Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

 

 

 

LOGO

 

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  x    No  ¨   
  United Airlines, Inc.   Yes  x    No  ¨   

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 Regulation S-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  x    No  ¨   
  United Airlines, Inc.   Yes  x    No  ¨   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

United Continental Holdings, Inc.

  Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨

United Airlines, Inc.

  Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

United Continental Holdings, Inc.

  Yes  ¨    No  x   
 

United Airlines, Inc.

  Yes  ¨    No  x   

The number of shares outstanding of each of the issuer’s classes of common stock as of October 13, 2015 is shown below:

 

United Continental Holdings, Inc.

   372,810,266 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 Form 10-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 Form 10-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 September 30, 2015

 

                 Page          
  PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

United Continental Holdings, Inc.:

  
 

Statements of Consolidated Operations

     3   
 

Statements of Consolidated Comprehensive Income (Loss)

     4   
 

Consolidated Balance Sheets

     5   
 

Condensed Statements of Consolidated Cash Flows

     7   
  United Airlines, Inc.:   
 

Statements of Consolidated Operations

     8   
 

Statements of Consolidated Comprehensive Income (Loss)

     9   
 

Consolidated Balance Sheets

     10   
 

Condensed Statements of Consolidated Cash Flows

     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

     27   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4.

 

Controls and Procedures

     41   
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     43   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 6.

 

Exhibits

     43   

Signatures

     44   

Exhibit Index

     45   


PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions, except per share amounts)

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
           2015                  2014                  2015                  2014        

Operating revenue:

           

Passenger—Mainline

    $ 7,254        $ 7,414        $ 20,153        $ 20,410    

Passenger—Regional

     1,706          1,900          4,903          5,269    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total passenger revenue

     8,960          9,314          25,056          25,679    

Cargo

     235          237          706          678    

Other operating revenue

     1,111          1,012          3,066          3,231    
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,306          10,563          28,828          29,588    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expense:

           

Salaries and related costs

     2,534          2,344          7,289          6,684    

Aircraft fuel

     1,934          3,127          5,904          9,145    

Regional capacity purchase

     572          597          1,725          1,747    

Landing fees and other rent

     551          567          1,647          1,706    

Depreciation and amortization

     469          422          1,343          1,248    

Aircraft maintenance materials and outside repairs

     424          435          1,252          1,364    

Distribution expenses

     366          375          1,026          1,039    

Aircraft rent

     185          222          580          668    

Special charges (Note 10)

     76          43          195          264    

Other operating expenses

     1,296          1,240          3,782          3,975    
  

 

 

    

 

 

    

 

 

    

 

 

 
     8,407          9,372          24,743          27,840    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     1,899          1,191          4,085          1,748    
           

Nonoperating income (expense):

           

Interest expense

     (164)         (186)         (504)         (559)   

Interest capitalized

     13          13          38          40    

Interest income

                     16          17    

Miscellaneous, net (Note 10)

     (147)         (106)         (321)         (141)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     (293)         (271)         (771)         (643)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,606          920          3,314          1,105    

Income tax expense (benefit)

     (3,210)         (4)         (3,203)           
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 4,816        $ 924        $ 6,517        $ 1,104    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share, basic

   $ 12.83        $ 2.50        $ 17.19        $ 2.98    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share, diluted

   $ 12.82        $ 2.37        $ 17.15        $ 2.84    
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

3


UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
           2015                  2014                  2015                  2014        

Net income

    $ 4,816         $ 924        $ 6,517        $ 1,104    
           

Other comprehensive income (loss), net change related to:

           

Fuel derivative financial instruments

     (104)         (120)         129          (95)   

Employee benefit plans

     (12)         (82)         18          (121)   

Investments and other

     (6)                 (2)         (4)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     (122)         (201)         145          (220)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income, net

    $ 4,694         $ 723        $ 6,662        $ 884    
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

4


UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30, 2015
     December 31, 2014  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 3,427        $ 2,002    

Short-term investments

     2,172          2,382    

Receivables, less allowance for doubtful accounts (2015—$18; 2014—$22)

     1,513          1,146    

Fuel hedge collateral deposits

     156          577    

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2015—$226; 2014—$169)

     704          666    

Deferred income taxes

     1,306          591    

Prepaid expenses and other

     819          774    
  

 

 

    

 

 

 
     10,097          8,138    
  

 

 

    

 

 

 

Operating property and equipment:

     

Owned—

     

Flight equipment

     23,231          21,107    

Other property and equipment

     4,342          4,016    
  

 

 

    

 

 

 
     27,573          25,123    

Less—Accumulated depreciation and amortization

     (8,038)         (7,079)   
  

 

 

    

 

 

 
     19,535          18,044    
  

 

 

    

 

 

 
     

Purchase deposits for flight equipment

     736          706    
     

Capital leases—

     

Flight equipment

     1,562          1,272    

Other property and equipment

     331          331    
  

 

 

    

 

 

 
     1,893          1,603    

Less—Accumulated amortization

     (988)         (886)   
  

 

 

    

 

 

 
     905          717    
  

 

 

    

 

 

 
     21,176          19,467    
  

 

 

    

 

 

 

Other assets:

     

Goodwill

     4,523          4,523    

Intangibles, less accumulated amortization (2015—$1,120; 2014—$1,049)

     4,193          4,284    

Deferred income taxes

     846          —    

Restricted cash

     206          276    

Other, net

     828          665    
  

 

 

    

 

 

 
     10,596          9,748    
  

 

 

    

 

 

 
   $ 41,869        $ 37,353    
  

 

 

    

 

 

 

(continued on next page)

 

5


UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30, 2015
    December 31, 2014  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Advance ticket sales

    $ 4,492        $ 3,701    

Frequent flyer deferred revenue

     2,138         2,058    

Accounts payable

     2,082         1,882    

Accrued salaries and benefits

     2,187         1,818    

Current maturities of long-term debt

     1,312         1,313    

Current maturities of capital leases

     137         110    

Fuel derivative instruments

     329         694    

Other

     811         932    
  

 

 

   

 

 

 
     13,488         12,508    
  

 

 

   

 

 

 
    

Long-term debt

     9,910         10,121    

Long-term obligations under capital leases

     762         571    
    

Other liabilities and deferred credits:

    

Frequent flyer deferred revenue

     2,796         2,879    

Postretirement benefit liability

     1,918         1,933    

Pension liability

     1,511         2,226    

Advanced purchase of miles

     1,070         1,217    

Deferred income taxes

     —         1,591    

Lease fair value adjustment, net

     380         466    

Other

     1,479         1,445    
  

 

 

   

 

 

 
     9,154         11,757    
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock

     —         —    

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 373,729,883 and 374,525,916 shares at September 30, 2015 and December 31, 2014, respectively

              

Additional capital invested

     7,941         7,721    

Retained earnings (deficit)

     2,634         (3,883)   

Stock held in treasury, at cost

     (1,090)        (367)   

Accumulated other comprehensive income (loss)

     (934)        (1,079)   
  

 

 

   

 

 

 
     8,555         2,396    
  

 

 

   

 

 

 
    $ 41,869        $ 37,353    
  

 

 

   

 

 

 

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

6


UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months Ended
September 30,
 
     2015      2014  

Cash Flows from Operating Activities:

     

Net cash provided by operating activities

    $ 4,877         $ 2,732    

Cash Flows from Investing Activities:

     

Capital expenditures

     (1,984)         (1,345)   

Purchases of short-term and other investments

     (1,859)         (2,859)   

Proceeds from sale of short-term and other investments

     2,069          2,388    

Investment in affiliates

     (130)         —    

Decrease in restricted cash

     112          79    

Proceeds from sale of property and equipment

     50          73    

Other, net

     23          34    
  

 

 

    

 

 

 

Net cash used in investing activities

     (1,719)         (1,630)   
  

 

 

    

 

 

 

Cash Flows from Financing Activities:

     

Payments of long-term debt

     (1,528)         (2,001)   

Repurchases of common stock

     (710)         (220)   

Proceeds from issuance of long-term debt

     613          1,177    

Principal payments under capital leases

     (80)         (81)   

Other, net

     (28)         (80)   
  

 

 

    

 

 

 

Net cash used in financing activities

     (1,733)         (1,205)   
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,425          (103)   

Cash and cash equivalents at beginning of the period

     2,002          3,220    
  

 

 

    

 

 

 

Cash and cash equivalents at end of the period

   $ 3,427        $ 3,117    
  

 

 

    

 

 

 

Investing and Financing Activities Not Affecting Cash:

     

Property and equipment acquired through the issuance of debt

   $ 797        $ 757    

Exchanges of certain convertible notes for common stock

     201          202    

Operating lease conversions to capital lease

     285            

Airport construction financing

             14    

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

7


UNITED AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Operating revenue:

           

Passenger—Mainline

   $ 7,254        $ 7,414        $ 20,153        $ 20,410    

Passenger—Regional

     1,706          1,900          4,903          5,269    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total passenger revenue

     8,960          9,314          25,056          25,679    

Cargo

     235          237          706          678    

Other operating revenue

     1,111          1,012          3,066          3,231    
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,306          10,563          28,828          29,588    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expense:

           

Salaries and related costs

     2,534          2,344          7,289          6,684    

Aircraft fuel

     1,934          3,127          5,904          9,145    

Regional capacity purchase

     572          597          1,725          1,747    

Landing fees and other rent

     551          567          1,647          1,706    

Depreciation and amortization

     469          422          1,343          1,248    

Aircraft maintenance materials and outside repairs

     424          435          1,252          1,364    

Distribution expenses

     366          375          1,026          1,039    

Aircraft rent

     185          222          580          668    

Special charges (Note 10)

     76          43          195          264    

Other operating expenses

     1,295          1,245          3,780          3,972    
  

 

 

    

 

 

    

 

 

    

 

 

 
     8,406          9,377          24,741          27,837    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     1,900          1,186          4,087          1,751    
           

Nonoperating income (expense):

           

Interest expense

     (164)         (187)         (504)         (564)   

Interest capitalized

     13          13          38          40    

Interest income

                     16          17    

Miscellaneous, net (Note 10)

     (147)         (91)         (322)         (121)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     (293)         (257)         (772)         (628)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,607          929          3,315          1,123    

Income tax expense (benefit)

     (3,169)         (4)         (3,163)           
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 4,776        $ 933        $ 6,478        $ 1,122    
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

8


UNITED AIRLINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Net income

    $ 4,776        $ 933        $ 6,478        $ 1,122    
           

Other comprehensive income (loss), net change related to:

           

Fuel derivative financial instruments

     (104)         (120)         129          (95)   

Employee benefit plans

     (12)         (82)         18          (121)   

Investments and other

     (6)                 (1)         (4)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     (122)         (201)         146          (220)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income, net

   $ 4,654        $ 732        $ 6,624        $ 902    
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

9


UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)         
     September 30, 2015      December 31, 2014  

ASSETS

     

Current assets:

     

Cash and cash equivalents

    $ 3,421         $ 1,996    

Short-term investments

     2,172          2,382    

Receivables, less allowance for doubtful accounts (2015—$18;
2014—$22)

     1,513          1,146    

Fuel hedge collateral deposits

     156          577    

Aircraft fuel, spare parts and supplies, less obsolescence allowance
(2015—$226; 2014—$169)

     704          666    

Deferred income taxes

     1,304          591    

Prepaid expenses and other

     867          823    
  

 

 

    

 

 

 
     10,137          8,181    
  

 

 

    

 

 

 

Operating property and equipment:

     

Owned—

     

Flight equipment

     23,231          21,107    

Other property and equipment

     4,342          4,016    
  

 

 

    

 

 

 
     27,573          25,123    

Less—Accumulated depreciation and amortization

     (8,038)         (7,079)   
  

 

 

    

 

 

 
     19,535          18,044    
  

 

 

    

 

 

 
     

Purchase deposits for flight equipment

     736          706    
     

Capital leases—

     

Flight equipment

     1,562          1,272    

Other property and equipment

     331          331    
  

 

 

    

 

 

 
     1,893          1,603    

Less—Accumulated amortization

     (988)         (886)   
  

 

 

    

 

 

 
     905          717    
  

 

 

    

 

 

 
     21,176          19,467    
  

 

 

    

 

 

 

Other assets:

     

Goodwill

     4,523          4,523    

Intangibles, less accumulated amortization (2015—$1,120; 2014—$1,049)

     4,193          4,284    

Deferred income taxes

     807          —    

Restricted cash

     206          276    

Other, net

     828          1,377    
  

 

 

    

 

 

 
     10,557          10,460    
  

 

 

    

 

 

 
    $ 41,870         $ 38,108    
  

 

 

    

 

 

 

 

(continued on next page)

 

10


UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)         
     September 30, 2015      December 31, 2014  
LIABILITIES AND STOCKHOLDER’S EQUITY              

Current liabilities:

     

Advance ticket sales

    $ 4,492         $ 3,701    

Frequent flyer deferred revenue

     2,138          2,058    

Accounts payable

     2,086          1,886    

Accrued salaries and benefits

     2,187          1,818    

Current maturities of long-term debt

     1,312          1,313    

Current maturities of capital leases

     137          110    

Fuel derivative instruments

     329          694    

Other

     811          933    
  

 

 

    

 

 

 
     13,492          12,513    
  

 

 

    

 

 

 
     

Long-term debt

     9,910          10,120    

Long-term obligations under capital leases

     762          571    
     

Other liabilities and deferred credits:

     

Frequent flyer deferred revenue

     2,796          2,879    

Postretirement benefit liability

     1,918          1,933    

Pension liability

     1,511          2,226    

Advanced purchase of miles

     1,070          1,217    

Deferred income taxes

     —          1,591    

Lease fair value adjustment, net

     380          466    

Other

     1,479          1,957    
  

 

 

    

 

 

 
     9,154          12,269    
  

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014

     —          —    

Additional capital invested

     6,652          7,347    

Retained earnings (deficit)

     2,850          (3,628)   

Accumulated other comprehensive income (loss)

     (933)         (1,079)   

Receivable from related parties

     (17)         (5)   
  

 

 

    

 

 

 
     8,552          2,635    
  

 

 

    

 

 

 
    $ 41,870         $ 38,108    
  

 

 

    

 

 

 

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

11


UNITED AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months Ended September 30,  
     2015      2014  

Cash Flows from Operating Activities:

     

Net cash provided by operating activities

    $ 4,866         $ 2,623    

Cash Flows from Investing Activities:

     

Capital expenditures

     (1,984)         (1,345)   

Purchases of short-term investments and other investments

     (1,859)         (2,859)   

Proceeds from sale of short-term and other investments

     2,069          2,388    

Investment in affiliates

     (130)         —    

Decrease in restricted cash

     112          79    

Proceeds from sale of property and equipment

     50          73    

Other, net

     23          34    
  

 

 

    

 

 

 

Net cash used in investing activities

     (1,719)         (1,630)   
  

 

 

    

 

 

 

Cash Flows from Financing Activities:

     

Payments of long-term debt

     (1,528)         (2,001)   

Dividend to UAL

     (709)         (120)   

Proceeds from issuance of long-term debt

     613          1,177    

Principal payments under capital leases

     (80)         (81)   

Other, net

     (18)         (71)   
  

 

 

    

 

 

 

Net cash used in financing activities

     (1,722)         (1,096)   
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,425          (103)   

Cash and cash equivalents at beginning of the period

     1,996          3,214    
  

 

 

    

 

 

 

Cash and cash equivalents at end of the period

    $ 3,421         $ 3,111    
  

 

 

    

 

 

 

Investing and Financing Activities Not Affecting Cash:

     

Property and equipment acquired through the issuance of debt

    $ 797         $ 757    

Operating lease conversions to capital lease

     285            

Airport construction financing

             14    

Transfer of UAL subsidiaries to United

     —          186    

Conversion of convertible notes to UAL common stock

     —          156    

The accompanying Combined Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

12


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 Form 10-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 Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report”). 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 - SIGNIFICANT ACCOUNTING POLICIES

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 Customers. 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 Codification, and is effective for annual reporting periods beginning after December 15, 2017. The Company is evaluating the impact on its financial statements.

The FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. As of September 30, 2015, the Company had approximately $180 million of unamortized debt issuance costs recorded as an asset on its balance sheet included under the caption Other, net. The Company will reclassify the unamortized debt issuance costs and present debt net of those unamortized costs on its balance sheet upon adoption of this standard.

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 per share (or its equivalent) using the practical expedient will no longer be categorized in the fair value hierarchy. It is effective for fiscal years and interim periods beginning after December 15, 2015, but early adoption is permitted. As of September 30, 2015, the Company had approximately $200 million of such investments as part of its Short-term investments balance sheet total. In addition, pension plan investments measured at net asset value per share, if any, will no longer be categorized within the fair value hierarchy beginning with the Company’s Annual Report on Form 10-K for the year ending December 31, 2015.

 

13


NOTE 2 - EARNINGS PER SHARE

The table below represents the computation of UAL’s basic and diluted earnings per share amounts and the number of securities that have been excluded from the computation of diluted earnings per share amounts because they were antidilutive (in millions, except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Basic earnings per share:

           

Earnings available to common stockholders

    $ 4,816         $ 924         $ 6,517         $ 1,104    
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted-average shares outstanding

     375          370          379          370    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share, basic

    $ 12.83         $ 2.50         $ 17.19         $ 2.98    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Earnings available to common stockholders

    $ 4,816         $ 924         $ 6,517         $ 1,104    

Effect of convertible notes

     —                  —          20    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings available to common stockholders including the effect of dilutive securities

    $ 4,816         $ 931         $ 6,517         $ 1,124    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares outstanding:

           

Basic weighted-average shares outstanding

     375          370          379          370    

Effect of convertible notes

     —          22          —          24    

Effect of employee stock awards

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted-average shares outstanding

     376          393          380          395    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share, diluted

    $ 12.82         $ 2.37         $ 17.15         $ 2.84    
  

 

 

    

 

 

    

 

 

    

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

           

Restricted stock and stock options

             1                 1   

In January 2015, the holders of substantially all of the remaining $202 million principal amount of United’s 4.5% Convertible Notes due 2015 (the “4.5% Convertible Notes”) exercised their conversion option resulting in the issuance of 11 million shares of UAL common stock. There is no convertible debt outstanding as of September 30, 2015.

In 2014, UAL’s Board of Directors authorized a share repurchase program to acquire up to $1 billion of UAL’s common stock (the “2014 Program”). On July 21, 2015, UAL’s Board of Directors authorized a new $3 billion share repurchase program, which the Company expects to complete by December 31, 2017 (the “2015 Program”). UAL spent $262 million and $712 million to repurchase approximately 4.6 million and 11.9 million shares of UAL common stock in open market transactions in the three and nine months ended September 30, 2015, respectively. As of September 30, 2015, the Company had completed purchases under the 2014 Program and had $2.97 billion remaining to spend under the 2015 Program. On October 22, 2015, UAL expects to enter into agreements under which it will repurchase approximately $300 million of shares of UAL common stock through an accelerated share repurchase program. The specific number of shares that UAL expects ultimately to repurchase under this accelerated share repurchase program will be determined based on a calculation period not to exceed approximately three months. 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 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.

 

14


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):

 

UAL (a)   Pension and
Other
Postretirement
Liabilities
    Derivative
Contracts
    Investments
and Other
    Pension and
Other
Postretirement
Deferred
Taxes
    Derivative
Contracts
Deferred
Taxes
    Total  

Balance at June 30, 2015

   $ (442)       $ (266)       $ 11        $ (115)       $ —        $ (812)   

Changes in value

    (10)        (181)        (6)        (1)        82         (116)   

Amounts reclassified to earnings

           150         —         (9)        (155)        (6)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    (2)        (31)        (6)        (10)        (73)        (122)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ (444)       $ (297)       $       $ (125)       $ (73)       $ (934)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ (472)       $ (499)       $       $ (115)       $ —  (b)     $ (1,079)   

Changes in value

           (227)        (1)        (1)        82         (144)   

Amounts reclassified to earnings

    25         429         (1)        (9)        (155)        289    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    28         202         (2)        (10)        (73)        145    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ (444)       $ (297)       $       $ (125)       $ (73)       $ (934)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
UAL (a)   Pension and
Other
Postretirement
Liabilities
    Derivative
Contracts
    Investments
and Other
    Pension and
Other
Postretirement
Deferred
Taxes
    Derivative
Contracts
Deferred
Taxes
    Total  

Balance at June 30, 2014

   $ 660        $ 36        $       $ (115)       $ —        $ 589    

Changes in value (c)

    (66)        (120)               —         —         (183)   

Amounts reclassified to earnings (c)

    (16)        —         (2)        —         —         (18)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    (82)        (120)               —         —         (201)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 578        $ (84)       $       $ (115)       $ —        $ 388    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 699        $ 11        $ 13        $ (115)       $ —        $ 608    

Changes in value (c)

    (71)        (99)               —         —         (166)   

Amounts reclassified to earnings (c)

    (50)               (8)        —         —         (54)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    (121)        (95)        (4)        —         —         (220)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 578        $ (84)       $       $ (115)       $ —        $ 388    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Details about AOCI Components

   Amount Reclassified
from AOCI to Income
     Affected Line Item in
the Statements of
Consolidated Operations
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
      
     2015      2014      2015      2014       
Derivatives designated as cash flow hedges               

Fuel contracts-reclassifications of (gains) losses into earnings

    $         150          $             —          $         429          $         4         Aircraft fuel
Amortization of pension and post-retirement items               

Amortization of unrecognized (gains) losses and prior service cost (credit) (d)

     8           (16)         25           (50)        Salaries and related costs
Investments and other               

Available for sale securities-reclassifications of gains into earnings

     —           (2)         (1)          (8)        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 nine months ended September 30, 2015.

(b) Deferred tax balance was offset by the Company’s valuation allowance.

(c) Income tax expense for these items 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).

 

15


NOTE 4 - INCOME TAXES

The Company’s income tax benefit was $3.2 billion for both the third quarter of 2015 and nine months ended September 30, 2015. This compares to an income tax benefit of $4 million in the third quarter of 2014 and a $1 million tax provision for the nine months ended September 30, 2014. A discrete tax benefit of $3.1 billion for the reduction to the U.S. net federal deferred tax asset valuation allowance and an approximately $100 million tax benefit related to a reduction to the net state deferred tax asset valuation allowance was included in the income tax benefit for the third quarter of 2015 and nine months ended September 30, 2015.

During 2015, the Company recorded a pre-tax profit of $3.3 billion for the nine months ended September 30, 2015. Additionally, during the third quarter of 2015, after considering all positive and negative evidence and the four sources of taxable income, the Company concluded that its deferred income tax assets are more likely than not to be realized. In evaluating the likelihood of utilizing the Company’s net federal and state deferred tax assets, the significant relevant factors that the Company considered are: (1) its recent history and forecasted profitability; (2) growth in the U.S. and global economies; and (3) future impact of taxable temporary differences. Therefore, the Company released almost all of its valuation allowance in the third quarter of 2015, resulting in a $3.2 billion benefit in its provision for income taxes. Additionally, during the current year, the Company expects there will be other reductions of the U.S. federal and state valuation allowances in the normal course as the Company recognizes U.S. taxable income. This taxable income will reduce the deferred tax asset on Net Operating Losses (“NOLs”) and will result in a reduction of the valuation allowances.

The Company expects it will retain a valuation allowance of approximately $82 million against certain state and local NOLs and credit carryforwards at the end of the year. The Company expects these NOLs and credits will expire unused due to limited carryforward periods. The ability to recognize the remaining valuation allowance against these state NOLs and credits will be evaluated on a quarterly basis to determine if there are any significant events or any prudent and feasible tax planning strategies that would affect the Company’s ability to utilize these deferred tax assets.

The Company’s effective tax rates differ from the federal statutory rate of 35% primarily because of the impact of changes to existing valuation allowances. The change in the effective tax rate each period is impacted by a number of factors, including the relative mix of domestic and state income tax expense in the U.S., adjustments to the valuation allowances and discrete items. After 2015, the Company anticipates its effective tax rate will be approximately 37%, which reflects a more normalized rate based upon the Company’s relative mix of domestic, foreign and state income tax expense.

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
September 30,
     Three Months Ended
September 30,
 
     2015      2014      2015      2014  
Service cost     $ 31         $ 24         $        $   
Interest cost      50          50          20          22    
Expected return on plan assets      (49)         (45)         —          (1)   
Amortization of unrecognized (gain) loss and prior service cost (credit)      21                  (13)         (19)   
Settlement (gain) loss              (1)         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 54         $ 31         $ 12         $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


     Pension Benefits      Other Postretirement
Benefits
 
     Nine Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
Service cost     $ 93         $ 73         $ 15         $ 14    
Interest cost      150          151          61          66    
Expected return on plan assets      (147)         (134)         (1)         (2)   
Amortization of unrecognized (gain) loss and prior service cost (credit)      65                  (40)         (58)   
Settlement (gain) loss              (1)         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 163         $ 97         $ 35         $ 20    
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2015, the Company contributed $800 million to its U.S. domestic tax-qualified defined benefit pension plans.

Share-Based Compensation. The Company generally grants incentive compensation awards, including long-term equity based awards, during the first quarter of the calendar year. During the nine months ended September 30, 2015, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.2 million shares of restricted stock and 0.3 million restricted stock units (“RSUs”) that vest pro-rata over three years on the anniversary of the grant date. The time-vested RSUs are cash-settled based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company also granted 0.6 million performance-based RSUs that will vest based on the Company’s return on invested capital and the Company’s relative improvement in pre-tax margin for the three years ending December 31, 2017. If these performance conditions are achieved, cash payments will be made after the end of the performance period based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The Company accounts for the RSUs as liability awards.

The table below presents information related to share-based compensation (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Share-based compensation expense

    $        $ 23         $ 40         $ 69    
     September 30, 2015      December 31, 2014                

Unrecognized share-based compensation

    $ 48         $ 62          

Profit Sharing Plans. Substantially all employees participate in profit sharing, which varies from 5% to 20% of pre-tax earnings, excluding special items, profit sharing expense and share-based compensation, depending on the work group and in some cases at varying percentages above and below certain pre-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 qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic work groups. Eligible non-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.

 

17


NOTE 6 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements (in millions):

 

     September 30, 2015      December 31, 2014  
     Total      Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3  
     UAL  

Cash and cash equivalents

    $ 3,427         $ 3,427         $ —         $ —         $ 2,002         $ 2,002         $ —         $ —    

Short-term investments:

                       

Asset-backed securities

     673          —          673          —          901          —          901          —    

Corporate debt

     908          —          908          —          876          —          876          —    

Certificates of deposit placed through an account registry service (“CDARS”)

     301          —          301          —          256          —          256          —    

Auction rate securities

     16          —          —          16          26          —          —          26    

U.S. government and agency notes

     49          —          49          —          68          —          68          —    

Other fixed income securities

     225          —          225          —          255          —          255          —    

Enhanced equipment trust certificates (“EETC”)

     26          —          —          26          28          —          —          28    

Fuel derivatives liability, net

     (312)         —          (312)         —          (717)         —          (717)         —    

Foreign currency derivatives asset, net

             —                  —                  —                  —    

Restricted cash

     208          208          —          —          320          320          —          —    
     United  

Cash and cash equivalents

    $     3,421         $     3,421         $ —         $ —         $     1,996         $     1,996         $ —         $ —    

Short-term investments:

                       

Asset-backed securities

     673          —          673          —          901          —          901          —    

Corporate debt

     908          —          908          —          876          —          876          —    

CDARS

     301          —          301          —          256          —          256          —    

Auction rate securities

     16          —          —          16          26          —          —          26    

U.S. government and agency notes

     49          —          49          —          68          —          68          —    

Other fixed income securities

     225          —          225          —          255          —          255          —    

EETC

     26          —          —          26          28          —          —          28    

Fuel derivatives liability, net

     (312)         —          (312)         —          (717)         —          (717)         —    

Foreign currency derivatives asset, net

             —                  —                  —                  —    

Restricted cash

     208          208          —          —          320          320          —          —    

Convertible debt derivative asset

     —          —          —          —          712          —          —          712    

Convertible debt derivative option liability

     —          —          —          —          (511)         —          —          (511)   

United’s debt-related derivatives presented in the tables above related to (a) supplemental indentures that provided that United’s convertible debt was convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in United’s convertible debt that were required to be separated and accounted for as though they were free-standing derivatives as a result of the United debt becoming convertible into the common stock of a different reporting entity. The derivatives described above related to the 4.5% Convertible Notes. Gains (losses) on these derivatives were recorded in Nonoperating income (expense): Miscellaneous, net in United’s statements of consolidated operations. These derivatives along with their gains (losses) were reported in United’s separate financial statements and were eliminated in consolidation for UAL. In January 2015, the holders of substantially all of the remaining $202 million principal amount of the 4.5% Convertible Notes exercised their conversion option resulting in the issuance of 11 million shares of UAL common stock. The derivative assets and liabilities associated with the 4.5% Convertible Notes were settled in connection with the retirement of the related convertible debt, and the final accounting did not materially impact UAL’s or United’s statements of consolidated operations.

 

18


Available-for-sale investment maturities - The short-term investments shown in the table above are classified as available-for-sale. As of September 30, 2015, asset-backed securities have remaining maturities of less than one year to approximately 40 years, corporate debt securities have remaining maturities of less than one year to approximately seven 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 instruments and investments presented in the tables 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  
     September 30, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  
            Total      Level 1      Level 2      Level 3             Total      Level 1      Level 2      Level 3  

UAL debt

    $  11,222         $  11,575         $   —         $   8,437         $   3,138         $   11,434         $   12,386         $   —         $   8,568         $   3,818    

United debt

     11,222          11,575          —          8,437          3,138          11,433          12,386          —          8,568          3,818    

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, (c) internally-developed models of the expected future cash flows related to the securities, or (d) broker quotes obtained by third-party valuation services.

Fuel derivatives

     Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.
Foreign currency derivatives      Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.

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.

NOTE 7 - HEDGING ACTIVITIES

Fuel Derivatives

The Company routinely hedges a portion of its expected aircraft 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 September 30, 2015, the Company had hedged approximately 23% and 17% of its projected fuel requirements (221 million gallons and 652 million gallons, respectively) for the remainder of 2015 and 2016, respectively, with commonly used financial

 

19


hedge instruments based on aircraft fuel or crude oil. As of September 30, 2015, the Company had fuel hedges expiring through December 2016.

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. Instruments that qualify for hedge accounting treatment typically include swaps, call options, collars (which consist of a purchased call option and a sold put option) and four-way collars (a collar with a higher strike sold call option and a lower strike purchased put option). Generally, utilizing hedge accounting, all periodic changes in fair value of the 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 cash flow hedge exceeds the change in the value of the Company’s expected future cash outlay to purchase fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is classified as Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.

The Company also uses certain combinations of derivative contracts that are economic hedges but do not qualify for hedge accounting under GAAP. Additionally, the Company may enter into contracts at different times and later combine those contracts into structures designated for hedge accounting. As with derivatives that qualify for hedge accounting, the economic hedges and individual contracts are part of the Company’s program to mitigate the adverse financial impact of potential increases in the price of fuel. The Company records changes in the fair value of these various contracts that are not designated for hedge accounting to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.

If the Company settles a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs. In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the condensed statements of consolidated cash flows.

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.

 

20


The Company’s derivatives were reported in its consolidated balance sheets as follows (in millions):

 

Classification

  Balance Sheet Location   September 30,
2015
    December 31,
2014
 

Derivatives designated as cash flow hedges

     

Assets:

     

Fuel contracts due within one year

  Receivables    $       $ —    

Fuel contracts with maturities greater than one year

  Other assets: Other, net            —    
   

 

 

   

 

 

 

Total assets

     $ 13        $ —    
   

 

 

   

 

 

 

Liabilities:

     

Fuel contracts due within one year

  Fuel derivative instruments    $ 217        $ 450    

Fuel contracts with maturities greater than one year

  Other liabilities and deferred credits: Other     —         27    
   

 

 

   

 

 

 

Total liabilities

     $ 217        $ 477    
   

 

 

   

 

 

 

Derivatives not designated for hedge accounting

     

Assets:

     

Fuel contracts due within one year

  Receivables    $       $   

Fuel contracts with maturities greater than one year

  Other assets: Other, net     —         —    
   

 

 

   

 

 

 

Total assets

     $       $   
   

 

 

   

 

 

 

Liabilities:

     

Fuel contracts due within one year

  Fuel derivative instruments    $ 112        $ 244    

Fuel contracts with maturities greater than one year

  Other liabilities and deferred credits: Other     —           
   

 

 

   

 

 

 

Total liabilities

     $ 112        $ 246    
   

 

 

   

 

 

 

Total derivatives

     

Assets:

     

Fuel contracts due within one year

  Receivables    $ 10        $   

Fuel contracts with maturities greater than one year

  Other assets: Other, net            —    
   

 

 

   

 

 

 

Total assets

     $ 17        $   
   

 

 

   

 

 

 

Liabilities:

     

Fuel contracts due within one year

  Fuel derivative instruments    $ 329        $ 694    

Fuel contracts with maturities greater than one year

  Other liabilities and deferred credits: Other     —         29    
   

 

 

   

 

 

 

Total liabilities

     $ 329        $ 723    
   

 

 

   

 

 

 

Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance 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 posted $156 million and $577 million of collateral with fuel derivative counterparties as of September 30, 2015 and December 31, 2014, respectively. The collateral is recorded as Fuel hedge collateral deposits on the Company’s balance sheet.

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):

 

            September 30,
2015
    December 31,
2014
 

Fuel derivative instruments

       $ (238    $ (209

Other liabilities and deferred credits: Other

               (30
     

 

 

   

 

 

 

Hedge derivatives liabilities, net

       $ (238    $ (239
     

 

 

   

 

 

 

 

21


The following tables present the impact of derivative instruments and their location within the Company’s unaudited statements of consolidated operations (in millions):

Derivatives designated as cash flow hedges

 

     Amount of Loss
Recognized
in AOCI on Derivatives
(Effective Portion)
    Loss
Reclassified from
AOCI into
Fuel Expense
     Amount of Loss
Recognized in
Nonoperating income
(expense): Miscellaneous, net
(Ineffective Portion)
 
     Three Months Ended
September 30,
    Three Months Ended
September 30,
     Three Months Ended
September 30,
 
             2015                     2014                     2015                     2014                      2015                      2014          

Fuel contracts

    $ (181    $ (120    $ (150    $        $        $ (8

Derivatives designated as cash flow hedges

 

     Amount of Loss
Recognized
in AOCI on Derivatives
(Effective  Portion)
    Loss
Reclassified from
AOCI into
Fuel Expense
    Amount of Loss
Recognized in
Nonoperating income
(expense):  Miscellaneous, net
(Ineffective Portion)
 
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 
             2015                     2014                     2015                     2014                     2015                      2014          

Fuel contracts

    $ (227    $ (99    $ (429    $ (4    $        $ (4

Derivatives not designated for hedge accounting

Fuel contracts

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
             2015                     2014                     2015                     2014          

Amount of loss recognized in Nonoperating income (expense): Miscellaneous, net

    $ (67    $ (102    $ (69    $ (103

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. The Company does not enter into derivative instruments for non-risk management purposes. At September 30, 2015, the Company had foreign currency derivative contracts in place to hedge European euro denominated sales. The notional amount of the hedges equates to 36% and 21% of the Company’s projected European euro denominated net cash inflows for the remainder of 2015 and 2016, respectively. Net cash relates primarily to passenger ticket sales inflows partially offset by expenses paid in local currencies. At September 30, 2015, the fair value of the Company’s foreign currency derivatives was an asset of $2 million.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Commitments. As of September 30, 2015, United had firm commitments and options to purchase aircraft from The Boeing Company (“Boeing”), Embraer S.A. (“Embraer”) and Airbus S.A.S. (“Airbus”) presented in the table below:

 

22


Aircraft Type

   Number of Firm
      Commitments (a)       
 

Airbus A350-1000

     35   

Boeing 737NG/737 MAX 9

     117   

Boeing 777-300ER

     10   

Boeing 787-8/-9/-10

     33   

Embraer E175

     10   
(a) United also has options and purchase rights for additional aircraft.   

The aircraft listed in the table above are scheduled for delivery through 2024. For the remainder of 2015, United expects to take delivery of two Boeing 737NG aircraft and three Boeing 787-9 aircraft.

As of September 30, 2015, United has 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 for additional information on aircraft financing.

The table below summarizes United’s commitments as of September 30, 2015, 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, including through the exercise of purchase options and purchase rights, will increase the total future capital commitments of the Company.

 

     (in billions)  

Last three months of 2015

    $                     0.6    

2016

     3.0    

2017

     2.3    

2018

     2.3    

2019

     3.1    

After 2019

     10.7    
  

 

 

 
    $ 22.0    
  

 

 

 

Aircraft Operating Leases. During the second quarter of 2015, the Company reached an agreement with AerCap Holdings N.V., a major aircraft leasing company (“AerCap”), to lease used Airbus A319s. Eleven aircraft will be delivered over the next two years beginning in early 2016. In addition, up to 14 more aircraft may be delivered over the next five years subject to certain conditions.

In September 2015, United entered into an amendment to the capacity purchase agreement (“CPA”) with SkyWest Airlines, Inc. (“SkyWest”), a wholly-owned subsidiary of SkyWest, Inc., to operate 18 new Embraer E175 aircraft under the United Express brand. SkyWest will purchase all of these 76-seat aircraft directly from the manufacturer with deliveries in 2016 and 2017.

In October 2015, United also entered into an amendment to the CPA with Mesa Air Group, Inc. and Mesa Airlines, Inc. (“Mesa”), a wholly-owned subsidiary of Mesa Air Group, Inc., pursuant to which Mesa will operate under the United Express brand an additional 15 new 76-seat Embraer E175 aircraft, with deliveries in 2015 and 2016. Of the 15 aircraft, United will assign its purchase obligations to Mesa with respect to 10 Embraer E175 aircraft at the time of each aircraft’s delivery, subject to certain conditions. Mesa will purchase the remaining five aircraft directly from Embraer; however, United has agreed that United will, under certain conditions, purchase these five aircraft directly from Embraer.

The table below summarizes the Company’s anticipated future payments through the end of the terms of our CPAs, excluding variable pass-through costs such as fuel and landing fees, among others. In addition, the table below summarizes the Company’s scheduled future minimum lease payments under aircraft operating leases having initial or remaining noncancelable lease terms of more than one year and includes aircraft rent or ownership costs under CPAs, including estimated commitments under the SkyWest CPA amendment for the operation of 18 new Embraer E175 aircraft.

 

23


(In millions)    Capacity Purchase
Agreements
     Aircraft Operating
Leases
 

Last three months of 2015

    $                     460         $                     291    

2016

     1,836          1,322    

2017

     1,725          1,292    

2018

     1,332          1,068    

2019

     1,103          868    

After 2019

     5,314          3,095    
  

 

 

    

 

 

 
    $ 11,770         $ 7,936    
  

 

 

    

 

 

 

Guarantees. United is the guarantor of approximately $2.0 billion in aggregate principal amount of tax-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 $1.5 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 $295 million of these obligations are accounted for as capital leases. All of these bonds are due between 2015 and 2038.

In the Company’s financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate, 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 September 30, 2015, the Company had $2.6 billion of floating rate debt and $124 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 from non-U.S. entities, with remaining terms of up to 12 years and an aggregate balance of $2.6 billion, the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions.

The Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. Under certain of the Company’s credit card processing agreements, the financial institutions in certain circumstances have the right to require that the Company maintain a reserve equal to a portion of advance ticket sales that has been processed by that financial institution, but for which the Company has not yet provided the air transportation. Such financial institutions may require additional cash or other collateral reserves to be established or additional withholding of payments related to receivables collected if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents and short term investments (collectively, “Unrestricted Liquidity”). The Company’s current level of Unrestricted Liquidity is substantially in excess of these minimum levels.

In September 2015, United amended and extended its Merchant Services Bankcard Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) and Paymentech LLC. Effective with the amended Merchant Services Bankcard Agreement, the Company’s $25 million restricted cash with JPMorgan was returned to United. In addition, the minimum levels of Unrestricted Liquidity that this financial institution required United to maintain were reduced.

Labor Negotiations. As of September 30, 2015, United had approximately 84,000 active employees, of whom approximately 80% were represented by various labor organizations. We are in the process of negotiating joint collective bargaining agreements with our technicians and flight attendants. 

NOTE 9 - DEBT

As of September 30, 2015, a substantial portion of the Company’s assets, principally aircraft, route authorities and loyalty program intangible assets, was pledged under various loan and other agreements. As of September 30, 2015, the Company was in compliance with its debt covenants. As of September 30, 2015, United had its entire capacity of $1.35 billion available under the revolving credit facility of the Company’s 2013 Credit and Guaranty Agreement.

 

24


4.5% Convertible Notes due 2015. At December 31, 2014, the remaining balance of these notes was $202 million. In January 2015, the holders of substantially all of the remaining $202 million principal amount of the 4.5% Convertible Notes exercised their conversion option resulting in the issuance of 11 million shares of UAL common stock.

6% Notes due 2026. In the first quarter of 2015, UAL used cash to repurchase $18 million par value 6% Notes due 2026 (the “2026 Notes”) in market transactions. On April 1, 2015, UAL used cash to redeem, at par, the remaining $303 million balance of the 2026 Notes.

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.

In the second quarter of 2015, the Company recorded a nonoperating special charge of $128 million for the extinguishment of the 2026 Notes and the 2028 Notes. The nonoperating special charge is related to the write off of unamortized non-cash debt discounts. See Note 10 of this report for additional information.

EETCs. In August 2014, 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 2015 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
September 30,
2015
     Proceeds
received from
issuance of
debt in the
nine months
ended
September 30,
2015
     Remaining
proceeds from
issuance of debt
to be received
in future
periods
 

August 2014

   A     $ 823          September 2026         3.75%        $ 823         $ 711         $ —    

August 2014

   B      238          September 2022         4.625%         238          206          —    
     

 

 

          

 

 

    

 

 

    

 

 

 
       $ 1,061               $ 1,061         $ 917         $ —    
     

 

 

          

 

 

    

 

 

    

 

 

 

In 2015, United borrowed approximately $480 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2015. The notes evidencing these borrowings, which are secured by the related aircraft, have maturity dates ranging from 2025 to 2027 and interest rates comprised of the London Interbank Offered Rate plus a specified margin.

The table below presents contractual principal payments at September 30, 2015 under then-outstanding long-term debt agreements in each of the next five calendar years (in millions):

 

     UAL and United  

Last three months of 2015

    $                 388    

2016

     1,213    

2017

     802    

2018

     1,339    

2019

     1,767    

After 2019

     5,687    
  

 

 

 
    $ 11,196    
  

 

 

 

 

25


NOTE 10 - SPECIAL ITEMS

For the three and nine months ended September 30, special items consisted of the following (in millions):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Operating:

   2015      2014      2015      2014  

Severance and benefits

    $ 28         $        $ 103         $ 58    

Integration-related costs

     15          28          47          79    

Costs associated with permanently grounding Embraer ERJ 135 aircraft

     —          —          —          66    

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

     33                  45          61    
  

 

 

    

 

 

    

 

 

    

 

 

 

Special charges

     76          43          195          264    

Nonoperating:

           

Loss on extinguishment of debt and Venezuela currency loss

     61          —          195          21    

Income tax benefit

     —          (3)         —          (4)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating and nonoperating special charges, net of income taxes

     137         40          390          281    

Income tax valuation allowance release (Note 4)

     (3,218)         —          (3,218)         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total special items

    $ (3,081)        $ 40         $ (2,828)        $ 281    
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three and nine months ended September 30, 2015, the Company recorded $28 million and $103 million, respectively, of severance and benefits primarily related to a voluntary early-out program for its flight attendants. In 2014, more than 2,500 flight attendants elected to voluntarily separate from the Company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through the end of 2016.

Integration-related costs include compensation costs related primarily to systems integration and training for employees.

During the three and nine months ended September 30, 2015, the Company recorded $33 million and $45 million, respectively, for losses on the sale of one aircraft, the impairment of several engines held for sale and discontinued internal software projects.

During the third quarter of 2015, the Company recorded a $61 million foreign exchange loss related to its cash holdings in Venezuela. The Venezuelan government has maintained currency controls and fixed official exchange rates (i.e. Sistema Complementario de Administracion de Divisas (“SICAD”), and Sistema Marginal de Divisas (“SIMADI”)) for many years. Previously, airlines were permitted to use the more favorable SICAD rate (currently 13.5 Venezuelan bolivars to one U.S. dollar) if repatriating profits and for payments of local goods and services in Venezuela. During 2015, many of the payments for local goods and services have transitioned to utilizing the SIMADI rate (currently 200 Venezuelan bolivars to one U.S. dollar) or have been required to be paid in U.S. dollars. Furthermore, the Venezuelan government has not permitted the exchange and repatriations of local currency since mid-2014. As a result, the Company has decided to change the exchange rate from historical SICAD rates to a combination of SIMADI and SICAD rates based on projections of future cash payments. Including this adjustment, the Company’s resulting cash balance held in Venezuelan bolivars at September 30, 2015 is approximately $15 million.

During the nine months ended September 30, 2015, the Company recorded $134 million 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 2026 Notes and the 2028 Notes.

During the nine months ended September 30, 2014, the Company recorded $58 million of severance and benefits primarily related to reductions of management and front-line employees, including from Hopkins International Airport (“Cleveland”), as part of its cost savings initiatives. The Company reduced its average daily departures from Cleveland by over 60 percent during the second quarter of 2014. The Company is currently evaluating its options regarding its long-term contractual commitments at Cleveland. The capacity reductions at Cleveland may result in further special charges, which could be significant, related to our contractual commitments.

 

 

26


During the nine months ended September 30, 2014, the Company recorded $66 million for the permanent grounding of 21 of the Company’s Embraer ERJ 135 regional aircraft under lease through 2018, which included an accrual for remaining lease payments and an amount for maintenance return conditions. The Company decided to permanently ground these 21 Embraer ERJ 135 aircraft as a result of new Embraer E175 regional jet deliveries, the impact of pilot shortages at regional carriers and fuel prices.

During the nine months ended September 30, 2014, the Company recorded $33 million for charges related primarily to the impairment of its flight equipment held for disposal associated with its Boeing 737-300 and 737-500 fleets and incurred losses on sales of aircraft and other assets and other special losses totaling $28 million.

During the nine months ended September 30, 2014, the Company recorded $21 million of losses due to exchange rate changes in Venezuela applicable to funds held in local currency.

Accruals

The accrual balance for severance and benefits was $110 million as of September 30, 2015, compared to $70 million as of September 30, 2014. The severance-related accrual as of September 30, 2015 is expected to be mostly paid through 2015. The following is a reconciliation of severance accrual activity for the period:

 

     Severance and
Benefits
 

Balance at December 31, 2014

    $                     109    

Accrual

     103    

Payments

     (102)   
  

 

 

 

Balance at September 30, 2015

    $ 110    
  

 

 

 

 

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 Form 10-Q is a combined report of UAL and United including their respective consolidated financial statements. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United’s operating revenues and operating expenses comprise nearly 100% of UAL’s revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL’s assets, liabilities and operating cash flows. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained. We sometimes use the words “we,” “our,” “us,” and the “Company” in this report for disclosures that relate to all of UAL and United.

The Company transports people and cargo through its mainline operations, which utilize jet aircraft with at least 118 seats, and regional operations, which utilize smaller aircraft that are operated under contract by United Express carriers. The Company serves virtually every major market around the world, either directly or through participation in Star Alliance®, the world’s largest airline alliance. UAL, through United and its regional carriers, operates an average of nearly 5,000 flights a day to 352 airports across six continents.

Third Quarter Financial Highlights

 

   

Third quarter 2015 net income was $4.8 billion, or $12.82 diluted earnings per share. Third quarter 2015 Non-GAAP net income was $1.7 billion, or $4.53 diluted earnings per share, which excludes $3.1 billion of special items and $33 million of “Hedge Program Adjustments,” consisting of $36 million of mark-to-market losses recorded in

 

27


 

Nonoperating expense from fuel derivative contracts settling in future periods and $69 million of prior period losses recorded in Nonoperating expense on fuel derivative contracts settled in the current period. See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information regarding special items.

 

   

Passenger revenue decreased 3.8% to $9.0 billion during the third quarter of 2015 as compared to the third quarter of 2014.

 

   

Third quarter 2015 aircraft fuel cost decreased 38.2% year-over-year.

 

   

Unrestricted liquidity at September 30, 2015 was $6.9 billion, including $1.35 billion of undrawn commitments under its revolving credit facility.

 

   

On July 21, 2015, UAL’s Board of Directors authorized a new $3 billion share repurchase program, which the Company expects to complete by December 31, 2017. UAL spent $262 million to repurchase approximately 4.6 million shares of UAL common stock in open market transactions in the third quarter of 2015 under the Company’s previously announced $1 billion share repurchase program and new $3 billion share repurchase program. As of September 30, 2015, the Company has $2.97 billion remaining to spend under the $3 billion share repurchase program. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.

 

   

UAL, United and Mileage Plus Holdings, LLC, a wholly-owned subsidiary of UAL and United (“MPH”) entered into a Second Amended and Restated Co-Branded Card Marketing Services Agreement (the “Co-Brand Agreement”) with Chase Bank USA, N.A. (“Chase”), pursuant to which members of the Company’s MileagePlus® loyalty program earn frequent flyer miles for making purchases using a MileagePlus® credit card issued by Chase. The Co-Brand Agreement also provides for joint marketing and other support for the MileagePlus® credit card. The Company estimates that its third quarter 2015 operating revenues increased by approximately $100 million and that its fourth quarter 2015 operating revenues will increase by approximately $100 million from the combined impact of the Co-Brand Agreement, agreements ancillary to the Co-Brand Agreement and updated assumptions for accounting purposes.

Third Quarter Operational Highlights

 

   

Consolidated traffic increased 2.0% and consolidated capacity increased 2.1% during the third quarter of 2015 as compared to the third quarter of 2014. The Company’s load factor for the third quarter of 2015 was 85.6%.

 

   

The Company took delivery of six Boeing 737-900ER aircraft, four Boeing 787-9 aircraft and one used Boeing 737-700 aircraft during the third quarter of 2015.

Outlook

The Company expects full-year 2015 consolidated capacity to increase between 1.4% and 1.7% year-over-year. The Company expects full year 2015 cost per available seat mile (“CASM”) excluding profit sharing, third-party business expense, fuel and special items to be down between 0.4% and 0.7% year-over-year. Full-year 2015 pre-tax margin is expected to be between 11.7% and 12.1%, excluding special items. We are unable to project CASM or pre-tax margin on a GAAP basis, as defined below, as the nature and amount of special items are not determinable at this time.

Since the summer of 2014, the price of jet fuel declined and remains volatile. Based on projected fuel consumption in 2015, a one dollar change in the price of a barrel of crude oil would change the Company’s annual fuel expense by approximately $93 million. To protect against increases in the prices of aircraft fuel, the Company routinely hedges 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 September 30, 2015 as compared to the corresponding period in 2014.

 

28


Third Quarter 2015 Compared to Third Quarter 2014

The Company recorded net income of $4.8 billion in the third quarter of 2015 as compared to net income of $924 million in the third quarter of 2014. Third quarter 2015 net income reflects $3.2 billion of income tax benefits primarily due to the release of the income tax valuation allowance. Excluding special items and with Hedge Program Adjustments, the Company had net income of $1.7 billion in the third quarter of 2015 as compared to net income of $1.1 billion in the third quarter of 2014. See “Reconciliation of GAAP to Non-GAAP Financial Measures” at the end of this item for additional information related to accounting principles generally accepted in the United States (“GAAP”) to Non-GAAP financial measures. The Company considers a key measure of its performance to be operating income, which was $1.9 billion for the third quarter of 2015, as compared to $1.2 billion for the third quarter of 2014, an approximate $0.7 billion improvement year-over-year. Significant components of the Company’s operating results for the three months ended September 30 are as follows (in millions, except percentage changes):

 

     2015     2014     Increase
(Decrease)
    % Increase
(Decrease)
 

Operating revenue

    $ 10,306       $ 10,563       $ (257     (2.4

Operating expense

     8,407        9,372        (965     (10.3
  

 

 

   

 

 

   

 

 

   

Operating income

     1,899        1,191        708        59.4   

Nonoperating expense

     (293     (271     22        8.1   

Income tax benefit

     (3,210     (4     3,206        NM   
  

 

 

   

 

 

   

 

 

   

Net income

    $ 4,816       $ 924       $ 3,892        421.2   
  

 

 

   

 

 

   

 

 

   

 

NM - Not meaningful

Certain consolidated statistical information for the Company’s operations for the three months ended September 30 is as follows:

 

     2015      2014      Increase
(Decrease)
    % Increase
(Decrease)
 

Passengers (thousands) (a)

     37,464             36,735             729        2.0   

Revenue passenger miles (“RPMs”) (millions) (b)

     57,160             56,065             1,095        2.0   

Available seat miles (“ASMs”) (millions) (c)

     66,745             65,378             1,367        2.1   

Passenger load factor (d)

     85.6 %         85.8 %         (0.2) pts.        N/A   

Passenger revenue per available seat mile (“PRASM”) (cents)

     13.42              14.25             (0.83     (5.8

Average yield per revenue passenger mile (cents) (e)

     15.68              16.61             (0.93     (5.6

CASM (cents)

     12.60              14.34             (1.74     (12.1

Average price per gallon of fuel, including fuel taxes

    $ 1.87             $ 3.02            $ (1.15     (38.1

Fuel gallons consumed (millions)

     1,035              1,037             (2     (0.2

Average full-time equivalent employees

     82,400              81,900             500        0.6   

 

(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.

 

29


Operating Revenue

The table below shows year-over-year comparisons by type of operating revenue for the three months ended September 30 (in millions, except for percentage changes):

 

      2015      2014      Increase
(Decrease)
    % Change  

Passenger—Mainline

    $ 7,254        $ 7,414        $ (160     (2.2

Passenger—Regional

     1,706         1,900         (194     (10.2
  

 

 

    

 

 

    

 

 

   

Total passenger revenue

     8,960         9,314         (354     (3.8

Cargo

     235         237         (2     (0.8

Other operating revenue

     1,111         1,012         99        9.8   
  

 

 

    

 

 

    

 

 

   
    $ 10,306        $ 10,563        $ (257     (2.4
  

 

 

    

 

 

    

 

 

   

The table below presents selected passenger revenue and operating data, broken out by geographic region, expressed as third quarter year-over-year changes:

 

         Domestic            Pacific            Atlantic            Latin              Total
  Mainline    
       Regional          Consolidated    
Increase (decrease) from 2014 (a):                     

Passenger revenue (in millions)

   $ 61           $ (127)          $ (59)          $ (35)          $ (160)          $ (194)          $ (354)      
Passenger revenue      1.7 %         (9.6)%         (3.2)%         (5.1)%         (2.2)%         (10.2)%         (3.8)%   

Average fare per passenger

     (5.9)%         (9.2)%         (5.2)%         (10.7)%         (8.3)%         (3.3)%         (5.7)%   

Yield

     (2.2)%         (10.8)%         (5.8)%         (10.6)%         (5.4)%         (2.1)%         (5.6)%   

PRASM

     (1.6)%         (11.6)%         (6.9)%         (11.6)%         (5.7)%         (1.9)%         (5.8)%   

Average stage length

     (3.5)%         3.4 %         0.9 %         0.8 %         (2.1)%         (1.4)%         0.7 %   

Passengers

     8.1 %         (0.4)%         2.2 %         6.3 %         6.6 %         (7.1)%         2.0 %   

RPMs (traffic)

     4.0 %         1.4 %         2.7 %         6.2 %         3.4 %         (8.3)%         2.0 %   
ASMs (capacity)      3.3 %         2.3 %         4.0 %         7.3 %         3.7 %         (8.5)%         2.1 %   

Passenger load factor (points)

     0.6             (0.8)            (1.1)            (0.9)            (0.2)            0.1             (0.2)      
(a) See Item 6 of the 2014 Annual Report for the definition of these statistics.

Consolidated passenger revenue in the third quarter of 2015 decreased 3.8% as compared to the year-ago period due to a decrease in consolidated yield of 5.6% year-over-year. Yields were impacted by a competitive domestic fare environment, unfavorable foreign currency results due to the strengthening of the U.S. dollar, international surcharge declines, travel reductions from corporate customers in the energy sector and increased industry capacity in certain regions. The decline in yields was partially offset by a 2.0% and 2.1% year-over-year increase in traffic and capacity, respectively.

Other operating revenue in the third quarter of 2015 increased $99 million, or 9.8%, as compared to the year-ago period primarily due to the impact of the amended Co-Brand Agreement with Chase.

 

30


Operating Expenses

The table below includes data related to the Company’s operating expenses for the three months ended September 30 (in millions, except for percentage changes):

 

      2015      2014      Increase
(Decrease)
     % Change  

Salaries and related costs

    $ 2,534         $ 2,344         $ 190          8.1    

Aircraft fuel

     1,934          3,127          (1,193)         (38.2)   

Regional capacity purchase

     572          597          (25)         (4.2)   

Landing fees and other rent

     551          567          (16)         (2.8)   

Depreciation and amortization

     469          422          47          11.1    

Aircraft maintenance materials and outside repairs

     424          435          (11)         (2.5)   

Distribution expenses

     366          375          (9)         (2.4)   

Aircraft rent

     185          222          (37)         (16.7)   

Special charges

     76          43          33          NM    

Other operating expenses

     1,296          1,240          56          4.5    
  

 

 

    

 

 

    

 

 

    
    $ 8,407         $ 9,372        $ (965)         (10.3)   
  

 

 

    

 

 

    

 

 

    

Salaries and related costs increased $190 million, or 8.1%, in the third quarter of 2015 as compared to the year-ago period primarily due to profit sharing expense as a result of improved profitability, higher pay rates driven by new collective bargaining agreements and an increase in pension expense resulting from changes in actuarial assumptions.

Aircraft fuel expense decreased $1.2 billion, or 38.2%, year-over-year primarily due to a 38.1% decrease in the average price per gallon of aircraft fuel in the third quarter of 2015 compared to the year-ago period. The table below presents the significant changes in aircraft fuel cost per gallon in the three month period ended September 30, 2015 as compared to the year-ago period:

 

     (In millions)             Average price per gallon  
      2015      2014      %
Change
     2015      2014      %
Change
 
Total aircraft fuel purchase cost excluding fuel hedge impacts     $ 1,784         $ 3,127          (42.9)        $ 1.72         $ 3.02         (43.0)   
Hedge losses reported in fuel expense      (150)         —          NM          (0.15)                 NM    
  

 

 

    

 

 

       

 

 

    

 

 

    
Fuel expense as reported      1,934          3,127          (38.2)         1.87          3.02         (38.1)   
Cash received (paid) on settled hedges that did not qualify for hedge accounting (a)      (100)                 NM          (0.10)         0.01         NM    
  

 

 

    

 

 

       

 

 

    

 

 

    
Fuel expense including all gains (losses) from settled hedges     $ 2,034        $ 3,126          (34.9)        $ 1.97        $ 3.01         (34.6)   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total fuel consumption (gallons)

     1,035          1,037          (0.2)            

 

(a) Includes ineffectiveness gains (losses) on settled hedges and gains (losses) on settled hedges that were not designated for hedge accounting. Ineffectiveness gains (losses) and gains (losses) on hedges that do not qualify for hedge accounting are recorded in Nonoperating income (expense): Miscellaneous, net.

Depreciation and amortization increased $47 million, or 11.1%, in the third quarter of 2015 as compared to the year-ago period primarily due to additions in owned property and equipment, specifically related to new aircraft and information technology assets.

Aircraft rent decreased $37 million, or 16.7%, in the third quarter of 2015 as compared to the year-ago period primarily due to lease expirations, the purchase or capital lease conversion of several operating leased aircraft and lower lease renewal rates for certain aircraft.

 

31


Details of the Company’s special charges include the following for the three months ended September 30 (in millions):

 

     2015      2014  

Severance and benefits

   $ 28       $ 6   

Integration-related costs

     15         28   

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

     33         9   
  

 

 

    

 

 

 

Special charges

   $ 76       $ 43   
  

 

 

    

 

 

 

See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information.

Other operating expenses increased $56 million, or 4.5%, in the third quarter of 2015 as compared to the year-ago period primarily due to technology initiatives, increased cargo volume, rate increases at various stations and increases in several other purchased services, partially offset by the discontinuance of a Transportation Security Administration (“TSA”) fee.

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 September 30 (in millions, except for percentage changes):

 

     2015      2014      Increase
(Decrease)
     %
Change
 

Interest expense

    $ (164)       $ (186)       $ (22)         (11.8)   

Interest capitalized

     13          13          —          —    

Interest income

                     (3)         (37.5)   

Miscellaneous, net

     (147)         (106)         41          38.7    
  

 

 

    

 

 

    

 

 

    

Total

   $ (293)       $ (271)       $ 22          8.1    
  

 

 

    

 

 

    

 

 

    

Miscellaneous, net included losses of $67 million from derivatives not qualifying for hedge accounting as compared to losses of $102 million in the year-ago period. The Company recorded a $61 million foreign exchange loss related to the Company’s cash holdings in Venezuela. Other foreign currency impacts were losses of approximately $20 million versus losses of approximately $1 million in the third quarters of 2015 and 2014, respectively. 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.

 

32


RESULTS OF OPERATIONS

First Nine Months 2015 Compared to First Nine Months 2014

The Company recorded net income of $6.5 billion in the first nine months of 2015 as compared to net income of $1.1 billion in the first nine months of 2014. Net income in the first nine months of 2015 reflects $3.2 billion of income tax benefits primarily due to the release of the income tax valuation allowance. Excluding special items and with Hedge Program Adjustments, the Company had net income of $3.5 billion in the first nine months of 2015 as compared to net income of $1.5 billion in the first nine months of 2014. See “Reconciliation of GAAP to Non-GAAP Financial Measures” at the end of this item for additional information related to GAAP to Non-GAAP financial measures. The Company considers a key measure of its performance to be operating income, which was $4.1 billion for the first nine months of 2015, as compared to $1.7 billion for the first nine months of 2014, an approximate $2.3 billion improvement year-over-year. Significant components of the Company’s operating results for the first nine months of 2015 are as follows (in millions, except percentage changes):

 

     2015     2014     Increase
(Decrease)
    % Increase
(Decrease)
 

Operating revenue

    $ 28,828       $ 29,588       $ (760     (2.6

Operating expense

     24,743        27,840        (3,097     (11.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4,085        1,748        2,337        133.7   

Nonoperating expense

     (771     (643     128        19.9   

Income tax expense (benefit)

     (3,203     1        (3,204     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    $ 6,517       $ 1,104       $ 5,413        490.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

NM - Not meaningful

Certain consolidated statistical information for the Company’s operations for the nine months ended September 30 is as follows:

 

     2015      2014      Increase
(Decrease)
    % Increase
(Decrease)
 

Passengers (thousands) (a)

     105,217              104,472              745        0.7   

RPMs (millions) (b)

     157,893              156,348              1,545        1.0   

ASMs (millions) (c)

     188,699              185,808              2,891        1.6   

Passenger load factor (d)

     83.7 %         84.1 %         (0.4) pts.        N/A   

PRASM (cents)

     13.28              13.82              (0.54     (3.9

Average yield per revenue passenger mile (cents) (e)

     15.87              16.42              (0.55     (3.3

CASM (cents)

     13.11              14.98              (1.87     (12.5

Average price per gallon of fuel, including fuel taxes

    $ 2.01             $ 3.09             $ (1.08     (35.0

Fuel gallons consumed (millions)

     2,935              2,957              (22     (0.7

Average full-time equivalent employees

     82,100              82,500              (400     (0.5

 

(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 nine months ended September 30 (in millions, except for percentage changes):

 

      2015      2014      Increase
(Decrease)
    % Change  

Passenger—Mainline

    $ 20,153        $ 20,410        $ (257     (1.3

Passenger—Regional

     4,903         5,269         (366     (6.9
  

 

 

    

 

 

    

 

 

   

Total passenger revenue

     25,056         25,679         (623     (2.4

Cargo

     706         678         28        4.1   

Other operating revenue

     3,066         3,231         (165     (5.1
  

 

 

    

 

 

    

 

 

   
    $ 28,828        $ 29,588        $ (760     (2.6
  

 

 

    

 

 

    

 

 

   

 

33


The table below presents selected passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014:

 

         Domestic            Pacific            Atlantic            Latin          Total
  Mainline    
       Regional            Consolidated      
Increase (decrease) from 2014 (a):                     

Passenger revenue (in millions)

   $ 102           $ (236)          $ (116)          $ (7)          $ (257)          $ (366)          $ (623)      
Passenger revenue      1.0 %         (6.6)%         (2.5)%         (0.3)%         (1.3)%         (6.9)%         (2.4)%   

Average fare per passenger

     (3.5)%         (7.0)%         (1.4)%         (6.0)%         (5.0)%         (1.2)%         (3.1)%   

Yield

     (0.7)%         (9.5)%         (1.9)%         (6.7)%         (3.2)%         (0.9)%         (3.3)%   

PRASM

     (1.0)%         (9.4)%         (3.2)%         (8.1)%         (3.8)%         (1.3)%         (3.9)%   

Average stage length

     (2.8)%         4.8 %         1.4 %         2.0 %         (1.3)%         (0.2)%         0.8 %   

Passengers

     4.7 %         0.5 %         (1.1)%         6.0 %         4.0 %         (5.8)%         0.7 %   

RPMs (traffic)

     1.7 %         3.3 %         (0.6)%         6.9 %         2.0 %         (6.1)%         1.0 %   
ASMs (capacity)      2.1 %         3.2 %         0.8 %         8.4 %         2.6 %         (5.8)%         1.6 %   

Passenger load factor (points)

     (0.3)            0.1  &n