United Airlines Announces Third-Quarter Profit

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Three Months Ended

Nine Months Ended

September 30,

%

September 30,

%

(In millions, except per share data)

2015

2014

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

Operating revenue:

Passenger:

Mainline

$7,254

$7,414

(2.2)

$20,153

$20,410

(1.3)

Regional

1,706

1,900

(10.2)

4,903

5,269

(6.9)

Total passenger revenue

8,960

9,314

(3.8)

25,056

25,679

(2.4)

Cargo

235

237

(0.8)

706

678

4.1

Other operating revenue

1,111

1,012

9.8

3,066

3,231

(5.1)

Total operating revenue

10,306

10,563

(2.4)

28,828

29,588

(2.6)

Operating expense:

Salaries and related costs

2,534

2,344

8.1

7,289

6,684

9.1

Aircraft fuel (A)

1,934

3,127

(38.2)

5,904

9,145

(35.4)

Regional capacity purchase

572

597

(4.2)

1,725

1,747

(1.3)

Landing fees and other rent

551

567

(2.8)

1,647

1,706

(3.5)

Depreciation and amortization

469

422

11.1

1,343

1,248

7.6

Aircraft maintenance materials and outside repairs

424

435

(2.5)

1,252

1,364

(8.2)

Distribution expenses

366

375

(2.4)

1,026

1,039

(1.3)

Aircraft rent

185

222

(16.7)

580

668

(13.2)

Special charges (B)

76

43

NM

195

264

NM

Other operating expenses

1,296

1,240

4.5

3,782

3,975

(4.9)

Total operating expense

8,407

9,372

(10.3)

24,743

27,840

(11.1)

Operating income

1,899

1,191

59.4

4,085

1,748

133.7

Nonoperating income (expense):

Interest expense

(164)

(186)

(11.8)

(504)

(559)

(9.8)

Interest capitalized

13

13

-

38

40

(5.0)

Interest income

5

8

(37.5)

16

17

(5.9)

Miscellaneous, net (B)

(147)

(106)

38.7

(321)

(141)

127.7

Total nonoperating expense

(293)

(271)

8.1

(771)

(643)

19.9

Income before income taxes

1,606

920

74.6

3,314

1,105

199.9

Income tax expense (benefit) (C)

(3,210)

(4)

NM

(3,203)

1

NM

Net income

$4,816

$924

421.2

$6,517

$1,104

490.3

Earnings per share, basic

$12.83

$2.50

413.2

$17.19

$2.98

476.8

Earnings per share, diluted

$12.82

$2.37

440.9

$17.15

$2.84

 NM

Weighted average shares, basic

375

370

1.4

379

370

2.4

Weighted average shares, diluted

376

393

(4.3)

380

395

(3.8)

NM Not meaningful

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

UAL's results of operations include fuel expense for both mainline and regional operations.

(A)

Three Months Ended

Nine Months Ended

September 30,

%

September 30,

%

(In millions, except per gallon)

2015

2014

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

Mainline fuel expense excluding hedge impacts

$1,483

$2,534

(41.5)

$4,527

$7,426

(39.0)

Hedge losses reported in fuel expense (a)

(150)

-

 NM

(429)

(4)

 NM

Total mainline fuel expense

1,633

2,534

(35.6)

4,956

7,430

(33.3)

Regional fuel expense

301

593

(49.2)

948

1,715

(44.7)

Consolidated fuel expense

1,934

3,127

(38.2)

5,904

9,145

(35.4)

Cash received (paid) on settled hedges that did not qualify for hedge accounting (b)

(100)

1

 NM

(214)

13

 NM

Fuel expense including all gains (losses) from settled hedges

$2,034

$3,126

(34.9)

$6,118

$9,132

(33.0)

Mainline fuel consumption (gallons)

862

846

1.9

2,432

2,414

0.7

Mainline average aircraft fuel price per gallon excluding hedge losses recorded in fuel expense

$1.72

$3.00

(42.7)

$1.86

$3.08

(39.6)

Mainline average aircraft fuel price per gallon

$1.89

$3.00

(37.0)

$2.04

$3.08

(33.8)

Mainline average aircraft fuel price per gallon including cash received (paid) on settled hedges that did not qualify for hedge accounting

$2.01

$2.99

(32.8)

$2.13

$3.07

(30.6)

Regional fuel consumption (gallons)

173

191

(9.4)

503

543

(7.4)

Regional average aircraft fuel price per gallon

$1.74

$3.10

(43.9)

$1.88

$3.16

(40.5)

Consolidated fuel consumption (gallons)

1,035

1,037

(0.2)

2,935

2,957

(0.7)

Consolidated average aircraft fuel price per gallon excluding hedge losses recorded in fuel expense 

$1.72

$3.02

(43.0)

$1.87

$3.09

(39.5)

Consolidated average aircraft fuel price per gallon

$1.87

$3.02

(38.1)

$2.01

$3.09

(35.0)

Consolidated average aircraft fuel price per gallon including cash received (paid) on settled hedges that did not qualify for hedge accounting

$1.97

$3.01

(34.6)

$2.08

$3.09

(32.7)

(a) Includes losses from settled hedges that were designated for hedge accounting. UAL allocates 100 percent of hedge accounting gains (losses) to mainline fuel expense.

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

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(B) Special items include the following:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

(In millions)

Operating:

Severance and benefits

$28

$6

$103

$58

Integration-related costs

15

28

47

79

Costs associated with permanently grounding Embraer ERJ 135 aircraft

-

-

-

66

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

33

9

45

61

    Special charges

76

43

195

264

Nonoperating:

       Loss on extinguishment of debt and Venezuela currency loss

61

-

195

21

          Income tax benefit

-

(3)

-

(4)

            Total operating and nonoperating special charges, net of income taxes

137

40

390

281

               Income tax valuation allowance release (C)

(3,218)

-

(3,218)

-

Mark-to-market (MTM) losses from fuel derivative contracts settling in future periods

36

95

28

57

Prior period gains (losses) on fuel derivative contracts settled in the current period

(69)

16

(173)

63

       Total special items, net of income taxes

$ (3,114)

$151

$ (2,973)

$401

2015 - Special items

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

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

(Gains) losses on sale of assets and other special charges: During the three and nine months ended September 30, 2015, the company recorded $33 million and $45 million, respectively, for losses on the sale of one aircraft, the impairment of several engines held for sale and discontinued internal software projects.

Loss on extinguishment of debt: During the nine months ended September 30, 2015, the company recorded $134 million of losses as part of Nonoperating income (expense): Miscellaneous, net due to the write-off of the unamortized non-cash debt discount related to the extinguishment of the 6% Notes due 2026 and 6% Notes due 2028.

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

MTM losses from fuel derivative contracts settling in future periods and prior period gains (losses) on fuel derivative contracts settled in the current period: The company uses certain combinations of derivative contracts that are economic hedges but do not qualify for hedge accounting under U.S. generally accepted accounting principles. Additionally, the company may enter into contracts at different times and later combine those contracts into structures designated for hedge accounting. As with derivatives that qualify for hedge accounting, the economic hedges and individual contracts are part of the company's program to mitigate the adverse financial impact of potential increases in the price of fuel. The company records changes in the fair value of these various contracts that are not designated for hedge accounting to Nonoperating income (expense):

Miscellaneous, net in the statements of consolidated operations. During the three and nine months ended September 30, 2015, the company recorded $36 million and $28 million, respectively, in MTM losses on fuel derivative contracts that will settle in future periods. For fuel derivative contracts that settled in the three and nine months ended September 30, 2015, the company recorded MTM losses of $69 million and $173 million, respectively, in prior periods. The figures above also include an insignificant amount of ineffectiveness on hedges that are designated for hedge accounting.

2014 - Special items

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

Integration-related costs: Integration-related costs included compensation costs related to systems integration, training, severance and relocation for employees.

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

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

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

MTM losses from fuel derivative contracts settling in future periods and prior period gains on fuel derivative contracts settled in the current period: The company utilizes certain derivative instruments that are economic hedges but do not qualify for hedge accounting under U.S. generally accepted accounting principles. The company records changes in the fair value of these economic hedges to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations. During the three and nine months ended September 30, 2014, the company recorded $95 million and $57 million, respectively, in MTM losses on economic hedges that will settle in future periods. For economic hedges that settled in the three and nine months ended September 30, 2014, the company recorded MTM gains of $16 million and $63 million, respectively, in prior periods. The figures above also include an insignificant amount of ineffectiveness on hedges that are designated for hedge accounting.

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

UNITED CONTINENTAL HOLDINGS, INC.

STATISTICS (Continued)

Three Months Ended

Nine Months Ended

September 30,

%

September 30,

%

2015

2014

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

Consolidated (Mainline and Regional):

Passengers (thousands)

37,464

36,735

2.0

105,217

104,472

0.7

Revenue passenger miles (millions)

57,160

56,065

2.0

157,893

156,348

1.0

Available seat miles (millions)

66,745

65,378

2.1

188,699

185,808

1.6

Passenger load factor

85.6 %

85.8 %

(0.2)

pts.

83.7 %

84.1 %

(0.4)

pts.

Passenger revenue per available seat mile (cents)

13.42

14.25

(5.8)

13.28

13.82

(3.9)

Total revenue per available seat mile (cents)

15.44

16.16

(4.5)

15.28

15.92

(4.0)

Average yield per revenue passenger mile (cents)

15.68

16.61

(5.6)

15.87

16.42

(3.3)

Average aircraft fuel price per gallon excluding hedge losses recorded in fuel expense (a)

$1.72

$3.02

(43.0)

$1.87

$3.09

(39.5)

Average aircraft fuel price per gallon (a)

$1.87

$3.02

(38.1)

$2.01

$3.09

(35.0)

Average aircraft fuel price per gallon including cash received (paid) on settled hedges that did not qualify for hedge accounting (a)

$1.97

$3.01

(34.6)

$2.08

$3.09

(32.7)

Fuel gallons consumed (millions)

1,035

1,037

(0.2)

2,935

2,957

(0.7)

Average full-time equivalent employees (thousands)

82.4

81.9

0.6

82.1

82.5

(0.5)

(a)

Fuel price per gallon includes aircraft fuel and related taxes.

(b)

Average stage length equals the average distance a flight travels weighted for size of aircraft.

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION

UAL evaluates its financial performance utilizing various accounting principles generally accepted in the United States of America (GAAP) and Non-GAAP financial measures, including income (loss) before income taxes excluding special items, net income (loss) excluding special items, net earnings (loss) per share excluding special items, and CASM, among others. CASM is a common metric used in the airline industry to measure an airline's cost structure and efficiency. Pursuant to SEC Regulation G, UAL has included the following reconciliation of reported Non-GAAP financial measures to comparable financial measures reported on a GAAP basis. UAL believes that adjusting for special items is useful to investors because special charges are non-recurring charges not indicative of UAL's ongoing performance. In addition, the company believes that adjusting for MTM gains and losses from fuel derivative contracts settling in future periods and prior period gains and losses on fuel derivative contracts settled in the current period is useful because the adjustments allow investors to better understand the cash impact of settled fuel derivative contracts in a given period. UAL also believes that excluding third-party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and non-air mileage redemptions, 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 recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry. UAL also believes that adjusting capital expenditures for fully reimbursable projects is useful to investors in order to appropriately reflect the non-reimbursable funds spent on capital expenditures.

Three Months Ended

Nine Months Ended

(in millions)

September 30,

$

%

September 30,

$

%

2015

2014

Increase/ (Decrease)

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

Increase/ (Decrease)

Operating expenses

$8,407

$9,372

$(965)

(10.3)

$24,743

$27,840

$(3,097)

(11.1)

Less: Special charges (B)

76

43

33

NM

195

264

(69)

NM

Operating expenses, excluding special charges

8,331

9,329

(998)

(10.7)

24,548

27,576

(3,028)

(11.0)

Less: Third-party business expenses

70

61

9

14.8

205

469

(264)

(56.3)

Less: Fuel expense

1,934

3,127

(1,193)

(38.2)

5,904

9,145

(3,241)

(35.4)

Less: Profit sharing, including taxes

277

129

148

114.7

545

182

363

199.5

Operating expenses, excluding fuel, profit sharing, special charges and third-party business expenses

$6,050

$6,012

$38

0.6

$17,894

$17,780

$114

0.6

Income before income taxes

$1,606

$920

$686

74.6

$3,314

$1,105

$2,209

199.9

Less: Special items before income tax benefit

104

154

(50)

NM

245

405

(160)

NM

Income before income taxes and excluding special items

$1,710

$1,074

$636

59.2

$3,559

$1,510

$2,049

135.7

Net income

$4,816

$924

$3,892

421.2

$6,517

$1,104

$5,413

490.3

Less: Special items, net of tax (B)

(3,114)

151

(3,265)

NM

(2,973)

401

(3,374)

NM

Net income, excluding special items

$1,702

$1,075

$627

58.3

$3,544

$1,505

$2,039

135.5

Diluted earnings per share

$12.82

$2.37

$10.45

440.9

$17.15

$2.84

$14.31

NM

Add back: Special items, net of tax

(8.29)

0.38

(8.67)

NM

(7.83)

1.02

(8.85)

NM

Diluted earnings per share, excluding special items

$4.53

$2.75

$1.78

64.7

$9.32

$3.86

$5.46

141.5

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended

Nine Months Ended

September 30,

%

September 30,

%

2015

2014

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

CASM Mainline Operations (cents)

Cost per available seat mile (CASM)

11.97

13.51

(11.4)

12.43

14.14

(12.1)

Less: Special charges (B)

0.13

0.07

NM

0.12

0.17

NM

CASM, excluding special charges

11.84

13.44

(11.9)

12.31

13.97

(11.9)

Less: Third-party business expenses

0.12

0.11

9.1

0.12

0.29

(58.6)

CASM, excluding special charges and third-party business expenses

11.72

13.33

(12.1)

12.19

13.68

(10.9)

Less: Fuel expense

2.77

4.45

(37.8)

2.98

4.59

(35.1)

CASM, excluding special charges, third-party business expenses and fuel

8.95

8.88

0.8

9.21

9.09

1.3

Less: Profit sharing per available seat mile

0.47

0.23

104.3

0.33

0.11

200.0

CASM, excluding special charges, third-party business expenses, fuel, and profit sharing

8.48

8.65

(2.0)

8.88

8.98

(1.1)

CASM Consolidated Operations (cents)

Cost per available seat mile (CASM)

12.60

14.34

(12.1)

13.11

14.98

(12.5)

Less: Special charges (B)

0.12

0.07

NM

0.10

0.14

NM

CASM, excluding special charges

12.48

14.27

(12.5)

13.01

14.84

(12.3)

Less: Third-party business expenses

0.10

0.09

11.1

0.11

0.25

(56.0)

CASM, excluding special charges and third-party business expenses

12.38

14.18

(12.7)

12.90

14.59

(11.6)

Less: Fuel expense

2.90

4.79

(39.5)

3.13

4.92

(36.4)

CASM, excluding special charges, third-party business expenses and fuel

9.48

9.39

1.0

9.77

9.67

1.0

Less: Profit sharing per available seat mile

0.42

0.19

121.1

0.29

0.10

190.0

CASM, excluding special charges, third-party business expenses, fuel, and profit sharing

9.06

9.20

(1.5)

9.48

9.57

(0.9)

UNITED CONTINENTAL HOLDINGS, INC.

CAPITAL EXPENDITURES AND FREE CASH FLOW

Capital Expenditures

(in millions)

Three Months Ended

September 30, 2015

Capital expenditures - GAAP

$673

Property and equipment acquired through the issuance of debt

70

Airport construction financing

5

Fully reimbursable projects

(32)

Adjusted capital expenditures – Non-GAAP

$716

Free Cash Flow

(in millions)

Three Months Ended

September 30, 2015

Net cash provided by operating activities

$1,300

Less capital expenditures

673

Free cash flow

$627

UNITED CONTINENTAL HOLDINGS, INC.

RETURN ON INVESTED CAPITAL (ROIC)

ROIC is a Non-GAAP financial measure that we believe provides useful supplemental information for management and investors by measuring the effectiveness of our operations' use of invested capital to generate profits.

(in millions)

Twelve Months Ended

September 30, 2015