United Airlines Reports Second-Quarter 2016 Performance

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Three Months Ended
June 30,

%
Increase/
(Decrease)

Six Months Ended
June 30,

%
Increase/
(Decrease)

(In millions, except per share data)

2016

2015

2016

2015

Operating revenue:

Passenger: (A)

Mainline

$

6,525

$

6,961

(6.3)

$

12,102

$

12,899

(6.2)

Regional

1,578

1,715

(8.0)

2,991

3,197

(6.4)

Total passenger revenue

8,103

8,676

(6.6)

15,093

16,096

(6.2)

Cargo

208

229

(9.2)

402

471

(14.6)

Other operating revenue

1,085

1,009

7.5

2,096

1,955

7.2

Total operating revenue

9,396

9,914

(5.2)

17,591

18,522

(5.0)

Operating expense:

Salaries and related costs

2,592

2,454

5.6

5,082

4,755

6.9

Aircraft fuel (B)

1,437

2,106

(31.8)

2,655

3,970

(33.1)

Regional capacity purchase

551

583

(5.5)

1,073

1,153

(6.9)

Landing fees and other rent

541

553

(2.2)

1,066

1,096

(2.7)

Depreciation and amortization

491

445

10.3

970

874

11.0

Aircraft maintenance materials and outside repairs

448

431

3.9

850

828

2.7

Distribution expenses

339

348

(2.6)

642

660

(2.7)

Aircraft rent

175

194

(9.8)

353

395

(10.6)

Special charges (C)

434

55

NM

624

119

NM

Other operating expenses

1,328

1,300

2.2

2,567

2,486

3.3

Total operating expense

8,336

8,469

(1.6)

15,882

16,336

(2.8)

Operating income

1,060

1,445

(26.6)

1,709

2,186

(21.8)

Nonoperating income (expense):

Interest expense

(157)

(167)

(6.0)

(316)

(340)

(7.1)

Interest capitalized

14

13

7.7

28

25

12.0

Interest income

9

6

50.0

17

11

54.5

Miscellaneous, net (C)

5

(100)

NM

(13)

(174)

(92.5)

Total nonoperating expense

(129)

(248)

(48.0)

(284)

(478)

(40.6)

Income before income taxes

931

1,197

(22.2)

1,425

1,708

(16.6)

Income tax expense (D)

343

4

NM

524

7

NM

Net income

$

588

$

1,193

(50.7)

$

901

$

1,701

(47.0)

Earnings per share, basic

$

1.78

$

3.14

(43.3)

$

2.63

$

4.46

(41.0)

Earnings per share, diluted

$

1.78

$

3.14

(43.3)

$

2.63

$

4.45

(40.9)

Weighted average shares, basic

331

380

(12.9)

342

381

(10.2)

Weighted average shares, diluted

331

380

(12.9)

343

382

(10.2)

NM Not meaningful

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(A)      Select passenger revenue information is as follows (in millions):

2Q 2016
Passenger
Revenue
(millions)

Passenger
Revenue
vs.
2Q 2015

PRASM
vs.
2Q 2015

Yield
vs.
2Q 2015

Available
Seat Miles
vs.
2Q 2015

Domestic

$

3,393

(3.7%)

(4.6%)

(4.7%)

0.9%

Atlantic

1,506

(7.9%)

(10.3%)

(4.8%)

2.7%

Pacific

1,013

(8.6%)

(7.6%)

(8.0%)

(1.1%)

Latin America

613

(11.8%)

(10.5%)

(13.5%)

(1.5%)

International

3,132

(8.9%)

(9.3%)

(7.8%)

0.5%

Mainline

6,525

(6.3%)

(6.9%)

(6.2%)

0.7%

Regional

1,578

(8.0%)

(3.4%)

(4.2%)

(4.8%)

Consolidated

$

8,103

(6.6%)

(6.6%)

(6.1%)

0.1%

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

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

Three Months Ended
June 30,

%
Increase/
(Decrease)

Six Months Ended
June 30,

%
Increase/
(Decrease)

(In millions, except per gallon)

2016

2015

2016

2015

Mainline fuel expense excluding hedge impacts

$

1,166

$

1,648

(29.2)

$

2,051

$

3,044

(32.6)

Hedge losses reported in fuel expense (a)

(35)

(118)

NM

(173)

(279)

NM

Total mainline fuel expense

1,201

1,766

(32.0)

2,224

3,323

(33.1)

Regional fuel expense

236

340

(30.6)

431

647

(33.4)

Consolidated fuel expense

1,437

2,106

(31.8)

2,655

3,970

(33.1)

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

—

(75)

NM

(5)

(114)

NM

Fuel expense including all losses from settled hedges

$

1,437

$

2,181

(34.1)

$

2,660

$

4,084

(34.9)

Mainline fuel consumption (gallons)

834

833

0.1

1,568

1,570

(0.1)

Mainline average aircraft fuel price per gallon

$

1.44

$

2.12

(32.1)

$

1.42

$

2.12

(33.0)

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

$

1.40

$

1.98

(29.3)

$

1.31

$

1.94

(32.5)

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

$

1.44

$

2.21

(34.8)

$

1.42

$

2.19

(35.2)

Regional fuel consumption (gallons)

161

171

(5.8)

317

330

(3.9)

Regional average aircraft fuel price per gallon

$

1.47

$

1.99

(26.1)

$

1.36

$

1.96

(30.6)

Consolidated fuel consumption (gallons)

995

1,004

(0.9)

1,885

1,900

(0.8)

Consolidated average aircraft fuel price per gallon

$

1.44

$

2.10

(31.4)

$

1.41

$

2.09

(32.5)

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

$

1.41

$

1.98

(28.8)

$

1.32

$

1.94

(32.0)

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

$

1.44

$

2.17

(33.6)

$

1.41

$

2.15

(34.4)

(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 losses on settled hedges and 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)

(C)      Special items include the following:

Three Months Ended
June 30,

Six Months Ended
June 30,

(In millions)

2016

2015

2016

2015

Operating:

Impairment of intangible asset related to Newark Liberty International Airport (Newark) slots

$

412

$

—

$

412

$

—

Labor agreement costs

10

—

110

—

Severance and benefit costs

6

25

14

75

Cleveland airport lease restructuring

—

—

74

—

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

6

30

14

44

Special charges

434

55

624

119

Nonoperating and income taxes:

(Gain) loss on extinguishment of debt and other

(9)

128

(1)

134

Income tax benefit related to special charges

(153)

—

(225)

—

Total operating and nonoperating special charges, net of income taxes

272

183

398

253

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

—

(26)

—

(7)

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

3

(90)

(1)

(105)

Total special items, net of income taxes

$

275

$

67

$

397

$

141

2016 - Special items

Impairment of intangible asset related to Newark slots: In April 2016, the Federal Aviation Administration (FAA) announced that it will designate Newark as a Level 2 schedule-facilitated airport under the International Air Transport Association Worldwide Slot Guidelines effective October 30, 2016. The designation was associated with an updated demand and capacity analysis of Newark by the FAA. In the second quarter of 2016, the company has determined that the FAA's action has impaired the entire value of its Newark slots because the slots will no longer be the mechanism that governs take-off and landing rights. Accordingly, the company recorded a $412 million special charge ($264 million net of taxes) to write off the intangible asset. The Newark slots served as part of the collateral for the term loans under the company's Credit Agreement and under the Second Amended and Restated Co-Branded Card Marketing Services Agreement with Chase Bank USA, N.A. (the Chase Agreement). The Credit Agreement and the Chase Agreement have been amended to remove the Newark slots as collateral with no replacement collateral required.

Labor agreement costs: The fleet service, passenger service, storekeeper and other employees represented by the Int'l Association of Machinists and Aerospace Workers ratified seven new contracts with the company which extended the contracts through 2021. During the three and six months ended June 30, 2016, the company recorded $10 million ($6 million net of taxes) and $110 million ($70 million net of taxes), respectively, of special charges primarily for bonus payments to be made in conjunction with the ratification of these contracts.

Severance and benefit costs: During the three and six months ended June 30, 2016, the company recorded $6 million ($4 million net of taxes) and $14 million ($9 million net of taxes), respectively, of severance and benefit costs 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.

Cleveland airport lease restructuring: During the six months ended June 30, 2016, the City of Cleveland agreed to amend the lease, which runs through 2029, associated with certain excess airport terminal space (principally Terminal D) and related facilities at Hopkins International Airport. The company recorded an accrual for remaining payments under the lease for facilities that the company no longer uses and will continue to incur costs under the lease without economic benefit to the company. This liability was measured and recorded at its fair value when the company ceased its right to use such facilities leased to it pursuant to the lease. The company recorded a net charge of $74 million ($47 million net of taxes) related to the amended lease.

(Gains) losses on sale of assets and other special charges: During the three and six months ended June 30, 2016, the company recorded $6 million ($4 million net of taxes) and $14 million ($9 million net of taxes), respectively.

(Gains) losses on extinguishment of debt and other: During the six months ended June 30, 2016, the company recorded $8 million ($5 million net of taxes) of losses due to exchange rate changes in Venezuela applicable to funds held in local currency, and the company recorded a $9 million ($6 million net of taxes) gain on the sale of an affiliate.

MTM (gains) 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 six months ended June 30, 2016, the company did not record any MTM gains or losses on fuel derivative contracts that will settle in future periods. For fuel derivative contracts that settled in the three and six months ended June 30, 2016, the company recorded MTM gains (losses) of $3 million and ($1 million), respectively, in prior periods.

2015 - Special items

Severance and benefit costs: During the three and six months ended June 30, 2015, the company recorded $25 million and $75 million, respectively, of severance and benefit costs 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.

(Gains) losses on sale of assets and other special charges: During the three and six months ended June 30, 2015, the company recorded $30 million and $44 million, respectively, for integration-related costs, impairment of assets, and other special gains and losses.

Loss on extinguishment of debt and other, net: During the three and six months ended June 30, 2015, the company recorded $128 million and $134 million, respectively, of losses as part of Nonoperating income (expense): Miscellaneous, net due to the write-off of the debt discount related to the redemption of the 6% Notes due 2026 and 6% Notes due 2028.

MTM gains from fuel derivative contracts settling in future periods and prior period 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 six months ended June 30, 2015, the company recorded $26 million and $7 million, respectively, in MTM gains on fuel derivative contracts that will settle in future periods. For fuel derivative contracts that settled in the three and six months ended June 30, 2015, the company recorded MTM losses of $90 million and $105 million, respectively, in prior periods.

(D)

The company's effective tax rate for the three and six months ended June 30, 2016 was 36.9% and 36.8%, respectively, which represented a blend of federal, state and foreign taxes and the impact of certain nondeductible items. The effective tax rate for the six months ended June 30, 2015 was 0.4% due primarily to the existing income tax valuation allowance against net operating losses and other deferred income tax assets. During 2015, after considering all positive and negative evidence, the company concluded that its deferred income taxes would more likely than not be realized. The company released substantially all of its valuation allowance in the third quarter of 2015.

UNITED CONTINENTAL HOLDINGS, INC.

STATISTICS

Three Months Ended

June 30,

%
Increase/
(Decrease)

Six Months Ended
June 30,

%
Increase/
(Decrease)

2016

2015

2016

2015

Mainline:

Passengers (thousands)

25,639

24,858

3.1

47,916

46,236

3.6

Revenue passenger miles (millions)

47,842

47,859

—

88,698

88,519

0.2

Available seat miles (millions)

57,452

57,048

0.7

108,617

107,173

1.3

Cargo ton miles (millions)

679

633

7.3

1,301

1,295

0.5

Passenger load factor:

Mainline

83.3

%

83.9

%

(0.6)

pts.

81.7

%

82.6

%

(0.9)

pts.

Domestic

86.8

%

86.6

%

0.2

pts.

85.2

%

85.6

%

(0.4)

pts.

International

79.9

%

81.3

%

(1.4)

pts.

78.3

%

79.8

%

(1.5)

pts.

Passenger revenue per available seat mile (cents)

11.36

12.20

(6.9)

11.14

12.04

(7.5)

Average yield per revenue passenger mile (cents)

13.64

14.54

(6.2)

13.64

14.57

(6.4)

Aircraft in fleet at end of period

720

708

1.7

720

708

1.7

Average stage length (miles)

1,890

1,939

(2.5)

1,875

1,928

(2.7)

Average daily utilization of each aircraft (hours)

        10:38

       10:54

(2.4)

       10:07

       10:25

(2.9)

Regional:

Passengers (thousands)

10,777

11,373

(5.2)

20,587

21,517

(4.3)

Revenue passenger miles (millions)

6,175

6,430

(4.0)

11,901

12,214

(2.6)

Available seat miles (millions)

7,273

7,637

(4.8)

14,381

14,781

(2.7)

Passenger load factor

84.9

%

84.2

%

0.7

pts.

82.8

%

82.6

%

0.2

pts.

Passenger revenue per available seat mile (cents)

21.70

22.46

(3.4)

20.80

21.63

(3.8)

Average yield per revenue passenger mile (cents)

25.55

26.67

(4.2)

25.13

26.17

(4.0)

Aircraft in fleet at end of period

494

522

(5.4)

494

522

(5.4)

Average stage length (miles)

565

558

1.3

570

560

1.8

Consolidated (Mainline and Regional):

Passengers (thousands)

36,416

36,231

0.5

68,503

67,753

1.1

Revenue passenger miles (millions)

54,017

54,289

(0.5)

100,599

100,733

(0.1)

Available seat miles (millions)

64,725

64,685

0.1

122,998

121,954

0.9

Passenger load factor

83.5

%

83.9

%

(0.4)

pts.

81.8

%

82.6

%

(0.8)

pts.

Passenger revenue per available seat mile (cents)

12.52

13.41

(6.6)

12.27

13.20

(7.0)

Total revenue per available seat mile (cents)

14.52

15.33

(5.3)

14.30

15.19

(5.9)

Average yield per revenue passenger mile (cents)

15.00

15.98

(6.1)

15.00

15.98

(6.1)

Aircraft in fleet at end of period

1,214

1,230

(1.3)

1,214

1,230

(1.3)

Average stage length (miles)

1,496

1,500

(0.3)

1,479

1,488

(0.6)

Average full-time equivalent employees (thousands)

83.2

82.3

1.1

82.8

82.0

1.0

Note: See Part II, Item 6 Selected Financial Data of the company's annual report on Form 10-K for the year ended December 31, 2015 for the definition of these statistics.

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, as adjusted, among others. CASM is a common metric used in the airline industry to measure an airline's cost structure and efficiency. UAL reports CASM excluding profit sharing, third-party business expenses, fuel and special charges. 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 charges 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 assets acquired through the issuance of debt, airport construction financing and excluding fully reimbursable projects is useful to investors in order to appropriately reflect the non-reimbursable funds spent on capital expenditures.

Three Months Ended
June 30,

$
Increase/
(Decrease)

%
Increase/
(Decrease)

Six Months Ended
June 30,

$
Increase/
(Decrease)

%
Increase/
(Decrease)

(in millions)

2016

2015

2016

2015

Operating expenses

$

8,336

$

8,469

$

(133)

(1.6)

$

15,882

$

16,336

$

(454)

(2.8)

Less: Special charges (C)

434

55

379

NM

624

119

505

NM

Operating expenses, excluding special charges

7,902

8,414

(512)

(6.1)

15,258

16,217

(959)

(5.9)

Less: Third-party business expenses

60

69

(9)

(13.0)

127

135

(8)

(5.9)

Less: Fuel expense

1,437

2,106

(669)

(31.8)

2,655

3,970

(1,315)

(33.1)

Less: Profit sharing, including taxes

209

198

11

5.6

302

268

34

12.7

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

$

6,196

$

6,041

$

155

2.6

$

12,174

$

11,844

$

330

2.8

 Income before income taxes

$

931

$

1,197

$

(266)

(22.2)

$

1,425

$

1,708

$

(283)

(16.6)

Less: special items before income taxes (C)

428

67

361

NM

622

141

481

NM

Income before income taxes and excluding special items

$

1,359

$

1,264

$

95

7.5

$

2,047

$

1,849

$

198

10.7

 Net income

$

588

$

1,193

$

(605)

(50.7)

$

901

$

1,701

$

(800)

(47.0)

Less: special items, net of tax (C)

275

67

208

NM

397

141

256

NM

Net income, excluding special items

$

863

$

1,260

$

(397)

(31.5)

$

1,298

$

1,842

$

(544)

(29.5)

 Diluted earnings per share

$

1.78

$

3.14

$

(1.36)

(43.3)

$

2.63

$

4.45

$

(1.82)

(40.9)

Add back: special items

1.29

0.17

1.12

NM

1.82

0.37

1.45

NM

Tax effect related to special items

(0.46)

—

(0.46)

NM

(0.66)

—

(0.66)

NM

Diluted earnings per share, excluding special items

$

2.61

$

3.31

$

(0.70)

(21.1)

$

3.79

$

4.82

$

(1.03)

(21.4)

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended
June 30,

%
Increase/
(Decrease)

Six Months Ended
June 30,

%
Increase/
(Decrease)

2016

2015

2016

2015

CASM Mainline Operations (cents)

Cost per available seat mile (CASM)

12.39

12.42

(0.2)

12.43

12.69

(2.0)

Less: Special charges (C)

0.76

0.10

NM

0.58

0.12

NM

CASM, excluding special charges

11.63

12.32

(5.6)

11.85

12.57

(5.7)

Less: Third-party business expenses

0.10

0.12

(16.7)

0.11

0.12

(8.3)

CASM, excluding special charges and third-party business expenses

11.53

12.20

(5.5)

11.74

12.45

(5.7)

Less: Fuel expense

2.09

3.10

(32.6)

2.05

3.10

(33.9)

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

9.44

9.10

3.7

9.69

9.35

3.6

Less: Profit sharing per available seat mile

0.36

0.34

5.9

0.28

0.25

12.0

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

9.08

8.76

3.7

9.41

9.10

3.4

CASM Consolidated Operations (cents)

Cost per available seat mile (CASM)

12.88

13.09

(1.6)