UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number |
Exact Name of Registrant as Specified in its Charter, Principal Office Address and Telephone Number |
State of Incorporation |
I.R.S. Employer Identification No | |||
001-06033 | United Continental Holdings, Inc. | Delaware | 36-2675207 | |||
77 W. Wacker Drive, Chicago, Illinois 60601 | ||||||
(312) 997-8000 | ||||||
001-11355 | United Air Lines, Inc. | Delaware | 36-2675206 | |||
77 W. Wacker Drive, Chicago, Illinois 60601 | ||||||
(312) 997-8000 | ||||||
001-10323 | Continental Airlines, Inc. | Delaware | 74-2099724 | |||
1600 Smith Street, Dept HQSEO, Houston, Texas 77002 | ||||||
(713) 324-2950 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
United Continental Holdings, Inc. |
Yes x No ¨ | United Air Lines, Inc. | Yes x No ¨ | |||
Continental Airlines, Inc. |
Yes x No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
United Continental Holdings, Inc. |
Yes x No ¨ | United Air Lines, Inc. | Yes x No ¨ | |||
Continental Airlines, Inc. |
Yes x No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
United Continental Holdings, Inc. |
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | ||||
United Air Lines, Inc. |
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ | ||||
Continental Airlines, Inc. |
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
United Continental Holdings, Inc. |
Yes ¨ No x | |
United Air Lines, Inc. |
Yes ¨ No x | |
Continental Airlines, Inc. |
Yes ¨ No x |
The number of shares outstanding of each of the issuers classes of common stock as of April 15, 2012 is shown below:
United Continental Holdings, Inc. |
332,061,107 shares of common stock ($0.01 par value) | |
United Air Lines, Inc. |
205 (100% owned by United Continental Holdings, Inc.) There is no market for United Air Lines, Inc. common stock. | |
Continental Airlines, Inc. |
1,000 (100% owned by United Continental Holdings, Inc.) There is no market for Continental Airlines, Inc. common stock. |
OMISSION OF CERTAIN INFORMATION
This combined Form 10-Q is separately filed by United Continental Holdings, Inc., United Air Lines, Inc. and Continental Airlines, Inc. United Air Lines, Inc. and Continental Airlines, Inc. meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format allowed under that General Instruction.
United Continental Holdings, Inc.
United Air Lines, Inc.
Continental Airlines, Inc.
Report on Form 10-Q
For the Quarter Ended March 31, 2012
Page | ||||
3 | ||||
United Continental Holdings, Inc.: |
||||
3 | ||||
4 | ||||
5 | ||||
7 | ||||
United Air Lines, Inc.: |
||||
8 | ||||
9 | ||||
10 | ||||
12 | ||||
Continental Airlines, Inc.: |
||||
13 | ||||
14 | ||||
15 | ||||
17 | ||||
18 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
32 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
41 | |||
42 | ||||
43 | ||||
43 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
43 | |||
43 | ||||
44 | ||||
45 |
UNITED CONTINENTAL HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In millions, except per share amounts)
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Operating revenue: |
||||||||
Passenger - Mainline |
$ | 5,954 | $ | 5,707 | ||||
Passenger - Regional |
1,554 | 1,410 | ||||||
|
|
|
|
|||||
Total passenger revenue |
7,508 | 7,117 | ||||||
Cargo |
264 | 283 | ||||||
Other operating revenue |
830 | 802 | ||||||
|
|
|
|
|||||
8,602 | 8,202 | |||||||
|
|
|
|
|||||
Operating expense: |
||||||||
Aircraft fuel |
3,229 | 2,672 | ||||||
Salaries and related costs |
1,897 | 1,806 | ||||||
Regional capacity purchase |
616 | 573 | ||||||
Landing fees and other rent |
469 | 473 | ||||||
Aircraft maintenance materials and outside repairs |
407 | 439 | ||||||
Depreciation and amortization |
380 | 388 | ||||||
Distribution expenses |
337 | 350 | ||||||
Aircraft rent |
251 | 253 | ||||||
Special charges (Note 10) |
164 | 77 | ||||||
Other operating expenses |
1,123 | 1,137 | ||||||
|
|
|
|
|||||
8,873 | 8,168 | |||||||
|
|
|
|
|||||
Operating income (loss) |
(271 | ) | 34 | |||||
Nonoperating income (expense): |
||||||||
Interest expense |
(216 | ) | (254 | ) | ||||
Interest capitalized |
8 | 6 | ||||||
Interest income |
5 | 4 | ||||||
Miscellaneous, net |
27 | (1 | ) | |||||
|
|
|
|
|||||
(176 | ) | (245 | ) | |||||
|
|
|
|
|||||
Loss before income taxes |
(447 | ) | (211 | ) | ||||
Income tax expense |
1 | 2 | ||||||
|
|
|
|
|||||
Net loss |
$ | (448 | ) | $ | (213 | ) | ||
|
|
|
|
|||||
Loss per share, basic and diluted |
$ | (1.36 | ) | $ | (0.65 | ) | ||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
3
UNITED CONTINENTAL HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net loss |
$ | (448 | ) | $ | (213 | ) | ||
Other comprehensive income, net: |
||||||||
Fuel derivative financial instruments: |
||||||||
Reclassification into earnings |
31 | (154 | ) | |||||
Change in fair value |
93 | 524 | ||||||
Employee benefit plans: |
||||||||
Amortization of net actuarial (gains) losses |
4 | (5 | ) | |||||
Investments and other |
9 | 4 | ||||||
|
|
|
|
|||||
137 | 369 | |||||||
|
|
|
|
|||||
Total comprehensive income (loss), net |
$ | (311 | ) | $ | 156 | |||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
4
UNITED CONTINENTAL HOLDINGS, INC.
(In millions, except shares)
(Unaudited) | ||||||||
March 31, 2012 |
December 31, 2011 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,606 | $ | 6,246 | ||||
Short-term investments |
1,667 | 1,516 | ||||||
|
|
|
|
|||||
Total unrestricted cash, cash equivalents and short-term investments |
7,273 | 7,762 | ||||||
Restricted cash |
42 | 40 | ||||||
Receivables, less allowance for doubtful accounts (2012 $8; 2011 $7) |
1,908 | 1,358 | ||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 $96; 2011 $89) |
645 | 615 | ||||||
Deferred income taxes |
610 | 615 | ||||||
Prepaid expenses and other |
783 | 607 | ||||||
|
|
|
|
|||||
11,261 | 10,997 | |||||||
|
|
|
|
|||||
Operating property and equipment: |
||||||||
Owned |
||||||||
Flight equipment |
16,035 | 15,786 | ||||||
Other property and equipment |
3,066 | 3,126 | ||||||
|
|
|
|
|||||
19,101 | 18,912 | |||||||
Less Accumulated depreciation and amortization |
(4,191 | ) | (4,005 | ) | ||||
|
|
|
|
|||||
14,910 | 14,907 | |||||||
|
|
|
|
|||||
Purchase deposits for flight equipment |
418 | 382 | ||||||
Capital leases |
||||||||
Flight equipment |
1,483 | 1,458 | ||||||
Other property and equipment |
235 | 237 | ||||||
|
|
|
|
|||||
1,718 | 1,695 | |||||||
Less Accumulated amortization |
(602 | ) | (565 | ) | ||||
|
|
|
|
|||||
1,116 | 1,130 | |||||||
|
|
|
|
|||||
16,444 | 16,419 | |||||||
|
|
|
|
|||||
Other assets: |
||||||||
Goodwill |
4,523 | 4,523 | ||||||
Intangibles, less accumulated amortization (2012 $701; 2011 $670) |
4,712 | 4,750 | ||||||
Restricted cash |
529 | 529 | ||||||
Other, net |
730 | 770 | ||||||
|
|
|
|
|||||
10,494 | 10,572 | |||||||
|
|
|
|
|||||
$ | 38,199 | $ | 37,988 | |||||
|
|
|
|
(continued on next page)
5
UNITED CONTINENTAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) | ||||||||
March
31, 2012 |
December 31, 2011 |
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Advance ticket sales |
$ | 4,433 | $ | 3,114 | ||||
Frequent flyer deferred revenue |
2,607 | 2,405 | ||||||
Accounts payable |
2,220 | 1,998 | ||||||
Accrued salaries and benefits |
1,139 | 1,509 | ||||||
Current maturities of long-term debt |
1,013 | 1,186 | ||||||
Current maturities of capital leases |
127 | 125 | ||||||
Other |
947 | 1,057 | ||||||
|
|
|
|
|||||
12,486 | 11,394 | |||||||
|
|
|
|
|||||
Long-term debt |
10,408 | 10,496 | ||||||
Long-term obligations under capital leases |
888 | 928 | ||||||
Other liabilities and deferred credits: |
||||||||
Frequent flyer deferred revenue |
2,958 | 3,253 | ||||||
Postretirement benefit liability |
2,415 | 2,407 | ||||||
Pension liability |
1,857 | 1,862 | ||||||
Advanced purchase of miles |
1,668 | 1,711 | ||||||
Deferred income taxes |
1,596 | 1,603 | ||||||
Lease fair value adjustment, net |
1,062 | 1,133 | ||||||
Other |
1,351 | 1,395 | ||||||
|
|
|
|
|||||
12,907 | 13,364 | |||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 332,043,357 and 330,906,192 shares at March 31, 2012 and December 31, 2011, respectively |
3 | 3 | ||||||
Additional capital invested |
7,130 | 7,114 | ||||||
Retained deficit |
(5,311 | ) | (4,863 | ) | ||||
Stock held in treasury, at cost |
(32 | ) | (31 | ) | ||||
Accumulated other comprehensive loss |
(280 | ) | (417 | ) | ||||
|
|
|
|
|||||
1,510 | 1,806 | |||||||
|
|
|
|
|||||
$ | 38,199 | $ | 37,988 | |||||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
6
UNITED CONTINENTAL HOLDINGS, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (448 | ) | $ | (213 | ) | ||
Adjustments to reconcile net loss to net cash provided (used) by operating activities |
||||||||
Increase in advance ticket sales |
1,319 | 1,326 | ||||||
Decrease in other liabilities |
(470 | ) | (235 | ) | ||||
Increase in receivables |
(427 | ) | (379 | ) | ||||
Depreciation and amortization |
380 | 388 | ||||||
Increase in other current assets |
(288 | ) | (190 | ) | ||||
Increase in accounts payable |
230 | 98 | ||||||
Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles |
(136 | ) | 38 | |||||
Debt and lease discount amortization |
(70 | ) | (44 | ) | ||||
Special charges, non-cash portion |
12 | 4 | ||||||
Increase (decrease) in fuel hedge collateral |
(1 | ) | 178 | |||||
Other, net |
23 | 34 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
124 | 1,005 | ||||||
|
|
|
|
|||||
Cash Flows from Investing Activities: |
||||||||
Capital expenditures |
(266 | ) | (205 | ) | ||||
Increase in short-term and other investments, net |
(148 | ) | (107 | ) | ||||
Proceeds from sale of property and equipment |
89 | 39 | ||||||
Aircraft purchase deposits paid, net |
(35 | ) | (38 | ) | ||||
Increase in restricted cash, net |
(2 | ) | (9 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(362 | ) | (320 | ) | ||||
|
|
|
|
|||||
Cash Flows from Financing Activities: |
||||||||
Payments of long-term debt |
(479 | ) | (528 | ) | ||||
Proceeds from issuance of long-term debt |
86 | 32 | ||||||
Principal payments under capital leases |
(23 | ) | (125 | ) | ||||
Other, net |
14 | 32 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(402 | ) | (589 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents during the period |
(640 | ) | 96 | |||||
Cash and cash equivalents at beginning of the period |
6,246 | 8,069 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of the period |
$ | 5,606 | $ | 8,165 | ||||
|
|
|
|
|||||
Investing and Financing Activities Not Affecting Cash: |
||||||||
Property and equipment acquired through the issuance of debt |
$ | 136 | $ | 64 |
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
7
UNITED AIR LINES, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In millions)
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Operating revenue: |
||||||||
Passenger - Mainline |
$ | 3,158 | $ | 3,087 | ||||
Passenger - Regional |
876 | 878 | ||||||
|
|
|
|
|||||
Total passenger revenue |
4,034 | 3,965 | ||||||
Cargo |
171 | 167 | ||||||
Other operating revenue |
570 | 544 | ||||||
|
|
|
|
|||||
4,775 | 4,676 | |||||||
|
|
|
|
|||||
Operating expense: |
||||||||
Aircraft fuel |
1,842 | 1,512 | ||||||
Salaries and related costs |
1,027 | 987 | ||||||
Regional capacity purchase |
379 | 382 | ||||||
Landing fees and other rent |
255 | 252 | ||||||
Aircraft maintenance materials and outside repairs |
267 | 292 | ||||||
Depreciation and amortization |
231 | 227 | ||||||
Distribution expenses |
182 | 187 | ||||||
Aircraft rent |
78 | 81 | ||||||
Special charges (Note 10) |
96 | 74 | ||||||
Other operating expenses |
726 | 674 | ||||||
|
|
|
|
|||||
5,083 | 4,668 | |||||||
|
|
|
|
|||||
Operating income (loss) |
(308 | ) | 8 | |||||
Nonoperating income (expense): |
||||||||
Interest expense |
(137 | ) | (168 | ) | ||||
Interest capitalized |
3 | 3 | ||||||
Interest income |
3 | 2 | ||||||
Miscellaneous, net |
18 | (5 | ) | |||||
|
|
|
|
|||||
(113 | ) | (168 | ) | |||||
|
|
|
|
|||||
Loss before income taxes |
(421 | ) | (160 | ) | ||||
Income tax expense |
2 | | ||||||
|
|
|
|
|||||
Net loss |
$ | (423 | ) | $ | (160 | ) | ||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
8
UNITED AIR LINES, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net loss |
$ | (423 | ) | $ | (160 | ) | ||
Other comprehensive income, net: |
||||||||
Fuel derivative financial instruments: |
||||||||
Reclassification into earnings |
15 | (125 | ) | |||||
Change in fair value |
58 | 385 | ||||||
Employee benefit plans: |
||||||||
Amortization of net actuarial (gains) losses |
(1 | ) | | |||||
Investments and other |
4 | | ||||||
|
|
|
|
|||||
76 | 260 | |||||||
|
|
|
|
|||||
Total comprehensive income (loss), net |
$ | (347 | ) | $ | 100 | |||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
9
UNITED AIR LINES, INC.
(In millions, except shares)
(Unaudited) | ||||||||
March 31, 2012 |
December 31, 2011 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,338 | $ | 3,458 | ||||
Short-term investments |
338 | 275 | ||||||
|
|
|
|
|||||
Total unrestricted cash, cash equivalents and short-term investments |
3,676 | 3,733 | ||||||
Restricted cash |
42 | 40 | ||||||
Receivables from related parties (Note 11) |
1,712 | 228 | ||||||
Receivables, less allowance for doubtful accounts (2012 $5; 2011 $5) |
1,641 | 763 | ||||||
Deferred income taxes |
340 | 348 | ||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 $75; |
335 | 340 | ||||||
Prepaid expenses and other |
524 | 447 | ||||||
|
|
|
|
|||||
8,270 | 5,899 | |||||||
|
|
|
|
|||||
Operating property and equipment: |
||||||||
Owned |
||||||||
Flight equipment |
9,177 | 9,135 | ||||||
Other property and equipment |
2,170 | 2,260 | ||||||
|
|
|
|
|||||
11,347 | 11,395 | |||||||
Less Accumulated depreciation and amortization |
(3,419 | ) | (3,359 | ) | ||||
|
|
|
|
|||||
7,928 | 8,036 | |||||||
|
|
|
|
|||||
Purchase deposits for flight equipment |
60 | 57 | ||||||
Capital leases |
||||||||
Flight equipment |
1,483 | 1,458 | ||||||
Other property and equipment |
65 | 67 | ||||||
|
|
|
|
|||||
1,548 | 1,525 | |||||||
Less Accumulated amortization |
(581 | ) | (548 | ) | ||||
|
|
|
|
|||||
967 | 977 | |||||||
|
|
|
|
|||||
8,955 | 9,070 | |||||||
|
|
|
|
|||||
Other assets: |
||||||||
Intangibles, less accumulated amortization (2012 $547; 2011 $534) |
2,269 | 2,283 | ||||||
Receivables from related parties (Note 11) |
1,290 | | ||||||
Restricted cash |
393 | 393 | ||||||
Other, net |
602 | 600 | ||||||
|
|
|
|
|||||
4,554 | 3,276 | |||||||
|
|
|
|
|||||
$ | 21,779 | $ | 18,245 | |||||
|
|
|
|
(continued on next page)
10
UNITED AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) | ||||||||
March
31, 2012 |
December 31, 2011 |
|||||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Advance ticket sales |
$ | 3,411 | $ | 1,652 | ||||
Frequent flyer deferred revenue (Note 11) |
2,607 | 1,484 | ||||||
Accounts payable |
1,385 | 1,109 | ||||||
Accrued salaries and benefits |
789 | 988 | ||||||
Current maturities of long-term debt |
615 | 615 | ||||||
Current maturities of capital leases |
124 | 122 | ||||||
Payables to related parties |
105 | 104 | ||||||
Other |
784 | 853 | ||||||
|
|
|
|
|||||
9,820 | 6,927 | |||||||
Long-term debt |
4,987 | 5,130 | ||||||
Long-term obligations under capital leases |
711 | 735 | ||||||
Other liabilities and deferred credits: |
||||||||
Frequent flyer deferred revenue (Note 11) |
2,958 | 2,018 | ||||||
Postretirement benefit liability |
2,119 | 2,115 | ||||||
Advanced purchase of miles (Note 11) |
1,668 | 1,442 | ||||||
Deferred income taxes |
699 | 707 | ||||||
Pension liability |
85 | 92 | ||||||
Other |
980 | 983 | ||||||
|
|
|
|
|||||
8,509 | 7,357 | |||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 shares at both March 31, 2012 and December 31, 2011 |
| | ||||||
Additional capital invested |
3,435 | 3,432 | ||||||
Retained deficit |
(5,631 | ) | (5,208 | ) | ||||
Accumulated other comprehensive loss |
(52 | ) | (128 | ) | ||||
|
|
|
|
|||||
(2,248 | ) | (1,904 | ) | |||||
|
|
|
|
|||||
$ | 21,779 | $ | 18,245 | |||||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
11
UNITED AIR LINES, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (423 | ) | $ | (160 | ) | ||
Adjustments to reconcile net loss to net cash provided (used) by operating activities |
||||||||
Increase in advance ticket sales |
1,759 | 736 | ||||||
Decrease in other liabilities |
(256 | ) | (119 | ) | ||||
Increase in receivables |
(805 | ) | (159 | ) | ||||
Depreciation and amortization |
231 | 227 | ||||||
Increase in other current assets |
(157 | ) | (60 | ) | ||||
Increase in accounts payable |
281 | 148 | ||||||
Decrease in frequent flyer deferred revenue and advanced purchase of miles |
(98 | ) | (41 | ) | ||||
Debt and lease discount amortization |
9 | 22 | ||||||
Special charges, non-cash portion |
| 6 | ||||||
Increase in receivables from related parties |
(427 | ) | (20 | ) | ||||
(Increase) decrease in fuel hedge cash collateral |
(1 | ) | 178 | |||||
Increase (decrease) in payables to related parties |
41 | (2 | ) | |||||
Other, net |
14 | 30 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
168 | 786 | ||||||
|
|
|
|
|||||
Cash Flows from Investing Activities: |
||||||||
Capital expenditures |
(113 | ) | (125 | ) | ||||
(Increase) decrease in short-term and other investments, net |
(59 | ) | 2 | |||||
Proceeds from sale of property and equipment |
56 | 1 | ||||||
Aircraft purchase deposits paid, net |
(3 | ) | (3 | ) | ||||
Increase in restricted cash, net |
(2 | ) | (10 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(121 | ) | (135 | ) | ||||
|
|
|
|
|||||
Cash Flows from Financing Activities: |
||||||||
Payments of long-term debt |
(147 | ) | (397 | ) | ||||
Principal payments under capital leases |
(23 | ) | (125 | ) | ||||
Other, net |
3 | 12 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(167 | ) | (510 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
(120 | ) | 141 | |||||
Cash and cash equivalents at beginning of the period |
3,458 | 4,665 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of the period |
$ | 3,338 | $ | 4,806 | ||||
|
|
|
|
|||||
Investing and Financing Activities Not Affecting Cash: |
||||||||
Transfer of OnePass frequent flyer liability and advanced purchase of miles from Continental |
$ | 2,387 | $ | |
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
12
CONTINENTAL AIRLINES, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In millions, except per share amounts)
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Operating revenue: |
||||||||
Passenger - Mainline |
$ | 2,796 | $ | 2,619 | ||||
Passenger - Regional |
678 | 532 | ||||||
|
|
|
|
|||||
Total passenger revenue |
3,474 | 3,151 | ||||||
Cargo |
92 | 115 | ||||||
Other operating revenue |
356 | 292 | ||||||
|
|
|
|
|||||
3,922 | 3,558 | |||||||
Operating expense: |
||||||||
Aircraft fuel |
1,387 | 1,160 | ||||||
Salaries and related costs |
847 | 805 | ||||||
Regional capacity purchase |
237 | 192 | ||||||
Landing fees and other rent |
214 | 220 | ||||||
Aircraft maintenance materials and outside repairs |
146 | 149 | ||||||
Depreciation and amortization |
149 | 161 | ||||||
Distribution expenses |
155 | 163 | ||||||
Aircraft rent |
174 | 172 | ||||||
Special charges (Note 10) |
68 | 3 | ||||||
Other operating expenses |
505 | 504 | ||||||
|
|
|
|
|||||
3,882 | 3,529 | |||||||
|
|
|
|
|||||
Operating income |
40 | 29 | ||||||
Nonoperating income (expense): |
||||||||
Interest expense |
(80 | ) | (83 | ) | ||||
Interest capitalized |
5 | 4 | ||||||
Interest income |
3 | 2 | ||||||
Miscellaneous, net |
23 | (7 | ) | |||||
|
|
|
|
|||||
(49 | ) | (84 | ) | |||||
|
|
|
|
|||||
Loss before income taxes |
(9 | ) | (55 | ) | ||||
Income tax expense (benefit) |
(1 | ) | 2 | |||||
|
|
|
|
|||||
Net loss |
$ | (8 | ) | $ | (57 | ) | ||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
13
CONTINENTAL AIRLINES, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
(In millions)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net loss |
$ | (8 | ) | $ | (57 | ) | ||
Other comprehensive income, net: |
||||||||
Fuel derivative financial instruments: |
||||||||
Reclassification into earnings |
16 | (29 | ) | |||||
Change in fair value |
35 | 139 | ||||||
Employee benefit plans: |
||||||||
Amortization of net actuarial (gains) losses |
5 | (5 | ) | |||||
Investments and other |
6 | 4 | ||||||
|
|
|
|
|||||
62 | 109 | |||||||
|
|
|
|
|||||
Total comprehensive income, net |
$ | 54 | $ | 52 | ||||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
14
CONTINENTAL AIRLINES, INC.
(In millions, except shares)
(Unaudited) | ||||||||
March 31, 2012 |
December 31, 2011 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,262 | $ | 2,782 | ||||
Short-term investments |
1,329 | 1,241 | ||||||
|
|
|
|
|||||
Total unrestricted cash, cash equivalents and short-term investments |
3,591 | 4,023 | ||||||
Receivables, less allowance for doubtful accounts (2012 $3; 2011 $2) |
267 | 595 | ||||||
Aircraft fuel, spare parts and supplies, less obsolescence allowance (2012 $21; 2011 $16) |
310 | 275 | ||||||
Deferred income taxes |
269 | 267 | ||||||
Prepaid expenses and other |
266 | 165 | ||||||
|
|
|
|
|||||
4,703 | 5,325 | |||||||
|
|
|
|
|||||
Operating property and equipment: |
||||||||
Owned |
||||||||
Flight equipment |
6,859 | 6,651 | ||||||
Other property and equipment |
895 | 866 | ||||||
|
|
|
|
|||||
7,754 | 7,517 | |||||||
Less Accumulated depreciation and amortization |
(772 | ) | (646 | ) | ||||
|
|
|
|
|||||
6,982 | 6,871 | |||||||
Purchase deposits for flight equipment |
358 | 324 | ||||||
Capital leases Other property and equipment |
170 | 170 | ||||||
Less Accumulated amortization |
(20 | ) | (17 | ) | ||||
|
|
|
|
|||||
150 | 153 | |||||||
|
|
|
|
|||||
7,490 | 7,348 | |||||||
|
|
|
|
|||||
Other assets: |
||||||||
Goodwill |
4,523 | 4,523 | ||||||
Intangibles, less accumulated amortization (2012 $154; 2011 $136) |
2,445 | 2,469 | ||||||
Restricted cash |
135 | 135 | ||||||
Other, net |
360 | 364 | ||||||
|
|
|
|
|||||
7,463 | 7,491 | |||||||
|
|
|
|
|||||
$ | 19,656 | $ | 20,164 | |||||
|
|
|
|
(continued on next page)
15
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
(Unaudited) | ||||||||
March 31, 2012 |
December 31, 2011 |
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Payables to related parties (Note 11) |
$ | 1,493 | $ | 11 | ||||
Advance ticket sales |
1,022 | 1,462 | ||||||
Accounts payable |
841 | 894 | ||||||
Current maturities of long-term debt |
398 | 571 | ||||||
Accrued salaries and benefits |
350 | 521 | ||||||
Current maturities of capital leases |
3 | 3 | ||||||
Frequent flyer deferred revenue (Note 11) |
| 921 | ||||||
Other |
237 | 279 | ||||||
|
|
|
|
|||||
4,344 | 4,662 | |||||||
|
|
|
|
|||||
Long-term debt |
5,013 | 4,957 | ||||||
Long-term obligations under capital leases |
177 | 193 | ||||||
Other liabilities and deferred credits: |
||||||||
Pension liability |
1,772 | 1,770 | ||||||
Payables to related parties (Note 11) |
1,290 | | ||||||
Lease fair value adjustment, net |
1,062 | 1,133 | ||||||
Deferred income taxes |
821 | 820 | ||||||
Postretirement benefit liability |
296 | 292 | ||||||
Frequent flyer deferred revenue (Note 11) |
| 1,235 | ||||||
Advanced purchase of miles (Note 11) |
| 270 | ||||||
Other |
490 | 507 | ||||||
|
|
|
|
|||||
5,731 | 6,027 | |||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock at par, $0.01 par value; authorized and outstanding 1,000 shares at both March 31, 2012 and December 31, 2011 |
| | ||||||
Additional capital invested |
4,160 | 4,148 | ||||||
Retained earnings |
466 | 474 | ||||||
Accumulated other comprehensive loss |
(235 | ) | (297 | ) | ||||
|
|
|
|
|||||
4,391 | 4,325 | |||||||
|
|
|
|
|||||
$ | 19,656 | $ | 20,164 | |||||
|
|
|
|
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
16
CONTINENTAL AIRLINES, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (8 | ) | $ | (57 | ) | ||
Adjustments to reconcile net loss to net cash provided (used) by operating activities |
||||||||
Increase (decrease) in advance ticket sales |
(440 | ) | 589 | |||||
Decrease in other liabilities |
(207 | ) | (127 | ) | ||||
(Increase) decrease in receivables |
378 | (220 | ) | |||||
Depreciation and amortization |
149 | 161 | ||||||
Increase in other current assets |
(171 | ) | (108 | ) | ||||
Decrease in accounts payable |
(51 | ) | (52 | ) | ||||
Increase (decrease) in frequent flyer deferred revenue and advanced purchase of miles |
(39 | ) | 79 | |||||
Debt and lease discount amortization |
(79 | ) | (65 | ) | ||||
Special charges, non-cash portion |
11 | (2 | ) | |||||
Increase in receivables from related parties |
(1 | ) | (63 | ) | ||||
Increase in payables to related parties |
386 | 79 | ||||||
Other, net |
27 | 4 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
(45 | ) | 218 | |||||
|
|
|
|
|||||
Cash Flows from Investing Activities: |
||||||||
Capital expenditures |
(153 | ) | (80 | ) | ||||
Increases in short-term investments, net |
(88 | ) | (109 | ) | ||||
Aircraft purchase deposits paid, net |
(32 | ) | (35 | ) | ||||
Proceeds from sale of property and equipment |
33 | 38 | ||||||
Decrease in restricted cash, net |
| 2 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(240 | ) | (184 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Payments of long-term debt |
(331 | ) | (131 | ) | ||||
Proceeds from issuance of long-term debt |
86 | 32 | ||||||
Other, net |
10 | 20 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(235 | ) | (79 | ) | ||||
|
|
|
|
|||||
Net decrease in cash and cash equivalents |
(520 | ) | (45 | ) | ||||
Cash and cash equivalents at beginning of the period |
2,782 | 3,398 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of the period |
$ | 2,262 | $ | 3,353 | ||||
|
|
|
|
|||||
Investing and Financing Activities Not Affecting Cash: |
||||||||
Transfer of frequent flyer liability and advanced purchase of miles to United |
$ | 2,387 | $ | | ||||
Property and equipment acquired through the issuance of debt |
136 | 64 |
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements.
17
UNITED CONTINENTAL HOLDINGS, INC.,
UNITED AIR LINES, INC. AND CONTINENTAL AIRLINES, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
United Continental Holdings, Inc. (together with its consolidated subsidiaries, UAL) is a holding company and its principal, wholly-owned subsidiaries are United Air Lines, Inc. (together with its consolidated subsidiaries, United) and Continental Airlines, Inc. (together with its consolidated subsidiaries, Continental). All significant intercompany transactions are eliminated.
This Quarterly Report on Form 10-Q is a combined report of UAL, United and Continental. We sometimes use the words we, our, us, and the Company for disclosures that relate to all of UAL, United and Continental. As UAL consolidates United and Continental for financial statement purposes, disclosures that relate to United and Continental activities also apply to UAL. When appropriate, UAL, United and Continental are named specifically for their related activities and disclosures.
Interim Financial Statements. The UAL, United and Continental 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 Companys financial position and results of operations. Certain prior year amounts have been reclassified to conform to the current years presentation. These reclassifications were made to conform the financial statement presentation of UAL, United and Continental. The UAL, United and Continental financial statements should be read together with the information included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 Annual Report). UALs 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 1FREQUENT FLYER AND PASSENGER REVENUE ACCOUNTING
Frequent Flyer Awards. Effective January 1, 2012, the Company updated its estimated selling price for miles to the contractual rate at which we sell miles to our Star Alliance partners participating in reciprocal frequent flyer programs. This change in estimate has been applied prospectively effective January 1, 2012.
United and Continental account for miles sold and awarded that will never be redeemed by program members, which the Company refers to as breakage, using the redemption method. UAL reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns. The Company re-evaluated its population breakage estimates for OnePass miles, which were previously not subject to an expiration policy, and increased the estimate of miles in the population expected to ultimately expire.
The Companys estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions, the expiration policy, program rules or program redemption opportunities may result in material changes to the deferred revenue balance as well as recognized revenues from the programs.
For the three months ended March 31, 2012, the combined net impact of these changes to UAL, United and Continental were not material.
NOTE 2NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04 (ASU 2011-04), Fair Value Measurement: Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. Some of the key amendments to the fair value measurement guidance include the highest and best use and valuation premise for nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement and fair value of an instrument
18
classified in a reporting entitys shareholders equity. Additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy include a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation processes in place, a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs and the level in the fair value hierarchy of items that are not measured at fair value in the consolidated balance sheet but whose fair value must be disclosed. ASU 2011-04 became effective for the Companys annual and interim periods beginning January 1, 2012, and the required disclosures are disclosed in Note 6 of this report.
NOTE 3LOSS PER SHARE
The table below represents the computation of UAL basic and diluted earnings per share amounts and the number of securities that have been excluded from the computation of diluted earnings per share amounts because they were antidilutive (in millions, except per share amounts):
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
UAL basic and diluted loss per share: |
||||||||
Loss available to common stockholders |
$ | (448 | ) | $ | (213 | ) | ||
|
|
|
|
|||||
Weighted average shares outstanding, basic and diluted |
330 | 328 | ||||||
|
|
|
|
|||||
Loss per share, basic and diluted |
$ | (1.36 | ) | $ | (0.65 | ) | ||
|
|
|
|
|||||
UAL potentially dilutive shares excluded from diluted per share amounts: |
||||||||
Restricted stock and units and stock options |
7 | 9 | ||||||
Continental 6% convertible junior subordinated debentures |
4 | 4 | ||||||
UAL 6% senior convertible notes |
40 | 40 | ||||||
UAL 4.5% senior limited-subordination convertible notes |
5 | 22 | ||||||
Continental 4.5% convertible notes |
12 | 12 |
UALs 6% Senior Notes due 2031 (the 6% Senior Notes), with a principal amount of $652 million as of March 31, 2012, can be redeemed, and the $125 million of UALs 8% Contingent Senior Notes (the 8% Notes), which UAL issued in January 2012, are redeemable with either cash or shares of UAL common stock, or in the case of mandatory redemption, a combination thereof, at UALs option. These notes are not included in the diluted earnings per share calculation because it is UALs intent to redeem these notes with cash if UAL were to decide to redeem these notes.
NOTE 4INCOME TAXES
Our effective tax rates are lower than the federal statutory rate of 35% primarily because of the impact of changes to existing valuation allowances. We continue to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets will ultimately not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible. The Companys management assesses available positive and negative evidence regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Although the Company was no longer in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of financial losses in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that the valuation allowance was still needed on net deferred assets. If UAL achieves significant profitability in 2012, then management will evaluate whether its recent history of profitability constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.
19
NOTE 5EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Other Postretirement Benefit Plans. The Companys net periodic benefit cost includes the following components (in millions):
Pension Benefits | Other Postretirement Benefits |
|||||||||||||||
Three Months Ended March 31, |
Three Months Ended March 31, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
UAL |
||||||||||||||||
Service cost |
$ | 25 | $ | 21 | $ | 13 | $ | 12 | ||||||||
Interest cost |
46 | 44 | 31 | 31 | ||||||||||||
Expected return on plan assets |
(35 | ) | (34 | ) | (1 | ) | (1 | ) | ||||||||
Amortization of unrecognized (gain) loss and prior service cost |
5 | (5 | ) | (1 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs |
$ | 41 | $ | 26 | $ | 42 | $ | 42 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
United |
||||||||||||||||
Service cost |
$ | 2 | $ | 1 | $ | 9 | $ | 9 | ||||||||
Interest cost |
2 | 2 | 27 | 28 | ||||||||||||
Expected return on plan assets |
(3 | ) | (2 | ) | (1 | ) | (1 | ) | ||||||||
Amortization of unrecognized gain and prior service cost |
| | (1 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs |
$ | 1 | $ | 1 | $ | 34 | $ | 36 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Continental |
||||||||||||||||
Service cost |
$ | 23 | $ | 20 | $ | 4 | $ | 3 | ||||||||
Interest cost |
44 | 42 | 4 | 3 | ||||||||||||
Expected return on plan assets |
(32 | ) | (32 | ) | | | ||||||||||
Amortization of unrecognized (gain) loss and prior service cost |
5 | (5 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs |
$ | 40 | $ | 25 | $ | 8 | $ | 6 | ||||||||
|
|
|
|
|
|
|
|
During the three months ended March 31, 2012, Continental contributed $33 million to its tax-qualified defined benefit pension plans. Continental contributed an additional $42 million to its tax-qualified defined benefit pension plans in April 2012.
Share-Based Compensation. In February 2012, UAL granted share-based compensation awards pursuant to the United Continental Holdings, Inc. 2008 Incentive Compensation Plan. These share-based compensation awards include approximately 0.5 million shares of restricted stock and 0.6 million restricted stock units (RSUs) that vest pro-rata over three years on the anniversary of the grant date. In addition, UAL granted 1.3 million performance-based RSUs which will vest based on UALs return on invested capital for the three years ending December 31, 2014. 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 RSUs as liability awards. The table below presents information related to share-based compensation (in millions):
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Share-based compensation expense (a) |
$ | 15 | $ | 13 |
March 31, 2012 |
December 31, 2011 |
|||||||
Unrecognized share-based compensation expense |
$ | 49 | $ | 43 |
(a) | Includes $4 million and $3 million of expense recognized in integration-related costs for three months ended March 31, 2012 and 2011, respectively. |
20
Profit Sharing Plans. In 2012, substantially all employees participate in profit sharing, which pays 15% of total pre-tax earnings, excluding special items and share-based compensation expense, to eligible employees when pre-tax profit, excluding special items, profit sharing expense and share-based compensation program expense, exceeds $10 million. Eligible U.S. co-workers in each participating work group receive a profit sharing payout using a formula based on the ratio of each qualified co-workers annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic workgroups. The international profit sharing plan pays eligible non-U.S. co-workers the same percentage of eligible pay that is calculated under the U.S. profit sharing plan. UAL recorded no profit sharing and related payroll tax expense in the three months ended March 31, 2012 and 2011, respectively. Profit sharing expense is recorded as a component of salaries and related costs in the consolidated statements of operations.
NOTE 6FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Companys financial statements as of March 31, 2012 and December 31, 2011 (in millions):
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
UAL | ||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 5,606 | $ | 5,606 | $ | | $ | | $ | 6,246 | $ | 6,246 | $ | | $ | | ||||||||||||||||
Short-term investments: |
||||||||||||||||||||||||||||||||
Asset-backed securities |
578 | | 578 | | 478 | | 478 | | ||||||||||||||||||||||||
Corporate debt |
508 | | 508 | | 515 | | 515 | | ||||||||||||||||||||||||
Certificates of deposit placed through an account registry service (CDARS) |
416 | | 416 | | 355 | | 355 | | ||||||||||||||||||||||||
Auction rate securities |
112 | | | 112 | 113 | | | 113 | ||||||||||||||||||||||||
U.S. government and agency notes |
24 | | 24 | | 22 | | 22 | | ||||||||||||||||||||||||
Other fixed income securities |
29 | | 29 | | 33 | | 33 | | ||||||||||||||||||||||||
Enhanced equipment trust certificates (EETC) |
62 | | | 62 | 60 | | | 60 | ||||||||||||||||||||||||
Fuel derivatives, net |
206 | | 206 | | 73 | | 73 | | ||||||||||||||||||||||||
Foreign currency derivatives |
| | | | (1 | ) | | (1 | ) | | ||||||||||||||||||||||
Restricted cash |
571 | 571 | | | 569 | 569 | | | ||||||||||||||||||||||||
United | ||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 3,338 | $ | 3,338 | $ | | $ | | $ | 3,458 | $ | 3,458 | $ | | $ | | ||||||||||||||||
Short-term investments: |
||||||||||||||||||||||||||||||||
Asset-backed securities |
26 | | 26 | | 29 | | 29 | | ||||||||||||||||||||||||
Corporate debt |
128 | | 128 | | 138 | | 138 | | ||||||||||||||||||||||||
CDARS |
151 | | 151 | | 87 | | 87 | | ||||||||||||||||||||||||
U.S. government and agency notes |
7 | | 7 | | 5 | | 5 | | ||||||||||||||||||||||||
Other fixed income securities |
26 | | 26 | | 16 | | 16 | | ||||||||||||||||||||||||
EETC |
62 | | | 62 | 60 | | | 60 | ||||||||||||||||||||||||
Fuel derivatives, net |
120 | | 120 | | 44 | | 44 | | ||||||||||||||||||||||||
Restricted cash |
435 | 435 | | | 433 | 433 | |
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Continental | ||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 2,262 | $ | 2,262 | $ | | $ | | $ | 2,782 | $ | 2,782 | $ | | $ | | ||||||||||||||||
Short-term investments: |
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Asset-backed securities |
552 | | 552 | | 449 | | 449 | | ||||||||||||||||||||||||
Corporate debt |
380 | | 380 | | 377 | | 377 | | ||||||||||||||||||||||||
CDARS |
265 | | 265 | | 268 | | 268 | | ||||||||||||||||||||||||
Auction rate securities |
112 | | | 112 | 113 | | | 113 | ||||||||||||||||||||||||
U.S. government and agency notes |
17 | | 17 | | 17 | | 17 | | ||||||||||||||||||||||||
Other fixed income securities |
3 | | 3 | | 17 | | 17 | | ||||||||||||||||||||||||
Fuel derivatives, net |
86 | | 86 | | 29 | | 29 | | ||||||||||||||||||||||||
Foreign currency derivatives |
| | | | (1 | ) | | (1 | ) | | ||||||||||||||||||||||
Restricted cash |
135 | 135 | | | 135 | 135 | | | ||||||||||||||||||||||||
Convertible debt derivative asset |
231 | | | 231 | 193 | | | 193 | ||||||||||||||||||||||||
Convertible debt option liability |
(119 | ) | | | (119 | ) | (95 | ) | | | (95 | ) |
The tables below present disclosures about the activity for Level 3 financial assets and financial liabilities for the three months ended March 31 (in millions):
Three Months Ended March 31, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Auction Rate Securities |
EETC | Auction Rate Securities |
EETC | |||||||||||||
UAL (a) |
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Balance at January 1 |
$ | 113 | $ | 60 | $ | 119 | $ | 66 | ||||||||
Settlements |
| (2 | ) | | (2 | ) | ||||||||||
Reported in earningsunrealized |
(1 | ) | | | | |||||||||||
Reported in other comprehensive income |
| 4 | 1 | (1 | ) | |||||||||||
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Balance at March 31 |
$ | 112 | $ | 62 | $ | 120 | $ | 63 | ||||||||
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(a) | For 2012 and 2011, Uniteds only Level 3 recurring measurements are the above EETCs. |
Continental |
Three Months Ended March 31, | |||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Auction Rate Securities |
Convertible Debt Supplemental Derivative Asset (a) |
Convertible Debt Conversion Option Liability (a) |
Auction Rate Securities |
Convertible Debt Supplemental Derivative Asset (a) |
Convertible Debt Conversion Option Liability (a) |
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Balance at January 1 |
$ | 113 | $ | 193 | $ | (95 | ) | $ | 119 | $ | 286 | $ | (164 | ) | ||||||||||
Sales |
| | | | | | ||||||||||||||||||
Gains (losses): |
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Reported in earnings: |
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Realized |
| | | | | | ||||||||||||||||||
Unrealized |
(1 | ) | 38 | (24 | ) | | (24 | ) | 12 | |||||||||||||||
Reported in other comprehensive income |
| | | 1 | | | ||||||||||||||||||
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Balance at March 31 |
$ | 112 | $ | 231 | $ | (119 | ) | $ | 120 | $ | 262 | $ | (152 | ) | ||||||||||
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(a) | These derivatives are not designated as hedges. The Convertible Debt Supplemental Derivative Asset is classified in Other Asset - Other, net, and the Convertible Debt Conversion Option Liability is classified in Other liabilities and deferred credits - Other in Continentals consolidated balance sheets. The earnings impact is classified in Nonoperating income (expense) - Miscellaneous, net in Continentals statements of consolidated operations. |
As of March 31, 2012, Continentals auction rate securities, which had a par value of $135 million and an amortized cost basis of $111 million, were variable-rate debt instruments with contractual maturities generally greater than ten years and with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that Continental holds are senior obligations under the applicable indentures authorizing the issuance of the securities.
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As of March 31, 2012, Uniteds EETC securities, which were repurchased in open market transactions in 2007, have an amortized cost basis of $63 million and unrealized losses of $1 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.
Continentals debt-related derivatives presented in the table above relate to (a) supplemental indenture agreements that provide that Continentals convertible debt, which was previously convertible into shares of Continental common stock, is convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in Continentals convertible debt that are required to be separated and accounted for as though they are free-standing derivatives as a result of the Continental debt becoming convertible into the common stock of a different reporting entity. These derivatives are reported in Continentals separate financial statements and eliminated in consolidation for UAL. See the Companys 2011 Annual Report for additional information.
The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above as of March 31, 2012 and December 31, 2011 (in millions):
March 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
UAL debt |
$ | 11,421 | $ | 12,105 | $ | 11,682 | $ | 11,992 | ||||||||
United debt |
5,602 | 5,607 | 5,745 | 5,630 | ||||||||||||
Continental debt |
5,411 | 5,588 | 5,528 | 5,503 |
Fair Value of Debt by Fair Value Hierarchy Level | ||||||||||||||||||||||||||||||||
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
UAL debt |
$ | 12,105 | $ | | $ | 910 | $ | 11,195 | $ | 11,992 | $ | | $ | 859 | $ | 11,133 | ||||||||||||||||
United debt |
5,607 | | | 5,607 | 5,630 | | | 5,630 | ||||||||||||||||||||||||
Continental debt |
5,588 | | | 5,588 | 5,503 | | | 5,503 |
Quantitative Information About Level 3 Fair Value Measurements as of March 31, 2012 ($ in millions)
Item |
Fair Value at March 31, 2012 |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) | ||||||
Auction rate securities |
$ | 112 | Discounted Cash Flows |
Hypothetical U.S. Treasury forward rates (a) Credit risk premium (b) Illiquidity premium (c) Expected repayments (d) |
0.15% - 3.6% (2.7%) 1% 5% Begin in 2012-2013, end in 2013-2035 | |||||
EETC |
$ | 62 | Discounted Cash Flows |
Structure credit risk (e) | 5% - 8% (6%) | |||||
Convertible debt derivative asset |
$ | 231 | Binomial Lattice Model |
Expected volatility (f) Own credit risk (g) |
45% - 60% (48%) 7% - 9% (8%) | |||||
Convertible debt option liability |
$ | (119 | ) | Binomial Lattice Model |
Expected volatility (f) Own credit risk (g) |
45% - 60% (49%) 7% - 9% (8%) |
(a) | Represents amounts used to determine base component of future interest rate sets that the Company has determined market participants would use in pricing the investments. |
(b) | Represents the credit risk premium component of the discount rate that the Company has determined market participants would use in pricing the investments. |
(c) | Represents the illiquidity premium component of the discount rate that the Company has determined market participants would use in pricing the investments. |
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(d) | Represents the estimated timing of principal repayments used in the discounted cash flow model. |
(e) | Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use in pricing the instruments. |
(f) | Represents the range in volatility estimates that the Company has determined market participants would use when pricing the instruments. |
(g) | Represents the range of Company-specific risk adjustments that the Company has determined market participants would use as a model input. |
Valuation ProcessesLevel 3 MeasurementsThe Companys internal valuation group is responsible for determining the fair value of financial instruments. Depending on the instrument, the valuation group utilizes discounted cash flow methods or option pricing methods as indicated above. Valuations using discounted cash flow methods are generally conducted by the valuation group. Valuations using option pricing models are generally provided to the Company by third-party valuation experts. Each reporting period, the valuation group reviews the unobservable inputs used by third-party valuation experts for reasonableness utilizing relevant information available to the Company from other published sources. The Company has a formal process to review changes in fair value for satisfactory explanation.
Sensitivity AnalysisLevel 3 MeasurementsChanges in the unobservable input values would be unlikely to cause material changes in the fair value of the auction rate securities and EETCs.
The significant unobservable inputs used in the fair value measurement of the Continental convertible debt derivative assets and liabilities are the UAL stock expected volatility and the Companys own credit risk. Significant increases (decreases) in expected volatility would result in a higher (lower) fair value measurement. Significant increases (decreases) in the Companys own credit risk would result in a lower (higher) fair value measurement. A change in one of the inputs would not necessarily result in a directionally similar change in the other.
Fair value of the financial instruments included in the tables above was determined as follows:
Description |
Fair Value Methodology | |
Cash, Cash Equivalents, Short-term Investments, Investments and Restricted Cash |
The carrying amounts approximate fair value because of the short-term maturity of these assets and liabilities. These assets have maturities of less than one year except for the EETCs, auction rate securities and corporate debt. | |
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) internally-developed models of the expected future cash flows related to the securities. | ||
Fuel Derivatives |
Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others. | |
Foreign Currency Derivatives |
Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates. | |
Debt |
Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities. | |
Convertible Debt Derivative Asset and Option Liability |
The Company used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and discount rate. |
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NOTE 7HEDGING ACTIVITIES
Aircraft Fuel Hedges. The Company has a risk management strategy to hedge a portion of its price risk related to projected aircraft fuel requirements. The Company periodically enters into derivative contracts to mitigate the adverse financial impact of potential increases in the price of fuel. The Company does not enter into derivative instruments for speculative, non-risk management purposes.
Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted special hedge accounting treatment. Generally, utilizing the special hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in accumulated other comprehensive income (loss) (AOCI) until the underlying fuel is consumed and recorded in fuel expense. The Company is exposed to the risk that its hedges may not be effective in offsetting changes in the cost of fuel and that its hedges may not continue to qualify for special hedge accounting. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Companys expected future cash outlay to purchase and consume fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is classified as other nonoperating income (expense).
The Company records each derivative instrument as a derivative asset or liability on a gross basis in its consolidated balance sheets and, accordingly, records any related collateral on a gross basis.
As of March 31, 2012, our projected fuel requirements for the remainder of 2012 were hedged as follows:
Maximum Price | Minimum Price | |||||||||||||||
% of Expected Consumption |
Weighted Average Price (per gallon) |
% of Expected Consumption |
Weighted Average Price (per gallon) |
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UAL (a) |
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Heating oil collars |
15 | % | $ | 3.27 | 15 | % | $ | 2.55 | ||||||||
Heating oil call options |
4 | 3.20 | N/A | N/A | ||||||||||||
Brent crude oil collars |
9 | 2.74 | 9 | 1.90 | ||||||||||||
Diesel fuel collars |
6 | 3.18 | 6 | 2.39 | ||||||||||||
Diesel fuel call options |
1 | 3.17 | N/A | N/A | ||||||||||||
Aircraft fuel collars |
1 | 3.00 | 1 | 2.35 | ||||||||||||
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Total |
36 | % | 31 | % | ||||||||||||
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(a) | As of March 31, 2012, UAL had also hedged 14% of projected first quarter 2013 fuel consumption. |
The following tables present information about the financial statement classification of the Companys derivatives and related gains (losses) (in millions):
Derivatives designated as hedges |
March 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||
Balance Sheet Location |
UAL | United | Continental | UAL | United | Continental | ||||||||||||||||||||
Assets: |
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Fuel contracts due within one year |
Receivables | $ | 206 | $ | 120 | $ | 86 | $ | 77 | $ | 48 | $ | 29 | |||||||||||||
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Liabilities: |
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Fuel contracts due within one year |
Other Current Liabilities |
$ | | $ | | $ | | $ | 4 | $ | 4 | $ | | |||||||||||||
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Amount of Gain
Recognized in AOCI on Derivatives (Effective portion) |
Gain (Loss) Reclassified from AOCI into Income (Fuel Expense) |
Amount of Gain Recognized in Income (Ineffective Portion) |
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Three Months Ended March 31, |
Three Months Ended March 31, |
Three Months Ended March 31, |
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Fuel contracts |
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||
UAL |
$ | 93 | $ | 524 | $ | (31 | ) | $ | 154 | $ | 25 | $ | 3 | |||||||||||
United |
58 | 385 | (15 | ) | 125 | 14 | 2 | |||||||||||||||||
Continental |
35 | 139 | (16 | ) | 29 | 11 | 1 |
Derivative Credit Risk and Fair Value
The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The following table presents information related to the Companys derivative credit risk as of March 31, 2012 (in millions):
UAL | United | Continental | ||||||||||
Net derivative asset with counterparties |
$ | 206 | $ | 120 | $ | 86 | ||||||
Collateral held by the Company |
1 | 1 | | |||||||||
Potential loss related to the failure of the Companys counterparties to perform |
205 | 119 | 86 |
NOTE 8COMMITMENTS AND CONTINGENCIES
General Guarantees and Indemnifications. In the normal course of business, the Company enters into numerous real estate leasing and aircraft financing arrangements that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities under which the Company typically indemnifies the lessors and any tax/financing parties against tort liabilities that arise out of the use, occupancy, operation or maintenance of the leased premises or financed aircraft. Currently, the Company believes that any future payments required under these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). Additionally, certain leased premises such as fueling stations or storage facilities include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premises.
Legal and Environmental Contingencies. The Company has certain contingencies resulting from litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the information currently available, the views of legal counsel, the nature of contingencies to which the Company is subject and prior experience, that the ultimate disposition of these contingencies will not materially affect the Companys consolidated financial position or results of operations.
The Company records liabilities for legal and environmental claims when a loss is probable and reasonably estimable. These amounts are recorded based on the Companys assessments of the likelihood of their eventual disposition.
Commitments. The table below summarizes the Companys commitments as of March 31, 2012, which primarily relate to the acquisition of aircraft and related spare engines, aircraft improvements and include other commitments primarily to acquire information technology services and assets (in millions):
UAL | United | Continental | ||||||||||
2012 |
$ | 1,383 | $ | 84 | $ | 1,299 | ||||||
2013 |
983 | 63 | 920 | |||||||||
2014 |
1,030 | 103 | 927 | |||||||||
2015 |
1,747 | 373 | 1,374 | |||||||||
2016 |
1,724 | 1,137 | 587 | |||||||||
After 2016 |
5,671 | 5,671 | | |||||||||
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$ | 12,538 | $ | 7,431 | $ | 5,107 | |||||||
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26
United Aircraft Commitments. As of March 31, 2012, United had firm commitments to purchase 50 new aircraft (25 Boeing 787 aircraft and 25 Airbus A350XWB aircraft) scheduled for delivery from 2016 through 2019. United also has options to purchase 42 Airbus A319 and A320 aircraft, and purchase rights for 50 Boeing 787 aircraft and 50 Airbus A350XWB aircraft.
United has secured considerable backstop financing commitments from its aircraft and engine manufacturers, subject to certain customary conditions. However, United can provide no assurance that backstop financing, or any other financing not already in place, for aircraft and engine deliveries will be available to United on acceptable terms when necessary or at all.
Continental Aircraft Commitments. As of March 31, 2012, Continental had firm commitments to purchase 78 new aircraft (53 Boeing 737 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2012 through 2016. From April 1, 2012 through December 31, 2012, Continental expects to take delivery of 15 Boeing 737-900ER aircraft and five Boeing 787-8 aircraft.
Continental has arranged for financing of eleven Boeing 737-900ER aircraft and four Boeing 787-8 aircraft scheduled for delivery from April 2012 through December 2012. See Note 9DebtContinental EETCs of this report for additional information.
However, Continental does not have backstop financing or any other financing currently in place for the other Boeing aircraft on order. Financing will be necessary to satisfy Continentals capital commitments for its firm order aircraft and other related capital expenditures. Continental can provide no assurance that backstop financing, or any other financing not already in place, for aircraft and engine deliveries will be available to Continental on acceptable terms when necessary or at all.
The Company is currently in discussions with Boeing over potential compensation related to delays in the 787 aircraft deliveries. The Company is not able to estimate the ultimate success, amount of, nature or timing of any potential recoveries from Boeing over such delays.
Credit Card Processing Agreements. United and Continental have agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. Under certain of Uniteds and Continentals credit card processing agreements, the financial institutions either require, or under certain circumstances have the right to require, that United and Continental maintain a reserve equal to a portion of advance ticket sales that have been processed by that financial institution, but for which United and Continental have not yet provided the air transportation.
As of March 31, 2012, United and Continental provided a reserve of $25 million, as required under their combined credit card processing agreement with JPMorgan Chase Bank, N.A. and Paymentech, LLC. Additional reserves may be required under this or other credit card processing agreements of United or Continental if the amount of unrestricted cash, cash equivalents, short-term investments and undrawn amounts under any revolving credit facilities held by United and Continental is less than $3.5 billion as of any calendar month-end measurement date. In addition, in certain circumstances, an increase in the future reserve requirements and the posting of a significant amount of cash collateral as provided by the terms of any or all of Uniteds and Continentals material credit card processing agreements could materially reduce the Companys liquidity.
Guarantees and Off-Balance Sheet Financing.
Guarantees. United and Continental are the guarantors of approximately $270 million and $1.7 billion, respectively, 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 $1.8 billion ($270 million for United and $1.5 billion for Continental) 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 $190 million (for Continental only) of these obligations are accounted for as capital leases. These bonds are due between 2015 and 2033.
In the Companys financing transactions that include loans, the Company typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on the London Interbank Offered Rate (LIBOR), for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject in most cases to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs. At March 31, 2012, UAL had $2.7 billion of floating rate debt (consisting of Uniteds $2.0 billion and Continentals $742 million of debt) and $385 million of fixed rate debt (consisting of Uniteds $200 million and Continentals $185 million of debt), with remaining terms of up to ten 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 ten years and an aggregate balance of $3.0 billion (consisting of Uniteds $2.2 billion and Continentals $840 million balance), 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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Houston Bush Terminal B Redevelopment Project. In May 2011, UAL, in partnership with the Houston Airport System, announced that it would begin construction of the first phase of a three-phase $1 billion terminal improvement project for Terminal B at George Bush Intercontinental Airport (Houston Bush) by the end of 2011. In November 2011, the City of Houston issued approximately $113 million of special facilities revenue bonds to finance the construction of a new south concourse at Houston Bush dedicated to the Companys regional jet operations. The bonds are guaranteed by Continental and are payable from certain rentals paid by Continental under a special facilities lease agreement with the City of Houston. Continentals initial commitment is to construct the first phase of the currently anticipated three-phase project. Continentals cost of construction of phase one of the project is currently estimated to be approximately $100 million and is funded by special facilities revenue bonds. Construction of the remaining phases of the project will be based on demand over the next seven to 10 years, with phase one currently expected to be completed in late 2013.
Based on a qualitative assessment of the Houston Bush Terminal B Redevelopment Project, due to the fact that Continental is guaranteeing the special facilities revenue bonds and the requirement that Continental fund cost overruns with no stated limits, Continental is considered the owner of the property during the construction period for accounting purposes. As a result, the construction project is being treated as a financing transaction such that the property and related financing will be included on UALs consolidated balance sheet as an asset under operating property and equipment and as a construction obligation under other long-term liabilities.
Credit Facilities. As of March 31, 2012 the Company had its entire commitment capacity of $500 million available under the Credit and Guaranty Agreement, dated as of December 22, 2011 (the Revolving Credit Facility) with a syndicate of banks led by Citibank N.A., as administrative agent. The Revolving Credit Facility has an expiration date of January 30, 2015.
Labor Negotiations. As of March 31, 2012, UAL and its subsidiaries had approximately 87,000 active employees, of whom approximately 80% are represented by various U.S. labor organizations. On February 27, 2012, the pilots at both United and Continental agreed to an extension of their protocol for joint negotiations and continue to engage in joint bargaining with the Company. On February 28, 2012, the flight attendants at United ratified a new collective bargaining agreement and joint negotiations will begin shortly for a joint collective bargaining agreement covering both Uniteds and Continentals flight attendant work groups. On March 7, 2012, the passenger service employees at both United and Continental voted to be represented by the International Association of Machinists and Aerospace Workers, AFL-CIO and negotiations are underway for a joint collective bargaining agreement for this employee group. We are continuing our negotiations for joint collective bargaining agreements with other work groups, including technicians, dispatchers, fleet service employees, storekeepers and various smaller groups.
As part of the recently amended collective bargaining agreement with the Association of Flight Attendants, the Company agreed to offer a voluntary program for flight attendants at United to retire early in exchange for a cash severance payment. The payments are dependent on the number of years of service each employee has accumulated. The Company is not currently able to estimate the amount of the total expense associated with the program as the deadline for volunteering is May 31, 2012.
NOTE 9DEBT
As of March 31, 2012, a substantial portion of our assets are pledged as collateral for our debt. These assets principally consist of aircraft and the related spare parts and engines, route authorities and loyalty program intangible assets. As of March 31, 2012, UAL, United and Continental were in compliance with their respective debt covenants.
Continental EETCs. In March 2012, Continental created two pass-through trusts, one of which issued $753 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 4.15% and the other of which issued $139 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 6.25%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $892 million, have been and will be used to purchase equipment notes issued by Continental. Of the $892 million in proceeds raised by the pass-through trusts, Continental received $188 million as of March 31, 2012, in exchange for Continentals issuance of an equivalent principal amount of equipment notes, which has been recorded as debt. The remaining amount is expected to be received during the last nine months of this year as aircraft are delivered to Continental and Continental issues equipment notes to the trusts. Continental records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The proceeds have been and are expected to be used to fund the acquisition of new aircraft, and in the case of currently owned aircraft, for general corporate purposes.
The Company evaluated whether the pass-through trusts formed are variable interest entities (VIEs) required to be consolidated by the Company under applicable accounting guidance, and determined that the pass-through trusts are VIEs. The Company determined that it does not have a variable interest in the pass-through trusts. The Company does not invest in or
28
obtain a financial interest in the pass-through trusts. Rather, Continental has an obligation to make interest and principal payments on its equipment notes held by the pass-through trusts. The Company was not intended to have any voting or non-voting equity interest in the pass-through trusts or to absorb variability from the pass-through trusts. Based on this analysis, the Company determined that it is not required to consolidate the pass-through trusts.
8% Contingent Senior Notes. UAL is obligated under an indenture to issue to the Pension Benefit Guaranty Corporation (PBGC) up to $500 million aggregate principal amount of 8% Notes in up to eight equal tranches of $62.5 million if certain financial triggering events occur (with each tranche issued no later than 45 days following the end of any applicable fiscal year).
During 2011, a financial triggering event under the 8% Notes indenture occurred at both June 30, 2011 and December 31, 2011 and, as a result, UAL issued two tranches of $62.5 million each of the 8% Notes in January 2012, which were recorded during 2011 at their fair value of $88 million as a component of integration costs. If a triggering event occurs as of June 30, 2012, UAL would be obligated to issue $62.5 million of the 8% Notes by February 14, 2013 and would record such obligation in the second quarter of 2012.
NOTE 10SPECIAL CHARGES
Special Charges. For the three months ended March 31, special charges consisted of the following (in millions):
Three Months Ended March 31, |
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2012 |
UAL | United | Continental | |||||||||
Integration-related costs |
$ | 134 | $ | 71 | $ | 63 | ||||||
Voluntary severance and benefits |
49 | 49 | | |||||||||
(Gains) losses on sale of assets and other special charges, net |
(19 | ) | (24 | ) | 5 | |||||||
|
|
|
|
|
|
|||||||
Subtotal special charges |
164 | 96 | 68 | |||||||||
Income tax benefit |
(2 | ) | | (2 | ) | |||||||
|
|
|
|
|
|
|||||||
Total special charges, net of income taxes |
$ | 162 | $ | 96 | $ | 66 | ||||||
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|
|
|
|
2011 |
UAL | United | Continental | |||||||||
Integration-related costs |
$ | 79 | $ | 74 | $ | 5 | ||||||
Gain on aircraft sales |
(2 | ) | | (2 | ) | |||||||
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|
|
|
|
|
|||||||
Total |
$ | 77 | $ | 74 | $ | 3 | ||||||
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|
|
Integration-related costs include compensation costs related to systems integration and training, costs to repaint aircraft and other branding activities, costs to write-off or accelerate depreciation on systems and facilities that are no longer used or planned to be used for significantly shorter periods, relocation costs for employees and severance primarily associated with administrative headcount reductions.
During the three months ended March 31, 2012, the Company recorded $49 million of severance and benefits associated with two voluntary employee programs. In one program, approximately 400 mechanics offered to retire early in exchange for a cash severance payment that was based on the number of years of service each employee had accumulated. The other program is a voluntary company-offered leave of absence that approximately 1,800 flight attendants accepted, which allows for continued medical coverage during the leave of absence period.
In addition, the Company sold six aircraft and its interest in a crew hotel in Hawaii during the first quarter of 2012. The Company also recorded an impairment charge on an intangible asset related to take-off and landing slots to reflect the discontinuance of one of the frequencies on an international route. The Company also made adjustments to certain legal reserves.
Accruals
The accrual for severance and medical costs was $90 million, $69 million and $21 million related to UAL, United and Continental, respectively, as of March 31, 2012. In addition, the accrual balance of future lease payments on permanently grounded aircraft was $23 million for both UAL and United as of March 31, 2012.
29
The severance-related accrual as of March 31, 2012, which primarily relates to the integration of United and Continental, is expected to be paid during 2012. Lease payments for grounded aircraft are expected to continue through 2013.
At March 31, 2011, the accrual balance for severance and medical costs was $81 million, $45 million and $36 million, related to UAL, United and Continental, respectively. In addition, the accrual balance of future lease payments on permanently grounded aircraft was $38 million for both UAL and United as of March 31, 2011.
NOTE 11RELATED PARTY TRANSACTIONS
Intercompany transactionsUnited and Continental
United and Continental perform services for one another including various aircraft maintenance services and aircraft ground handling at certain airports, and they utilize one management team to oversee the sales and administrative functions of both airlines. For services provided, Continental paid United $120 million and United paid Continental $86 million during the quarter ended March 31, 2012. These payments do not include interline billings, which are common among airlines for transportation-related services. Most of these transactions are routinely settled through the clearing house, which is customarily used in the monthly settlement of such items. Transactions not settled through the clearing house are typically settled in cash on a quarterly basis. As of March 31, 2012, Continental had a net current payable of $1.5 billion to United primarily related to the transfer of the current portion of the frequent flyer liability and the cash transfer from United in conjunction with the conversion to the new passenger service system, as described below. In addition, Continental had a $1.3 billion noncurrent payable to United associated with the transfer of the long-term portion of the frequent flyer liability.
Frequent flyer program transition
In the first quarter of 2012, the Company moved to a single loyalty program. Continentals loyalty program formally ended in the first quarter of 2012, at which point United automatically enrolled OnePass members in MileagePlus and deposited into those MileagePlus accounts award miles equal to these members OnePass award miles balance. In March 2012, the related frequent flyer deferred revenue and advance purchase of miles liabilities for Continentals OnePass program was transferred to United with a corresponding liability recorded by Continental payable to United for assuming the frequent flyer obligations. No gain or loss was incurred from the transaction as the liabilities were transferred at their respective net book value. The obligation associated with this transfer will be settled by Continental through future redemptions by MileagePlus members on Continental operated flights. The Company currently does not expect a material impact in redemptions from moving to a single loyalty program.
Passenger service system and ticket stock integration
In March 2012, Continental and United converted to a single passenger service system, allowing the Company to operate using a single reservations system, carrier code, flight schedule, website and departure control system. In conjunction with the conversion to a single passenger service system, all tickets are now sold by United. As a result, the air traffic liability of Continental will diminish as tickets previously sold by Continental are used or refunded and Uniteds advanced ticket sales liability and associated cash receipts from the ticket sales will increase accordingly. Given the system conversion, United transferred $1 billion in cash to Continental in March 2012 as an advance against future settlements when passengers travel. Revenue will continue to be recorded by the carrier that is operating the flight.
Revenue and expense allocation
In November 2011, the Company received a single operating certificate from the Federal Aviation Administration. The Company plans to merge Continental and United into one legal entity. Once this legal merger occurs, the financial statements of United and Continental will be combined for all periods presented from the date of the merger at their historical cost, and there will no longer be a requirement to separately report the historical financial statements of Continental.
Until Continental and United are merged into one legal entity, revenue and expenses will continue to be recorded by each entity based on either specific identification of the related transaction, where applicable, or appropriate allocations based on metrics that are systematic and rational. Certain revenues and expenses that were previously recorded based on a specific identification were allocated in March 2012 in connection with the conversion to a single passenger service system. We believe the allocated amounts will generally be comparable to historical amounts. Each airline will continue to record actual expenses for aircraft that are owned or leased and passenger revenue will be determined on an actual basis for the carrier operating the flight. The table below illustrates a summary of the primary allocation metrics to be used:
30
Account |
Allocation metric between subsidiaries | |
Operating revenue: |
||
Passenger |
Actual ticket revenue based on specifically identified flights operated by each carrier. Frequent flyer component of passenger revenue based on historic revenue passenger miles (RPMs) split between carriers. Regional revenue, based on the carrier that contracted with the regional carrier | |
Cargo |
Actual by operating carrier | |
Other operating |
Passenger related based on passenger revenue and other based on passengers enplaned or other similar criteria | |
Operating expense: |
||
Aircraft fuel |
Actual by operating carrier | |
Salaries and related costs |
Actual for operational workgroups and allocation based on historical RPMs for administrative personnel | |
Regional capacity purchase |
Actual based on specific identification of the carrier that contracted with regional carrier for flying | |
Landing fees and other rent |
Allocation based on passengers enplaned | |
Aircraft maintenance materials and outside repairs |
Actual based on the aircraft maintained | |
Depreciation and amortization |
Specific identification of carriers operational assets (i.e. flight equipment) and intangible assets and allocation based on historical RPMs for other assets | |
Distribution expenses |
Allocation based on passenger revenue | |
Aircraft rent |
Actual based on specific identification of each carriers aircraft | |
Special charges |
Specific identification | |
Other operating expenses |
Specific identification where applicable and allocation based on historical RPMs for other |
31
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
United Continental Holdings, Inc. (together with its consolidated subsidiaries, UAL) is a holding company and its principal, wholly-owned subsidiaries are United Air Lines, Inc. (together with its consolidated subsidiaries, United) and Continental Airlines, Inc. (together with its consolidated subsidiaries, Continental). All significant intercompany transactions are eliminated.
This Quarterly Report on Form 10-Q is a combined report of UAL, United and Continental. We sometimes use the words we, our, us, and the Company for disclosures that relate to all of UAL, United and Continental. As UAL consolidates United and Continental for financial statement purposes, disclosures that relate to United and Continental activities also apply to UAL. When appropriate, UAL, United and Continental are named specifically for their related activities and disclosures.
The Company transports people and cargo through its mainline operations, which utilize jet aircraft with at least 100 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 worlds largest airline alliance. Based on annual flight schedules as of April 1, 2012, the Company offers approximately 5,700 daily departures to 376 destinations.
First Quarter Financial Highlights
| UALs first quarter 2012 net loss was $286 million, or $0.87 diluted loss per share, excluding $162 million of special charges, net of tax. On a GAAP basis, UALs first quarter 2012 net loss was $448 million, or $1.36 diluted loss per share. |
| UALs passenger revenue increased 5.5% during the first quarter of 2012 as compared to the first quarter of 2011. |
| Offsetting the improvement in revenue was a 20.8% year-over-year increase in UALs first quarter 2012 fuel cost. This increase was primarily due to a 20.1% increase in the price of fuel in the first quarter of 2012 as compared to the first quarter of 2011. |
| UALs operating loss was $271 million during the first quarter of 2012, resulting in an operating margin of (3.2)%. |
| UALs unrestricted cash, cash equivalents and short-term investments totaled $7.3 billion at March 31, 2012. |
First Quarter Operational Highlights
| UALs traffic and capacity both increased 0.3% during the first quarter of 2012 as compared to the first quarter of 2011. The Companys load factor for the first quarter of 2012 was 78.1%. |
| For the quarter ended March 31, 2012, the Company recorded a U.S. Department of Transportation on-time arrival rate of 80.1% and a system completion factor of 99.1%. |
| The Company took delivery of four new Boeing 737-900ER aircraft during the first quarter of 2012. |
| In March 2012, Continental and United converted to a single passenger service system, a single loyalty program and a single website. |
Outlook
Due to significant increases in fuel prices, the Company plans to reduce 2012 consolidated capacity from previous projections by reducing flight frequencies, indefinitely postponing the start of flights to certain markets and exiting less profitable markets. As compared to 2011 capacity, the Company expects full-year 2012 consolidated capacity to be down 0.5% to 1.5% year-over-year, with full-year 2012 domestic capacity to be down 1.7% to 2.7% and full-year 2012 international capacity to be up 0.2% to 1.2%. The Company is also analyzing the removal of certain less fuel-efficient aircraft from its fleet and other cost-saving measures.
Integration
The Company made progress toward integrating products, services and policies. In the first quarter of 2012, the Company moved to a single loyalty program, MileagePlus. Continentals loyalty program formally ended in the first quarter of 2012, at which point United automatically enrolled OnePass members in MileagePlus and deposited into those MileagePlus accounts award miles equal to their OnePass award miles balance.
In March 2012, we converted to a single passenger service system allowing the Company to operate using a single reservations system, carrier code, flight schedule, website and departure control system.
32
RESULTS OF OPERATIONS
The following discussion provides an analysis of UALs results of operations and reasons for material changes therein for the three months ended March 31, 2012 as compared to the corresponding period in 2011.
First Quarter 2012 Compared to First Quarter 2011
UAL recorded net loss of $448 million in the first quarter of 2012 as compared to net loss of $213 million in the first quarter of 2011. Excluding special items, UAL had net loss of $286 million in the first quarter of 2012 as compared to net loss of $136 million in the first quarter of 2011. See Reconciliation of GAAP to non-GAAP Financial Measures at the end of this item for additional information related to non-GAAP financial measures. We consider a key measure of our performance to be operating income, which was a loss of $271 million for the first quarter of 2012, as compared to income of $34 million for the first quarter of 2011. Significant components of our operating results for the three months ended March 31 are as follows (in millions, except percentage changes):
2012 | 2011 | Increase (Decrease) |
% Change |
|||||||||||||
Operating Revenue |
$ | 8,602 | $ | 8,202 | $ | 400 | 4.9 | |||||||||
Operating Expenses |
8,873 | 8,168 | 705 | 8.6 | ||||||||||||
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|
|
|
|||||||||||
Operating Income (Loss) |
(271 | ) | 34 | (305 | ) | NM | ||||||||||
Nonoperating Expense |
(176 | ) | (245 | ) | (69 | ) | (28.2 | ) | ||||||||
Income Tax Expense |
1 | 2 | (1 | ) | (50.0 | ) | ||||||||||
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|
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Net Loss |
$ | (448 | ) | $ | (213 | ) | $ | 235 | 110.3 | |||||||
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|
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NMNot meaningful |
Certain consolidated statistical information for UALs operations for the three months ended March 31 is as follows:
2012 | 2011 | Increase (Decrease) |
% Change |
|||||||||||||
Passengers (thousands) (a) |
32,527 | 32,589 | (62 | ) | (0.2 | ) | ||||||||||
Revenue Passenger Miles (RPMs) (millions) (b) |
47,107 | 46,964 | 143 | 0.3 | ||||||||||||
Available Seat Miles (ASMs) (millions) (c) |
60,344 | 60,172 | 172 | 0.3 | ||||||||||||
Passenger load factor (d) |
78.1 | % | 78.0 | % | 0.1 pts. | N/A | ||||||||||
Passenger revenue per available seat mile (PRASM) (cents) |
12.44 | 11.83 | 0.61 | 5.2 | ||||||||||||
Average yield per revenue passenger mile (cents) (e) |
15.94 | 15.15 | 0.79 | 5.2 | ||||||||||||
Cost per available seat mile (CASM) (cents) |
14.70 | 13.57 | 1.13 | 8.3 | ||||||||||||
Average price per gallon of fuel, including fuel taxes |
$ | 3.34 | $ | 2.78 | $ | 0.56 | 20.1 | |||||||||
Fuel gallons consumed (millions) |
967 | 960 | 7 | 0.7 | ||||||||||||
Average full-time equivalent employees |
83,700 | 82,000 | 1,700 | 2.1 |
(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. |
33
Operating Revenue
The table below shows year-over-year comparisons by type of operating revenue for the three months ended March 31 (in millions, except for percentage changes):
2012 | 2011 | Increase (Decrease) |
% Change |
|||||||||||||
PassengerMainline |
$ | 5,954 | $ | 5,707 | $ | 247 | 4.3 | |||||||||
PassengerRegional |
1,554 | 1,410 | 144 | 10.2 | ||||||||||||
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|
|
|
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Total passenger revenue |
7,508 | 7,117 | 391 | 5.5 | ||||||||||||
Cargo |
264 | 283 | (19 | ) | (6.7 | ) | ||||||||||
Other operating revenue |
830 | 802 | 28 | 3.5 | ||||||||||||
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|
|
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$ | 8,602 | $ | 8,202 | $ | 400 | 4.9 | ||||||||||
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|
|
|
|
The table below presents selected passenger revenues and operating data, broken out by geographic region, expressed as first quarter year-over-year changes:
Domestic | Pacific | Atlantic | Latin | Total Mainline |
Regional | Consolidated | ||||||||||||||||||||||
Increase (decrease) from 2011: |
||||||||||||||||||||||||||||
Passenger revenue (in millions) |
$ | 41 | $ | 61 | $ | 69 | $ | 76 | $ | 247 | $ | 144 | $ | 391 | ||||||||||||||
Passenger revenue |
1.4 | % | 5.8 | % | 6.2 | % | 11.7 | % | 4.3 | % | 10.2 | % | 5.5 | % | ||||||||||||||
Average fare per passenger |
4.8 | % | 6.8 | % | 6.4 | % | 9.8 | % | 6.8 | % | 5.6 | % | 5.7 | % | ||||||||||||||
Yield |
3.3 | % | 4.1 | % | 6.0 | % | 6.9 | % | 4.5 | % | 6.1 | % | 5.2 | % | ||||||||||||||
PRASM |
4.5 | % | (0.2 | )% | 5.3 | % | 7.0 | % | 4.1 | % | 9.1 | % | 5.2 | % | ||||||||||||||
Average stage length |
2.7 | % | 6.0 | % | 1.2 | % | 3.5 | % | 4.1 | % | 0.6 | % | 2.3 | % | ||||||||||||||
Passengers |
(3.2 | )% | (0.9 | )% | (0.3 | )% | 1.7 | % | (2.3 | )% | 4.4 | % | (0.2 | )% | ||||||||||||||
RPMs (traffic) |
(1.8 | )% | 1.6 | % | 0.1 | % | 4.5 | % | (0.2 | )% | 3.8 | % | 0.3 | % | ||||||||||||||
ASMs (capacity) |
(3.0 | )% | 6.1 | % | 0.8 | % | 4.4 | % | 0.2 | % | 1.0 | % | 0.3 | % | ||||||||||||||
Passenger load factor (points) |
1.0 | (3.4 | ) | (0.6 | ) | 0.1 | (0.3 | ) | 2.0 | 0.1 |
Consolidated passenger revenue in the first quarter of 2012 increased 5.5% as compared to the year-ago period primarily due to increased pricing as consolidated average fare per passenger and yield increased by 5.7% and 5.2%, respectively. The average fare per passenger increased in the 2012 period as compared to the 2011 period due to a number of fare increases implemented in response to higher fuel prices.
Operating Expenses
The table below includes data related to UALs operating expenses for the three months ended March 31 (in millions, except for percentage changes):
2012 | 2011 | Increase (Decrease) |
% Change |
|||||||||||||
Aircraft fuel |
$ | 3,229 | $ | 2,672 | $ | 557 | 20.8 | |||||||||
Salaries and related costs |
1,897 | 1,806 | 91 | 5.0 | ||||||||||||
Regional capacity purchase |
616 | 573 | 43 | 7.5 | ||||||||||||
Landing fees and other rent |
469 | 473 | (4 | ) | (0.8 | ) | ||||||||||
Aircraft maintenance materials and outside repairs |
407 | 439 | (32 | ) | (7.3 | ) | ||||||||||
Depreciation and amortization |
380 | 388 | (8 | ) | (2.1 | ) | ||||||||||
Distribution expenses |
337 | 350 | (13 | ) | (3.7 | ) | ||||||||||
Aircraft rent |
251 | 253 | (2 | ) | (0.8 | ) | ||||||||||
Special charges |
164 | 77 | 87 | NM | ||||||||||||
Other operating expenses |
1,123 | 1,137 | (14 | ) | (1.2 | ) | ||||||||||
|
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|
|
|
|
|||||||||||
$ | 8,873 | $ | 8,168 | $ | 705 | 8.6 | ||||||||||
|
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|
|
|
|
34
Aircraft fuel expense increased $557 million, or 20.8%, year-over-year due primarily to a 20.1% increase in fuel prices and a swing to fuel hedge losses in the current quarter versus gains in the first quarter of 2011. The table below presents the significant changes in aircraft fuel cost per gallon in the three month period ended March 31, 2012 as compared to the year-ago period.
(In millions) | Average price per gallon | |||||||||||||||||||||||
2012 | 2011 | % Change |
2012 | 2011 | % Change |
|||||||||||||||||||
Aircraft fuel expense |
$ | 3,229 | $ | 2,672 | 20.8 | $ | 3.34 | $ | 2.78 | 20.1 | ||||||||||||||
Fuel hedge gains (losses) |
(31 | ) | 154 | NM | (0.03 | ) | 0.16 | NM | ||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||||
Total fuel purchase cost excluding fuel hedge impacts |
$ | 3,198 | $ | 2,826 | 13.2 | $ | 3.31 | $ | 2.94 | 12.6 | ||||||||||||||
|
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|
|
|
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|
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Total fuel consumption (gallons) |
967 | 960 | 0.7 |
Salaries and related costs increased $91 million, or 5.0%, in the first quarter of 2012 as compared to the year-ago period due to several factors including a slight increase in the number of average full-time employees, higher pay rates primarily driven by new collective bargaining agreements, and additional overtime for airport and call center employees related to our conversion to a single passenger service system.
Regional capacity purchase increased $43 million, or 7.5%, in the first quarter of 2012 as compared to the year-ago period primarily due to a contractual amendment with one of our regional carrier partners to shift the arrangement from a prorate agreement to a capacity purchase agreement.
Aircraft maintenance materials and outside repairs decreased $32 million, or 7.3%, in the first quarter of 2012 as compared to the year-ago period primarily due to lower rates on a new engine maintenance contract as well as fewer airframe maintenance visits in the first quarter of 2012 as compared to the first quarter of 2011.
Distribution expenses decreased $13 million, or 3.7%, in the first quarter of 2012 as compared to the year-ago period due to lower credit card discount fees driven by legislation reducing costs on debit card sales and lower rates on global distribution systems fees paid in 2012 as compared to 2011.
Details of UALs special charges include the following for the three months ended March 31 (in millions):
2012 | 2011 | |||||||
Integration-related costs |
$ | 134 | $ | 79 | ||||
Voluntary severance and benefits |
49 | | ||||||
Gains on sale of assets and other special charges, net |
(19 | ) | (2 | ) | ||||
|
|
|
|
|||||
Special charges |
$ | 164 | $ | 77 | ||||
|
|
|
|
See Note 10 to the financial statements included in Part I, Item I of this report.
Nonoperating Income (Expense). The following table illustrates the year-over-year dollar and percentage changes in UALs nonoperating income (expense) for the three months ended March 31 (in millions, except for percentage changes):
2012 | 2011 | Increase (Decrease) |
% Change |
|||||||||||||
Interest expense |
$ | (216 | ) | $ | (254 | ) | $ | (38 | ) | (15.0 | ) | |||||
Interest capitalized |
8 | 6 | 2 | 33.3 | ||||||||||||
Interest income |
5 | 4 | 1 | 25.0 | ||||||||||||
Miscellaneous, net |
27 | (1 | ) | 28 | NM | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | (176 | ) | $ | (245 | ) | $ | (69 | ) | (28.2 | ) | |||||
|
|
|
|
|
|
35
Interest expense decreased $38 million in the first quarter of 2012, or 15%, compared to the year-ago period primarily due to a decrease in debt outstanding during the first quarter of 2012 as compared to debt outstanding during the year-ago period.
During the first quarter of 2012, miscellaneous, net included fuel hedge ineffectiveness gain of $25 million primarily resulting from an increase in fuel hedge values in excess of the increase in aircraft fuel prices during the quarter.
Income Taxes. Our effective tax rates are lower than the federal statutory rate of 35% primarily because of the impact of changes to existing valuation allowances. We continue to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because management has concluded that it is more likely than not that such deferred tax assets will ultimately not be realized.
LIQUIDITY AND CAPITAL RESOURCES
Current Liquidity
As of March 31, 2012, UAL had $7.3 billion in unrestricted cash, cash equivalents and short-term investments, as compared to $7.8 billion at December 31, 2011. At March 31, 2012, UAL also had $571 million of restricted cash and cash equivalents, which is primarily collateral for performance bonds, letters of credit, credit card processing agreements, and estimated future workers compensation claims. As of March 31, 2012, the Company had its entire commitment capacity of $500 million under the Revolving Credit Facility available for letters of credit or borrowings.
As is the case with many of our principal competitors, we have a high proportion of debt compared to capital. We have a significant amount of fixed obligations, including debt, aircraft leases and financings, leases of airport property and other facilities, and pension funding obligations. At March 31, 2012, UAL had approximately $12.4 billion of debt and capital lease obligations, including $1.1 billion that will become due in the next 12 months. In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines.
The Company will continue to evaluate opportunities to repurchase its debt in open market transactions to reduce its indebtedness and the amount of interest paid on its indebtedness.
As of March 31, 2012, United had firm commitments to purchase 50 new aircraft (25 Boeing 787 aircraft and 25 Airbus A350XWB aircraft) scheduled for delivery from 2016 through 2019. United also has options to purchase 42 Airbus A319 and A320 aircraft, and purchase rights for 50 Boeing 787 aircraft and 50 Airbus A350XWB aircraft.
United has secured considerable backstop financing commitments from its aircraft and engine manufacturers, subject to certain customary conditions. However, United can provide no assurance that backstop financing, or any other financing not already in place, for aircraft and engine deliveries will be available to United on acceptable terms when necessary or at all.
As of March 31, 2012, Continental had firm commitments to purchase 78 new aircraft (53 Boeing 737 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2012 through 2016. From April 1, 2012 through December 31, 2012, Continental expects to take delivery of 15 Boeing 737-900ER aircraft and five Boeing 787-8 aircraft.
Continental has arranged for financing of eleven Boeing 737-900ER aircraft and four Boeing 787-8 aircraft scheduled for delivery from April 2012 through December 2012. See Note 9DebtContinental EETCs of the financial statements in Part I, Item I of this report.
However, Continental does not have backstop financing or any other financing currently in place for the other Boeing aircraft on order. Financing will be necessary to satisfy Continentals capital commitments for its firm order aircraft and other related capital expenditures. Continental can provide no assurance that backstop financing, or any other financing not already in place, for aircraft and engine deliveries will be available to Continental on acceptable terms when necessary or at all.
The Company is currently in discussions with Boeing over potential compensation related to delays in the 787 aircraft deliveries. The Company is not able to estimate the ultimate success, amount of, nature or timing of any potential recoveries from Boeing over such delays.
As of March 31, 2012, a substantial portion of UALs assets, principally aircraft, spare engines, aircraft spare parts, route authorities and certain other intangible assets, were 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.
36
Credit Ratings. As of the filing date of this report, UAL, United and Continental had the following corporate credit ratings:
S&P | Moodys | Fitch | ||||
UAL |
B | B2 | B | |||
United |
B | B2 | B | |||
Continental |
B | B2 | B |
These credit ratings are below investment grade levels. Downgrades from these rating levels, among other things, could restrict the availability, or increase the cost of future financing for the Company.
Sources and Uses of Cash
Operating Activities. UALs cash flows provided by operations for the three months ended March 31, 2012 were $124 million compared to $1.0 billion in the same period in 2011. The decrease is attributable to an increase in the Companys net loss year-over-year and the cash flow impact of certain working capital items. Additionally, during the first quarter of 2011, UAL had a $178 million increase in cash collateral posted from counterparties for its fuel hedges.
Investing Activities. UALs capital expenditures, net of financings, were $266 million and $205 million in the three months ended March 31, 2012 and 2011, respectively. UALs capital expenditures in the three months ended March 31, 2012 were higher, as compared to the year-ago period, due primarily to the impact of fleet-related expenditures, such as the purchase of new 737-900ER aircraft, 767-300 cabin reconfigurations, 767-400 lie flat seat installations, and spare parts.
In addition to capital expenditures during the three months ended March 31, 2012, Continental acquired four aircraft through the issuance of debt, as discussed under Financing Activities below.
The purchase of short-term investments increased by $148 million in the three months ended March 31, 2012 due to the investment of higher cash balances as compared to the year-ago period.
Financing Activities. In March 2012, Continental created two pass-through trusts, one of which issued $753 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 4.15% and the other of which issued $139 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 6.25%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $892 million, have been and will be used to purchase equipment notes issued by Continental. Of the $892 million in proceeds raised by the pass-through trusts, Continental received $188 million as of March 31, 2012, in exchange for Continentals issuance of an equivalent principal amount of equipment notes, which has been recorded as debt. The proceeds have been and are expected to be used to fund the acquisition of new aircraft and, in the case of currently owned aircraft, for general corporate purposes.
During the three months ended March 31, 2012, UAL made debt and capital lease payments of $502 million. These payments include $195 million related to Continentals Series 2002-1 EETCs.
Continental received $96 million during the first quarter of 2011 from its December 2010 pass-through trust financing. The proceeds in the first quarter of 2011 related to the financing of two new and two currently owned aircraft. The proceeds related to the two currently owned aircraft were used for general corporate purposes. As noted in Investing Activities above, the financing proceeds related to the acquisition of two new aircraft are not reflected as a financing activity in the consolidated statement of cash flows as the funds are distributed directly to the aircraft supplier. See the 2011 Annual Report for additional information related to this financing.
Commitments, Contingencies and Liquidity Matters
As described in the 2011 Annual Report, the Companys liquidity may be adversely impacted by a variety of factors, including, but not limited to, obligations associated with fuel hedge settlements and related collateral requirements, pension funding obligations, reserve requirements associated with credit card processing agreements, guarantees, commitments and contingencies. See the 2011 Annual Report and Notes 5, 7, 8 and 9 to the financial statements contained in Part I, Item 1 of this report for information related to these matters.
United and ContinentalResults of Operations
In November 2011, the Company received a single operating certificate from the Federal Aviation Administration. The Company plans to merge United and Continental into one legal entity. Once this legal merger occurs, the financial statements of United and Continental will be combined for all periods presented from the date of the merger at their historical cost, and there will no longer be a requirement to separately report the historical financial statements of Continental.
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Until Continental and United are merged into one legal entity, revenue and expenses will continue to be recorded by each entity based on either specific identification of the related transaction, where applicable, or appropriate allocations based on metrics that are systematic and rational. Each airline will continue to record actual expenses for aircraft that are owned or leased and passenger revenue will be determined on an actual basis for the carrier operating the flight.
United
The following table presents information related to Uniteds results of operations for the three months ended March 31 (in millions, except percentage changes):
Three Months Ended March 31, |
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2012 | 2011 | % Change | ||||||||||
Operating Revenue: |
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Passenger revenue |
$ | 4,034 | $ | 3,965 | 1.7 | |||||||
Cargo and other revenue |
741 | 711 | 4.2 | |||||||||
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Total revenue |
$ | 4,775 | $ | 4,676 | 2.1 | |||||||
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Operating Expenses: |
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Aircraft fuel |
$ | 1,842 | $ | 1,512 | 21.8 | |||||||
Salaries and related costs |
1,027 | 987 | 4.1 | |||||||||
Regional capacity purchase |
379 | 382 | (0.8 | ) | ||||||||
Landing fees and other rent |
255 | 252 | 1.2 | |||||||||
Aircraft maintenance materials and outside repairs |
267 | 292 | (8.6 | ) | ||||||||
Depreciation and amortization |
231 | 227 | 1.8 | |||||||||
Distribution expenses |
182 | 187 | (2.7 | ) | ||||||||
Aircraft rent |
78 | 81 | (3.7 | ) | ||||||||
Special charges |
96 | 74 | 29.7 | |||||||||
Other operating expenses |
726 | 674 | 7.7 | |||||||||
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|
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Total operating expenses |
$ | 5,083 | $ | 4,668 | 8.9 | |||||||
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Operating income |
$ | (308 | ) | $ | 8 | NM | ||||||
Nonoperating expense |
(113 | ) | (168 | ) | (32.7 | ) | ||||||
RPMs |
26,071 | 26,302 | (0.9 | ) | ||||||||
ASMs |
33,082 | 33,326 | (0.7 | ) |
United had net loss of $423 million in the three months ended March 31, 2012, as compared to net loss of $160 million in the three months ended March 31, 2011. As compared to the first quarter of 2011, Uniteds consolidated revenue increased $99 million, or 2.1%, to $4.8 billion for the three months ended March 31, 2012. These increases were primarily due to year-over-year capacity discipline, which in turn resulted in higher average fares. Average fares were higher due to fare increases implemented in response to higher fuel prices, as discussed in UALs results of operations above.
Aircraft fuel expense increased 21.8% in the three months ended March 31, 2012, as compared to the year-ago period, which was primarily driven by increased market prices for aircraft fuel, as highlighted in the fuel table in Operating Expenses, above. Fuel hedge losses were $15 million in the three months ended March 31, 2012, compared to fuel hedge gains of $125 million in the three months ended March 31, 2011.
Salaries and related costs increased 4.1% in the three months ended March 31, 2012, as compared to the year-ago period, which was primarily driven by new collective bargaining agreements for flight attendants and mechanics.
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Aircraft maintenance materials and outside repairs decreased $25 million, or 8.6%, in the first quarter of 2012 as compared to the year-ago period, primarily due to lower rates on a new engine maintenance contract as well as fewer airframe visits in 2012 as compared to 2011.
Special charges increased $22 million, or 29.7%, in the first quarter of 2012 as compared to the year-ago period, primarily due to costs associated with the integration of United and Continental, as discussed in UALs results of operations above.
Uniteds nonoperating expense decreased $55 million, or 32.7%, in the first quarter of 2012 as compared to the year-ago period due to a decrease in interest expense as a result of a decrease in the principal amount of debt outstanding year-over-year.
Continental
The following table presents information related to Continentals results of operations for the three months ended March 31 (in millions, except percentage changes):
Three Months Ended March 31, |
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2012 | 2011 | % Change | ||||||||||
Operating Revenue: |
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Passenger revenue |
$ | 3,474 | $ | 3,151 | 10.3 | |||||||
Cargo and other revenue |
448 | 407 | 10.1 | |||||||||
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Total revenue |
$ | 3,922 | $ | 3,558 | 10.2 | |||||||
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Operating Expenses: |
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Aircraft fuel |
$ | 1,387 | $ | 1,160 | 19.6 | |||||||
Salaries and related costs |
847 | 805 | 5.2 | |||||||||
Regional capacity purchase |
237 | 192 | 23.4 | |||||||||
Landing fees and other rent |
214 | 220 | (2.7 | ) | ||||||||
Aircraft maintenance materials and outside repairs |
146 | 149 | (2.0 | ) | ||||||||
Depreciation and amortization |
149 | 161 | (7.5 | ) | ||||||||
Distribution expenses |
155 | 163 | (4.9 | ) | ||||||||
Aircraft rent |
174 | 172 | 1.2 | |||||||||
Special charges |
68 | 3 | NM | |||||||||
Other operating expenses |