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CHICAGO, April 25, 2007 – UAL Corporation (NASDAQ: UAUA), the holding company whose primary subsidiary is United Airlines, today reported financial results for the first quarter ended March 31, 2007. Download results
· UAL reported a net loss of $152 million. UAL’s pre-tax loss of $236 million was an improvement of $70 million year-over-year, excluding reorganization items.
· UAL continued its strong cost performance, with first quarter mainline CASM decreasing by 4.3 percent from the first quarter of 2006. Excluding fuel, profit sharing programs and special items, mainline CASM decreased by 3.3 percent from the first quarter of 2006.
· Operating cash flow increased by 38 percent from the first quarter of 2006 to approximately $626 million.
· The company’s cash and short-term investments balance at March 31, 2007 was $4.2 billion, including $856 million of restricted cash after reducing on and off balance sheet debt by $1.4 billion in the first quarter of 2007.
· Implementing a deferred revenue accounting policy for Mileage Plus resulted in lower passenger revenue. If the company had continued to account for Mileage Plus under the old incremental cost method, first quarter passenger revenue is estimated to have been $107 million higher.
· Basic and diluted loss per share was $1.32 with weighted average shares outstanding of 117 million.
Effective Cost Control Offsets Lower Total Revenue
Pre-tax results improved in the seasonally weak quarter and the company continued to generate strong operating cash flow. The company improved its first quarter results by achieving its cost control targets and generating ticket revenue growth. Ticket revenue growth was offset by the effects of the deferred revenue accounting policy for the Mileage Plus program.
“We continue to generate significant cash flow by tightly controlling costs and improving ticket revenue growth in a seasonally weaker quarter, at the same time investing strategically in the customer and the enterprise,” said Glenn Tilton, United’s president, chairman and CEO. “We are focused on our performance agenda, improving our product, our processes and, most importantly, our relationship with our customers.”
Year-over-year comparisons between the financial statements of the old and reorganized UAL entities continue to be affected by fresh-start and exit related items, including the effects of deferred revenue accounting for the Mileage Plus program. Because the one-year anniversary of the company’s exit from reorganization occurred on February 1st, year-over-year results will become more comparable beginning in the second quarter of 2007.
Despite a 0.6 percent increase in consolidated capacity and a 1.4 percent increase in consolidated revenue passenger miles from the first quarter of 2006, total operating expense excluding special items declined year-over-year by $149 million, or 3.2 percent.
Operating earnings were improved by $22 million from special items resulting from the reduction in the estimated liability with respect to litigation related to United’s leaseholds at San Francisco and Los Angeles International Airports. In addition, the company also recorded $34 million of charges to interest expense: $23 million to expense certain deferred debt issuance and financing costs when the exit facility was prepaid and refinanced as well as a charge of $11 million related to the final accounting of the associated interest rate swap which was terminated in February.
Year-over-year revenue results in the quarter were lower due to several factors. Passenger revenue results were affected by the change to deferred revenue accounting for the Mileage Plus program. Absent the Mileage Plus accounting effect, the company estimates that first quarter passenger revenue would have been $107 million higher than reported. Other revenue declined year-over-year due to the company’s decision to exit low-margin third-party aircraft maintenance work and lower fuel sales to third-parties by United Aviation Fuels Corp (UAFC). This resulted in lower Other Operating Revenue and lower Cost of Third Party Sales and had a negligible effect on earnings.
United reduced its first quarter loss year-over-year. Mainline unit earnings, which is mainline revenue per available seat mile (RASM) minus mainline operating cost per available seat mile (CASM), was a loss of 0.22 cents, 46 percent better than a loss of 0.41 cents a year ago. Mainline unit earnings excluding fuel and special items increased 2.2 percent to 2.73 cents from 2.67 cents.
Results from the company’s regional affiliate operations were relatively flat year-over-year. On a 5.2 percent increase in capacity, revenue from regional affiliates increased by $6 million or 0.9 percent, while regional affiliates’ expense decreased by $4 million or 0.6 percent over the year-ago quarter.
The company recorded an income tax benefit in the first quarter of 2007 of $84 million associated with the quarter’s pre-tax loss. The effective tax rate for the quarter was 36 percent. Because of its Net Operating Loss carry-forwards and excess tax deductions, the company expects to pay minimal cash taxes in 2007.
Strong Cash Generation Facilitates Early Pay Down of Exit Loan
The company generated positive operating cash flow of $626 million, approximately $170 million higher than the comparable period in 2006. During the quarter, the company used cash to pay down $986 million of its original $3 billion exit facility and refinanced the remaining $2 billion. The transaction resulted in reducing net interest costs by $70 million per year, less restrictive covenants and released approximately $2.5 billion of collateral. The company reduced its outstanding debt by an additional $331 million through payments of other scheduled debt maturities. Total on and off balance sheet debt reduction in the quarter was $1.4 billion.
The company ended the quarter with a total cash and short-term investments balance of $4.2 billion, including a restricted cash balance of $856 million.
“United’s fundamentals, demonstrated by good cost control and significant cash generation, continue to be strong and position us well relative to peers,” said Jake Brace, executive vice president and Chief Financial Officer. “We have paid down debt and maintained a solid cash balance during a seasonally weak quarter, and we continue to identify opportunities to reduce our costs.”
Revenue Improves During Quarter; Reported Revenue Reflects Mileage Plus Accounting Change
Total revenues for the first quarter declined from the first quarter of 2006 by 2.1 percent, or $92 million, to $4.4 billion. In addition to the $81 million reduction driven by lower UAFC sales, other operating and cargo revenues declined as United reduced low-margin third-party maintenance work, experienced declining Pacific cargo yield, and stopped carrying US domestic mail at the end of the second quarter of 2006. The company recently announced it had agreed to terms with the U.S. Postal Service for a new contract to begin carrying domestic mail on April 28, which is expected to generate up to $400 million in revenue over the four and a half year contract period.
Total mainline passenger revenue was essentially flat in the first quarter compared to the first quarter of 2006 primarily due to lower period-to-period Mileage Plus revenue recognition. The negative effect of the change to a deferred revenue method for the company’s frequent flyer accounting depressed first quarter revenue by $107 million. Mileage Plus revenue was $94 million worse year-over-year.
United now applies the same deferred revenue accounting, previously used for miles sold to third parties, to also account for miles earned for flight activity. While it is a preferable revenue recognition method, the new deferred revenue method also leads to greater revenue volatility, increases revenue seasonality, and lowers the amount of passenger revenue recognized in the current period.
Consolidated passenger revenue per available seat mile (PRASM) declined by 0.3 percent, while mainline PRASM was unchanged. Adjusted for Mileage Plus effects, consolidated and mainline PRASM increased by 1.9 percent and 2.3 percent respectively over the year-ago period. PRASM results for the quarter were driven by strong international performance compensating for weaker domestic performance.
Mainline RASM decreased by 2.7 percent, and mainline RASM excluding UAFC and adjusting for the change to Mileage Plus accounting increased by 1.4 percent from the comparable quarter in 2006 (Note 9). The company believes that measures of mainline PRASM and RASM adjusted for these items are useful to investors in understanding year-over-year performance.
Comparison of 2007 First Quarter Geographic Passenger Revenue
Versus 2006 First Quarter
Geographic Area2
1Q 2007 Passenger Revenue
(millions)
Passenger Revenues
% Increase/ (Decrease)
PRASM
% Increase/ (Decrease)
ASM1
% Increase/ (Decrease)
North America
$1,985
(4.1%)
(4.1%)
0.0%
Pacific
$689
4.9%
4.1%
0.8%
Atlantic
$454
15.9%
9.6%
5.8%
Latin America
$136
(1.0%)
16.1%
(14.9%)
Total Mainline
$3,264
0.2%
0.1%
0.1%
Regional Affiliates2
$675
0.9%
(4.2)%
5.2%
Total Consolidated
$ 3,939
0.4%
(0.3)%
0.6%
Adjusted Consolidated3
$4,046
2.6%
1.9%
1ASM (available seat miles)
2Mileage Plus accounting impacts all mainline geographic regions and the regional affiliate segment.
3Consolidated PRASM adjusted for Mileage Plus effects (See Footnote 9(b)).
As in the last quarter, this quarter’s operations and performance were adversely affected by severe winter storms. The company estimates that cancellations due to these weather-related issues resulted in a mainline capacity reduction of 0.6 percent, and consolidated capacity reduction of 0.7 percent. In addition, the company estimates that passenger revenues were reduced by approximately $32 million due to these storms.
Regional affiliate PRASM was down 4.2 percent compared to last year, with 5.2 percent capacity growth, on a 0.2 point increase in load factor and a 4.3 percent decline in yield compared to the first quarter of 2006.
“We improved our performance through the quarter and finished one of our traditionally weak periods on a good note with strong international results offsetting relative softness in the domestic market,” said John Tague, executive vice president and Chief Revenue Officer.
Strong Control of Operating Expenses
Mainline CASM decreased by 4.3 percent from the year-ago quarter to 10.93 cents. Excluding fuel, profit sharing programs and special operating items, mainline CASM was 7.74 cents, a decrease of 3.3 percent compared with the first quarter of 2006.
First Quarter Increase / (Decrease)
Mainline
Consolidated
2007
2006
% Chg.
2007
2006
% Chg.
CASM (cents)
10.93
11.42
(4.3)
11.61
12.13
(4.3)
CASM excluding fuel and special items (cents)
7.91
8.03
(1.5)
8.39
8.55
(1.9)
CASM excluding fuel, profit sharing programs, and special items (cents)
7.74
8.00
(3.3)
8.24
8.53
(3.4)
The company continues to focus on implementing continuous improvement programs to improve the passenger experience, control costs, and mitigate inflationary pressures. The company is on-track to achieve the additional $265 million of cost savings in 2007 to fulfill the $400 million cost program announced in the second quarter of 2006.
The company has entered into various fuel hedging positions as economic hedges. The company recorded a net loss of $3 million on hedge contracts settling in the first quarter. The company also recognized an unrealized mark-to-market gain of $24 million related to hedge positions in place at the end of the first quarter which will settle in future quarters. These costs were recorded in the first quarter’s mainline aircraft fuel expense.
Improving Productivity and Operating Performance
The first quarter’s severe winter storms affected the company’s performance in the Department of Transportation (DOT) operational statistics. Nevertheless, the company ranked third in DOT on-time arrival statistics in January and February, the latest results available, among the six major U.S. network carriers. The company continues to focus on improving its efficiency and expects these metrics to continue to improve.
Productivity continued to increase in the first quarter. Employee productivity (available seat miles divided by employee equivalents) improved 4.4 percent for the quarter compared to the same period in 2006, driven by average full-time equivalent employees decreasing by 3.9 percent. Aircraft productivity, as measured by fleet utilization, improved 0.8 percent over the first quarter of 2006 to an average of approximately 11 hours per day.
“Our operational performance was challenged in the quarter by severe weather and systemic air traffic control issues, and we are improving our processes to ensure that we are minimizing the impact to our customers, even when the delay is outside of our control,” said Pete McDonald, executive vice president and Chief Operating Officer. “Our continuous improvement efforts are working-- and we appreciate the great work our employees are doing to improve productivity and meet customers’ needs. We continue to turn planes quickly, improving our on-time ranking while increasing our aircraft utilization to provide more flights without purchasing additional aircraft.”
Business Highlights
United Airlines implemented a refreshed united.com web site, providing customers with more powerful booking tools, intuitive navigation and a clean, new look. The new site provides customers with more flight-search capabilities that include shopping by schedule, price or flexible dates, as well as the ability to select and change seat assignments. For Mileage Plus® members, united.com offers the ability to access past travel itineraries and easily see alternative dates for award tickets should their first choice be unavailable.
The Open Skies agreement approved by the European Union allows the company to serve any point in Europebeginning April 2008. United has applied to complete its antitrust immunity with its Star Alliance partner bmi. The US Department of Transportation granted United and bmi immunity in 2002 but suspended its application pending entry into force of open skies.
United introduced the first-ever nonstop, capital-to-capital service between Washington, D.C., and Beijing on March 28. United also began daily non-stop service between Washington, D.C. and Romeon April 1.
In the first quarter, the company implemented a number of customer experience improvement initiatives.
- The company has fully implemented its premium boarding process in San Franciscoand has begun a similar implementation at Washington Dulles and O’Hare.
- With their 2007 membership kits, Global Service members now have a single point of contact for reservations, problem resolution and service requests.
- The company has changed its customer feedback process from paper forms collected from a sample of flights to a web-based questionnaire that takes less than 5 minutes to complete and is available to every customer. The new survey process has resulted in more timely and actionable information.
Fresh Start Reporting
Upon emergence from its Chapter 11 reorganization in February 2006, the company adopted fresh-start reporting in accordance with SOP 90-7. The company’s emergence resulted in a new reporting entity with no retained earnings or accumulated deficit as of February 1, 2006. Accordingly, the company’s financial information shown for periods prior to February 1, 2006 is not comparable to consolidated financial statements presented on or after that date. For further discussion on fresh-start reporting, please refer to the company’s 2006 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
To offer additional information for investors, the company has identified certain items consisting only of major non-cash fresh-start reporting and exit-related credits and charges (Note 10). While it is not practical for the company to present information for all items that are not comparable in the pre- and post-exit periods, the company believes that the items identified in Note 10 are the material non-cash fresh-start reporting and exit-related items and that such information is useful to investors in understanding year-over-year performance. These fresh-start and exit-related items were discussed in the company’s Form 8-K filed with the Securities and Exchange Commission on May 8, 2006 and in the company’s 2006 10-K.
Outlook
The company currently expects second quarter and full-year 2007 capacity to be:
Capacity (ASMs) Second Quarter 2007 Full Year 2007
Mainline -0.5 to 0.0 percent +0.0 to 1.0 percent
Regional Affiliates +7.5 to 8.5 percent +3.5 to 4.5 percent
Consolidated +0.5 to 1.0 percent +0.0 to 1.0 percent
Including the effects of cost savings initiatives previously announced, the company estimates that mainline CASM excluding fuel, severance and special items will increase by 1.5 percent to 2.0 percent for the second quarter of 2007 and for the full year 2007 will increase by 1.0 to 2.0 percent.
As of April 24, 2007, United had hedged 23 percent of forecasted fuel consumption for the second quarter of 2007, predominantly through crude oil three-way options with upside protection on a weighted average basis beginning from $59 per barrel and capped at $69 per barrel. Payment obligations on a weighted average basis begin if crude drops below $55 per barrel.
The company expects mainline jet fuel price per gallon, including the impact of hedges, to average $2.12 per gallon in the second quarter of 2007.
Note 9 to the attached Statements of Consolidated Operations provides a reconciliation of net income or loss reported under GAAP to net income or loss excluding reorganization items for all periods presented, as well as a reconciliation of other non-GAAP financial measures, including special items
http://www.united.com/press/detail/0,6862,58073,00.html
