United Airlines Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview United Airlines Holdings, Inc. (together with its consolidated subsidiaries, "UAL" or the "Company") is a holding company and its principal, wholly-owned subsidiary is United Airlines, Inc. (together with its consolidated subsidiaries, "United"). This Quarterly Report on Form 10-Q is a combined report of UAL and United including their respective consolidated financial statements. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted. United's operating revenues and operating expenses comprise nearly 100% of UAL's revenues and operating expenses. In addition, United comprises approximately the entire balance of UAL's assets, liabilities and operating cash flows. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained. We sometimes use the words "we," "our," "us," and the "Company" in this report for disclosures that relate to all of UAL and United. The Company transports people and cargo through its mainline operations, which utilize jet aircraft with at least 126 seats, and regional operations, which utilize smaller aircraft that are operated under contract by United Express carriers. The Company serves virtually every major market around the world, either directly or through participation in Star Alliance ® , the world's largest airline alliance. Impact of COVID-19 and Outlook The novel coronavirus (COVID-19) pandemic, together with the measures implemented by governmental authorities and private organizations in response to the pandemic, has had an adverse impact that has been material to the Company's business, operating results, financial condition and liquidity. Measures such as "shelter in place" or quarantine requirements, international and domestic travel restrictions or advisories, limitations on public gatherings, social distancing recommendations, remote work arrangements and closures of tourist destinations and attractions, as well as consumer perceptions of the safety, ease and predictability of air travel, have contributed to a precipitous decline in passenger demand and bookings for both business and leisure travel. The Company began experiencing a significant decline in international and domestic demand related to COVID-19 during the first quarter of 2020. The decline in demand caused a material deterioration in our revenues in the first nine months of 2020, resulting in a net loss of $5.2 billion for that period. Although during the third quarter of 2020 the Company experienced modest improvement in demand, the full extent of the ongoing impact of COVID-19 on the Company's longer-term operational and financial performance will depend on future developments, including those outside our control related to possible increases in COVID-19 cases and/or new quarantine requirements being imposed in certain jurisdictions or other restrictions on travel, all of which are highly uncertain and cannot be predicted with certainty. In response to decreased demand, the Company cut, relative to 2019 capacity, approximately 70% of its scheduled capacity for the third quarter of 2020. The Company expects scheduled capacity to be down approximately 55% year-over-year in the fourth quarter of 2020. The Company plans to continue to proactively evaluate and cancel flights on a rolling 60-day basis until it sees signs of a recovery in demand and expects demand to remain suppressed and plateau at levels around 50%, relative to 2019 levels, until an accepted treatment and/or vaccine for COVID-19 is widely available. In addition, the Company does not currently expect the recovery from COVID-19 to follow a linear path. As such, the Company's actual flown capacity may differ materially from its currently scheduled capacity. The Company has taken a number of actions in response to the decreased demand for air travel. In addition to the schedule reductions discussed above, the Company has: • reduced its planned capital expenditures and reduced operating expenditures for the remainder of 2020 and 2021 (including by postponing projects deemed non-critical to the Company's operations); • terminated its share repurchase program; • issued approximately $10.2 billion in secured notes, secured term loan facilities and new aircraft financings; • borrowed $1.0 billion under the $2.0 billion revolving credit facility of the Amended and Restated Credit and Guaranty Agreement (the "Revolving Credit Agreement"); • raised approximately $1.1 billion in cash proceeds in an underwritten public offering of UAL common stock; • entered into an equity distribution agreement relating to the issuance and sale, from time to time, of up to 28 million shares of UAL common stock; 31 Table of Contents • entered into agreements to finance certain aircraft currently subject to purchase agreements through sale and leaseback transactions; • elected to defer the payment of $140 million in payroll taxes incurred through September 30, 2020, as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), until 2021 and 2022; • temporarily grounded certain of its mainline fleet; and • taken a number of actions to reduce employee-related costs, including, among other items, the Company's Chief Executive Officer and President waived 100% of their respective base salaries through 2020, other officers temporarily waived a portion of their base salaries, the Company's non-employee directors waived 100% of their cash compensation for the second and third quarters of 2020, the Company suspended merit salary increases for 2020 and implemented a temporary four-day work week for management and administrative employees and the Company offered voluntary unpaid leaves of absence. In addition, and as announced in July 2020, the Company started the involuntary furlough process earlier this summer when issuing Worker Adjustment and Retraining Notification ("WARN") Act notices to 36,000 of its employees. Since then, the Company worked to reduce the total number of furloughs to approximately 13,000 employees by working closely with its union partners, introducing new voluntary options selected by approximately 9,000 employees and proposing creative solutions that would save jobs. This workforce reduction is part of the Company's strategic realignment of its business and new organizational structure as a result of the impacts of the COVID-19 pandemic on the Company's operations and cost structure. The COVID-19 pandemic is an act of nature and is a circumstance beyond the Company's control, which is further compounded by governmental restrictions on travel and stay-at-home orders that have substantially reduced bookings and the demand for airline travel, resulting in the temporary grounding of a substantial number of the Company's aircraft. The Company continues to focus on reducing expenses and managing its liquidity. We expect to continue to modify our cost management structure and capacity as the timing of demand recovery becomes more certain. On March 27, 2020, the President of the United States signed the CARES Act into law. The CARES Act is intended to respond to the COVID-19 pandemic and its impact on the economy, public health, state and local governments, individuals, and businesses. The CARES Act also provides supplemental appropriations for federal agencies to respond to the COVID-19 pandemic. On April 20, 2020, United entered into a Payroll Support Program Agreement (the "PSP Agreement") with the U.S. Treasury Department ("Treasury") providing the Company with total funding of approximately $5.1 billion pursuant to the Payroll Support Program under the CARES Act. These funds will be used to pay for the salaries and benefits of United employees. Approximately $3.6 billion of the $5.1 billion was a direct grant and approximately $1.5 billion is in the form of a 10-year senior unsecured promissory note (the "PSP Note"). As of September 30, 2020, the Company has received the full amount of the $5.1 billion through the Payroll Support Program under the CARES Act. As of September 30, 2020, the Company recorded $3.1 billion in grant income as Special charges (credit) on the Company's statement of consolidated operations and recorded $453 million as Payroll Support Program deferred credit on the Company's consolidated balance sheet. The Company also recorded $66 million in warrants issued to Treasury, within stockholders' equity, in connection with the PSP Note. See Note 3 and Note 10 to the financial statements included in Part I, Item 1 for additional information related to these warrants and the PSP Note, respectively. On September 28, 2020, UAL and United entered into a loan agreement with Treasury. The agreement provides for a term loan facility of up to approximately $5.2 billion (the "Term Loan Facility") pursuant to the loan program established under Section 4003(b) of the CARES Act (the "Loan Program"). The loans (the "Term Loans") may be disbursed in up to three disbursements on or before March 26, 2021. Treasury has advised United that it intends to allocate additional loan commitments under the CARES Act in October 2020, and that it expects that such additional allocations will increase the amount available under the Term Loan Facility to up to $7.5 billion in the aggregate. Such increase, and the amount thereof, are subject to final approval by Treasury and both the availability of, and agreement on, collateral. On September 28, 2020, United borrowed, and recorded as Long-term debt on the Company's consolidated balance sheet, $520 million, the proceeds of which were used to pay certain transaction fees and expenses, and for working capital and other general corporate purposes of the Company. See Note 3 to the financial statements included in Part I, Item 1 for a discussion on the warrants issued in connection with the Term Loans and Note 10 to the financial statements included in Part I, Item 1 for a discussion on the Term Loans. Under the PSP Agreement and Loan Program, the Company and its business are subject to certain restrictions, including, but not limited to, restrictions on the payment of dividends and the ability to repurchase UAL's equity securities, requirements to maintain certain levels of scheduled service, requirements to maintain U.S. employment levels through September 30, 2020 and certain limitations on executive compensation. 32 Table of Contents RESULTS OF OPERATIONS The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three months ended September 30, 2020 as compared to the corresponding period in 2019. Third Quarter 2020 Compared to Third Quarter 2019 The Company recorded a net loss of $1.8 billion in the third quarter of 2020 as compared to net income of $1.0 billion in the third quarter of 2019. The Company considers a key measure of its performance to be operating income (loss), which was a $1.6 billion loss for the third quarter of 2020, as compared to income of $1.5 billion for the third quarter of 2019, a $3.1 billion decrease year-over-year, primarily as a result of the global COVID-19 pandemic. Significant components of the Company's operating results for the three months ended September 30 are as follows (in millions, except percentage changes): 2020 2019 Increase (Decrease) % Change Operating revenue $ 2,489 $ 11,380 $ (8,891) (78.1) Operating expense 4,104 9,907 (5,803) (58.6) Operating income (loss) (1,615) 1,473 (3,088) NM Nonoperating income (expense) (717) (124) 593 NM Income tax expense (benefit) (491) 325 (816) NM Net income (loss) $ (1,841) $ 1,024 $ (2,865) NM Certain consolidated statistical information for the Company's operations for the three months ended September 30 is as follows: 2020 2019 Increase (Decrease) % Change Passengers (thousands) (a) 9,739 43,091 (33,352) (77.4) Revenue passenger miles ("RPMs" or "traffic") (millions) (b) 10,613 64,629 (54,016) (83.6) Available seat miles ("ASMs" or "capacity") (millions) (c) 22,212 75,076 (52,864) (70.4) Passenger load factor (d) 47.8 % 86.1 % (38.3) pts. N/A Passenger revenue per available seat mile ("PRASM") (cents) 7.42 13.96 (6.54) (46.8) Average yield per revenue passenger mile ("Yield") (cents) (e) 15.54 16.22 (0.68) (4.2) Cargo revenue ton miles ("CTM") (millions) (f) 685 804 (119) (14.8) Cost per available seat mile ("CASM") (cents) 18.48 13.20 5.28 40.0 Average price per gallon of fuel, including fuel taxes $ 1.31 $ 2.02 $ (0.71) (35.1) Fuel gallons consumed (millions) 387 1,134 (747) (65.9) Employee headcount, as of September 30 87,900 95,000 (7,100) (7.5) (a) The number of revenue passengers measured by each flight segment flown. (b) The number of scheduled miles flown by revenue passengers. (c) The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. (d) Revenue passenger miles divided by available seat miles. (e) The average passenger revenue received for each revenue passenger mile flown. (f) The number of cargo revenue tons transported multiplied by the number of miles flown. Operating Revenue. The table below shows year-over-year comparisons by type of operating revenue for the three months ended September 30 (in millions, except for percentage changes): 2020 2019 Increase (Decrease) % Change Passenger revenue $ 1,649 $ 10,481 $ (8,832) (84.3) Cargo 422 282 140 49.6 Other operating revenue 418 617 (199) (32.3) Total operating revenue $ 2,489 $ 11,380 $ (8,891) (78.1) 33 Table of Contents The table below presents selected third quarter passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes: Increase (decrease) from 2019: Domestic Atlantic Pacific Latin Total Average fare per passenger (23.6) % 10.5 % 50.1 % (24.2) % (30.4) % Passengers (75.1) % (91.6) % (94.2) % (80.6) % (77.4) % RPMs (traffic) (78.2) % (90.1) % (95.5) % (84.3) % (83.6) % ASMs (capacity) (65.3) % (72.9) % (84.6) % (74.3) % (70.4) % Passenger load factor (points) (32.2) (55.1) (58.6) (33.4) (38.3) Passenger revenue decreased $8.8 billion, or 84.3%, in the third quarter of 2020 as compared to the year-ago period primarily due to the decrease in demand for air travel as a result of the worldwide spread of COVID-19 and the associated shelter-in-place directives and travel restrictions. Effective August 30, 2020, the Company eliminated change fees on all standard Economy and Premium cabin tickets for travel within the U.S. 50 states, Puerto Rico and the U.S. Virgin Islands. Cargo revenue increased $140 million, or 49.6%, in the third quarter of 2020 as compared to the year-ago period primarily due to an increase in cargo-only charter flights with higher yields as a result of an increased demand for critical goods during the COVID-19 pandemic. Other operating revenue decreased $199 million, or 32.3%, in the third quarter of 2020 as compared to the year-ago period primarily due to a decline in mileage revenue from non-airline partners, including the co-branded credit card partner, JPMorgan Chase Bank, N.A., and lower revenue from airport lounges due to United Club closures and fewer overall customers utilizing these lounges. Operating Expenses. The table below includes data related to the Company's operating expenses for the three months ended September 30 (in millions, except for percentage changes): 2020 2019 Increase (Decrease) % Change Salaries and related costs $ 2,229 $ 3,063 $ (834) (27.2) Aircraft fuel 508 2,296 (1,788) (77.9) Regional capacity purchase 425 721 (296) (41.1) Landing fees and other rent 500 645 (145) (22.5) Depreciation and amortization 626 575 51 8.9 Aircraft maintenance materials and outside repairs 115 490 (375) (76.5) Distribution expenses 53 432 (379) (87.7) Aircraft rent 50 67 (17) (25.4) Special charges (credit) (1,081) 27 (1,108) NM Other operating expenses 679 1,591 (912) (57.3) Total operating expenses $ 4,104 $ 9,907 $ (5,803) (58.6) Salaries and related costs decreased $834 million, or 27.2%, in the third quarter of 2020 as compared to the year-ago period primarily due to schedule reductions for management and administrative employees, Company-offered leaves of absence and other voluntary separation programs, $203 million lower profit sharing and other employee incentives due to the impact of COVID-19 on the third quarter of 2020 results and $29 million in tax credits provided by the Employee Retention Credit under the CARES Act related to the third quarter of 2020. Aircraft fuel expense decreased by $1.8 billion, or 77.9%, in the third quarter of 2020 as compared to the year-ago period. The table below presents the significant changes in aircraft fuel cost per gallon in the three months ended September 30, 2020 as compared to the year-ago period: (In millions) Average price per gallon 2020 2019 % Change 2020 2019 % Change Fuel expense $ 508 $ 2,296 (77.9) $ 1.31 $ 2.02 (35.1) Total fuel consumption (gallons) 387 1,134 (65.9) 34 Table of Contents Regional capacity purchase decreased $296 million, or 41.1%, in the third quarter of 2020 as compared to the year-ago period primarily due to significantly reduced regional flying as a result of COVID-19 and reduced rates under certain capacity purchase agreements. Landing fees and other rent decreased $145 million, or 22.5%, in the third quarter of 2020 as compared to the year-ago period primarily due to reduced flying. Depreciation and amortization increased $51 million, or 8.9%, in the third quarter of 2020 as compared to the year-ago period primarily due to additions of aircraft, upgrades to aircraft interiors and completion of technology projects. Aircraft maintenance materials and outside repairs decreased $375 million, or 76.5%, in the third quarter of 2020 as compared to the year-ago period primarily due to a reduction in airframe checks, engine overhauls, expenses associated with power-by-the-hour engine maintenance contracts and line maintenance due to reduced flying. Distribution expenses decreased $379 million, or 87.7%, in the third quarter of 2020 as compared to the year-ago period as a result of the overall decrease in passenger revenue due to the COVID-19 pandemic. Details of the Company's special charges (credit) include the following for the three months ended September 30 (in millions): 2020 2019 CARES Act grant $ (1,494) $ — Severance and benefit costs 350 2 Impairment of assets 38 — (Gains) losses on sale of assets and other special charges 25 25 Special charges (credit) $ (1,081) $ 27 See Note 11 to the financial statements included in Part I, Item 1 of this report for additional information. Other operating expenses decreased $912 million, or 57.3%, in the third quarter of 2020 as compared to the year-ago period primarily due to the impacts of COVID-19 on our airport operations (including United Club closures, catering, cargo trucking and handling, interrupted trip charges, ground handling and navigation fees), technology projects and crew-related expenses. Nonoperating Income (Expense ). The table below shows year-over-year comparisons of the Company's nonoperating income (expense) for the three months ended September 30 (in millions, except for percentage changes): 2020 2019 Increase (Decrease) % Change Interest expense $ (345) $ (191) $ 154 80.6 Interest capitalized 16 22 (6) (27.3) Interest income 8 36 (28) (77.8) Unrealized gains on investments, net 15 21 (6) (28.6) Miscellaneous, net (411) (12) 399 NM Total $ (717) $ (124) $ 593 NM Interest expense increased $154 million, or 80.6%, in the third quarter of 2020 as compared to the year-ago period primarily due to the issuance of new debt financings in 2020 to provide additional liquidity to the Company during the COVID-19 pandemic. Miscellaneous, net increased $399 million in the third quarter of 2020 as compared to the year-ago period primarily due to settlement losses and special termination benefits related to furloughs and voluntary separation programs under the Company's non-pilot U.S. defined benefit pension plan and postretirement medical programs. See Notes 6 and 11 to the financial statements included in Part I, Item 1 of this report for additional information. I ncome Taxes. See Note 5 to the financial statements included in Part I, Item 1 of this report for information related to income taxes. 35 Table of Contents First Nine Months 2020 Compared to First Nine Months 2019 The Company recorded a net loss of $5.2 billion in the first nine months of 2020 as compared to net income of $2.4 billion in the first nine months of 2019. The Company considers a key measure of its performance to be operating income (loss), which was a $4.2 billion loss for the first nine months of 2020, as compared to income of $3.4 billion for the first nine months of 2019, a $7.7 billion decrease year-over-year. Significant components of the Company's operating results for the nine months ended September 30 are as follows (in millions, except percentage changes): 2020 2019 Increase (Decrease) % Change Operating revenue $ 11,943 $ 32,371 $ (20,428) (63.1) Operating expense 16,167 28,931 (12,764) (44.1) Operating income (loss) (4,224) 3,440 (7,664) NM Nonoperating income (expense) (2,225) (370) 1,855 NM Income tax expense (benefit) (1,277) 702 (1,979) NM Net income (loss) $ (5,172) $ 2,368 $ (7,540) NM Certain consolidated statistical information for the Company's operations for the nine months ended September 30 is as follows: 2020 2019 Increase (Decrease) % Change Passengers (thousands) 42,911 122,137 (79,226) (64.9) RPMs (millions) 56,812 180,727 (123,915) (68.6) ASMs (millions) 92,113 213,961 (121,848) (56.9) Passenger load factor 61.7 % 84.5 % (22.8) pts. N/A PRASM (cents) 10.20 13.88 (3.68) (26.5) Yield (cents) 16.54 16.43 0.11 0.7 CTM (millions) 1,876 2,440 (564) (23.1) CASM (cents) 17.55 13.52 4.03 29.8 Average price per gallon of fuel, including fuel taxes $ 1.65 $ 2.08 $ (0.43) (20.7) Fuel gallons consumed (millions) 1,501 3,221 (1,720) (53.4) Employee headcount, as of September 30 87,900 95,000 (7,100) (7.5) Operating Revenue. The table below shows year-over-year comparisons by type of operating revenue for the nine months ended September 30 (in millions, except for percentage changes): 2020 2019 Increase (Decrease) % Change Passenger revenue $ 9,395 $ 29,692 $ (20,297) (68.4) Cargo 1,088 863 225 26.1 Other operating revenue 1,460 1,816 (356) (19.6) Total operating revenue $ 11,943 $ 32,371 $ (20,428) (63.1) The table below presents selected passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019: Increase (decrease) from 2019: Domestic Atlantic Pacific Latin Total Average fare per passenger (6.1) % 3.6 % (0.1) % (0.7) % (9.9) % Passengers (63.7) % (75.8) % (75.7) % (62.7) % (64.9) % RPMs (traffic) (65.4) % (73.8) % (77.2) % (64.2) % (68.6) % ASMs (capacity) (52.7) % (60.9) % (68.2) % (56.2) % (56.9) % Passenger load factor (points) (23.0) (27.2) (23.2) (15.5) (22.8) 36 Table of Contents Passenger revenue decreased $20.3 billion, or 68.4%, in the first nine months of 2020 as compared to the year-ago period primarily due to the decrease in demand for air travel as a result of the worldwide spread of COVID-19 and the associated shelter-in-place directives and travel restrictions. Effective August 30, 2020, the Company eliminated change fees on all standard Economy and Premium cabin tickets for travel within the U.S. 50 states, Puerto Rico and the U.S. Virgin Islands. Cargo revenue increased $225 million, or 26.1%, in the first nine months of 2020 as compared to the year-ago period primarily due to the implementation and continued expansion of cargo-only charter flights with higher yields as a result of an increased demand for critical goods during the COVID-19 pandemic. Other operating revenue decreased $356 million, or 19.6%, in the first nine months of 2020 as compared to the year-ago period primarily due to a decline in mileage revenue from non-airline partners, including the co-branded credit card partner, JPMorgan Chase Bank, N.A., and lower revenue from airport lounges due to United Club closures and fewer overall customers utilizing these lounges. Operating Expenses. The table below includes data related to the Company's operating expenses for the nine months ended September 30 (in millions, except for percentage changes): 2020 2019 Increase (Decrease) % Change Salaries and related costs $ 7,354 $ 8,993 $ (1,639) (18.2) Aircraft fuel 2,474 6,704 (4,230) (63.1) Regional capacity purchase 1,550 2,124 (574) (27.0) Landing fees and other rent 1,552 1,893 (341) (18.0) Depreciation and amortization 1,859 1,682 177 10.5 Aircraft maintenance materials and outside repairs 659 1,319 (660) (50.0) Distribution expenses 379 1,234 (855) (69.3) Aircraft rent 147 221 (74) (33.5) Special charges (credit) (2,467) 116 (2,583) NM Other operating expenses 2,660 4,645 (1,985) (42.7) Total operating expenses $ 16,167 $ 28,931 $ (12,764) (44.1) Salaries and related costs decreased $1.6 billion, or 18.2%, in the first nine months of 2020 as compared to the year-ago period primarily due to schedule reductions of management and administrative employees, Company-offered leaves of absence, other voluntary separation programs, $440 million lower profit sharing and employee incentives due to the impact of COVID-19 on 2020 results and $171 million in tax credits provided by the Employee Retention Credit under the CARES Act related to the second and third quarters of 2020. Aircraft fuel expense decreased $4.2 billion, or 63.1%, in the first nine months of 2020 as compared to the year-ago period. The table below presents the significant changes in aircraft fuel cost per gallon in the nine months ended September 30, 2020 as compared to the year-ago period: (In millions) Average price per gallon 2020 2019 % Change 2020 2019 % Change Fuel expense $ 2,474 $ 6,704 (63.1) $ 1.65 $ 2.08 (20.7) Total fuel consumption (gallons) 1,501 3,221 (53.4) Regional capacity purchase decreased $574 million, or 27.0%, in the first nine months of 2020 as compared to the year-ago period primarily due to reduced regional flying as a result of COVID-19 and reduced rates under certain capacity purchase agreements. Landing fees and other rent decreased $341 million, or 18.0%, in the first nine months of 2020 as compared to the year-ago period primarily due to reduced flying. Depreciation and amortization increased $177 million, or 10.5%, in the first nine months of 2020 as compared to the year-ago period primarily due to additions of aircraft, upgrades to aircraft interiors and completion of technology projects. 37 Table of Contents Aircraft maintenance materials and outside repairs decreased $660 million, or 50.0%, in the first nine months of 2020 as compared to the year-ago period primarily due to a reduction in airframe checks, engine overhauls, expenses associated with power-by-the-hour engine maintenance contracts and line maintenance due to reduced flying. Distribution expenses decreased $855 million, or 69.3%, in the first nine months of 2020 as compared to the year-ago period as a result of the overall decrease in passenger revenue due to the COVID-19 pandemic. Aircraft rent decreased $74 million, or 33.5%, in the first nine months of 2020 as compared to the year-ago period primarily due to the purchase of leased aircraft. Details of the Company's special charges (credit) include the following for the nine months ended September 30 (in millions): 2020 2019 CARES Act grant $ (3,083) $ — Severance and benefit costs 413 14 Impairment of assets 168 69 (Gains) losses on sale of assets and other special charges 35 33 Special charges (credit) $ (2,467) $ 116 See Note 11 to the financial statements included in Part I, Item 1 of this report for additional information. Other operating expenses decreased $2 billion, or 42.7%, in the first nine months of 2020 as compared to the year-ago period primarily due to the impacts of COVID-19 on our airport operations (including United Club closures, catering, cargo trucking and handling, interrupted trip charges, ground handling and navigation fees), technology projects, crew-related expenses and $88 million received in settlement of credit card interchange fees. Nonoperating Income (Expense). The following table illustrates the year-over-year dollar and percentage changes in the Company's nonoperating income (expense) for the nine months ended September 30 (in millions, except for percentage changes): 2020 2019 Increase (Decrease) % Change Interest expense $ (712) $ (570) $ 142 24.9 Interest capitalized 54 65 (11) (16.9) Interest income 45 103 (58) (56.3) Unrealized gains (losses) on investments, net (295) 72 (367) NM Miscellaneous, net (1,317) (40) 1,277 NM Total $ (2,225) $ (370) $ 1,855 NM Interest expense increased $142 million, or 24.9%, in the first nine months of 2020 as compared to the year-ago period primarily due to the issuance of new debt financings in 2020 to provide additional liquidity to the Company during the COVID-19 pandemic. Interest income decreased $58 million, or 56.3%, in the first nine months of 2020 as compared to the year-ago period primarily due to a decrease in interest rates. Unrealized gains (losses) on investments, net, decreased by $367 million, due to a $295 million loss in the first nine months of 2020 as compared to a $72 million gain in the year-ago period, as a result of a decrease in the market value of the Company's equity investment in Azul and a decrease in the fair value of the Avianca Holdings S.A. ("AVH") share call options, AVH share appreciation rights and AVH share-based upside sharing agreement. See Notes 8 and 11 to the financial statements included in Part I, Item 1 of this report for additional information. Miscellaneous, net increased $1.3 billion in the first nine months of 2020 as compared to the year-ago period, primarily due to credit loss allowances associated with the Company's Term Loan Agreement, with, among others, BRW Aviation Holding LLC and BRW Aviation LLC, and related guarantee and settlement losses and special termination benefits related to furloughs and voluntary separation programs under the Company's non-pilot U.S. defined benefit pension plan and postretirement medical programs. See Notes 6, 7, 9 and 11 to the financial statements included in Part I, Item 1 of this report for additional information. 38 Table of Contents Income Taxes. See Note 5 to the financial statements included in Part I, Item 1 of this report for information related to income taxes. LIQUIDITY AND CAPITAL RESOURCES Current Liquidity As of September 30, 2020, the Company had $13.7 billion in unrestricted cash, cash equivalents and short-term investments, $4.7 billion available for borrowing by United under the Loan Program at any time until March 26, 2021 and $1.0 billion available for borrowing by United under the Revolving Credit Agreement at any time until April 1, 2022. At September 30, 2020, the Company also had $248 million of restricted cash and cash equivalents, which primarily consisted of collateral for letters of credit, collateral associated with facility leases and other insurance-related obligations and amounts to be used for the payment of fees, principal and interest on the MileagePlus Financing. The Company began experiencing a significant decline in international and domestic demand related to COVID-19 during the first quarter of 2020. In response to decreased demand, the Company cut, relative to 2019 capacity, approximately 70% of its scheduled capacity for the third quarter of 2020. The Company expects scheduled capacity to be down approximately 55% year-over-year in the fourth quarter of 2020. The Company plans to continue to proactively evaluate and cancel flights on a rolling 60-day basis until it sees signs of a recovery in demand and expects demand to remain suppressed and plateau at levels around 50%, relative to 2019 levels, until an accepted treatment and/or vaccine for COVID-19 is widely available. In addition, the Company does not currently expect the recovery from COVID-19 to follow a linear path. As such, the Company's actual flown capacity may differ materially from its currently scheduled capacity. The Company has taken a number of actions in response to the decreased demand for air travel. In addition to the schedule reductions discussed above, the Company has: • reduced its planned capital expenditures and reduced operating expenditures for the remainder of 2020 and 2021 (including by postponing projects deemed non-critical to the Company's operations); • terminated its share repurchase program; • issued approximately $10.2 billion in secured notes, secured term loan facilities and new aircraft financings; • borrowed $1.0 billion under the $2.0 billion revolving credit facility of the Revolving Credit Agreement; • raised approximately $1.1 billion in cash proceeds in an underwritten public offering of UAL common stock; • entered into an equity distribution agreement relating to the issuance and sale, from time to time, of up to 28 million shares of UAL common stock; • entered into agreements to finance certain aircraft currently subject to purchase agreements through sale and leaseback transactions; • elected to defer the payment of $140 million in payroll taxes incurred through September 30, 2020, as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), until 2021 and 2022; • temporarily grounded certain of its mainline fleet; and • taken a number of actions to reduce employee-related costs, including, among other items, the Company's Chief Executive Officer and President waived 100% of their respective base salaries through 2020, other officers temporarily waived a portion of their base salaries, the Company's non-employee directors waived 100% of their cash compensation for the second and third quarters of 2020, the Company suspended merit salary increases for 2020 and implemented a temporary four-day work week for management and administrative employees and the Company offered voluntary unpaid leaves of absence. On April 20, 2020, United entered into the PSP Agreement with Treasury, providing the Company with total funding of approximately $5.1 billion pursuant to the Payroll Support Program under the CARES Act. As of September 30, 2020, the Company has received the full amount of the $5.1 billion through the Payroll Support Program under the CARES Act. On September 28, 2020, UAL and United entered into a loan agreement with Treasury. The agreement provides for a Term Loan Facility of up to approximately $5.2 billion pursuant to the loan program established under Section 4003(b) of the CARES Act. The Term Loans may be disbursed in up to three disbursements on or before March 26, 2021. Treasury has advised United that it intends to allocate additional loan commitments under the CARES Act in October 2020, and that it expects that such additional allocations will increase the amount available under the Term Loan Facility to up to $7.5 billion in the aggregate. Such increase, and the amount thereof, are subject to final approval by Treasury and both the availability of, and agreement on, collateral. On September 28, 2020, United borrowed $520 million under the Term Loan Facility, the proceeds of which were 39 Table of Contents used to pay certain transaction fees and expenses, and for working capital and other general corporate purposes of the Company. Several of the Company's debt agreements contain covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness and pay dividends on or repurchase stock. As of September 30, 2020, UAL and United were in compliance with their respective debt covenants. In addition, in connection with the PSP Agreement and Loan Program, the Company and its business will be subject to certain restrictions. We have a significant amount of fixed obligations, including debt and leases of aircraft, airport and other facilities, and pension funding obligations. As of September 30, 2020, the Company had approximately $33.8 billion of debt, finance lease, operating lease and sale-leaseback obligations, including $5.4 billion that will become due in the next 12 months. In addition, we have substantial noncancelable commitments for capital expenditures, including the acquisition of certain new aircraft and related spare engines. As of September 30, 2020, our current assets exceeded our current liabilities by approximately $685 million. At September 30, 2020, $4.9 billion of current liabilities related to tickets sold to passengers for travel beyond September 30, 2020. While we expect many of those passengers to travel, canceling flights could result in refunds or the issuance of significant amounts of electronic travel certificates and future flight credits which can be applied towards the purchase of future tickets. As of September 30, 2020, United had firm commitments and options to purchase aircraft from The Boeing Company ("Boeing"), Airbus S.A.S. ("Airbus") and Embraer S.A. ("Embraer") as presented in the table below: Scheduled Aircraft Deliveries Aircraft Type Number of Firm Commitments (a) Last Three Months of 2020 2021 2022 After 2022 Airbus A321XLR 50 — — — 50 Airbus A350 45 — — — 45 Boeing 737 MAX 171 16 24 — 131 Boeing 787 11 3 8 — — Embraer E175 15 11 4 — — (a) United also has options and purchase rights for additional aircraft. The aircraft listed in the table above are scheduled for delivery through 2030. To the extent the Company and the aircraft manufacturers with whom the Company has existing orders for new aircraft agree to modify the contracts governing those orders, the amount and timing of the Company's future capital commitments could change. Following the Federal Aviation Administration ("FAA") order issued on March 13, 2019 prohibiting the operation of Boeing 737 MAX series aircraft by U.S. certificated operators ("FAA Order"), Boeing suspended deliveries of new Boeing 737 MAX aircraft. As a result, scheduled deliveries of Boeing 737 MAX series aircraft have been delayed, and the Company expects these delays to continue. The extent of the delay to the scheduled deliveries of new Boeing 737 MAX aircraft is expected to be impacted by the length of time the FAA Order remains in place, Boeing's production rate and the pace at which Boeing can deliver aircraft following the lifting of the FAA Order, among other factors, and these factors have been and could continue to be significantly impacted by the COVID-19 pandemic. Accordingly, we anticipate that a certain number of 2020 and 2021 MAX deliveries described in the table above may move to later years. If the FAA Order is not lifted by the two-year anniversary of its issuance, an event of loss is likely to occur under certain of the Company's financing documents related to the Boeing 737 MAX aircraft. An event of loss would require the Company to prepay at par approximately $450 million of indebtedness incurred to finance these aircraft. The Company expects that it would be able to refinance any such prepayment. United also has agreements to purchase 20 used Airbus A319 aircraft with expected delivery dates through 2022 and 11 used Boeing 737-700 aircraft with expected delivery dates through 2021. In the first nine months of 2020, United entered into agreements with third parties to finance through sale and leaseback transactions new Boeing model 787-9 aircraft and Boeing model 737 MAX aircraft subject to purchase agreements between United and Boeing. In connection with delivery of each aircraft from Boeing, United will assign its right to purchase such aircraft to the buyer, and simultaneous with the buyer's purchase from Boeing, United will enter into a long-term lease for such aircraft with the buyer as lessor. Seven Boeing model 787-9 aircraft were delivered under these transactions (and each is presently subject to a long-term lease to United). Remaining aircraft in the agreements are scheduled to be delivered through 2021. Upon delivery of aircraft in these sale and leaseback transactions, the Company will account for these aircraft which have a repurchase option at a price other than fair value as part of Flight equipment on the Company's balance sheet and the related 40 Table of Contents obligation recorded in Other current liabilities and Other financial liabilities from sale-leasebacks (noncurrent) since they do not qualify for sale recognition. The remaining aircraft in this transaction that qualify for sale recognition will be recorded as Operating lease right-of-use assets and lease liabilities on the Company's balance sheet after recognition of related gains or losses on such sale. As of September 30, 2020, UAL and United have total capital commitments related to the acquisition of aircraft and related spare engines, aircraft improvements and non-aircraft capital commitments for approximately $24.3 billion, of which approximately $1.3 billion, $3.0 billion, $1.3 billion, $2.8 billion, $2.0 billion and $13.9 billion are due in the last three months of 2020 and for the full year for 2021, 2022, 2023, 2024 and thereafter, respectively. We must return to profitability and/or access the capital markets to meet our significant long-term debt and finance lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines. Financing may be necessary to satisfy the Company's capital commitments for its firm order aircraft and other related capital expenditures. The Company has backstop financing commitments available from certain of its aircraft manufacturers for a limited number of its future aircraft deliveries, subject to certain customary conditions. See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information on aircraft financing and other debt instruments. As of September 30, 2020, a substantial portion of the Company's assets, principally aircraft and certain related assets, certain route authorities and airport slots, was pledged under various loan and other agreements. On July 2, 2020, substantially all of the assets of Mileage Plus Holdings, LLC, a direct wholly-owned subsidiary of United ("MPH"), and Mileage Plus Intellectual Property Assets, Ltd., an indirect wholly-owned subsidiary of MPH ("MIPA"), were pledged as security in connection with the issuance of $6.8 billion of senior secured notes and a secured term loan facility secured by substantially all of the assets of MPH (the "MileagePlus Financing"). The Company has unencumbered assets, including aircraft, engines, spare parts and other physical assets, routes, and slots and gates, among other items, available to be pledged as collateral for future financings, if needed. Credit Ratings. As of the filing date of this report, UAL and United had the following corporate credit ratings: S&P Moody's Fitch UAL B+ Ba2 BB- United B+ * BB- * The credit agency does not issue corporate credit ratings for subsidiary entities. These credit ratings are below investment grade levels; however, the Company has been able to secure financing with investment grade credit ratings for certain enhanced equipment trust certificates ("EETCs") and term loans. Downgrades from current rating levels, among other things, could restrict the availability and/or increase the cost of future financing for the Company. Sources and Uses of Cash Operating Activities. Cash flows used by operations were $2.0 billion for the nine months ended September 30, 2020 compared to $5.7 billion provided by operations in the same period in 2019. The decrease is primarily attributable to a $7.7 billion decrease in operating income for the first nine months of 2020 as compared to the same period in 2019 caused by the COVID-19 pandemic. Investing Activities. Capital expenditures, net of returns of purchase deposits on flight equipment, were approximately $1.6 billion and $3.3 billion in the nine months ended September 30, 2020 and September 30, 2019, respectively. Capital expenditures for the nine months ended September 30, 2020 were primarily attributable to additions of new aircraft, aircraft improvements, and increases in facility and information technology assets. Financing Activities. During the nine months ended September 30, 2020, the Company made debt and finance lease payments of $1.0 billion. In the nine months ended September 30, 2020, the Company received and recorded approximately $13.5 billion from various credit agreements, including the MileagePlus financing, the PSP Note, Term Loan Facility and EETC pass-through trusts established in September 2019. See Note 10 to the financial statements included in Part I, Item 1 of this report for additional information. 41 Table of Contents In the nine months ended September 30, 2020, the Company received approximately $1.1 billion from the sale of UAL common stock. Share Repurchase Programs. On February 24, 2020, the Company suspended share repurchases under its share repurchase program authorized by UAL's Board of Directors in July 2019. UAL's Board of Directors subsequently terminated this share repurchase program on April 24, 2020. In the nine months ended September 30, 2020, UAL repurchased approximately 4.3 million shares of UAL common stock in open market transactions for $0.3 billion. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds of this report for additional information. Commitments, Contingencies and Liquidity Matters. As described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "2019 Form 10-K") and in Part II, Item 1A. Risk Factors of this report, the Company's liquidity may be adversely impacted by a variety of factors, including, but not limited to, pension funding obligations, reserve requirements associated with credit card processing agreements, guarantees, commitments, contingencies and the ongoing impact of the COVID-19 pandemic. See the 2019 Form 10-K and Notes 5, 6, 7, 8, 9, 10 and 11 to the financial statements contained in Part I, Item 1 of this report for additional information. 42 Table of Contents CRITICAL ACCOUNTING POLICIES See "Critical Accounting Policies" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2019 Form 10-K. FORWARD-LOOKING INFORMATION Certain statements throughout Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report, including statements regarding the potential impacts of the COVID-19 pandemic and steps the Company plans to take in response thereto, are forward-looking and thus reflect the Company's current expectations and beliefs with respect to certain current and future events and anticipated financial and operating performance. Such forward-looking statements are and will be subject to many risks and uncertainties relating to the Company's operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward-looking statements. Words such as "expects," "will," "plans," "anticipates," "indicates," "remains," "believes," "estimates," "forecast," "guidance," "outlook," "goals", "targets" and similar expressions are intended to identify forward-looking statements. Additionally, forward-looking statements include statements that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law. Our actual results could differ materially from these forward-looking statements due to numerous factors including, without limitation, the following: the duration and spread of the ongoing global COVID-19 pandemic and the outbreak of any other disease or similar public health threat and the impact on the business, results of operations and financial condition of the Company; the impact of workforce reductions on the Company's business; the lenders' ability to accelerate the MileagePlus indebtedness, foreclose upon the collateral securing the MileagePlus indebtedness or exercise other remedies if the Company is not able to comply with the covenants in the MileagePlus financing agreements; the final terms of borrowing pursuant to the Loan Program established under Section 4003(b) of the CARES Act and the effects of the grant and promissory note through the Payroll Support Program under the CARES Act; the costs and availability of financing; our significant amount of financial leverage from fixed obligations and ability to seek additional liquidity and maintain adequate liquidity; our ability to comply with the terms of our various financing arrangements; our ability to utilize our net operating losses to offset future taxable income; the material disruption of our strategic operating plan as a result of the COVID-19 pandemic, and our ability to execute our strategic operating plans in the long term; general economic conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices, costs of aircraft fuel and energy refining capacity in relevant markets); risks of doing business globally, including instability and political developments that may impact our operations in certain countries; demand for travel and the impact that global economic and political conditions have on customer travel patterns; our capacity decisions and the capacity decisions of our competitors; competitive pressures on pricing and on demand; changes in aircraft fuel prices; disruptions in our supply of aircraft fuel; our ability to cost-effectively hedge against increases in the price of aircraft fuel, if we decide to do so; the effects of any technology failures or cybersecurity or significant data breaches; disruptions to services provided by third-party service providers; potential reputational or other impact from adverse events involving our aircraft or operations, the aircraft or operations of our regional carriers or our code share partners or the aircraft or operations of another airline; our ability to attract and retain customers; the effects of any terrorist attacks, international hostilities or other security events, or the fear of such events; the mandatory grounding of aircraft in our fleet; disruptions to our regional network as a result of the COVID-19 pandemic or otherwise; the impact of regulatory, investigative and legal proceedings and legal compliance risks; the success of our investments in other airlines, including in other parts of the world, which involve significant challenges and risks, particularly given the impact of the COVID-19 pandemic; industry consolidation or changes in airline alliances; the ability of other air carriers with whom we have alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; costs associated with any modification or termination of our aircraft orders; disruptions in the availability of aircraft, parts or support from our suppliers; our ability to maintain satisfactory labor relations and the results of any collective bargaining agreement process with our union groups; any disruptions to operations due to any potential actions by our labor groups; labor costs; the impact of any management changes; extended interruptions or disruptions in service at major airports where we operate; U.S. or foreign governmental legislation, regulation and other actions (including Open Skies agreements, environmental regulations and the United Kingdom's withdrawal from the European Union); the seasonality of the airline industry; weather conditions; the costs and availability of aviation and other insurance; our ability to realize the full value of our intangible assets and long-lived assets; any impact to our reputation or brand image; and other risks and uncertainties set forth under Part I, Item 1A., Risk Factors, of our 2019 Form 10-K, and Part II, Item 1A., Risk Factors, of this report, as well as other risks and uncertainties set forth from time to time in the reports we file with the U.S. Securities and Exchange Commission (the "SEC"). 43 Table of Contents