United Airlines Results

United Airlines Raises Full Year 2019 Adjusted Diluted Earnings Per Share Guidance

United Airlines

United Airlines (UAL) yesterday announced that it has achieved third quarter diluted earnings per share (EPS) of $3.99 and adjusted diluted EPS of $4.07, and raised its full year 2019 adjusted diluted EPS guidance, with a new range of $11.25 to $12.25.

"Thanks to the outstanding efforts of our employees, United extended our streak of expanding pre-tax margin on a quarterly basis. It provides us further confidence to raise our full year 2019 adjusted diluted EPS guidance, putting us ahead of pace to achieve our goal of $11 to $13 in adjusted diluted EPS by the end of 2020," said Oscar Munoz, CEO of United Airlines. "While headwinds affected the sector as a whole this quarter, United's team once again demonstrated a robust ability to overcome adverse cost pressure, managing to continue growing our network while investing in winning our customers' loyalty through smart enhancements to the United experience."

  • Reported third quarter net income of $1.0 billion, diluted earnings per share of $3.99, pre-tax earnings of $1.3 billion and pre-tax margin of 11.9 percent, expanding pre-tax margin 2.3 points versus the third quarter of 2018.
  • Reported third quarter adjusted net income of $1.0 billion, adjusted diluted EPS of $4.07, adjusted pre-tax earnings of $1.4 billion and adjusted pre-tax margin of 12.1 percent, expanding adjusted pre-tax margin 2.5 points versus the third quarter of 2018.²
  • Consolidated third quarter passenger revenue per available seat mile (PRASM) increased 1.7 percent year-over-year.
  • Consolidated third quarter unit cost per available seat mile (CASM) decreased 0.9 percent year-over-year.
  • Consolidated third quarter CASM, excluding special charges, third party business expenses, fuel and profit sharing, increased 2.1 percent year-over-year.
  • Repurchased $363 million of its common shares in the third quarter of 2019 at an average purchase price of $88.22 per share.
  • Raised $1.2 billion in Enhanced Equipment Trust Certificates at a record low blended interest rate of 2.8% in connection with the financing of certain aircraft.

1 Excludes special charges and the mark-to-market impact of financial instruments, the nature of which are not determined at this time, and imputed interest on certain finance leases. Accordingly, UAL is not providing earnings guidance on a GAAP basis.

2 Excludes special charges, the mark-to-market impact of financial instruments and imputed interest on certain finance leases. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the tables accompanying this release.

For more information on UAL's fourth quarter and full year 2019 guidance, please visit ir.united.com for the company's investor update.

Third Quarter 2019 Highlights

Customer Experience

  • Announced MileagePlus award miles never expire, giving members a lifetime to use miles on flights, experiences, hotels and more.
  • Announced partnership with CLEAR which includes a free or discounted CLEAR membership for U.S. based MileagePlus members.
  • MileagePlus members between the ages of 18 to 22 receive a 10% discount on domestic flights when booked through the United mobile app by Dec. 31, 2019.
  • Announced improvements to United PassPlus, the airline's prepaid program that offers discounts, fixed fares and amenities to both individual and corporate customers.
  • Customers are now provided three inflight snack options on domestic flights regardless of departure time, including the Stroopwafel.
  • Customers can now pre pay for bags as soon as their ticket is issued. Previously customers had to wait until check-in to pay for their bags.
  • MileagePlus loyalty program was awarded Favorite Frequent-Flyer Program for the fourth time by Trazee Awards and the United Explorer Card from Chase was awarded Favorite Credit Card for the second consecutive year.

Operations

  • Achieved No. 1 in on-time departures in all hubs where United faces large hub competitors: Denver, Chicago and Los Angeles.
  • Completed introduction of ConnectionSaver to all of seven domestic hubs, saving over 35,000 connections in the quarter.

Employees

  • Honored with being recognized by search site indeed.com as a "Top 50 Workplace" for 2019.
  • Recognized for fourth consecutive year as a top-scoring company and best place to work for disability and inclusion with a perfect score of 100% on the 2019 Disability Equality Index.
  • Expects to hire about 8,000 people by the end of 2019.

Network

  • Announced 12 new and expanded international routes from Chicago, Denver, New York/Newark and San Francisco including Nice, France; Palermo, Italy; and Curacao.
  • Announced nonstop service to Tokyo Haneda with routes from Chicago, Los Angeles, New York/Newark and Washington, D.C., beginning March 28, 2020.
  • Resumed daily nonstop service between New York/Newark and Delhi and Mumbai on September 6.

Fleet

  • Launched Boeing 767-300ER ultra-premium United Polaris business class configuration on all flights between New York/Newark and London-Heathrow starting Sept. 15, 2019.
  • Took delivery of six used Airbus A319 aircraft and nine new Embraer E175 aircraft.

Community

  • Launched Crowdrise fundraising campaign for those affected by Hurricane Dorian.
  • Operated a Boeing 787-8 Dreamliner crewed exclusively by women to the largest airshow in the world, EAA AirVenture in Oshkosh, Wisconsin, to symbolize the airline's commitment to supporting women in aviation.

Investor Day

On March 5, 2020 United will host an investor event in New York. More details will be provided at a later date.

About United

United's shared purpose is "Connecting People. Uniting the World." We are more focused than ever on our commitment to customers through a series of innovations and improvements designed to help build a great experience: Every customer. Every flight. Every day. Together, United Airlines and United Express operate approximately 4,900 flights a day to 358 airports across five continents. In 2018, United and United Express operated more than 1.7 million flights carrying more than 158 million customers. United is proud to have the world's most comprehensive route network, including U.S. mainland hubs in Chicago, Denver, Houston, Los Angeles, New York/Newark, San Francisco and Washington, D.C. United operates 788 mainline aircraft and the airline's United Express carriers operate 560 regional aircraft. United is a founding member of Star Alliance, which provides service to 195 countries via 26 member airlines. For more information, visit united.com, follow @United on Twitter and Instagram or connect on Facebook. The common stock of United's parent, United Airlines Holdings, Inc., is traded on the Nasdaq under the symbol "UAL".

On January 1, 2019, United Airlines Holdings, Inc. ("UAL") adopted Accounting Standards Update No. 2016-02, Leases ("Topic 842"). As such, certain previously reported 2018 figures are adjusted in this report on a basis consistent with Topic 842.

UNITED AIRLINES HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

Three Months Ended

September 30,

%

Increase/

Nine Months Ended

September 30,

%

Increase/

(In millions, except per share data)

2019

2018

(Decrease)

2019

2018

(Decrease)

Operating revenue:

Passenger

$

10,481

$

10,120

3.6

$

29,692

$

28,150

5.5

Cargo

282

296

(4.7)

863

903

(4.4)

Other operating revenue

617

587

5.1

1,816

1,759

3.2

Total operating revenue

11,380

11,003

3.4

32,371

30,812

5.1

Operating expense:

Salaries and related costs

3,063

2,930

4.5

8,993

8,534

5.4

Aircraft fuel

2,296

2,572

(10.7)

6,704

6,927

(3.2)

Regional capacity purchase

721

676

6.7

2,124

1,999

6.3

Landing fees and other rent

645

618

4.4

1,893

1,822

3.9

Depreciation and amortization

575

545

5.5

1,682

1,607

4.7

Aircraft maintenance materials and outside repairs

490

455

7.7

1,319

1,333

(1.1)

Distribution expenses

432

427

1.2

1,234

1,162

6.2

Aircraft rent

67

109

(38.5)

221

355

(37.7)

Special charges (B)

27

17

NM

116

186

NM

Other operating expenses

1,591

1,467

8.5

4,645

4,293

8.2

Total operating expense

9,907

9,816

0.9

28,931

28,218

2.5

Operating income

1,473

1,187

24.1

3,440

2,594

32.6

Operating margin

12.9

%

10.8

%

2.1

pts.

10.6

%

8.4

%

2.2

pts.

Adjusted operating margin (Non-GAAP) (A)

13.2

%

10.9

%

2.3

pts.

11.0

%

9.0

%

2.0

pts.

Nonoperating income (expense):

Interest expense

(191)

(172)

11.0

(570)

(497)

14.7

Interest capitalized

22

16

37.5

65

46

41.3

Interest income

36

28

28.6

103

70

47.1

Miscellaneous, net (B)

9

(1)

NM

32

(118)

NM

Total nonoperating expense

(124)

(129)

(3.9)

(370)

(499)

(25.9)

Income before income taxes

1,349

1,058

27.5

3,070

2,095

46.5

Pre-tax margin

11.9

%

9.6

%

2.3

pts.

9.5

%

6.8

%

2.7

pts.

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

12.1

%

9.6

%

2.5

pts.

9.8

%

7.6

%

2.2

pts.

Income tax expense (D)

325

225

44.4

702

434

61.8

Net income

$

1,024

$

833

22.9

$

2,368

$

1,661

42.6

Diluted earnings per share

$

3.99

$

3.05

30.8

$

9.04

$

5.98

51.2

Diluted weighted average shares

256.4

273.6

(6.3)

262.0

278.0

(5.8)

NM Not meaningful

UNITED AIRLINES HOLDINGS, INC.

PASSENGER REVENUE INFORMATION AND STATISTICS

Passenger revenue information is as follows (in millions, except for percentage changes):

3Q 2019

Passenger

Revenue

3Q 2018

Passenger

Revenue (a)

Reporting

Adjustments

(b)

3Q 2018

Passenger

Revenue

(b)

Passenger

Revenue

vs.

3Q 2018

(b)

PRASM

vs.

3Q 2018

(b)

Yield vs.

3Q 2018

(b)

Available

Seat Miles

vs.

3Q 2018

3Q 2019

Available

Seat

Miles

3Q 2019

Revenue

Passenger

Miles

Domestic

$

6,554

$

6,253

$

56

$

6,309

3.9%

2.1%

2.3%

1.7%

42,670

36,940

Atlantic

1,963

1,933

(38)

1,895

3.6%

0.8%

1.0%

2.8%

15,219

13,216

Pacific

1,121

1,163

(30)

1,133

(1.1)%

(3.4)%

(4.0)%

2.3%

10,858

9,038

Latin America

843

771

12

783

7.7%

7.2%

5.9%

0.4%

6,329

5,435

International

3,927

3,867

(56)

3,811

3.0%

0.9%

0.5%

2.2%

32,406

27,689

Consolidated

$

10,481

$

10,120

$

$

10,120

3.6%

1.7%

1.6%

1.9%

75,076

64,629

(a) As previously reported.

(b) During the third quarter of 2019, United implemented a new revenue accounting software system which allowed it to more precisely determine the geographic regions associated with certain ancillary passenger revenue items. Prior to July 2019, those ancillary revenue items were determined using an allocation method that was based on revenue from passenger travel. While the total passenger revenue is not impacted, the geographic totals for each period are not comparable year-over-year due to the change. The third quarter 2018 passenger revenue presented in the table above, and utilized in the year-over-year comparisons displayed, was adjusted using the third quarter 2019 percentages.

Select operating statistics are as follows:

Three Months Ended

September 30,

%

Increase/

(Decrease)

Nine Months Ended

September 30,

%

Increase/

(Decrease)

2019

2018

2019

2018

Passengers (thousands)

43,091

42,886

0.5

122,137

118,439

3.1

Revenue passenger miles (millions)

64,629

63,393

1.9

180,727

173,187

4.4

Available seat miles (millions)

75,076

73,681

1.9

213,961

206,360

3.7

Passenger load factor:

Consolidated

86.1

%

86.0

%

0.1

pts.

84.5

%

83.9

%

0.6

pts.

Domestic

86.6

%

86.7

%

(0.1)

pts.

85.7

%

85.7

%

pts.

International

85.4

%

85.2

%

0.2

pts.

82.9

%

81.6

%

1.3

pts.

Passenger revenue per available seat mile (cents)

13.96

13.73

1.7

13.88

13.64

1.8

Total revenue per available seat mile (cents)

15.16

14.93

1.5

15.13

14.93

1.3

Average yield per revenue passenger mile (cents)

16.22

15.96

1.6

16.43

16.25

1.1

Cargo ton miles

804

851

(5.5)

2,440

2,523

(3.3)

Aircraft in fleet at end of period

1,348

1,306

3.2

1,348

1,306

3.2

Average stage length (miles)

1,473

1,454

1.3

1,464

1,453

0.8

Average full-time equivalent employees

90,591

89,022

1.8

90,071

87,112

3.4

Average aircraft fuel price per gallon

$

2.02

$

2.32

(12.9)

$

2.08

$

2.23

(6.7)

Fuel gallons consumed (millions)

1,134

1,111

2.1

3,221

3,101

3.9

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 AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In millions)

September 30, 2019

December 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

$

2,959

$

1,694

Short-term investments

2,167

2,256

Receivables, less allowance for doubtful accounts

1,617

1,426

Aircraft fuel, spare parts and supplies, less obsolescence allowance

1,065

985

Prepaid expenses and other

725

733

Total current assets

8,533

7,094

Total operating property and equipment, net

29,332

27,399

Operating lease right-of-use assets

4,937

5,262

Other assets:

Goodwill

4,523

4,523

Intangibles, less accumulated amortization

3,114

3,159

Restricted cash

100

105

Notes receivable, net

529

516

Investments in affiliates and other, net

1,131

966

Total other assets

9,397

9,269

Total assets

$

52,199

$

49,024

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Advance ticket sales

$

5,515

$

4,381

Accounts payable

2,848

2,363

Frequent flyer deferred revenue

2,537

2,286

Accrued salaries and benefits

2,104

2,184

Current maturities of long-term debt

1,243

1,230

Current maturities of finance leases

92

123

Current maturities of operating leases

778

719

Other

574

553

Total current liabilities

15,691

13,839

Other long-term liabilities and deferred credits:

Long-term debt

12,900

12,215

Long-term obligations under finance leases

186

224

Long-term obligations under operating leases

4,941

5,276

Frequent flyer deferred revenue

2,682

2,719

Postretirement benefit liability

836

1,295

Pension liability

1,087

1,576

Deferred income taxes

1,594

828

Other

981

1,010

Total other long-term liabilities and deferred credits

25,207

25,143

Stockholders' equity

11,301

10,042

Total liabilities and stockholders' equity

$

52,199

$

49,024

UNITED AIRLINES HOLDINGS, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

(In millions)

Nine Months Ended

September 30,

2019

2018

Cash Flows from Operating Activities:

Net cash provided by operating activities

$

5,728

$

5,035

Cash Flows from Investing Activities:

Capital expenditures

(3,336)

(2,496)

Purchases of short-term and other investments

(2,168)

(1,975)

Proceeds from sale of short-term and other investments

2,282

1,979

Investment in affiliates

(36)

(139)

Proceeds from sale of property and equipment

47

30

Loans made to others

(10)

(10)

Other, net

(10)

104

Net cash used in investing activities

(3,231)

(2,507)

Cash Flows from Financing Activities:

Proceeds from issuance of long-term debt

1,109

1,241

Payments of long-term debt

(726)

(1,519)

Repurchases of common stock

(1,431)

(1,010)

Principal payments under finance leases

(105)

(57)

Capitalized financing costs

(51)

(31)

Other, net

(29)

(17)

Net cash used in financing activities

(1,233)

(1,393)

Net increase in cash, cash equivalents and restricted cash

1,264

1,135

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

$

3,063

$

2,726

Investing and Financing Activities Not Affecting Cash:

Property and equipment acquired through the issuance of debt

$

306

$

125

Operating lease conversions to finance lease

36

52

Right-of-use assets acquired through operating leases

344

537

Property and equipment acquired through finance leases

8

UNITED AIRLINES 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

September 30, 2019

Net Operating Profit After Tax ("NOPAT")

Pre-tax income

$

3,623

Adjustments:

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

Impairment of assets

301

Termination of a maintenance service agreement

64

Severance and benefit costs

21

MTM gains on financial instruments

(128)

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

31

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

3,912

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

739

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

163

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

(14)

less: Income taxes paid

(22)

NOPAT (Non-GAAP)

$

4,778

Average Invested Capital (five-quarter average)

Total assets

$

50,642

less: Non-interest bearing liabilities (b)

(17,823)

Average invested capital (Non-GAAP)

$

32,819

ROIC (Non-GAAP)

14.6

%

(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 September 30, 2019, the effective cash tax rate was 0.6%.

(b)

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

UNITED AIRLINES 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

September 30,

%

Increase/

Nine Months Ended

September 30,

%

Increase/

2019

2018

(Decrease)

2019

2018

(Decrease)

CASM (cents)

Cost per available seat mile (CASM) (GAAP)

13.20

13.32

(0.9)

13.52

13.67

(1.1)

Special charges (B)

0.04

0.02

NM

0.05

0.09

NM

Third-party business expenses

0.07

0.04

75.0

0.06

0.04

50.0

Fuel expense

3.05

3.49

(12.6)

3.13

3.36

(6.8)

Profit sharing, including taxes

0.24

0.17

41.2

0.17

0.12

41.7

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

9.80

9.60

2.1

10.11

10.06

0.5

NM Not Meaningful

UNITED AIRLINES HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended

September 30,

$

Increase/

%

Increase/

Nine Months Ended

September 30,

$

Increase/

%

Increase/

(in millions)

2019

2018

(Decrease)

(Decrease)

2019

2018

(Decrease)

(Decrease)

Operating expenses (GAAP)

$

9,907

$

9,816

$

91

0.9

$

28,931

$

28,218

$

713

2.5

Special charges (B)

27

17

10

NM

116

186

(70)

NM

Operating expenses, excluding special charges

9,880

9,799

81

0.8

28,815

28,032

783

2.8

Adjusted to exclude:

Third-party business expenses

49

29

20

69.0

120

89

31

34.8

Fuel expense

2,296

2,572

(276)

(10.7)

6,704

6,927

(223)

(3.2)

Profit sharing, including taxes

174

127

47

37.0

368

252

116

46.0

Adjusted operating expenses (Non-GAAP)

$

7,361

$

7,071

$

290

4.1

$

21,623

$

20,764

$

859

4.1

Operating income (GAAP)

$

1,473

$

1,187

$

286

24.1

$

3,440

$

2,594

$

846

32.6

Adjusted to exclude:

Special charges (B)

27

17

10

NM

116

186

(70)

NM

Adjusted operating income (Non-GAAP)

$

1,500

$

1,204

$

296

24.6

$

3,556

$

2,780

$

776

27.9

Pre-tax income (GAAP)

$

1,349

$

1,058

$

291

27.5

$

3,070

$

2,095

$

975

46.5

Adjusted to exclude:

Special charges (B)

27

17

10

NM

116

186

(70)

NM

MTM (gains) losses on financial instruments (B)

(21)

(29)

8

NM

(72)

61

(133)

NM

Interest expense on ERJ 145 finance leases (C)

22

13

9

NM

68

13

55

NM

Adjusted pre-tax income (Non-GAAP)

$

1,377

$

1,059

$

318

30.0

$

3,182

$

2,355

$

827

35.1

Net income (GAAP)

$

1,024

$

833

$

191

22.9

$

2,368

$

1,661

$

707.0

42.6

Adjusted to exclude:

Special charges (B)

27

17

10

NM

116

186

(70)

NM

MTM (gains) losses on financial instruments (B)

(21)

(29)

8

NM

(72)

61

(133)

NM

Interest expense on ERJ 145 finance leases (C)

22

13

9

NM

68

13

55

NM

Income tax expense (benefit) related to adjustments above

(6)

(6)

NM

(25)

(58)

33

NM

Adjusted net income (Non-GAAP)

$

1,046

$

834

$

212

25.4

$

2,455

$

1,863

$

592

31.8

Diluted earnings per share (GAAP)

$

3.99

$

3.05

$

0.94

30.8

$

9.04

$

5.98

$

3.06

51.2

Adjusted to exclude:

Special charges (B)

0.10

0.06

0.04

NM

0.44

0.67

(0.23)

NM

MTM (gains) losses on financial instruments (B)

(0.08)

(0.11)

0.03

NM

(0.27)

0.22

(0.49)

NM

Interest expense on ERJ 145 finance leases (C)

0.08

0.05

0.03

NM

0.26

0.05

0.21

NM

Income tax benefit related to adjustments

(0.02)

(0.02)

NM

(0.10)

(0.22)

0.12

NM

Adjusted diluted earnings per share (Non-GAAP)

$

4.07

$

3.05

$

1.02

33.4

$

9.37

$

6.70

$

2.67

39.9

NM Not Meaningful

UNITED AIRLINES 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

September 30,

Nine Months Ended

September 30,

Capital Expenditures (in millions)

2019

2018

2019

2018

Capital expenditures (GAAP)

$

869

$

825

$

3,336

$

2,496

Property and equipment acquired through the issuance of debt

86

306

125

Property and equipment acquired through finance leases

8

Adjusted capital expenditures (Non-GAAP)

$

955

$

825

$

3,650

$

2,621

Free Cash Flow (in millions)

Net cash provided by operating activities (GAAP)

$

1,103

$

883

$

5,728

$

5,035

Less capital expenditures

869

825

3,336

2,496

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

$

234

$

58

$

2,392

$

2,539

Net cash provided by operating activities (GAAP)

$

1,103

$

883

$

5,728

$

5,035

Less adjusted capital expenditures (Non-GAAP)

955

825

3,650

2,621

Free cash flow (Non-GAAP)

$

148

$

58

$

2,078

$

2,414

UNITED AIRLINES HOLDINGS, INC.

NOTES (UNAUDITED)

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In millions)

2019

2018

2019

2018

Operating:

Severance and benefit costs

$

2

$

9

$

14

$

34

Impairment of assets

11

69

145

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

25

(3)

33

7

Total special charges

27

17

116

186

Nonoperating MTM (gains) losses on financial instruments

(21)

(29)

(72)

61

Total special charges and MTM (gains) losses on financial instruments

6

(12)

44

247

Income tax expense (benefit) related to special charges and MTM (gains) losses on financial instruments

(2)

3

(10)

(55)

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

$

4

$

(9)

$

34

$

192

Severance and benefit costs: During the three and nine months ended September 30, 2019, the company recorded $2 million and $12 million, respectively, of management severance. During the nine months ended September 30, 2019, the company recorded $2 million of severance and benefit costs 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.

During the three and nine months ended September 30, 2018, the company recorded $5 million and $19 million, respectively, of severance and benefit costs related to the voluntary early-out program for its technicians and related employees, and $4 million and $15 million, respectively, of management severance.

Impairment of assets: During the nine months ended September 30, 2019, the company recorded a $47 million impairment for aircraft engines removed from operations, an $8 million fair value adjustment for aircraft purchased off lease, a $6 million charge for the early termination of several regional aircraft finance leases and $8 million in other miscellaneous impairments.

In May 2018, the Brazil–United States open skies agreement was ratified, which provides air carriers with unrestricted access between the United States and Brazil. The company determined that the approval of the open skies agreement impaired the entire value of its Brazil route authorities because the agreement removed all limitations or reciprocity requirements for flights between the United States and Brazil. Accordingly, the company recorded a $105 million special charge to write off the entire value of the intangible asset associated with its Brazil routes. For the three and nine months ended September 30, 2018, the company also recorded $11 million and $40 million, respectively, of fair value adjustments related to aircraft purchased off lease, write-off of unexercised aircraft purchase options and other impairments related to certain fleet types and international slots no longer in use.

(Gains) losses on sale of assets and other special charges. During the three months ended September 30, 2019, the company recorded charges of $18 million for the settlement of certain legal matters and $15 million related to a contract termination, as well as an $8 million gain primarily related to the sale and disposition of certain assets. During the nine months ended September 30, 2019, the company recorded $8 million of losses on the sale of assets.

During the three and nine months ended September 30, 2018, the company recorded $3 million of gains primarily related to the sale of aircraft engines and $7 million of losses primarily related to contract termination of regional aircraft operations in Guam, respectively.

MTM gains and losses on financial instruments: During the three and nine months ended September 30, 2019, the company recorded gains of $25 million and $77 million, respectively, for the change in market value of certain of its equity investments, primarily Azul Linhas Aéreas Brasileiras S.A.. Also, during the three and nine months ended September 30, 2019, the company recorded losses of $4 million and $5 million, respectively, 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.

During the three and nine months ended September 30, 2018, the company recorded gains of $29 million and losses of $61 million, respectively, for the change in market value of certain of its equity investments.

(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. As a result of this change, the company recognized $22 million and $68 million, respectively, of additional interest expense in the three and nine months ended September 30, 2019, and $13 million of additional interest expense in the third quarter of 2018.

(D) Effective tax rate

The company's effective tax rate for the three and nine months ended September 30, 2019 was 24.1% and 22.9%, respectively. The effective tax rate for the three and nine months ended September 30, 2018 was 21.3% and 20.7%, 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.

SOURCE United Airlines



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