10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2017

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  ☒    No  ☐   
  United Airlines, Inc.   Yes  ☒    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  ☒    No  ☐   
  United Airlines, Inc.   Yes  ☒    No  ☐   

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

 

United Continental Holdings, Inc.

  Large accelerated filer ☒   Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company ☐   Emerging growth company ☐

United Airlines, Inc.

  Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer ☒   Smaller reporting company ☐   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

  United Continental Holdings, Inc.     
  United Airlines, Inc.     

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  ☒   
  United Airlines, Inc.   Yes  ☐    No  ☒   

The number of shares outstanding of each of the issuer’s classes of common stock as of October 12, 2017 is shown below:

 

United Continental Holdings, Inc.

     296,252,435 shares of common stock ($0.01 par value)

United Airlines, Inc.

    

1,000 (100% owned by United Continental Holdings, Inc.)

There is no market for United Airlines, Inc. common stock.

OMISSION OF CERTAIN INFORMATION

This combined Quarterly Report on 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.


Table of Contents

United Continental Holdings, Inc.

United Airlines, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2017

 

                 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

     25  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     37  

Item 4.

 

Controls and Procedures

     38  
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     39  

Item 1A.

 

Risk Factors

     39  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     39  

Item 6.

 

Exhibits

     39  

Exhibit Index

     40  

Signatures

     41  


Table of Contents

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,
 
         2017              2016              2017              2016      

Operating revenue:

           

Passenger—Mainline

    $ 7,083        $ 7,017        $ 19,970        $ 19,119   

Passenger—Regional

     1,445         1,586         4,354         4,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total passenger revenue

     8,528         8,603         24,324         23,696   

Cargo

     257         224         731         626   

Other operating revenue

     1,093         1,086         3,243         3,182   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating revenue

     9,878         9,913         28,298         27,504   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expense:

           

Salaries and related costs

     2,812         2,625         8,341         7,707   

Aircraft fuel

     1,809         1,603         5,038         4,258   

Landing fees and other rent

     585         546         1,670         1,612   

Regional capacity purchase

     567         572         1,652         1,645   

Depreciation and amortization

     556         503         1,610         1,473   

Aircraft maintenance materials and outside repairs

     451         451         1,377         1,301   

Distribution expenses

     352         345         1,021         987   

Aircraft rent

     145         168         476         521   

Special charges (Note 10)

     50         45         145         669   

Other operating expenses

     1,459         1,431         4,199         3,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     8,786         8,289         25,529         24,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     1,092         1,624         2,769         3,333   
           

Nonoperating income (expense):

           

Interest expense

     (164)        (150)        (472)        (466)  

Interest capitalized

     20         20         64         48   

Interest income

     17         14         41         31   

Miscellaneous, net (Note 10)

     15                (3)        (11)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonoperating expense, net

     (112)        (114)        (370)        (398)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     980         1,510         2,399         2,935   

Income tax expense

     343         545         848         1,069   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 637       $ 965       $ 1,551       $ 1,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share, basic

   $ 2.12       $ 3.02       $ 5.06       $ 5.57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share, diluted

   $ 2.12       $ 3.01       $ 5.04       $ 5.57   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
         2017              2016              2017              2016      

Net income

    $ 637        $ 965        $ 1,551        $ 1,866   
           

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

           

Fuel derivative financial instruments, net of taxes

     —         12                123   

Employee benefit plans, net of taxes

            (75)        (1)        (89)  

Investments and other, net of taxes

     17         (1)               (1)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss), net

     20         (64)               33   
           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income, net

    $ 657        $ 901        $ 1,556        $ 1,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

4


Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30, 2017
     December 31, 2016  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 1,870       $ 2,179   

Short-term investments

     2,458         2,249   

Receivables, less allowance for doubtful accounts (2017 — $11; 2016 — $10)

     1,603         1,176   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2017 — $342; 2016 — $295)

     937         873   

Prepaid expenses and other

     1,009         832   
  

 

 

    

 

 

 

Total current assets

     7,877         7,309   
  

 

 

    

 

 

 

Operating property and equipment:

     

Owned—

     

Flight equipment

     29,043         25,873   

Other property and equipment

     6,186         5,652  
  

 

 

    

 

 

 

Total owned property and equipment

     35,229         31,525   

Less — Accumulated depreciation and amortization

     (11,358)        (9,975)  
  

 

 

    

 

 

 

Total owned property and equipment, net

     23,871         21,550   
  

 

 

    

 

 

 
     

Purchase deposits for flight equipment

     1,044         1,059   
     

Capital leases—

     

Flight equipment

     1,136         1,319   

Other property and equipment

     488         331   
  

 

 

    

 

 

 

Total capital leases

     1,624         1,650   

Less — Accumulated amortization

     (910)        (941)  
  

 

 

    

 

 

 

Total capital leases, net

     714         709   
  

 

 

    

 

 

 

Total operating property and equipment, net

     25,629         23,318   
  

 

 

    

 

 

 

Other assets:

     

Goodwill

     4,523         4,523   

Intangibles, less accumulated amortization (2017 — $1,294; 2016 — $1,234)

     3,558         3,632   

Deferred income taxes

     —         655   

Restricted cash

     96         124   

Investments in affiliates and other, net

     882         579   
  

 

 

    

 

 

 

Total other assets

     9,059         9,513   
  

 

 

    

 

 

 

Total assets

   $ 42,565       $ 40,140   
  

 

 

    

 

 

 

 

(continued on next page)

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     (Unaudited)
September 30, 2017
     December 31, 2016  

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Advance ticket sales

    $ 4,537        $ 3,730   

Accounts payable

     2,231         2,139   

Frequent flyer deferred revenue

     1,992         2,135   

Accrued salaries and benefits

     1,983         2,307   

Current maturities of long-term debt

     1,516         849   

Current maturities of capital leases

     125         116   

Other

     703         1,010   
  

 

 

    

 

 

 

Total current liabilities

     13,087         12,286   
  

 

 

    

 

 

 
     

Long-term debt

     11,334         9,918   

Long-term obligations under capital leases

     968         822   
     

Other liabilities and deferred credits:

     

Frequent flyer deferred revenue

     2,793         2,748   

Postretirement benefit liability

     1,588         1,581   

Pension liability

     1,631         1,892   

Deferred income taxes

     253         —   

Advanced purchase of miles

     106         430   

Lease fair value adjustment, net

     219         277   

Other

     1,616         1,527   
  

 

 

    

 

 

 

Total other liabilities and deferred credits

     8,206         8,455   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholders’ equity:

     

Preferred stock

     —         —   

Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 296,252,431 and 314,612,744 shares at September 30, 2017 and December 31, 2016, respectively

             

Additional capital invested

     6,591         6,569   

Retained earnings

     4,991         3,427   

Stock held in treasury, at cost

     (1,791)        (511)  

Accumulated other comprehensive loss

     (824)        (829)  
  

 

 

    

 

 

 

Total stockholders’ equity

     8,970         8,659   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

    $ 42,565        $ 40,140   
  

 

 

    

 

 

 

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

 

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Table of Contents

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months  Ended
September 30,
 
     2017      2016  

Cash Flows from Operating Activities:

     

Net cash provided by operating activities

    $ 2,685        $ 4,884   
     

Cash Flows from Investing Activities:

     

Capital expenditures

     (2,900)        (2,343)  

Purchases of short-term and other investments

     (2,584)        (1,989)  

Proceeds from sale of short-term and other investments

     2,380         1,957   

Proceeds from sale of property and equipment

            24   

Investment in and loans to affiliates

     —          (8)  

Other, net

     142         (5)  
  

 

 

    

 

 

 

Net cash used in investing activities

     (2,954)        (2,364)  
  

 

 

    

 

 

 
     

Cash Flows from Financing Activities:

     

Proceeds from issuance of long-term debt and airport construction financing

     2,119         510   

Repurchases of common stock

     (1,291)        (2,442)  

Payments of long-term debt

     (722)        (911)  

Principal payments under capital leases

     (84)        (95)  

Other, net

     (77)        (40)  
  

 

 

    

 

 

 

Net cash used in financing activities

     (55)        (2,978)  
  

 

 

    

 

 

 

Net decrease in cash, cash equivalents and restricted cash

     (324)        (458)  

Cash, cash equivalents and restricted cash at beginning of the period

     2,303         3,212   
  

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at end of the period (a)

    $ 1,979        $ 2,754   
  

 

 

    

 

 

 
     

Investing and Financing Activities Not Affecting Cash:

     

Property and equipment acquired through the issuance of debt and capital leases

    $ 918        $ 115   

Airport construction financing

     41         68   

Operating lease conversions to capital lease

     —          12   

 

     

(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheet:

 

Reconciliation of cash, cash equivalents and restricted cash:

    

Current assets:

    

Cash and cash equivalents

    $ 1,870          $   2,630   

Restricted cash included in Prepaid expenses and other

     13         

Other assets:

    

Restricted cash

     96        123   
  

 

 

   

 

 

 

Total cash, cash equivalents and restricted cash

    $   1,979       $ 2,754   
  

 

 

   

 

 

 

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

 

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Table of Contents

UNITED AIRLINES, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

(In millions)

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
     2017      2016      2017      2016  

Operating revenue:

           

Passenger—Mainline

   $ 7,083       $ 7,017       $ 19,970       $ 19,119   

Passenger—Regional

     1,445         1,586         4,354         4,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total passenger revenue

     8,528         8,603         24,324         23,696   

Cargo

     257         224         731         626   

Other operating revenue

     1,093         1,086         3,243         3,182   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating revenue

     9,878         9,913         28,298         27,504   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expense:

           

Salaries and related costs

     2,812         2,625         8,341         7,707   

Aircraft fuel

     1,809         1,603         5,038         4,258   

Landing fees and other rent

     585         546         1,670         1,612   

Regional capacity purchase

     567         572         1,652         1,645   

Depreciation and amortization

     556         503         1,610         1,473   

Aircraft maintenance materials and outside repairs

     451         451         1,377         1,301   

Distribution expenses

     352         345         1,021         987   

Aircraft rent

     145         168         476         521   

Special charges (Note 10)

     50         45         145         669   

Other operating expenses

     1,459         1,431         4,198         3,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expense

     8,786         8,289         25,528         24,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     1,092         1,624         2,770         3,334   
           

Nonoperating income (expense):

           

Interest expense

     (164)        (150)        (472)        (466)  

Interest capitalized

     20         20         64         48   

Interest income

     17         14         41         31   

Miscellaneous, net (Note 10)

     15                (3)        (11)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonoperating expense, net

     (112)        (114)        (370)        (398)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     980         1,510         2,400         2,936   

Income tax expense

     343         545         848         1,069   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 637       $ 965       $ 1,552       $ 1,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

UNITED AIRLINES, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2017              2016              2017              2016      

Net income

    $ 637        $ 965        $ 1,552        $ 1,867   
           

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

           

Fuel derivative financial instruments, net of taxes

     —          12                123   

Employee benefit plans, net of taxes

            (75)        (1)        (89)  

Investments and other, net of taxes

     17         (1)               (1)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss), net

     20         (64)               33   
           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income, net

    $ 657        $ 901        $ 1,557        $ 1,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

    (Unaudited)        
    September 30, 2017     December 31, 2016  

ASSETS

   

Current assets:

   

Cash and cash equivalents

   $ 1,864       $ 2,173   

Short-term investments

    2,458        2,249   

Receivables, less allowance for doubtful accounts (2017 — $11; 2016 — $10)

    1,603        1,176   

Aircraft fuel, spare parts and supplies, less obsolescence allowance (2017 — $342; 2016 — $295)

    937        873   

Prepaid expenses and other

    1,008        832   
 

 

 

   

 

 

 

Total current assets

    7,870        7,303   
 

 

 

   

 

 

 

Operating property and equipment:

   

Owned—

   

Flight equipment

    29,043        25,873   

Other property and equipment

    6,186        5,652   
 

 

 

   

 

 

 

Total owned property and equipment

    35,229        31,525   

Less — Accumulated depreciation and amortization

    (11,358)       (9,975)  
 

 

 

   

 

 

 

Total owned property and equipment, net

    23,871        21,550   
 

 

 

   

 

 

 
   

Purchase deposits for flight equipment

    1,044        1,059   
   

Capital leases—

   

Flight equipment

    1,136        1,319   

Other property and equipment

    488        331   
 

 

 

   

 

 

 

Total capital leases

    1,624        1,650   

Less — Accumulated amortization

    (910)       (941)  
 

 

 

   

 

 

 

Total capital leases, net

    714        709   
 

 

 

   

 

 

 

Total operating property and equipment, net

    25,629        23,318   
 

 

 

   

 

 

 

Other assets:

   

Goodwill

    4,523        4,523   

Intangibles, less accumulated amortization (2017 — $1,294; 2016 — $1,234)

    3,558        3,632   

Deferred income taxes

    —        612   

Restricted cash

    96        124   

Investments in affiliates and other, net

    882        579   
 

 

 

   

 

 

 

Total other assets

    9,059        9,470   
 

 

 

   

 

 

 

Total assets

   $ 42,558       $ 40,091   
 

 

 

   

 

 

 

 

(continued on next page)

 

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UNITED AIRLINES, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

    (Unaudited)        
    September 30, 2017     December 31, 2016  
LIABILITIES AND STOCKHOLDER’S EQUITY            

Current liabilities:

   

Advance ticket sales

   $ 4,537       $ 3,730   

Accounts payable

    2,231        2,144   

Frequent flyer deferred revenue

    1,992        2,135   

Accrued salaries and benefits

    1,983        2,307   

Current maturities of long-term debt

    1,516        849   

Current maturities of capital leases

    125        116   

Other

    707        1,009   
 

 

 

   

 

 

 

Total current liabilities

    13,091        12,290   
 

 

 

   

 

 

 
   

Long-term debt

    11,334        9,918   

Long-term obligations under capital leases

    968        822   
   

Other liabilities and deferred credits:

   

Frequent flyer deferred revenue

    2,793        2,748   

Postretirement benefit liability

    1,588        1,581   

Pension liability

    1,631        1,892   

Deferred income taxes

    297        —    

Advanced purchase of miles

    106        430   

Lease fair value adjustment, net

    219        277   

Other

    1,616        1,527   
 

 

 

   

 

 

 

Total other liabilities and deferred credits

    8,250        8,455   
 

 

 

   

 

 

 

Commitments and contingencies

   

Stockholder’s equity:

   

Common stock at par, $0.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at both September 30, 2017 and December 31, 2016

    —         —    

Additional capital invested

    2,325        3,573   

Retained earnings

    7,504        5,937   

Accumulated other comprehensive loss

    (824)       (829)  

Receivable from related parties

    (90)       (75)  
 

 

 

   

 

 

 

Total stockholder’s equity

    8,915        8,606   
 

 

 

   

 

 

 

Total liabilities and stockholder’s equity

  $ 42,558       $ 40,091   
 

 

 

   

 

 

 

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

 

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UNITED AIRLINES, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

 

     Nine Months Ended
September 30,
 
     2017      2016  

Cash Flows from Operating Activities:

     

Net cash provided by operating activities

    $ 2,671        $ 4,878   
     

Cash Flows from Investing Activities:

     

Capital expenditures

     (2,900)        (2,343)  

Purchases of short-term investments and other investments

     (2,584)        (1,989)  

Proceeds from sale of short-term and other investments

     2,380         1,957   

Proceeds from sale of property and equipment

            24   

Investment in and loans to affiliates

     —          (8)  

Other, net

     142         (5)  
  

 

 

    

 

 

 

Net cash used in investing activities

     (2,954)        (2,364)  
  

 

 

    

 

 

 
     

Cash Flows from Financing Activities:

     

Proceeds from issuance of long-term debt and airport construction financing

     2,119         510   

Dividend to UAL

     (1,291)        (2,442)  

Payments of long-term debt

     (722)        (911)  

Principal payments under capital leases

     (84)        (95)  

Other, net

     (63)        (34)  
  

 

 

    

 

 

 

Net cash used in financing activities

     (41)        (2,972)  
  

 

 

    

 

 

 

Net decrease in cash, cash equivalents and restricted cash

     (324)        (458)  

Cash, cash equivalents and restricted cash at beginning of the period

     2,297         3,206   
  

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at end of the period (a)

    $ 1,973        $ 2,748   
  

 

 

    

 

 

 
     

Investing and Financing Activities Not Affecting Cash:

     

Property and equipment acquired through the issuance of debt and capital leases

    $ 918        $ 115   

Airport construction financing

     41         68   

Operating lease conversions to capital lease

     —          12   

 

     

(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheet:

 

Reconciliation of cash, cash equivalents and restricted cash:

    

Current assets:

    

Cash and cash equivalents

    $ 1,864          $   2,624   

Restricted cash included in Prepaid expenses and other

     13         

Other assets:

    

Restricted cash

     96        123   
  

 

 

   

 

 

 

Total cash, cash equivalents and restricted cash

    $   1,973       $ 2,748   
  

 

 

   

 

 

 

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

 

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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, 2016. The Company’s quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results.

NOTE 1 - RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board (“FASB”) amended the FASB Accounting Standards Codification and created a new Topic 606, Revenue from Contracts with 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 Accounting Standards Codification. The Company will use the full-retrospective approach in adopting this standard on January 1, 2018. We have reached conclusions on the applicability of the standard on accounting for contracts with customers. The standard impacts the classification of certain revenue streams and affects the timing of revenue and expense recognition for others. The most significant impact is the reclassification of certain ancillary fees from other operating revenue into passenger revenue on the statement of consolidated operations. For 2016, the amount to be reclassified at adoption of the new standard from other operating revenue into passenger revenue under Topic 606 is approximately $2.0 billion. These ancillary fees are directly related to passenger travel, such as ticket change fees and baggage fees and will no longer be considered distinct performance obligations separate from the passenger travel component. In addition, the ticket change fees, which were previously recognized when received, will be recognized when transportation is provided. While the classification of certain transactions within operating revenue and between operating revenue and operating expenses will change, the Company believes that the adoption of the standard will not have a material impact on its earnings.

In February 2016, the FASB amended the FASB Accounting Standards Codification and created a new Topic 842, Leases (“Topic 842”). The guidance requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their income statements similar to the current Topic 840, Leases. It is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. Lessees and lessors are required to adopt Topic 842 using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. We have not completed our evaluation of the impact but believe this standard will have a significant impact on our consolidated balance sheets but is not expected to have a material impact on the Company’s results of operations or cash flows. The primary effect of adopting the new standard will be to record assets and obligations for its operating leases.

 

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In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10) (“ASU 2016-01”). This standard makes several changes, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is effective for interim and annual periods beginning after December 15, 2017. Based on its portfolio of investments as of September 30, 2017, the Company does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

NOTE 2 - EARNINGS PER SHARE

The computations of UAL’s basic and diluted earnings per share are set forth below (in millions, except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
Earnings available to common stockholders     $ 637        $ 965        $ 1,551        $ 1,866   
  

 

 

    

 

 

    

 

 

    

 

 

 
Basic weighted-average shares outstanding      299.8         320.0         306.8         334.9   
Effect of employee stock awards      0.8         0.4         0.8         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
Diluted weighted-average shares outstanding      300.6         320.4         307.6         335.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
Earnings per share, basic     $ 2.12        $ 3.02        $ 5.06        $ 5.57   
Earnings per share, diluted     $ 2.12        $ 3.01        $ 5.04        $ 5.57   

The number of antidilutive securities excluded from the computation of diluted earnings per share amounts was not material.

In the three and nine months ended September 30, 2017, UAL repurchased approximately 8 million and 18 million shares of UAL common stock in open market transactions, respectively, for $0.6 billion and $1.3 billion, respectively. As of September 30, 2017, the Company had approximately $0.6 billion remaining to purchase shares under its existing share repurchase authority. UAL may repurchase shares through the open market, privately negotiated transactions, block trades or accelerated share repurchase transactions from time to time in accordance with applicable securities laws. UAL will repurchase shares of UAL common stock subject to prevailing market conditions, and may discontinue such repurchases at any time. See Part II, Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.

 

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NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The tables below present the components of the Company’s accumulated other comprehensive income (loss), net of tax (“AOCI”) (in millions):

 

                          Deferred Taxes        
UAL       Pension and
Other
Postretirement
Liabilities
    Fuel
Derivative
Contracts
    Investments
and Other
    Pension and
Other
Postretirement
Liabilities
    Fuel
Derivative
Contracts
    Investments
and Other
    Total  

Balance at June 30, 2017

     $ (860)      $ —       $ (16)      $ 26       $ —       $      $ (844)  

Changes in value

      (9)       —        26              —        (9)       11   

Amounts reclassified to earnings

      14        —        —        (5)       —        —         
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

            —        26        (2)       —        (9)       20   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

     $ (855)      $ —       $ 10       $ 24       $ —       $ (3)      $ (824)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     $ (854)      $ (2)      $      $ 24       $      $      $ (829)  

Changes in value

      (42)       —              15        —        (3)       (21)  

Amounts reclassified to earnings

      41              —        (15)       (1)       (1)       26   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

      (1)                   —        (1)       (4)        
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

     $ (855)      $ —       $ 10       $ 24       $ —       $ (3)      $   (824)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                          Deferred Taxes        
UAL       Pension and
Other
Postretirement
Liabilities
    Fuel
Derivative
Contracts
    Investments
and Other
    Pension and
Other
Postretirement
Liabilities
    Fuel
Derivative
Contracts
    Investments
and Other
    Total  

Balance at June 30, 2016

     $ (385)      $ (41)      $      $ (146)      $ (165)      $ —       $ (734)  

Changes in value

      (124)       (6)             45              (1)       (83)  

Amounts reclassified to earnings

            24        (2)       (2)       (8)             19   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

      (118)       18        (1)       43        (6)       —        (64)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

     $ (503)      $ (23)      $      $ (103)      $ (171)      $ —       $ (798)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     $ (363)      $ (215)      $      $ (154)      $ (102)      $ —       $ (831)  

Changes in value

      (157)       (5)             57              (1)       (103)  

Amounts reclassified to earnings

      17        197        (2)       (6)       (71)             136   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

      (140)       192        (1)       51        (69)       —        33   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

     $ (503)      $ (23)      $      $ (103)      $ (171)      $ —       $   (798)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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,
        
     2017      2016      2017      2016         
Pension and other postretirement liabilities               

Amortization of unrecognized losses and prior service cost (a)

      $            14           $            6           $            41           $            17          Salaries and related costs  
Fuel derivative contracts               

Reclassifications of losses into earnings

     —          24          2          197          Aircraft fuel  
Investments and other               

Reclassifications of gains into earnings

     —          (2)        —          (2)        Miscellaneous, net  

 

(a) 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).

 

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NOTE 4 - INCOME TAXES

The Company’s effective tax rate for the three and nine months ended September 30, 2017 was 35.0% and 35.3%, respectively, and the effective tax rate for the three and nine months ended September 30, 2016 was 36.1% and 36.4%, respectively. The effective tax rates represented a blend of federal, state and foreign taxes and included the impact of certain nondeductible items. The effective tax rate for the three and nine months ended September 30, 2017 also reflects the impact of a change in the mix of domestic and foreign earnings.

NOTE 5 - EMPLOYEE BENEFIT PLANS

Defined Benefit Pension and Other Postretirement Benefit Plans. The Company’s net periodic benefit cost includes the following components (in millions):

 

     Pension Benefits      Other Postretirement
Benefits
 
     Three Months  Ended
September 30,
     Three Months  Ended
September 30,
 
         2017              2016              2017              2016      
Service cost     $ 48        $ 29        $       $  
Interest cost      55         50         16         22   
Expected return on plan assets      (61)        (54)        —         —   
Amortization of unrecognized (gain) loss and prior service cost (credit)      32         19         (18)        (13)  
Settlement loss                    —         —   
Curtailment gain      —         —         —         (47)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 77        $ 46        $       $ (34)  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pension Benefits      Other Postretirement
Benefits
 
     Nine Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  
Service cost     $ 146        $ 84        $ 10        $ 14   
Interest cost      165         151         50         66   
Expected return on plan assets      (182)        (162)        (1)        (1)  
Amortization of unrecognized (gain) loss and prior service cost (credit)      95         57         (54)        (40)  
Settlement loss                    —         —   
Curtailment gain      —         —         —         (47)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 229        $ 134        $       $ (8)  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three and nine months ended September 30, 2017, the Company contributed $160 million and $400 million, respectively, to its U.S. domestic tax-qualified defined benefit pension plans.

Share-Based Compensation. During the first nine months of 2017, UAL’s Board of Directors and stockholders approved the United Continental Holdings, Inc. 2017 Incentive Compensation Plan (the “2017 Plan”). The 2017 Plan is an incentive compensation plan that allows the Company to use different forms of long-term equity incentives to attract, retain, and reward officers and employees (including prospective officers and employees). The 2017 Plan replaced the United Continental Holdings, Inc. 2008 Incentive Compensation Plan (the “2008 Plan”). Any awards granted under the 2008 Plan prior to the approval of the 2017 Plan remain in effect pursuant to their terms. Awards may not be granted under the 2017 Plan after May 24, 2027. Under the 2017 Plan, the Company may grant: non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986), stock appreciation rights, restricted shares, restricted share units (“RSUs”), performance compensation awards, performance units, cash incentive awards, other equity-based and equity-related awards, and dividends and dividend equivalents.

 

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In the nine months ended September 30, 2017, UAL granted share-based compensation awards pursuant to both the 2008 Plan and the 2017 Plan. These share-based compensation awards include 1.5 million RSUs, consisting of 0.9 million time-vested RSUs and 0.6 million performance-based RSUs, and 36,000 stock options. The time-vested RSUs vest pro-rata, on February 28th of each year, over a three year period from the date of grant. These RSUs are generally equity awards settled in stock for domestic employees and liability awards settled in cash for international employees. The cash payments are based on the 20-day average closing price of UAL common stock immediately prior to the vesting date. The performance-based RSUs vest based on the Company’s relative improvement in pre-tax margin for the three years ending December 31, 2019. If this performance condition is 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 performance-based 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,  
     2017      2016      2017      2016  

Share-based compensation expense

    $ 10        $ 23        $ 66        $ 36   
     September 30,
2017
     December 31,
2016
               

Unrecognized share-based compensation

    $ 90        $ 65         

NOTE 6 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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

 

     September 30, 2017      December 31, 2016  
     Total      Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3  

Cash and cash equivalents

    $     1,870       $     1,870       $ —       $ —       $     2,179       $     2,179       $ —       $ —   

Short-term investments:

                       

Corporate debt

     959         —         959         —         835         —         835         —   

Asset-backed securities

     891         —         891         —         792         —         792         —   

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

     142         —         142         —         246         —         246         —   

U.S. government and agency notes

     112         —         112         —         140         —         140         —   

Other fixed-income securities

     171         —         171         —         54         —         54         —   

Other investments measured at NAV

     183         —         —         —         182         —         —         —   
Restricted cash      109         109         —         —         124         124        —         —   

Long-term investments:

                       

Equity securities

     114         114         —         —         —         —         —         —   

Enhanced equipment trust certificates (“EETC”)

     21         —         —         21         23         —         —         23   

Available-for-sale investment maturities - The short-term investments shown in the table above are classified as available-for-sale. As of September 30, 2017, asset-backed securities have remaining maturities of less than one year to approximately 17 years, corporate debt securities have remaining maturities of less than one year to approximately three 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 two years. The EETC securities mature in 2019.

Restricted cash - Restricted cash primarily includes collateral for letters of credit and collateral associated with workers’ compensation obligations.

 

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Equity securities - Equity securities represent United’s investment in Azul Linhas Aereas Brasileiras S.A. (“Azul”), which was previously accounted for as a cost-method investment. The fair value of Azul’s shares became readily determinable in the second quarter of 2017 upon its initial public offering and is now accounted for as an available-for-sale investment.

Investments presented in the table 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, 2017      December 31, 2016  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  
            Total      Level 1      Level 2      Level 3             Total      Level 1      Level 2      Level 3  

Long-term debt

    $  12,850        $  13,217        $   —        $  9,640        $  3,577        $  10,767        $  11,055        $   —        $  8,184        $  2,871   

Fair value of the financial instruments included in the tables above was determined as follows:

 

Description

    

Fair Value Methodology

Cash and cash equivalents      The carrying amounts approximate fair value because of the short-term maturity of these assets.

Short-term investments,

Equity securities, EETC 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, or (c) broker quotes obtained by third-party valuation services.
Other investments measured at NAV      In accordance with the relevant accounting standards, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The investments measured using NAV are shares of mutual funds that invest in fixed-income instruments including bonds, debt securities, and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. The Company can redeem its shares at any time at NAV subject to a three-day settlement period.
Long-term 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

As of September 30, 2017, the Company did not have any fuel hedging contracts outstanding to hedge its fuel consumption. The last of the Company’s fuel hedge derivatives designated for cash flow hedge accounting expired in December 2016. The Company’s current strategy is to not enter into transactions to hedge its fuel consumption, although the Company regularly reviews its strategy based on market conditions and other factors.

 

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The following table presents 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
 
     Three Months Ended
September 30,
     Three Months Ended
September 30,
 
           2017                  2016                  2017                  2016        

Fuel contracts

    $ —        $ (6)       $ —        $ (24)  
     Amount of Loss
Recognized
in AOCI on Derivatives
(Effective Portion)
     Loss
Reclassified  from
AOCI into
Fuel Expense (a)
 
     Nine Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Fuel contracts

    $ —        $ (5)       $ (2)       $ (197)  

 

 

(a) The 2017 loss reclassified from AOCI into fuel expense represents hedge losses on December 2016 settled trades, but for which the associated fuel purchased in December was not consumed until January 2017.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Commitments. As of September 30, 2017, United had firm commitments and options to purchase aircraft from The Boeing Company (“Boeing”), Airbus S.A.S. (“Airbus”), and Embraer S.A. (“Embraer”) presented in the table below:

 

Aircraft Type

   Number of Firm
      Commitments (a)       
 

Airbus A350

     45  

Boeing 737 MAX

     161  

Boeing 777-300ER

     4  

Boeing 787

     18  

Embraer E175

     5  
(a) United also has options and purchase rights for additional aircraft.  

The aircraft listed in the table above are scheduled for delivery through 2027. To the extent the Company and the aircraft manufacturers with whom the Company has existing orders for new aircraft agree to modify the contracts governing those orders, the amount and timing of the Company’s future capital commitments could change. For the remainder of 2017, United expects to take delivery of five Embraer E175 aircraft. Additionally, the Company also currently expects to take delivery of four used Airbus A319s and two used Airbus A320s for the remainder of 2017.

 

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The table below summarizes United’s commitments as of September 30, 2017, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and include other capital purchase commitments. Any new firm aircraft orders, including through the exercise of purchase options and purchase rights, will increase the total future capital commitments of the Company.

 

     (in billions)  

Last three months of 2017

    $                     0.9   

2018

     3.0   

2019

     3.1   

2020

     2.2   

2021

     1.4   

After 2021

     11.4   
  

 

 

 
    $ 22.0   
  

 

 

 

United secured individual bank financing for five Embraer E175 aircraft to be delivered in the last three months of 2017. See Note 9 of this report for additional information on aircraft financing. The Company has also secured backstop financing commitments from certain of its aircraft manufacturers for a limited number of its future aircraft deliveries, subject to certain customary conditions. Financing may be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures.

Regional CPAs. In February 2017, United entered into a five-year capacity purchase agreement (“CPA”) with Air Wisconsin Airlines for regional service under the United Express brand to operate up to 65 CRJ 200 aircraft.

In the third quarter of 2017, United reached agreements with certain of its regional air partners to accelerate the retirement of 21 turboprop aircraft from service, modify some aircraft service entry and exit dates, as well as extend the term of up to approximately 125 aircraft under an existing CPA through December 31, 2022. The future commitments have been incorporated into the table below.

The table below summarizes the Company’s 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 billions)  

Last three months of 2017

    $                     0.5   

2018

     2.0   

2019

     1.8   

2020

     1.6   

2021

     1.5   

After 2021

     4.6   
  

 

 

 
    $ 12.0   
  

 

 

 

Guarantees. As of September 30, 2017, United is the guarantor of approximately $1.8 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 $1.4 billion of these obligations are accounted for as operating leases with the associated expense recorded on a straight-line basis resulting in ratable accrual of the lease obligation over the expected lease term. The leasing arrangements associated with approximately $441 million of these obligations are accounted for as capital leases. All of these bonds are due between 2019 and 2038.

In the Company’s financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate (“LIBOR”), for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject, in most cases, to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs. At September 30, 2017, the Company had $3.3 billion of floating rate debt and $68 million of fixed rate debt, with remaining terms of up to 11 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 11 years and an aggregate balance of $3.2 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.

 

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As of September 30, 2017, United is the guarantor of $159 million of aircraft mortgage debt issued by one of United’s regional carriers. The aircraft mortgage debt is subject to similar increased cost provisions as described above for the Company’s debt and the Company would potentially be responsible for those costs under the guarantees.

Labor Negotiations. As of September 30, 2017, United had approximately 89,700 employees, of whom approximately 80% were represented by various U.S. labor organizations.

NOTE 9 - DEBT

As of September 30, 2017, a substantial portion of the Company’s assets, principally aircraft, route authorities, airport slots and loyalty program intangible assets, was pledged under various loan and other agreements. As of September 30, 2017, UAL and United were in compliance with their debt covenants.

2017 Credit and Guaranty Agreement. On March 29, 2017, United and UAL, as borrower and guarantor, respectively, entered into an Amended and Restated Credit and Guaranty Agreement (the “2017 Credit Agreement”). The 2017 Credit Agreement consists of a $1.5 billion term loan due April 1, 2024, which (i) was used to retire the entire principal balance of the term loans under the credit and guaranty agreement, dated March 27, 2013 (as amended, the “2013 Credit Agreement”), and (ii) increased the term loan balance by approximately $440 million, and a $2.0 billion revolving credit facility available for drawing until April 1, 2022, which increased the available capacity under the revolving credit facility of the 2013 Credit Agreement. As of September 30, 2017, United had its entire capacity of $2.0 billion available under the revolving credit facility. The obligations of United under the 2017 Credit Agreement are secured by liens on certain international route authorities, certain take-off and landing rights and related assets of United.

Borrowings under the 2017 Credit Agreement bear interest at a variable rate equal to LIBOR, subject to a 0% floor, plus a margin of 2.25% per annum, or another rate based on certain market interest rates, plus a margin of 1.25% per annum. The principal amount of the term loan must be repaid in consecutive quarterly installments of 0.25% of the original principal amount thereof, commencing on June 30, 2017, with any unpaid balance due on April 1, 2024. United may prepay all or a portion of the loan from time to time, at par plus accrued and unpaid interest. United pays a commitment fee equal to 0.75% per annum on the undrawn amount available under the revolving credit facility.

The 2017 Credit Agreement includes covenants that, among other things, require the Company to maintain at least $2.0 billion of unrestricted liquidity and a minimum ratio of appraised value of collateral to the outstanding obligations under the Credit Agreement of 1.60 to 1.0. The 2017 Credit Agreement contains events of default customary for this type of financing, including a cross default and cross acceleration provision to certain other material indebtedness of the Company. Under the provisions of the 2017 Credit Agreement, UAL’s ability to make investments and to pay dividends on, or repurchase, UAL’s common stock is restricted.

EETCs. In September 2016 and June 2016, United created EETC pass-through trusts, each of which issued pass-through certificates. The proceeds of the issuance of the pass-through certificates are used to purchase equipment notes issued by United and secured by its aircraft. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The pass-through certificates represent fractional undivided interests in the respective pass-through trusts and are not obligations of United. The payment obligations under the equipment notes are those of United. Proceeds received from the sale of pass-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by United and are not reported as debt on our consolidated balance sheet because the proceeds held by the depositary are not United’s assets. Certain details of the pass-through trusts with proceeds received from issuance of debt in 2017 are as follows (in millions, except stated interest rate):

 

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EETC Date            

  

Class

   Principal     

Final expected
distribution date

   Stated
interest
rate
     Total  debt
recorded
as of September 30,

2017
     Proceeds
received
from
issuance of
debt during
2017
 

September 2016

   AA     $             637       October 2028      2.875%        $ 637        $ 557   

September 2016

   A      283       October 2028      3.10%         283      

 

247 

 

June 2016

   AA      729       July 2028      3.10%         729         319   

June 2016

   A      324       July 2028      3.45%         324         142   
     

 

 

          

 

 

    

 

 

 
       $          1,973              $                       1,973        $             1,265   
     

 

 

          

 

 

    

 

 

 

Secured Notes Payable. In the first nine months of 2017, United borrowed approximately $392 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2017. The notes evidencing these borrowings, which are secured by the related aircraft, mature in 2027 and each has an interest rate comprised of LIBOR plus a specified margin.

4.25% Senior Notes due 2022. In September 2017, UAL issued $400 million aggregate principal amount of 4.25% Senior Notes due October 1, 2022 (the “4.25% Senior Notes due 2022”). These notes are fully and unconditionally guaranteed and recorded by United on its balance sheet as debt. The indenture for the 4.25% Senior Notes due 2022 requires UAL to offer to repurchase the notes for cash at a purchase price equal to 101% of the principal amount of notes repurchased plus accrued and unpaid interest if certain changes of control of UAL occur.

5% Senior Notes due 2024. In January 2017, UAL issued $300 million aggregate principal amount of 5% Senior Notes due February 1, 2024 (the “5% Senior Notes due 2024”). These notes are fully and unconditionally guaranteed and recorded by United on its balance sheet as debt. The indenture for the 5% Senior Notes due 2024 requires UAL to offer to repurchase the notes for cash at a purchase price equal to 101% of the principal amount of notes repurchased plus accrued and unpaid interest if certain changes of control of UAL occur.

The table below presents the Company’s contractual principal payments (not including debt discount or debt issuance costs) at September 30, 2017 under then-outstanding long-term debt agreements (in millions):

 

Last three months of 2017

    $ 184   

2018

     1,527   

2019

     1,115   

2020

     1,120   

2021

     1,107   

After 2021

     7,963   
  

 

 

 
    $                 13,016   
  

 

 

 

 

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NOTE 10 - SPECIAL CHARGES

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
Operating:    2017      2016      2017      2016  

Severance and benefit costs

    $ 23        $ 13        $ 101        $ 27   

Impairment of assets

     15         —         15         412   

Labor agreement costs

     —         14         —         124   

Cleveland airport lease restructuring

     —         —         —         74   

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

     12         18         29         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Special charges

     50         45         145         669   

Nonoperating:

           

Other (gain) loss

     —         —         —         (1)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Special charges before income taxes

     50         45         145         668   

Income tax benefit related to special charges

     (18)        (16)        (52)        (241)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total special charges, net of tax

    $ 32        $ 29        $ 93        $ 427   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three and nine months ended September 30, 2017, the Company recorded $16 million ($10 million net of taxes) and $73 million ($47 million net of taxes), respectively, of severance and benefit costs related to a voluntary early-out program for its technicians and related employees represented by the International Brotherhood of Teamsters (the “IBT”). In the first quarter of 2017, approximately 1,000 technicians and related employees elected to voluntarily separate from the Company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through early 2019. Also during the three and nine months ended September 30, 2017, the Company recorded $7 million ($5 million net of taxes) and $28 million ($18 million net of taxes), respectively, of severance primarily related to its management reorganization initiative.

During the three and nine months ended September 30, 2016, the Company recorded $13 million ($8 million net of taxes) and $27 million ($17 million net of taxes), respectively, of severance and benefit costs primarily related to a voluntary early-out program for its flight attendants.

During the three months ended September 30, 2017, the Company recorded a $15 million ($10 million net of taxes) intangible asset impairment charge related to a maintenance service agreement.

In April 2016, the Federal Aviation Administration (“FAA”) announced that, effective October 30, 2016, it would designate Newark Liberty International Airport (“Newark”) as a Level 2 schedule-facilitated airport under the International Air Transport Association Worldwide Slot Guidelines. The designation was associated with an updated demand and capacity analysis of Newark by the FAA. In the second quarter of 2016, the Company determined that the FAA’s action impaired the entire value of its Newark slots because the slots are no longer the mechanism that governs take-off and landing rights. Accordingly, the Company recorded a $412 million special charge ($264 million net of taxes) to write off the intangible asset.

During the nine months ended September 30, 2016, the fleet service, passenger service, storekeeper and other employees represented by the International Association of Machinists and Aerospace Workers (the “IAM”) ratified seven new contracts with the Company which extended the contracts through 2021. The Company also reached a tentative agreement with the IBT during the same time period. During the three and nine months ended September 30, 2016, the Company recorded $61 million ($39 million net of taxes) and $171 million ($109 million net of taxes), respectively, of special charges primarily for payments in conjunction with the IAM and IBT agreements described above. Also, as part of its contract with the Association of Flight Attendants, the Company amended two of its flight attendant postretirement medical plans. The amendments triggered curtailment accounting, resulting in the recognition of a one-time $47 million gain ($30 million net of taxes) for accelerated recognition of a prior service credit.

During the nine months ended September 30, 2016, the City of Cleveland agreed to amend the Company’s lease, which runs through 2029, associated with certain excess airport terminal space (principally Terminal D) and related facilities at Hopkins International Airport. The Company recorded an accrual for remaining payments under the lease for facilities that the Company

 

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no longer uses and will continue to incur costs under the lease without economic benefit to the Company. This liability was measured and recorded at its fair value when the Company ceased its right to use such facilities leased to it pursuant to the lease. The Company recorded a special charge of $74 million ($47 million net of taxes) related to the amended lease.

Accrual

The accrual balance for severance and benefits was $31 million as of September 30, 2017, compared to $34 million as of September 30, 2016. The severance-related accrual as of September 30, 2017 is expected to be mostly paid through early 2019. The accrual balance for future lease payments on permanently grounded aircraft was $28 million as of September 30, 2017, compared to $41 million as of September 30, 2016. The grounded aircraft related accrual as of September 30, 2017 is expected to be mostly paid through 2025. The following is a reconciliation of severance and permanently grounded aircraft accrual activity for the nine months ended September 30:

 

     Severance and
Benefits
     Permanently
Grounded
Aircraft
 

Balance at December 31, 2016

    $ 14        $ 41   

Accrual

     101         —   

Payments

     (84)        (13)  
  

 

 

    

 

 

 

Balance at September 30, 2017

    $ 31        $ 28   
  

 

 

    

 

 

 
     Severance and
Benefits
     Permanently
Grounded
Aircraft
 

Balance at December 31, 2015

    $ 27        $ 78   

Accrual

     27         (17)  

Payments

     (20)        (20)  
  

 

 

    

 

 

 

Balance at September 30, 2016

    $                     34        $                     41   
  

 

 

    

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

United Continental Holdings, Inc. (together with its consolidated subsidiaries, “UAL” or the “Company”) is a holding company and its principal, wholly-owned subsidiary is United Airlines, Inc. (together with its consolidated subsidiaries, “United”). This Quarterly Report on 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 approximately 4,500 flights a day to 337 airports across five continents.

Third Quarter Financial Highlights

 

   

Third quarter 2017 net income was $637 million, or $2.12 diluted earnings per share, as compared to net income of $965 million, or diluted earnings per share of $3.01, in the third quarter of 2016.

 

   

During the quarter, the Company canceled approximately 8,300 flights as a result of severe weather in southeast Texas, Florida and parts of the Caribbean. The operational disruption reduced third quarter income before income taxes by an estimated $185 million.

 

   

Passenger revenue decreased 0.9% to $8.5 billion during the third quarter of 2017 as compared to the third quarter of 2016. Revenue was impacted by an estimated $210 million due to the operational disruption.

 

   

Third quarter 2017 aircraft fuel cost increased $206 million, 12.9% year-over-year.

 

   

Unrestricted liquidity at September 30, 2017 was $6.3 billion, including $2.0 billion of undrawn commitments under the Company’s revolving credit facility.

 

   

In the three months ended September 30, 2017, UAL repurchased approximately 8 million of its common stock in open market transactions for $0.6 billion. As of September 30, 2017, the Company had $0.6 billion remaining to purchase shares under its existing share repurchase authority.

Third Quarter Operational Highlights

 

   

United achieved the best-ever third-quarter consolidated on-time departures in its history.

 

   

Consolidated traffic increased 1.7% and consolidated capacity increased 3% during the third quarter of 2017 as compared to the third quarter of 2016. The Company’s load factor for the third quarter of 2017 was 84.4%.

 

   

The Company took delivery of one Boeing 787-9 aircraft, four Boeing 737-800 aircraft and nine Embraer E175 aircraft during the third quarter of 2017.

 

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Outlook

The Company expects full-year 2017 consolidated capacity to increase approximately 3.5% year-over-year. Domestic capacity is expected to increase approximately 4.5% year-over-year and international capacity is expected to increase approximately 2.0% year-over-year.

As outlined at our November 2016 Investor Day presentation, the Company expects to drive significant incremental value by 2020 relative to 2015. United anticipates capturing this value through a variety of initiatives including a re-fleeting and upgauge program, additional customer choice through segmentation, improvements to the revenue management systems, ongoing sensible cost management, realizing our full network potential through improved schedule quality and enhancements to the MileagePlus program. In addition, the Company will continue to focus on improving reliability while increasing the efficiency of the operation.

The price of jet fuel remains volatile. Based on projected fuel consumption in 2017, a one dollar change in the price of a barrel of crude oil would change the Company’s annual fuel expense by approximately $95 million.

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, 2017 as compared to the corresponding period in 2016.

Third Quarter 2017 Compared to Third Quarter 2016

The Company recorded net income of $637 million in the third quarter of 2017 as compared to net income of $965 million in the third quarter of 2016. The Company considers a key measure of its performance to be operating income, which was $1.1 billion for the third quarter of 2017, as compared to $1.6 billion for the third quarter of 2016, a $532 million decrease year-over-year. Third quarter 2017 income before income taxes was negatively impacted by an estimated $185 million as a result of severe weather in southeast Texas, Florida and parts of the Caribbean. Significant components of the Company’s operating results for the three months ended September 30 are as follows (in millions, except percentage changes):

 

     2017      2016      Increase
(Decrease)
     % Increase
(Decrease)
 

Operating revenue

    $ 9,878        $ 9,913        $ (35)        (0.4)  

Operating expense

     8,786         8,289         497         6.0   
  

 

 

    

 

 

    

 

 

    

Operating income

     1,092         1,624         (532)        (32.8)  

Nonoperating expense

     (112)        (114)        (2)        (1.8)  

Income tax expense

     343         545         (202)        (37.1)  
  

 

 

    

 

 

    

 

 

    

Net income

     $ 637        $ 965        $ (328)        (34.0)  
  

 

 

    

 

 

    

 

 

    

 

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

 

     2017      2016      Increase
(Decrease)
     %  Increase
(Decrease)
 

Passengers (thousands) (a)

     39,302           38,651           651         1.7   

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

     59,145           58,172           973         1.7   

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

     70,083           68,074           2,009         3.0   

Passenger load factor (d)

     84.4%        85.5%        (1.1) pts.         N/A   

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

     12.17           12.64           (0.47)        (3.7)  

Average yield per revenue passenger mile (“Yield”) (cents) (e)

     14.42           14.79           (0.37)        (2.5)  

Cost per available seat mile (“CASM”) (cents)

     12.54           12.18           0.36         3.0   

Average price per gallon of fuel, including fuel taxes

    $ 1.70         $ 1.52          $ 0.18         11.8   

Fuel gallons consumed (millions)

     1,065           1,057                  0.8   

Average full-time equivalent employees

     87,300           85,100           2,200         2.6   

 

(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.

 

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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):

 

      2017      2016      Increase
(Decrease)
     % Change  

Passenger—Mainline

    $ 7,083        $ 7,017        $ 66         0.9   

Passenger—Regional

     1,445         1,586         (141)        (8.9)  
  

 

 

    

 

 

    

 

 

    

Total passenger revenue

     8,528         8,603         (75)        (0.9)  

Cargo

     257         224         33         14.7   

Other operating revenue

     1,093         1,086                0.6   
  

 

 

    

 

 

    

 

 

    

Total operating revenue

    $ 9,878        $ 9,913        $ (35)        (0.4)  
  

 

 

    

 

 

    

 

 

    

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

 

         Domestic            Atlantic            Pacific            Latin                 Total
     Consolidated    
                Mainline            Regional      

Increase (decrease) from 2016:

                              

Passenger revenue (in millions)

    $ (2)          $ 3          $ (109)          $ 33                $ (75)               $ 66          $ (141)      
Passenger revenue      — %        0.2 %        (9.3)%        4.7 %             (0.9)%             0.9 %        (8.9)%  

Average fare per passenger

     (2.2)%        (0.1)%        (6.0)%        3.8 %             (2.5)%             (4.9)%        0.4 %  
Yield      (3.2)%        (0.9)%        (6.6)%        3.4 %             (2.5)%             (2.1)%        1.9 %  

PRASM

     (4.4)%        (0.4)%        (10.4)%        3.5 %             (3.7)%             (3.1)%        (1.8)%  
Passengers      2.2 %        0.3 %        (3.5)%        0.9 %             1.7 %             6.1 %        (9.2)%  

RPMs (traffic)

     3.3 %        1.1 %        (2.9)%        1.3 %             1.7 %             3.2 %        (10.6)%  
ASMs (capacity)      4.6 %        0.6 %        1.2 %        1.3 %             3.0 %             4.2 %        (7.2)%  

Passenger load factor (points)

     (1.1)           0.4             (3.5)           —                  (1.1)                (0.9)           (3.0)     

Consolidated passenger revenue in the third quarter of 2017 decreased $75 million, or 0.9%, as compared to the year-ago period primarily due to a 1.1 percentage point decrease in load factor. Third quarter 2017 consolidated PRASM and consolidated yield decreased 3.7% and 2.5%, respectively, compared to the third quarter of 2016. The Pacific region experienced a 10.4% decline in PRASM in the third quarter of 2017 as compared to the year-ago period due to unfavorable supply and demand dynamics in China. The Domestic region experienced a 4.4% and a 3.2% decline in PRASM and yield, respectively, as compared to the year-ago period due to severe weather in southeast Texas, Florida, and parts of the Caribbean, uncompetitive Basic Economy pricing, and competitive pricing environment with ultra-low-cost carriers.

Cargo revenue increased $33 million, or 14.7%, in the third quarter of 2017 as compared to the year-ago period primarily due to higher international freight volume.

 

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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):

 

      2017      2016      Increase
(Decrease)
     % Change  

Salaries and related costs

    $ 2,812        $ 2,625        $ 187         7.1   

Aircraft fuel

     1,809         1,603         206         12.9   

Landing fees and other rent

     585         546         39         7.1   

Regional capacity purchase

     567         572         (5)        (0.9)  

Depreciation and amortization

     556         503         53         10.5   

Aircraft maintenance materials and outside repairs

     451         451         —         —   

Distribution expenses

     352         345                2.0   

Aircraft rent

     145         168         (23)        (13.7)  

Special charges

     50         45                NM   

Other operating expenses

     1,459         1,431         28         2.0   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

    $ 8,786        $ 8,289        $ 497         6.0   
  

 

 

    

 

 

    

 

 

    

Salaries and related costs increased $187 million, or 7.1%, in the third quarter of 2017 as compared to the year-ago period primarily due to higher pay rates and benefit expenses driven by collective bargaining agreements finalized in 2016, and a 2.6% increase in average full-time equivalent employees, partially offset by a decrease in profit sharing and other employee incentive programs expense.

Aircraft fuel expense increased $206 million, or 12.9%, year-over-year primarily due to an 11.8% increase in the average price per gallon of aircraft fuel in the third quarter of 2017 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, 2017 as compared to the year-ago period:

 

      (In millions)             Average price per gallon  
      2017      2016      %
Change
     2017      2016      %
Change
 

Total aircraft fuel purchase cost excluding fuel hedge impacts

    $ 1,809        $ 1,579         14.6        $ 1.70        $ 1.49         14.1   

Hedge losses reported in fuel expense

     —         24         NM         —         0.03         NM   
  

 

 

    

 

 

       

 

 

    

 

 

    

Fuel expense

    $ 1,809        $ 1,603         12.9        $ 1.70        $ 1.52         11.8   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total fuel consumption (gallons)

     1,065         1,057         0.8            

Landing fees and other rent increased $39 million, or 7.1%, in the third quarter of 2017 as compared to the year-ago period due to higher rental rates and a 3% increase in consolidated capacity.

Depreciation and amortization increased $53 million, or 10.5%, in the third quarter of 2017 as compared to the year-ago period, primarily due to additions of new aircraft, aircraft improvements and increases in information technology assets.

Aircraft rent decreased $23 million, or 13.7%, in the third quarter of 2017 as compared to the year-ago period, primarily due to the purchase of leased aircraft and lower lease renewal rates.

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

 

     2017      2016  

Severance and benefit costs

    $ 23        $ 13   

Impairment of assets

     15         —   

Labor agreement costs

     —         14   

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

     12         18   
  

 

 

    

 

 

 

Special charges

    $ 50        $ 45   
  

 

 

    

 

 

 

 

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

Nonoperating Income (Expense). The following table illustrates the year-over-year dollar and percentage changes in the Company’s nonoperating income (expense) for the three months ended September 30 (in millions, except for percentage changes):

 

     2017      2016      Increase
(Decrease)
     %
Change
 

Interest expense

    $ (164)       $ (150)       $ 14         9.3   

Interest capitalized

     20         20         —         —   

Interest income

     17         14                21.4   

Miscellaneous, net

     15                13         NM   
  

 

 

    

 

 

    

 

 

    

Total

    $ (112)       $ (114)       $ (2)        (1.8)  
  

 

 

    

 

 

    

 

 

    

Income Taxes. See Note 4 to the financial statements included in Part I, Item 1 of this report for information related to income taxes.

First Nine Months 2017 Compared to First Nine Months 2016

The Company recorded net income of $1.6 billion in the first nine months of 2017 as compared to net income of $1.9 billion in the first nine months of 2016. The Company considers a key measure of its performance to be operating income, which was $2.8 billion for the first nine months of 2017 as compared to $3.3 billion for the first nine months of 2016, a $564 million decrease year-over-year. Income before income taxes for the first nine months of 2017 was negatively impacted by an estimated $185 million as a result of severe weather in southeast Texas, Florida and parts of the Caribbean. Significant components of the Company’s operating results for the nine months ended September 30 are as follows (in millions, except percentage changes):

 

     2017      2016      Increase
(Decrease)
     % Increase
(Decrease)
 

Operating revenue

    $ 28,298        $ 27,504        $ 794         2.9   

Operating expense

     25,529         24,171         1,358         5.6   
  

 

 

    

 

 

    

 

 

    

Operating income

     2,769         3,333         (564)        (16.9)  

Nonoperating expense

     (370)        (398)        (28)        (7.0)  

Income tax expense

     848         1,069         (221)        (20.7)  
  

 

 

    

 

 

    

 

 

    

Net income

    $ 1,551        $ 1,866        $ (315)        (16.9)  
  

 

 

    

 

 

    

 

 

    

 

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

 

     2017      2016      Increase
(Decrease)
     %  Increase
(Decrease)
 

Passengers (thousands) (a)

     110,654           107,154           3,500         3.3   

RPMs (millions) (b)

     163,112           158,771           4,341         2.7   

ASMs (millions) (c)

     197,358           191,072           6,286         3.3   

Passenger load factor (d)

     82.6%        83.1%        (0.5) pts.         N/A   

PRASM (cents)

     12.32           12.40           (0.08)        (0.6)  

Yield (cents) (e)

     14.91           14.92           (0.01)        (0.1)  

CASM (cents)

     12.94           12.65           0.29         2.3   

Average price per gallon of fuel, including fuel taxes

    $ 1.68          $ 1.45         $ 0.23         15.9   

Fuel gallons consumed (millions)

     2,998           2,942           56         1.9   

Average full-time equivalent employees

     86,200           83,600           2,600         3.1   

 

(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.

 

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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):

 

      2017      2016      Increase
(Decrease)
     % Change  

Passenger—Mainline

    $ 19,970        $ 19,119        $ 851         4.5   

Passenger—Regional

     4,354         4,577         (223)        (4.9)  
  

 

 

    

 

 

    

 

 

    

Total passenger revenue

     24,324         23,696         628         2.7   

Cargo

     731         626         105         16.8   

Other operating revenue

     3,243         3,182         61         1.9   
  

 

 

    

 

 

    

 

 

    

Total operating revenue

    $ 28,298        $ 27,504        $ 794         2.9   
  

 

 

    

 

 

    

 

 

    

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, 2017 compared to the nine months ended September 30, 2016:

 

         Domestic            Atlantic            Pacific            Latin              Total
     Consolidated    
           Mainline          Regional    
Increase (decrease) from 2016:                           

Passenger revenue (in millions)

   $ 523          $ 37          $ (84)          $ 152             $ 628             $ 851          $ (223)      
Passenger revenue      3.7 %        0.9 %        (2.7)%        7.2 %           2.7 %           4.5 %        (4.9)%  

Average fare per passenger

     (0.2)%        1.2 %        (1.6)%        4.1 %           (0.6)%           (2.9)%        2.1 %  

Yield

     (0.6)%        0.7 %        (3.2)%        4.7 %           (0.1)%           0.4 %        2.7 %  

PRASM

     (0.8)%        1.5 %        (6.8)%        4.5 %           (0.6)%           — %        0.5 %  

Passengers

     3.8 %        (0.3)%        (1.1)%        2.9 %           3.3 %           7.5 %        (6.9)%  

RPMs (traffic)

     4.3 %        0.1 %        0.5 %        2.3 %           2.7 %           4.0 %        (7.4)%  

ASMs (capacity)

     4.5 %        (0.6)%        4.4 %        2.5 %           3.3 %           4.4 %        (5.4)%  
Passenger load factor (points)      (0.2)           0.6             (3.2)           (0.1)              (0.5)              (0.3)           (1.7)     

Consolidated passenger revenue in the first nine months of 2017 increased $628 million, or 2.7%, as compared to the year-ago period primarily due to a 2.7% increase in traffic. Consolidated PRASM and consolidated yield for the first nine months of 2017 decreased 0.6% and 0.1%, respectively, as compared to the first nine months of 2016. The Pacific region experienced a 6.8% decline in PRASM in the first nine months of 2017 as compared to the year-ago period due to unfavorable supply and demand dynamics in China. The Domestic region experienced a 0.8% and a 0.6% decline in PRASM and yield, respectively, as compared to the year-ago period due to severe weather in southeast Texas, Florida and parts of the Caribbean, uncompetitive Basic Economy pricing, and competitive pricing environment with ultra-low-cost carriers.

Cargo revenue increased $105 million, or 16.8%, in the first nine months of 2017 as compared to the year-ago period primarily due to higher international freight volume.

 

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Operating Expenses

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

 

      2017      2016      Increase
(Decrease)
     % Change  

Salaries and related costs

    $ 8,341        $ 7,707        $ 634         8.2   

Aircraft fuel

     5,038         4,258         780         18.3   

Landing fees and other rent

     1,670         1,612         58         3.6   

Regional capacity purchase

     1,652         1,645                0.4   

Depreciation and amortization

     1,610         1,473         137         9.3   

Aircraft maintenance materials and outside repairs

     1,377         1,301         76         5.8   

Distribution expenses

     1,021         987         34         3.4   

Aircraft rent

     476         521         (45)        (8.6)  

Special charges

     145         669         (524)        NM   

Other operating expenses

     4,199         3,998         201         5.0   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

    $ 25,529        $ 24,171        $ 1,358         5.6   
  

 

 

    

 

 

    

 

 

    

Salaries and related costs increased $634 million, or 8.2%, in the first nine months of 2017 as compared to the year-ago period primarily due to higher pay rates and benefit expenses driven by collective bargaining agreements finalized in 2016, and a 3.1% increase in average full-time equivalent employees, partially offset by a decrease in profit sharing and other employee incentive programs expense.

Aircraft fuel expense increased $780 million, or 18.3%, year-over-year primarily due to a 15.9% increase in the average price per gallon of aircraft fuel in the first nine months of 2017 compared to the year-ago period. The table below presents the significant changes in aircraft fuel cost per gallon in the nine months ended September 30, 2017 as compared to the year-ago period:

 

     (In millions)             Average price per gallon  
      2017      2016      %
Change
     2017      2016      %
Change
 
Total aircraft fuel purchase cost excluding fuel hedge impacts     $ 5,036        $ 4,061         24.0        $ 1.68        $ 1.38         21.7   
Hedge losses reported in fuel expense             197         NM         —         0.07         NM   
  

 

 

    

 

 

       

 

 

    

 

 

    
Fuel expense     $ 5,038        $ 4,258         18.3        $ 1.68        $ 1.45         15.9   
  

 

 

    

 

 

       

 

 

    

 

 

    

Total fuel consumption (gallons)

     2,998         2,942         1.9            

Depreciation and amortization increased $137 million, or 9.3%, in the first nine months of 2017 as compared to the year-ago period, primarily due to additions of new aircraft, aircraft improvements, accelerated depreciation of assets related to certain fleet types and increases in information technology assets.

Aircraft maintenance materials and outside repairs increased $76 million, or 5.8%, in the first nine months of 2017 as compared to the year-ago period, primarily due to an increase in airframe and engine maintenance visits due to the cyclical timing of these events.

Aircraft rent decreased $45 million, or 8.6%, in the first nine months of 2017 as compared to the year-ago period, primarily due to the purchase of leased aircraft and lower lease renewal rates.

Other operating expenses increased $201 million, or 5.0%, in the first nine months of 2017 as compared to the year-ago period primarily due to increases in purchased services and technology initiatives, as well as increases in food and other amenities associated with the Company’s customer experience initiatives.

 

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

 

     2017      2016  

Severance and benefit costs

    $ 101        $ 27   

Impairment of assets

     15         412   

Labor agreement costs

     —         124   

Cleveland airport lease restructuring

     —         74   

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

     29         32   
  

 

 

    

 

 

 

Special charges

    $ 145        $ 669   
  

 

 

    

 

 

 

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

Nonoperating Income (Expense). The following table illustrates the year-over-year dollar and percentage changes in the Company’s nonoperating income (expense) for the nine months ended September 30 (in millions, except for percentage changes):

 

     2017      2016      Increase
(Decrease)
     %
Change
 

Interest expense

    $ (472)       $ (466)       $        1.3   

Interest capitalized

     64         48         16         33.3   

Interest income

     41         31         10         32.3   

Miscellaneous, net

     (3)        (11)        (8)        (72.7)  
  

 

 

    

 

 

    

 

 

    

Total

    $ (370)       $ (398)       $ (28)        (7.0)  
  

 

 

    

 

 

    

 

 

    

Income Taxes. See Note 4 to the financial statements included in Part I, Item 1 of this report for information related to income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Current Liquidity

As of September 30, 2017, the Company had $4.3 billion in unrestricted cash, cash equivalents and short-term investments, as compared to $4.4 billion at December 31, 2016. At September 30, 2017, the Company also had $109 million of restricted cash and cash equivalents, which is primarily collateral for letters of credit and estimated future workers’ compensation claims. As of September 30, 2017, the Company had its entire commitment capacity of $2.0 billion under the revolving credit facility of the Company’s Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017 (the “2017 Credit Agreement”) available for borrowings.

As is the case with many of our principal competitors, we have a high proportion of debt compared to capital and a deficit in working capital. We have a significant amount of fixed obligations, including debt, aircraft leases and financings, leases of airport property and other facilities, and pension funding obligations. At September 30, 2017, the Company had approximately $13.9 billion of debt and capital lease obligations, including $1.6 billion that will become due in the next 12 months. In addition, we have substantial noncancelable commitments for capital expenditures, including the acquisition of certain new aircraft and related spare engines. As of September 30, 2017, our current liabilities exceeded our current assets by approximately $5.2 billion. However, approximately $6.5 billion of our current liabilities are related to our advance ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel in the near future and not actual cash outlays. The deficit in working capital does not have an adverse impact to our cash flows, liquidity or operations.

 

34


Table of Contents

As of September 30, 2017, United had firm commitments and options to purchase aircraft from The Boeing Company (“Boeing”), Airbus S.A.S. (“Airbus”) and Embraer S.A. (“Embraer”) presented in the table below:

 

Aircraft Type

   Number of Firm
         Commitments (a)        
 

Airbus A350

     45   

Boeing 737 MAX

     161   

Boeing 777-300ER

      

Boeing 787

     18   

Embraer E175

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

The aircraft listed in the table above are scheduled for delivery through 2027. To the extent the Company and the aircraft manufacturers with whom the Company has existing orders for new aircraft agree to modify the contracts governing those orders, the amount and timing of the Company’s future capital commitments could change. For the remainder of 2017, United expects to take delivery of five Embraer E175 aircraft. Additionally, the Company also currently expects to take delivery of four used Airbus A319s and two used Airbus A320s for the remainder of 2017.

As of September 30, 2017, UAL and United have total capital commitments primarily related to the acquisition of aircraft and related spare engines, aircraft improvements and include other capital purchase commitments for approximately $22.0 billion, of which approximately $0.9 billion, $3.0 billion, $3.1 billion, $2.2 billion, $1.4 billion and $11.4 billion are due in the last three months of 2017 and for the full year for 2018, 2019, 2020, 2021 and thereafter, respectively. Any new firm aircraft orders, including through the exercise of purchase options and purchase rights, will increase the total future capital commitments of the Company.

United secured individual bank financing for five Embraer E175 aircraft to be delivered in the last three months of 2017. See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on aircraft financing. The Company has also secured backstop financing commitments from certain of its aircraft manufacturers for a limited number of its future aircraft deliveries, subject to certain customary conditions. Financing may be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures.

As of September 30, 2017, a substantial portion of the Company’s assets, principally aircraft, route authorities, airport slots and loyalty program intangible assets, was pledged under various loan and other agreements. We must sustain our profitability and/or access the capital markets to meet our significant long-term debt and capital lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines.

Credit Ratings. As of the filing date of this report, UAL and United had the following corporate credit ratings:

 

<
     S&P    Moody’s    Fitch
UAL    BB-    Ba2    BB
United    BB-    *    BB