United Announces Highest-Ever Quarterly Profit

2Q 2015
Passenger
Revenue
(millions)

Passenger
Revenue vs.
2Q 2014

PRASM vs.
2Q 2014

Yield vs.
2Q 2014

Available
Seat Miles
vs. 2Q 2014

Domestic

$3,523

0.2%

(3.4%)

(2.3%)

3.7%

Atlantic

1,635

(4.4%)

(6.4%)

(1.7%)

2.1%

Pacific

1,108

(6.9%)

(8.8%)

(9.6%)

2.2%

Latin America

695

(4.9%)

(10.9%)

(8.8%)

6.7%

International

3,438

(5.3%)

(8.1%)

(6.0%)

3.1%

Mainline

6,961

(2.6%)

(5.8%)

(4.2%)

3.4%

Regional

1,715

(6.4%)

(1.7%)

(1.1%)

(4.8%)

Consolidated

$8,676

(3.4%)

(5.6%)

(4.1%)

2.3%

UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

(In millions, except per share data)

2015

2014

Increase/
(Decrease)

2015

2014

Increase/
(Decrease)

Operating revenue:

Passenger:

Mainline

$6,961

$7,148

(2.6)

$12,899

$12,996

(0.7)

Regional

1,715

1,833

(6.4)

3,197

3,369

(5.1)

Total passenger revenue

8,676

8,981

(3.4)

16,096

16,365

(1.6)

Cargo

229

232

(1.3)

471

441

6.8

Other operating revenue

1,009

1,116

(9.6)

1,955

2,219

(11.9)

Total operating revenue

9,914

10,329

(4.0)

18,522

19,025

(2.6)

Operating expense:

Salaries and related costs

2,454

2,187

12.2

4,755

4,340

9.6

Aircraft fuel (A)

2,106

3,101

(32.1)

3,970

6,018

(34.0)

Regional capacity purchase

583

591

(1.4)

1,153

1,150

0.3

Landing fees and other rent

553

567

(2.5)

1,096

1,139

(3.8)

Depreciation and amortization

445

417

6.7

874

826

5.8

Aircraft maintenance materials and outside repairs

431

471

(8.5)

828

929

(10.9)

Distribution expenses

348

346

0.6

660

664

(0.6)

Aircraft rent

194

222

(12.6)

395

446

(11.4)

Special charges (B)

55

169

NM

119

221

NM

Other operating expenses

1,300

1,352

(3.8)

2,486

2,735

(9.1)

Total operating expense

8,469

9,423

(10.1)

16,336

18,468

(11.5)

Operating income

1,445

906

59.5

2,186

557

292.5

Nonoperating income (expense):

Interest expense

(167)

(186)

(10.2)

(340)

(373)

(8.8)

Interest capitalized

13

13

-

25

27

(7.4)

Interest income

6

4

50.0

11

9

22.2

Miscellaneous, net (B)

(100)

54

NM

(174)

(35)

397.1

Total nonoperating expense

(248)

(115)

115.7

(478)

(372)

28.5

Income before income taxes

1,197

791

51.3

1,708

185

NM

Income tax expense (C)

4

2

100.0

7

5

40.0

Net income

$1,193

$789

51.2

$1,701

$180

NM

Earnings per share, basic

$3.14

$2.12

48.1

$4.46

$0.48

NM

Earnings per share, diluted

$3.14

$2.01

56.2

$4.45

$0.47

NM

Weighted average shares, basic

380

373

1.9

381

371

2.7

Weighted average shares, diluted

380

396

(4.0)

382

392

(2.6)

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

Six Months Ended

June 30,

%

June 30,

%

(In millions, except per gallon)

2015

2014

Increase/(Decrease)

2015

2014

Increase/ (Decrease)

Mainline fuel expense excluding hedge impacts

$1,648

$2,527

(34.8)

$3,044

$4,892

(37.8)

Hedge losses reported in fuel expense (a)

(118)

(1)

 NM

(279)

(4)

 NM

Total mainline fuel expense

1,766

2,528

(30.1)

3,323

4,896

(32.1)

Regional fuel expense

340

573

(40.7)

647

1,122

(42.3)

Consolidated fuel expense

2,106

3,101

(32.1)

3,970

6,018

(34.0)

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

(75)

5

 NM

(114)

12

 NM

Fuel expense including all gains (losses) from settled hedges

$2,181

$3,096

(29.6)

$4,084

$6,006

(32.0)

Mainline fuel consumption (gallons)

833

822

1.3

1,570

1,568

0.1

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

$1.98

$3.07

(35.5)

$1.94

$3.12

(37.8)

Mainline average aircraft fuel price per gallon

$2.12

$3.08

(31.2)

$2.12

$3.12

(32.1)

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

$2.21

$3.07

(28.0)

$2.19

$3.11

(29.6)

Regional fuel consumption (gallons)

171

182

(6.0)

330

352

(6.3)

Regional average aircraft fuel price per gallon

$1.99

$3.15

(36.8)

$1.96

$3.19

(38.6)

Consolidated fuel consumption (gallons)

1,004

1,004

-

1,900

1,920

(1.0)

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

$1.98

$3.09

(35.9)

$1.94

$3.13

(38.0)

Consolidated average aircraft fuel price per gallon

$2.10

$3.09

(32.0)

$2.09

$3.13

(33.2)

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

$2.17

$3.08

(29.5)

$2.15

$3.13

(31.3)

(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.

2015 - Special items

Severance and benefits: During the three and six months ended June 30, 2015, the company recorded $25 million and $75 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 2015. The company will record approximately $25 million of additional expense through the remainder of 2015 associated with this program over the remaining required service periods.

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 six months ended June 30, 2015, the company recorded $16 million and $12 million, respectively, for the 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 unamortized non-cash debt discount related to the extinguishment 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. 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 three and six months ended June 30, 2014, the company recorded $38 million and $52 million, respectively, 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 and training and relocation for employees.

Costs associated with permanently grounding Embraer ERJ 135 aircraft: During the three months ended June 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.

Losses on sale of assets and other special charges: During the six months ended June 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 Boeing 737-500 fleets and incurred losses on sales of aircraft and other assets and other special losses totaling $19 million.

Venezuela local currency loss: The company recorded $21 million of losses due to exchange rate changes in Venezuela applicable to funds held in local currency.

MTM gains 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 six months ended June 30, 2014, the company recorded $46 million and $33 million, respectively, in MTM gains on economic hedges that will settle in future periods. For economic hedges that settled in the three and six months ended June 30, 2014, the company recorded MTM gains of $7 million and $42 million, respectively, in prior periods. The figures above also include an insignificant amount of ineffectiveness on hedges that are designated for hedge accounting.

No federal income tax expense was recognized related to the company's pretax income for the three and six months ended June 30, 2015, and 2014 due to the utilization of book net operating loss carry forwards for which no benefit has previously been recognized. The company is required to provide a valuation allowance for its deferred tax assets in excess of deferred tax liabilities because UAL concluded that it is more likely than not that such deferred tax assets will ultimately not be realized.

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.

Three Months Ended

Six Months Ended

(in millions)

June 30,

$

%

June 30,

$

%

2015

2014

Increase/ (Decrease)

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

Increase/ (Decrease)

Operating expenses

$8,469

$9,423

$(954)

(10.1)

$16,336

$18,468

$(2,132)

(11.5)

Less: Special charges (B)

55

169

(114)

 NM

119

221

(102)

 NM

Operating expenses, excluding special charges

8,414

9,254

(840)

(9.1)

16,217

18,247

(2,030)

(11.1)

Less: Third-party business expenses

69

215

(146)

(67.9)

135

408

(273)

(66.9)

Less: Fuel expense

2,106

3,101

(995)

(32.1)

3,970

6,018

(2,048)

(34.0)

Less: Profit sharing, including  taxes

198

53

145

273.6

268

53

215

405.7

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

$6,041

$5,885

$156

2.7

$11,844

$11,768

$76

0.6

Income before income taxes

$1,197

$791

$406

51.3

$1,708

$185

$1,523

 NM

Less: Special items before income tax benefit

67

130

(63)

 NM

141

251

(110)

 NM

Income before income taxes and excluding special items

$1,264

$921

$343

37.2

$1,849

$436

$1,413

324.1

Net income

$1,193

$789

$404

51.2

$1,701

$180

$1,521

 NM

Less: Special items, net of tax (B)

67

130

(63)

 NM

141

250

(109)

 NM

Net income, excluding special items

$1,260

$919

$341

37.1

$1,842

$430

$1,412

328.4

Diluted earnings per share

$3.14

$2.01

$1.13

56.2

$4.45

$0.47

$3.98

 NM

Add back: Special items, net of tax

0.17

0.33

(0.16)

 NM

0.37

0.64

(0.27)

 NM

Diluted earnings per share, excluding special items

$3.31

$2.34

$0.97

41.5

$4.82

$1.11

$3.71

334.2

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

2015

2014

Increase/ (Decrease)

2015

2014

Increase/ (Decrease)

CASM Mainline Operations (cents)

Cost per available seat mile (CASM)

12.42

14.09

(11.9)

12.69

14.47

(12.3)

Less:  Special charges (B)

0.10

0.31

NM

0.12

0.21

NM

CASM, excluding special charges

12.32

13.78

(10.6)

12.57

14.26

(11.9)

Less:  Third-party business expenses

0.12

0.39

(69.2)

0.12

0.39

(69.2)

CASM, excluding special charges and third-party business expenses

12.20

13.39

(8.9)

12.45

13.87

(10.2)

Less:  Fuel expense

3.10

4.58

(32.3)

3.10

4.66

(33.5)

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

9.10

8.81

3.3

9.35

9.21

1.5

Less: Profit sharing per available seat mile

0.34

0.10

240.0

0.25

0.05

400.0

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

8.76

8.71

0.6

9.10

9.16

(0.7)

CASM Consolidated Operations (cents)

Cost per available seat mile (CASM)

13.09

14.91

(12.2)

13.40

15.34

(12.6)

Less:  Special charges (B)

0.08

0.27

NM

0.10

0.19

NM

CASM, excluding special charges

13.01

14.64

(11.1)

13.30

15.15

(12.2)

Less:  Third-party business expenses

0.11

0.34

(67.6)

0.11

0.34

(67.6)

CASM, excluding special charges and third-party business expenses

12.90

14.30

(9.8)

13.19

14.81

(10.9)

Less:  Fuel expense

3.25

4.91

(33.8)

3.26

4.99

(34.7)

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

9.65

9.39

2.8

9.93

9.82

1.1

Less: Profit sharing per available seat mile

0.31

0.08

287.5

0.22

0.05

340.0

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

9.34

9.31

0.3

9.71

9.77

(0.6)

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

June 30, 2015

Net Operating Profit After Tax (NOPAT)

Pre-tax income excluding special items (a)

$3,385

NOPAT adjustments (b)

1,195

NOPAT

Effective tax rate

0.2%