | (3.7 | ) | ||||||||||
Average price per gallon of fuel, including fuel taxes | $ | 1.41 | $ | 2.09 | $ | (0.68 | ) | (32.5 | ) | |||||||
Fuel gallons consumed (millions) | 1,885 | 1,900 | (15 | ) | (0.8 | ) | ||||||||||
Average full-time equivalent employees | 82,800 | 82,000 | 800 | 1.0 |
(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 six months ended June 30 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Passenger—Mainline | $ | 12,102 | $ | 12,899 | $ | (797 | ) | (6.2 | ) | |||||||
Passenger—Regional | 2,991 | 3,197 | (206 | ) | (6.4 | ) | ||||||||||
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Total passenger revenue | 15,093 | 16,096 | (1,003 | ) | (6.2 | ) | ||||||||||
Cargo | 402 | 471 | (69 | ) | (14.6 | ) | ||||||||||
Other operating revenue | 2,096 | 1,955 | 141 | 7.2 | ||||||||||||
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$ | 17,591 | $ | 18,522 | $ | (931 | ) | (5.0 | ) | ||||||||
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The table below presents selected passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes for the six months ended June 30, 2016 compared to the six months ended June 30, 2015:
Domestic | Atlantic | Pacific | Latin | Total Mainline | Regional | Consolidated | ||||||||||||||||||||||
Increase (decrease) from 2015: | ||||||||||||||||||||||||||||
Passenger revenue (in millions) | $ | (213) | $ | (270) | $ | (202) | $ | (112) | $ | (797) | $ | (206) | $ | (1,003) | ||||||||||||||
Passenger revenue | (3.3)% | (9.6)% | (9.3)% | (7.8)% | (6.2)% | (6.4)% | (6.2)% | |||||||||||||||||||||
Average fare per passenger | (7.5)% | (4.6)% | (7.3)% | (14.5)% | (9.5)% | (2.2)% | (7.3)% | |||||||||||||||||||||
Yield | (4.5)% | (4.5)% | (7.9)% | (14.3)% | (6.4)% | (4.0)% | (6.1)% | |||||||||||||||||||||
PRASM | (5.0)% | (9.6)% | (8.4)% | (12.6)% | (7.5)% | (3.8)% | (7.0)% | |||||||||||||||||||||
Passengers | 4.6 % | (5.2)% | (2.2)% | 7.8 % | 3.6 % | (4.3)% | 1.1 % | |||||||||||||||||||||
RPMs (traffic) | 1.3 % | (5.3)% | (1.5)% | 7.6 % | 0.2 % | (2.6)% | (0.1)% | |||||||||||||||||||||
ASMs (capacity) | 1.8 % | 0.1% | (0.9)% | 5.5 % | 1.3 % | (2.7)% | 0.9 % | |||||||||||||||||||||
Passenger load factor (points) | (0.4) | (4.1) | (0.5) | 1.6 | (0.9) | 0.2 | (0.8) |
Consolidated passenger revenue in the first six months of 2016 decreased 6.2% as compared to the year-ago period due to a decrease in consolidated yield of 6.1% year-over-year. Yields were impacted by a strong U.S. dollar, lower surcharges, travel reductions from customers impacted by declining oil prices, competitive actions and higher yielding demand not keeping pace with industry capacity. The decline in yields was partially offset by a 0.9% year-over-year increase in capacity.
Cargo revenue decreased $69 million or 14.6%, in the first six months of 2016 as compared to the year-ago period due to lower freight yields and lower mail volumes year-over-year. Freight 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 results in the first quarter of 2015. The labor dispute was resolved during the first quarter of 2015.
Other operating revenue in the first six months of 2016 increased $141 million or 7.2%, as compared to the year-ago period primarily due to the impact of the Chase Agreement, which became effective in the third quarter of 2015.
Operating Expenses
The table below includes data related to the Company’s operating expenses for the six months ended June 30 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Salaries and related costs | $ | 5,082 | $ | 4,755 | $ | 327 | 6.9 | |||||||||
Aircraft fuel | 2,655 | 3,970 | (1,315) | (33.1) | ||||||||||||
Regional capacity purchase | 1,073 | 1,153 | (80) | (6.9) | ||||||||||||
Landing fees and other rent | 1,066 | 1,096 | (30) | (2.7) | ||||||||||||
Depreciation and amortization | 970 | 874 | 96 | 11.0 | ||||||||||||
Aircraft maintenance materials and outside repairs | 850 | 828 | 22 | 2.7 | ||||||||||||
Distribution expenses | 642 | 660 | (18) | (2.7) | ||||||||||||
Aircraft rent | 353 | 395 | (42) | (10.6) | ||||||||||||
Special charges | 624 | 119 | 505 | NM | ||||||||||||
Other operating expenses | 2,567 | 2,486 | 81 | 3.3 | ||||||||||||
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$ | 15,882 | $ | 16,336 | $ | (454) | (2.8) | ||||||||||
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Salaries and related costs increased $327 million or 6.9%, in the first six months of 2016 as compared to the year-ago period primarily due to higher pay rates and benefit expenses driven by the extension of current collective bargaining agreements, an increase in employee incentive expenses due to improvements in operational performance and a 1.0% increase in average full-time equivalent employees.
Aircraft fuel expense decreased $1.3 billion or 33.1%, year-over-year primarily due to a 32.5% decrease in the average price per gallon of aircraft fuel in the first six months of 2016 compared to the year-ago period. 2016 fuel expense includes the benefit of a $20 million fuel tax refund. The table below presents the significant changes in aircraft fuel cost per gallon in the six months ended June 30, 2016 as compared to the year-ago period:
(In millions) | Average price per gallon | |||||||||||||||||||||||
2016 | 2015 | % Change | 2016 | 2015 | % Change | |||||||||||||||||||
Total aircraft fuel purchase cost excluding fuel hedge impacts | $ | 2,482 | $ | 3,691 | (32.8) | $ | 1.32 | $ | 1.94 | (32.0) | ||||||||||||||
Hedge losses reported in fuel expense | (173) | (279) | NM | (0.09) | (0.15) | NM | ||||||||||||||||||
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Fuel expense as reported | $ | 2,655 | $ | 3,970 | (33.1) | $ | 1.41 | $ | 2.09 | (32.5) | ||||||||||||||
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Total fuel consumption (gallons) | 1,885 | 1,900 | (0.8) |
Regional capacity purchase decreased $80 million or 6.9%, in the first six months of 2016 as compared to the year-ago period primarily due to a decrease in regional capacity and a decrease in one-time start-up and exit costs, partially offset by contractual rate increases.
Depreciation and amortization increased $96 million or 11.0%, in the first six months of 2016 as compared to the year-ago period primarily due to additions of new aircraft, conversions of operating leases to capital leases, aircraft improvements, and accelerated depreciation of certain assets related to several fleet types.
Details of the Company’s special charges include the following for the six months ended June 30 (in millions):
2016 | 2015 | |||||||
Impairment of intangible asset related to Newark slots | $ | 412 | $ | — | ||||
Labor agreement costs | 110 | — | ||||||
Cleveland airport lease restructuring | 74 | — | ||||||
Severance and benefit costs | 14 | 75 | ||||||
(Gains) losses on sale of assets and other special charges | 14 | 44 | ||||||
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Special charges | $ | 624 | $ | 119 | ||||
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See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information.
Nonoperating Income (Expense).The following table illustrates the year-over-year dollar and percentage changes in the Company’s nonoperating income (expense) for the six months ended June 30 (in millions, except for percentage changes):
2016 | 2015 | Increase (Decrease) | % Change | |||||||||||||
Interest expense | $ | (316) | $ | (340) | $ | (24) | (7.1) | |||||||||
Interest capitalized | 28 | 25 | 3 | 12.0 | ||||||||||||
Interest income | 17 | 11 | 6 | 54.5 | ||||||||||||
Miscellaneous, net | (13) | (174) | (161) | (92.5) | ||||||||||||
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Total | $ | (284) | $ | (478) | $ | (194) | (40.6) | |||||||||
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In the first six months of 2016, Miscellaneous, net did not include any gains or losses from derivatives not qualifying for hedge accounting as compared to losses of $2 million in the year-ago period. Foreign currency losses were approximately $27 million and $36 million in the first six months of 2016 and 2015, respectively. Foreign currency results in 2016 include $8 million of losses due to exchange rate changes in Venezuela applicable to funds held in local currency. Miscellaneous, net for 2016 includes a $9 million gain on the sale of an affiliate. Miscellaneous, net for the first six months of 2015 includes a $134 million special charge related to the write off of unamortized non-cash debt discounts for the early redemption of the 2026 Notes and the 2028 Notes. See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information.
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 June 30,March 31, 2017 and at December 31, 2016, the Company had $4.7$4.4 billion in unrestricted cash, cash equivalents and short-term investments, as compared to $5.2 billion at Decemberinvestments. At March 31, 2015. At June 30, 2016,2017, the Company also had $167$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 June 30, 2016,March 31, 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 June 30, 2016,March 31, 2017, the Company had approximately $11.4$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 June 30, 2016,March 31, 2017, our current liabilities exceeded our current assets by approximately $6.1$5 billion. However, approximately $7.5$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.
As of June 30, 2016,March 31, 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 | ||||
| ||||
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 11four Boeing 737NG aircraft, one Boeing787-9 aircraft, six Boeing777-300ER aircraft, and five24 Embraer E175 aircraft. UnitedE175. Additionally, the Company also currently expects to assigntake delivery of five used A319s in 2017. During the five 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 June 30, 2016,March 31, 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. See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on aircraft financing.
As of June 30, 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 $23.7 billion, of which approximately $2.3 billion, $4.3 billion, $4.3 billion, $3.3 billion, $2.6 billion and $6.9 billion are due in the last six months of 2016 and for the full year forMarch 31, 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 June 30, 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 sixthree months ended June 30, 2016 was $3.7 billionMarch 31, 2017 compared to $3.6$1.2 billion in the same period in 2015. Net2016. Operating income for the first sixthree months of 20162017 decreased $0.8approximately $0.4 billion versus theyear-ago period. However, net incomeChanges in 2016 includes $0.9working capital items included an approximately $0.2 billion moredecrease in non-cash expenses versus the year-ago period. Significant non-cash items in 2016 include the $0.4 billion impairment of the Newark slots and $0.5 billion of income tax expense. Frequent flyer deferred revenue and advanced purchase of miles decreased by approximately $0.2 billion due to increased utilization ofpre-purchased miles. Other changes in working capital items were largely offsetting in the first six months of 2016 versus the first six months of 2015. Significant cash payments in 2016 included $0.7 billion in profit sharing and $0.2 billion in pension funding.
Investing Activities.Capital expenditures were $1.7$0.7 billion and $1.3$0.8 billion in the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively. Capital expenditures for the sixthree months ended June 30, 2016March 31, 2017 were primarily attributable to the purchase of aircraft, facility and fleet-related costs. In addition to capital expenditures during the six months ended June 30, 2016, we acquired one aircraft through the issuance of debt. In June 2015, through a wholly-owned subsidiary, we invested $100 million for an ownership stake of approximately five percent in Azul Linhas Aereas Brasileiras S.A., Brazil’s third-largest airline, which provides a range of customer benefits including codesharing of flights (subject to government approval), joint loyalty-program participation and expanded connection opportunities on routes between the U.S. and Brazil, a key market for United, in addition to other points in North and South America.
Financing Activities.During the sixthree months ended June 30, 2016,March 31, 2017, the Company made debt and capital lease payments of $519 million.$0.3 billion.
On March 29, 2017, United and UAL, as borrower and guarantor, respectively, entered into 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 27, 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 under the revolving credit facility of the 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-off and landing rights and related assets of United.
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 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 Company. Under the provisions of the 2017 Credit Agreement, UAL’s ability to make investments and to pay dividends on, or repurchase, UAL’s common stock is restricted.
In the second quarterthree months ended March 31, 2017, United received and recorded $710 million of 2016, United completed an enhanced equipment trust certificates (“EETC”) offering for a total principal amount of $1.1 billion. United had not received any ofproceeds as debt from the proceeds and accordingly had not recorded any debt related to thetwo EETC offering as of June 30,pass-through trusts established in 2016. United expects to receive all proceeds from the pass-through trusts by the end of the firstsecond quarter of 2017. See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on EETC pass-through trusts.information.
In the first quarter of 2015, the holders of substantially allthree months ended March 31, 2017, United received and recorded $300 million proceeds of the remaining $202 million principal amount of United’s 4.5% Convertible Notes 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 2026 Notes in market transactions. On April 1, 2015, UAL used cash to redeem, at par, the remaining $303 million balance of the 20265% Senior Notes.
In the first quarter of 2015, UAL used cash to repurchase $13 million par value 2028 Notes in market transactions. On May 1, 2015, UAL used cash to redeem, at par, the remaining $298 million balance of the 2028 Notes.
In the first six months of 2015, United issued $0.9 billion of debt related to a 2014 EETC offering to finance new aircraft.
As of June 30, 2016, United had its entire capacity of $1.35 billion available under the revolving credit facility of the Company’s Credit Agreement. See Note 11 in 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.
The obligations of United under the 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 covenants in the Credit Agreement and in the Company’s indentures are summarized in Note 11 of the 2015 Annual Report. The Company was in compliance with all of these covenants as of June 30, 2016.
Share Repurchase Programs.In the three and six months ended June 30, 2016,March 31, 2017, UAL repurchased 15 million and 42approximately 5 million shares of UAL common stock in open market transactions, respectively, for $694 million and $2.2 billion, respectively.$0.3 billion. As of June 30, 2016,March 31, 2017, the Company had $255 millionapproximately $1.5 billion remaining to purchase shares under its 2015 $3 billionexisting share repurchase authorization.authority.
In July 2016, UAL’s Board of Directors authorized a new $2 billion share repurchase program to acquire UAL’s common stock.
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. 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.
As of June 30, 2016, United is the guarantor of $43 million of aircraft mortgage debt issued by one of United’s regional carriers and is expected to be the guarantor of up to an additional $129 million of aircraft mortgage debt the regional carrier plans to issue in 2016.
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.
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 the 2015our 2016 Annual Report, 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 June 30, 2016, the Company had hedged approximately 12% of its projected fuel requirements (252 million gallons) for the remainder of 2016 with commonly used financial hedge instruments based on aircraft fuel or crude oil. As of June 30, 2016, the Company had fuel hedges expiring through December 2016.
At June 30, 2016, fuel derivatives were in a net liability position of $7 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 June 30, 2016 (in millions).
Period from July 1, 2016 to December 31, 2016 | ||||||||||||
Change in | (Increase) decrease to unhedged fuel cost (b) | Fuel derivative gain (loss) (c) | Net (increase) decrease to fuel cost | |||||||||
30% | $ | (863 | ) | $ | 38 | $ | (825 | ) | ||||
20% | (576 | ) | 21 | (555 | ) | |||||||
10% | (288 | ) | 9 | (279 | ) | |||||||
(10)% | 288 | (11 | ) | 277 | ||||||||
(20)% | 576 | (19 | ) | 557 | ||||||||
(30)% | 863 | (23 | ) | 840 |
(a) Projected using equal shifts in spot and forward prices for aircraft fuel and crude oil underlying hedge contracts at June 30, 2016 levels.
(b) Projections based on an average forward price of $1.42 per gallon, excluding taxes and other delivery costs and estimated consumption of 2.0 billion gallons for the six months ending December 31, 2016.
(c) Change in projected cash gain/(loss) on existing fuel derivatives as of June 30, 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 June 30, 2016,March 31, 2017, disclosure controls and procedures of each of UAL and United were effective.
Changes in Internal Control over Financial Reporting during the Quarter Ended June 30, 2016March 31, 2017
During the three months ended June 30, 2016,March 31, 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 |
See Part I, Item 3., “Legal Proceedings” of the 20152016 Annual Report for a description of legal proceedings. The disclosure below includes an update to the legal proceedings disclosures included in the 2015 Annual Report, which is in addition to, and not in lieu of, those disclosures contained in the 2015 Annual Report.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and the 2015 Annual Report, the Company and certain of its current and former executive officers and employees received federal grand jury subpoenas requesting records and testimony related to certain individuals formerly associated with the Port Authority of New York and New Jersey and related operations of the Company. As announced in September 2015, certain of the Company’s executives stepped down in connection with its related internal investigation. The Company cooperated with the investigation by the U.S. Attorney’s Office for the District of New Jersey (the “USAO”) in respect of the Port Authority matter and, as announced on July 14, 2016, the Company reached a resolution in the form of a Non-Prosecution Agreement with the USAO. The Company continues to cooperate with the ongoing and related investigation by the SEC and has participated in discussions with representatives of the SEC.
ITEM 1A. | RISK |
See Part I, Item 1A., “Risk Factors,” of the 20152016 Annual Report for a detailed discussion of the risk factors affecting UAL and United. The disclosures below include updates to certain risk factor disclosures included in the 2015 Annual Report, which are in addition to, and not in lieu of, those disclosures contained in the 2015 Annual Report.
Global economic, political and industry conditions constantly change and unfavorable conditions may have a material adverse effect on the Company’s business and results of operations.
The Company’s business and results of operations are significantly impacted by general economic and industry conditions. The airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength of the U.S. and global economies. The Company is a global business with operations outside of the United States from which it derives significant operating revenues. The Company’s international operations are a vital part of its worldwide airline network. Volatile economic, political and market conditions in these international regions may have a negative impact on the Company’s operating results and its ability to achieve its business objectives.
Robust demand for the Company’s air transportation services depends largely on favorable economic conditions, including the strength of the domestic and foreign economies, low unemployment levels, strong consumer confidence levels and the availability of consumer and business credit. Air transportation is often a discretionary purchase that leisure travelers may limit or eliminate during difficult economic times. In addition, during periods of unfavorable economic conditions, business travelers usually reduce the volume of their travel, either due to cost-saving initiatives or as a result of decreased business activity requiring travel. During such periods, the Company’s business and results of operations may be adversely affected due to significant declines in industry passenger demand, particularly with respect to the Company’s business and premium cabin travelers, and a reduction in fare levels.
Stagnant or weakening global economic conditions either in the United States or in other geographic regions, and any future volatility in U.S. and global financial and credit markets may have a material adverse effect on the Company’s revenues, results of operations and liquidity. If such economic conditions were to disrupt capital markets in the future, the Company may be unable to obtain financing on acceptable terms (or at all) to refinance certain maturing debt and to satisfy future capital commitments.
Recently, United Kingdom (“UK”) voters voted for the UK to exit the European Union (“EU”), a non-binding referendum that, if passed into law, could adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British pound and European euro, additional travel restrictions on passengers traveling between the UK and other EU countries and legal uncertainty and potentially divergent national laws and regulations. These adverse effects in European market conditions could negatively impact the Company’s business, results of operations, and financial condition.
In addition, significant or volatile changes in exchange rates between the U.S. dollar and other currencies may have a material adverse impact upon the Company’s liquidity, revenues, costs and operating results.
Current or future litigation and regulatory actions, or failure to comply with the terms of our Non-Prosecution Agreement with the USAO, could have a material adverse impact on the Company.
From time to time, we are subject to litigation and other legal and regulatory proceedings relating to our business or investigations or other actions by governmental agencies, including as described in Part I, Item 3 “Legal Proceedings” of the 2015 Annual Report and in Part II, Item 1 “Legal Proceedings” of this report. No assurances can be given that the results of these or new matters will be favorable to us. An adverse resolution of lawsuits, arbitrations, investigations or other proceedings or actions could have a material adverse effect on our financial condition and results of operations, including as a result of non-monetary remedies. Defending ourselves in these matters may be time-consuming, expensive and disruptive to normal business operations and may result in significant expense and a diversion of management’s time and attention from the operation of our business, which could impede our ability to achieve our business objectives. Additionally, any amount that we may be required to pay to satisfy a judgment, settlement, fine or penalty may not be covered by insurance. Under our charter and certain indemnification agreements that we have entered into (and may in the future enter into) with our officers, directors and certain third parties, we could be required to indemnify and advance expenses to them in connection with their involvement in certain actions, suits, investigations and other proceedings. There can be no assurance that any of these payments will not be material.
We entered into a Non-Prosecution Agreement with the USAO on July 14, 2016 in connection with the previously disclosed Port Authority investigation conducted by the USAO. In the event we violate the terms of this Non- Prosecution Agreement during its two year term, we could be subject to criminal prosecution by the USAO. Any such prosecution could have a material adverse effect on the Company.
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 secondfirst 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) | ||||||||||||
April 1, 2016 through April 30, 2016 | 3,139,641 | $ | 53.38 | 3,139,641 | $ | 781 | ||||||||||
May 1, 2016 through May 31, 2016 | 5,120,868 | 45.07 | 5,120,868 | 550 | ||||||||||||
June 1, 2016 through June 30, 2016 | 6,766,143 | 43.62 | 6,766,143 | 255 | ||||||||||||
|
|
|
| |||||||||||||
Total | 15,026,652 | 15,026,652 | ||||||||||||||
|
|
|
|
|
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 | ||||||||||||
|
|
|
| |||||||||||||
Total | 4,578,448 | 4,578,448 | ||||||||||||||
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(a) In the three and six months ended June 30, 2016,March 31, 2017, UAL repurchased 15 million and 42approximately 5 million shares of UAL common stock in open market transactions, respectively, for $694 million and $2.2 billion, respectively. As of June 30, 2016, the Company had $255 million remaining to purchase shares under its 2015 $3 billion share repurchase authorization.
$0.3 billion. In July 2016, UAL’s Board of Directors authorized a new $2 billion share repurchase programprogram. As of March 31, 2017, the Company had approximately $1.5 billion remaining to acquire UAL’s common stock.
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. UAL will repurchase
(b) The table does not include shares withheld from employees to satisfy certain tax obligations due upon the vesting of restricted 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 169,556 shares were withheld under this plan in the first quarter of 2017 at an average share price of $74.28. These shares of UAL common stock subjectwithheld to prevailing market conditions, andsatisfy tax withholding obligations may discontinue such repurchases at any time.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: | By: | /s/ | ||||
| ||||||
| ||||||
Date: | By: | /s/ Chris Kenny | ||||
Chris Kenny | ||||||
Vice President and Controller | ||||||
(principal accounting officer) | ||||||
United Airlines, Inc. | ||||||
(Registrant) | ||||||
Date: | By: | /s/ | ||||
| ||||||
| ||||||
Date: | By: | /s/ Chris Kenny | ||||
Chris Kenny | ||||||
Vice President and Controller | ||||||
(principal accounting officer) |
Exhibit No. | Registrant | Exhibit | ||
UAL United | ||||
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UAL United | ||||
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UAL
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10.3 | UAL | First Amendment to the United Continental Holdings, Inc. 2006 Director Equity Incentive Plan (as amended and restated on February 20, 2014) | ||
*10.4 | UAL United | Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017, among United Airlines, Inc, as borrower, United Continental Holdings, Inc., as parent and a guarantor, the subsidiaries of UAL from time to time party thereto other than United, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to UAL’s Form8-K filed April 3, 2017, Commission file number1-6033, and incorporated herein by reference) | ||
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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