United Airlines Expects To Deliver Peer-Leading Pre-Tax Margin Growth During First-Quarter 2019

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

Three Months Ended
March 31,

%
Increase/
(Decrease)

(In millions, except per share data)

2019

2018

Operating revenue:

Passenger

$

8,725

$

8,149

7.1

Cargo

286

293

(2.4)

Other operating revenue

578

590

(2.0)

Total operating revenue

9,589

9,032

6.2

Operating expense:

Salaries and related costs

2,873

2,726

5.4

Aircraft fuel

2,023

1,965

3.0

Regional capacity purchase

688

630

9.2

Landing fees and other rent

588

579

1.6

Depreciation and amortization

547

524

4.4

Aircraft maintenance materials and outside repairs

408

440

(7.3)

Distribution expenses

360

342

5.3

Aircraft rent

81

127

(36.2)

Special charges (B)

18

40

NM

Other operating expenses

1,508

1,397

7.9

Total operating expense

9,094

8,770

3.7

Operating income

495

262

88.9

Operating margin

5.2

%

2.9

%

2.3

pts.

Adjusted operating margin (Non-GAAP) (A)

5.3

%

3.3

%

2.0

pts.

Nonoperating income (expense):

Interest expense

(188)

(162)

16.0

Interest capitalized

22

18

22.2

Interest income

29

17

70.6

Miscellaneous, net (B)

9

47

(80.9)

Total nonoperating expense

(128)

(80)

60.0

Income before income taxes

367

182

101.6

Pre-tax margin

3.8

%

2.0

%

1.8

pts.

Adjusted pre-tax margin (Non-GAAP) (A)

4.1

%

2.0

%

2.1

pts.

Income tax expense (D)

75

37

102.7

Net income

$

292

$

145

101.4

Diluted earnings per share

$

1.09

$

0.51

113.7

Diluted weighted average shares

268.3

284.9

(5.8)

NM Not meaningful

UNITED CONTINENTAL HOLDINGS, INC.

PASSENGER REVENUE INFORMATION AND STATISTICS

Passenger revenue information is as follows:

1Q 2019
Passenger
Revenue
(millions)

Passenger
Revenue
vs.
1Q 2018

PRASM
vs.
1Q 2018

Yield
vs.
1Q 2018

Available
Seat Miles
vs.
1Q 2018

1Q 2019
Available Seat
Miles (millions)

Domestic

$

5,367

8.0%

0.6%

0.9%

7.4%

36,726

Atlantic

1,331

6.3%

(2.8%)

(4.8%)

9.4%

10,626

Pacific

1,121

4.9%

4.5%

2.2%

0.3%

10,923

Latin America

906

5.3%

2.6%

2.3%

2.6%

7,370

International

3,358

5.6%

1.4%

(0.1%)

4.1%

28,919

Consolidated

$

8,725

7.1%

1.1%

0.5%

5.9%

65,645

Select operating statistics are as follows:

Three Months Ended
March 31,

%
Increase/
(Decrease)

2019

2018

Passengers (thousands)

36,454

34,495

5.7

Revenue passenger miles (millions)

53,097

49,849

6.5

Available seat miles (millions)

65,645

61,977

5.9

Passenger load factor:

Consolidated

80.9

%

80.4

%

0.5

pts.

Domestic

82.6

%

82.8

%

(0.2)

pts.

International

78.7

%

77.5

%

1.2

pts.

Passenger revenue per available seat mile (cents)

13.29

13.15

1.1

Total revenue per available seat mile (cents)

14.61

14.57

0.3

Average yield per revenue passenger mile (cents)

16.43

16.35

0.5

Aircraft in fleet at end of period

1,348

1,295

4.1

Average stage length (miles)

1,448

1,443

0.3

Average full-time equivalent employees

88,730

85,561

3.7

Average aircraft fuel price per gallon

$

2.05

$

2.11

(2.8)

Fuel gallons consumed (millions)

985

932

5.7

Note: See Part II, Item 6, Selected Financial Data, of UAL's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, for definitions of these statistics.

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In millions)

March 31, 2019

December 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

$

1,848

$

1,694

Short-term investments

2,219

2,256

Receivables, less allowance for doubtful accounts

1,789

1,426

Aircraft fuel, spare parts and supplies, less obsolescence allowance

972

985

Prepaid expenses and other

780

733

Total current assets

7,608

7,094

Total operating property and equipment, net

28,586

27,399

Operating lease right-of-use assets

5,065

5,262

Other assets:

Goodwill

4,523

4,523

Intangibles, less accumulated amortization

3,144

3,159

Restricted cash

103

105

Notes receivable, net

512

516

Investments in affiliates and other, net

1,098

966

Total other assets

9,380

9,269

Total assets

$

50,639

$

49,024

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Advance ticket sales

$

6,006

$

4,381

Accounts payable

2,707

2,363

Frequent flyer deferred revenue

2,388

2,286

Accrued salaries and benefits

1,660

2,184

Current maturities of long-term debt

1,201

1,230

Current maturities of finance leases

133

123

Current maturities of operating leases

639

719

Other

601

553

Total current liabilities

15,335

13,839

Other long-term liabilities and deferred credits:

Long-term debt

12,734

12,215

Long-term obligations under finance leases

236

224

Long-term obligations under operating leases

5,145

5,276

Frequent flyer deferred revenue

2,750

2,719

Postretirement benefit liability

1,287

1,295

Pension liability

1,454

1,576

Deferred income taxes

898

828

Other

998

1,010

Total other long-term liabilities and deferred credits

25,502

25,143

Stockholders' equity

9,802

10,042

Total liabilities and stockholders' equity

$

50,639

$

49,024

UNITED CONTINENTAL HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

Three Months Ended
March 31,

2019

2018

Cash Flows from Operating Activities:

Net cash provided by operating activities

$

1,915

$

1,709

Cash Flows from Investing Activities:

Capital expenditures

(1,609)

(944)

Purchases of short-term and other investments

(724)

(596)

Proceeds from sale of short-term and other investments

768

840

Loans made to others

-

(10)

Investment in affiliates

(27)

-

Other, net

12

15

Net cash used in investing activities

(1,580)

(695)

Cash Flows from Financing Activities:

Proceeds from issuance of long-term debt

646

673

Payments of long-term debt

(250)

(189)

Repurchases of common stock

(513)

(529)

Principal payments under finance leases

(20)

(18)

Capitalized financing costs

(17)

(16)

Other, net

(29)

(16)

Net cash used in financing activities

(183)

(95)

Net increase in cash, cash equivalents and restricted cash

152

919

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

1,799

1,591

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

$

1,951

$

2,510

Investing and Financing Activities Not Affecting Cash:

Property and equipment acquired through the issuance of debt

$

92

$

60

Operating lease conversions to finance lease

36

-

Right-of-use assets acquired through operating leases

51

103

Property and equipment acquired through finance leases

8

-

UNITED CONTINENTAL HOLDINGS, INC.

RETURN ON INVESTED CAPITAL (ROIC)-Non-GAAP

ROIC is a non-GAAP financial measure that UAL believes provides useful supplemental information for management and investors by measuring the effectiveness of the company's operations' use of invested capital to generate profits.

(in millions)

Twelve Months Ended
March 31, 2019

Net Operating Profit After Tax ("NOPAT")

Pre-tax income

$

2,833

Adjustments:

Special charges and mark-to-market ("MTM") losses on financial instruments:

Impairment of assets

362

Termination of a maintenance service agreement

64

Severance and benefit costs

33

MTM losses on financial instruments

33

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

6

Pre-tax income excluding special charges and MTM losses on financial instruments (Non-GAAP)

3,331

add: Interest expense (net of income tax benefit) (a)

693

add: Interest component of capitalized aircraft rent (net of income tax benefit) (a)

193

add: Net interest on pension (net of income tax benefit) (a)

(12)

less: Income taxes paid

(14)

NOPAT (Non-GAAP)

$

4,191

Average Invested Capital (five-quarter average)

Total assets

$

49,392

less: Non-interest bearing liabilities (b)

(16,966)

Average invested capital (Non-GAAP)

$

32,426

ROIC (Non-GAAP)

12.9

%

(a)

Income tax benefit measured based on the effective cash tax rate. The effective cash tax rate is calculated by dividing cash taxes paid by pre-tax income excluding special charges and MTM gains on financial instruments. For the twelve months ended March 31, 2019, the effective cash tax rate was 0.4%.

(b)

Non-interest bearing liabilities include advance ticket sales, frequent flyer deferred revenue, deferred income taxes and other non-interest bearing liabilities.

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION

(A) UAL evaluates its financial performance utilizing various accounting principles generally accepted in the United States of America (GAAP) and Non-GAAP financial measures, including adjusted operating income (loss), adjusted operating margin, adjusted pre-tax income (loss), adjusted pre-tax margin, adjusted net income (loss), adjusted diluted earnings (loss) per share and CASM, excluding special charges, third-party business expenses, fuel, and profit sharing, among others. UAL believes that adjusting for special charges is useful to investors because special charges are not indicative of UAL's ongoing performance. UAL believes that adjusting for MTM gains and losses on financial instruments is useful to investors because those unrealized gains or losses may not ultimately be realized on a cash basis. UAL believes that adjusting for interest expense related to finance leases of Embraer ERJ 145 aircraft is useful to investors because of the accelerated recognition of interest expense.

CASM is a common metric used in the airline industry to measure an airline's cost structure and efficiency. UAL reports CASM excluding special charges, third-party business expenses, fuel and profit sharing. UAL believes that adjusting for special charges is useful to investors because special charges are not indicative of UAL's ongoing performance. UAL also believes that excluding third-party business expenses, such as maintenance, ground handling and catering services for third parties and fuel sales, provides more meaningful disclosure because these expenses are not directly related to UAL's core business. UAL also believes that excluding fuel costs from certain measures is useful to investors because it provides an additional measure of management's performance excluding the effects of a significant cost item over which management has limited influence. UAL excludes profit sharing because this exclusion allows investors to better understand and analyze our operating cost performance and provides a more meaningful comparison of our core operating costs to the airline industry.

Reconciliations of reported non-GAAP financial measures to the most directly comparable GAAP financial measures are included below.

Three Months Ended

March 31,

%
Increase/
(Decrease)

2019

2018

CASM (cents)

Cost per available seat mile (CASM) (GAAP)

13.85

14.15

(2.1)

Special charges (B)

0.02

0.07

NM

Third-party business expenses

0.05

0.05

-

Fuel expense

3.08

3.17

(2.8)

Profit sharing, including taxes

0.05

0.02

150.0

CASM, excluding special charges, third-party business expenses, fuel, and profit sharing (Non-GAAP)

10.65

10.84

(1.8)

NM Not Meaningful

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended
March 31,

$
Increase/
(Decrease)

%
Increase/
(Decrease)

(in millions)

2019

2018

Operating expenses (GAAP)

$

9,094

$

8,770

$

324

3.7

Special charges (B)

18

40

(22)

NM

Operating expenses, excluding special charges

9,076

8,730

346

4.0

Adjusted to exclude:

Third-party business expenses

30

31

(1)

(3.2)

Fuel expense

2,023

1,965

58

3.0

Profit sharing, including taxes

33

17

16

94.1

Adjusted operating expenses (Non-GAAP)

$

6,990

$

6,717

$

273

4.1

Operating income (GAAP)

$

495

$

262

$

233

88.9

Adjusted to exclude:

Special charges (B)

18

40

(22)

NM

Adjusted operating income (Non-GAAP)

$

513

$

302

$

211

69.9

Pre-tax income (GAAP)

$

367

$

182

$

185

101.6

Adjusted to exclude:

Special charges (B)

18

40

(22)

NM

MTM gains on financial instruments (B)

(17)

(45)

28

NM

Interest expense on ERJ 145 finance leases (C)

21

-

21

NM

Adjusted pre-tax income (Non-GAAP)

$

389

$

177

$

212

119.8

Net income (GAAP)

$

292

$

145

$

147

101.4

Adjusted to exclude:

Special charges (B)

18

40

(22)

NM

MTM gains on financial instruments (B)

(17)

(45)

28

NM

Interest expense on ERJ 145 finance leases (C)

21

-

21

NM

Income tax expense (benefit) related to adjustments above

(5)

1

(6)

NM

Adjusted net income (Non-GAAP)

$

309

$

141

$

168

119.1

Diluted earnings per share (GAAP)

$

1.09

$

0.51

$

0.58

113.7

Adjusted to exclude:

Special charges (B)

0.07

0.14

(0.07)

NM

MTM gains on financial instruments (B)

(0.07)

(0.16)

0.09

NM

Interest expense on ERJ 145 finance leases (C)

0.08

-

0.08

NM

Income tax benefit related to adjustments

(0.02)

-

(0.02)

NM

Adjusted diluted earnings per share (Non-GAAP)

$

1.15

$

0.49

$

0.66

134.7

NM Not Meaningful

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

UAL believes that adjusting capital expenditures for assets acquired through the issuance of debt and finance leases is useful to investors in order to appropriately reflect the total amounts spent on capital expenditures. UAL also believes that adjusting net cash provided by operating activities for capital expenditures and adjusted capital expenditures is useful to allow investors to evaluate the company's ability to generate cash that is available for debt service or general corporate initiatives.

Three Months Ended
March 31,

Capital Expenditures (in millions)

2019

2018

Capital expenditures (GAAP)

$

1,609

$

944

Property and equipment acquired through the issuance of debt

92

60

Property and equipment acquired through finance leases

8

-

Adjusted capital expenditures (Non-GAAP)

$

1,709

$

1,004

Free Cash Flow (in millions)

Net cash provided by operating activities (GAAP)

$

1,915

$

1,709

Less capital expenditures

1,609

944

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

$

306

$

765

Net cash provided by operating activities (GAAP)

$

1,915

$

1,709

Less adjusted capital expenditures (Non-GAAP)

1,709

1,004

Free cash flow (Non-GAAP)

$

206

$

705

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(B) Special charges and MTM gains on financial instruments include the following:

Three Months Ended
March 31,

(In millions)

2019

2018

Operating:

Impairment of assets

$

8

$

23

Severance and benefit costs

6

14

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

4

3

Total special charges

18

40

Nonoperating MTM gains on financial instruments

(17)

(45)

Total special charges and MTM gains on financial instruments

1

(5)

Income tax expense related to special charges and MTM gains on financial instruments

-

1

Total special charges and MTM gains on financial instruments, net of income taxes

$

1

$

(4)

Impairment of assets: During the three months ended March 31, 2019, the company recorded an $8 million fair value adjustment for aircraft purchased off lease. During the three months ended March 31, 2018, the company recorded a $23 million fair value adjustment for aircraft purchased off lease and impairments related to certain fleet types and certain international slots no longer in use.

Severance and benefit costs: During the three months ended March 31, 2019 and 2018, the company recorded $2 million and $8 million, respectively, of severance and benefit costs primarily related to a voluntary early-out program for its technicians and related employees represented by the International Brotherhood of Teamsters. In the first quarter of 2017, approximately 1,000 technicians and related employees elected to voluntarily separate from the company and received a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through early 2019. Also during the three months ended March 31, 2019 and 2018, the company recorded $4 million and $6 million, respectively, of management severance.

MTM gains on financial instruments: During the three months ended March 31, 2019 and 2018, the company recorded gains of $14 million and $45 million, respectively, for the change in market value of its investment in Azul Linhas Aéreas Brasileiras S.A. During the first quarter of 2019, the company recorded gains of $3 million for the change in fair value of certain derivative assets related to equity of Avianca Holdings S.A. For equity investments and derivative assets subject to MTM accounting, the company records gains and losses as part of Nonoperating income (expense): Miscellaneous, net in its statements of consolidated operations.

(C) Interest expense related to finance leases of Embraer ERJ 145 aircraft

During the third quarter of 2018, United entered into an agreement with the lessor of 54 Embraer ERJ 145 aircraft to purchase those aircraft in 2019. The provisions of the new lease agreement resulted in a change in accounting classification of these new leases from operating leases to finance leases up until the purchase date. The company recognized $21 million of additional interest expense in the three months ended March 31, 2019 as a result of this change.

(D) Effective tax rate

The company's effective tax rate for the three months ended March 31, 2019 and 2018 was 20.4% and 20.3%, respectively. The effective tax rate represents a blend of federal, state and foreign taxes and includes the impact of certain nondeductible items and the impact of a change in the company's mix of domestic and foreign earnings.